UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172019
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-34652
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SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
__________________________________________
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THE NETHERLANDSEngland and Wales | | 98-064125498-1386780 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer
Identification No.)
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Jan Tinbergenstraat 80, 7559 SP Hengelo
The Netherlands
| | 31-74-357-8000 |
(Address of Principal Executive Offices, including Zip Code) | | (Registrant’s Telephone Number, Including Area Code)I.R.S. Employer Identification No.) |
529 Pleasant Street, Attleboro, Massachusetts, 02703, United States
(Address of principal executive offices, including zip code))
+1 (508) 236 3800
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Ordinary Shares—Shares - nominal value €0.01 per share | ST | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨Nox
Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,”" "smaller reporting company," and “small reporting company”"emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | | Accelerated filer | o |
Non-accelerated filer | o | | Smaller reporting companyo | ☐ |
(Do not check if a smaller reporting company) | | | Emerging growth companyo
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
The aggregate market value of the registrant’s ordinary shares held by non-affiliates at June 30, 20172019 was approximately $7.3$7.9 billion based on the New York Stock Exchange closing price for such shares on that date.
As of January 12, 2018, 171,393,40331, 2020, 157,828,172 ordinary shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates information from certain portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2017.2019.
TABLE OF CONTENTS
Cautionary Statements Concerning Forward-Looking Statements
This Annual Report on Form 10-K (this "Report"), including any documents incorporated by reference herein, includes “forward-looking statements”"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements also relate to our future prospects, developments, and business strategies. These forward-looking statements may be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “forecast,” “continue,” “intend,” “plan,”"may," "will," "could," "should," "expect," "anticipate," "believe," "estimate," "predict," "project," "forecast," "continue," "intend," "plan," and similar terms or phrases, or the negative of such terminology, including references to assumptions. However, these terms are not the exclusive means of identifying such statements.
Forward-looking statements contained herein, or in other statements made by us, are made based on management’s expectations and beliefs concerning future events impacting us. These statements are subject to uncertainties and other important factors relating to our operations and business environment, all of which are difficult to predict, and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurances that any of the events anticipated by these forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.
We believe that the following important factors, among others (including those described in Item 1A, “Risk"Risk Factors,”" included elsewhere in this Annual Report on Form 10-K)Report), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf:
instability and changes in the global markets, including regulatory, political, economic, governmental, and military matters;
changes to current policies bymatters, such as the U.S. government;recent exit of the United Kingdom (the "U.K.") from the European Union (the "EU");
adverse conditions or competition in the industries upon which we are dependent, including the automotive industry;
competition in our industry;
competitive pressure from customers that could require us to reduce prices;prices or result in reduced demand;
losses and costs as a result of intellectual property, product liability, warranty, and recall claims;
market acceptance of new product introductions and product innovations;
supplier interruption or non-performance, limiting our access to manufactured components or raw materials;
risks related to the acquisition or disposition of businesses, or the restructuring of our business;
business disruptions due to natural disasters or other disasters outside our control;control, such as the recent coronavirus outbreak;
labor disruptions or increased labor costs;
difficultiesinability to realize all of the revenue or failuresachieve anticipated gross margins from products subject to integrate businessesexisting purchase orders for which we acquire;are currently engaged in development;
security breaches, cyber theft of our intellectual property, and other disruptions from any future acquisitionsto our information technology infrastructure, or improper disclosure of confidential, personal, or proprietary data;
foreign currency risks, changes in socio-economic conditions, or changes to monetary and joint venturesfiscal policies;
our level of indebtedness, or dispositions that require significant resources and/our inability to meet debt service obligations or resultcomply with the covenants contained in significant unanticipated losses, costs, or liabilities;
market acceptance of new product introductionsthe credit agreement and product innovations;senior notes indentures;
changes in,to current policies, such as trade tariffs, by the United States (the "U.S.") government;
risks related to the potential for goodwill impairment;
the impact of challenges by taxing authorities of our historical and future tax positions or our allocation of taxable income among our subsidiaries, and challenges to the sovereign taxation regimes of EU member states by the European Commission and the Organization for Economic Co-operation and Development;
changes to, or inability to comply with, various regulations, including tax laws, import/export regulations, anti-bribery laws, environmental, health, and safety laws, and other governmental regulations; and
foreign currency risks and changesrelated to our domicile in socio-economic conditions and/or monetary and fiscal policies, including as a result of the impending exit of the U.K. from the European Union;
losses and costs as a result of intellectual property, product liability, warranty, and recall claims that may be brought against us;
taxing authorities challenging our historical and future tax positions or our allocation of taxable income among our subsidiaries;
our level of indebtedness or inability to meet our debt service obligations or comply with the covenants contained in the credit agreements;
security breaches and other disruptions to our information technology infrastructure; and
other risks set forth in Item 1A, “Risk Factors,” included elsewhere in this Annual Report on Form 10-K.
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements contained in this Annual Report on Form 10-K.Report. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. We urge readers to review carefully the risk factors described in this Annual Report on Form 10-K and in the other documents that we file with the U.S. Securities and Exchange Commission. You can read these documents at www.sec.gov or on our website at www.sensata.com.
PART I
The Company
The reporting company is Sensata Technologies Holding N.V. (“plc ("Sensata N.V.”) and its wholly-owned subsidiaries, collectively referred to as the “Company,” “Sensata,” “we,” “our,” and “us.”
Sensata N.V. is incorporated under the laws of the Netherlands and conducts its operations through subsidiary companies that operate business and product development centers primarily in the United States (the "U.S."), the Netherlands, Belgium, Bulgaria, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and manufacturing operations primarily in China, Malaysia, Mexico, Bulgaria, France, Germany, the U.K., and the U.S. We organize our operations into two businesses, Performance Sensing and Sensing Solutions.
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V. are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata U.K.”plc"), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. beingand its wholly-owned subsidiaries, collectively referred to as the surviving entity (the “Merger”)."Company," "Sensata," "we," "our," and "us."
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will become the publicly-traded parent of the subsidiary companies thatWe are currently controlled by Sensata N.V.
Overview
Sensata, a global industrial technology company engagesthat develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in the development, manufacture,mission-critical systems and sale of sensorsapplications that create valuable business insights for our customers and controls. We produceend users. For more than 100 years, we have been providing a wide range of sensorscustomized, sensor-rich solutions that address increasingly complex engineering and controls for applications such as pressure, temperature, and speed and position sensors in automotive systems, thermal circuit breakers in aircraft, and bimetal current and temperature control devices in electric motors. We can traceoperating performance requirements to help our origins back to entities that have been engagedcustomers solve their most difficult challenges in the sensorsautomotive, heavy vehicle and controls business since 1916.off-road ("HVOR"), industrial, and aerospace industries.
Our sensors are customized devices that translate a physical phenomenon,parameter, such as pressure, temperature, or position, into electronic signals that microprocessors or computer-based control systemsour customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are customized devices embedded within systems to protect them from excessive heat or current. Underlying theseOur sensors, sensor-based solutions, and controls are core technology platforms—included in mission-critical solutions that play a key role in the four key megatrends that are shaping our markets:
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| • | Clean & Efficient - our customers are facing ever increasing mandates to make their products cleaner and more efficient due to regulation and consumer demand. Our sensors are being used in mission-critical systems and applications including those that help: industrial customers to make more efficient pumps and boilers; automotive customers to meet the standards of emissions and pollution control legislation; and fleet managers to increase the fuel efficiency of heavy duty trucks. |
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| • | Electrification - electrification provides a significant opportunity for us to expand the use of our sensors and electrical protection solutions within the automotive, industrial, and HVOR industries. For example, in the automotive industry as customers seek to extend the range of the battery and improve the efficiency of electric vehicles they are incorporating electrical subsystems, which require additional sensors to monitor, control, and optimize what is happening within the vehicle. Further, higher voltage battery systems are also driving increased needs for electrical protection. Sensors are also used in thermal management applications to help maintain batteries at optimal temperatures as well as electric motors and heat pumps. |
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| • | Smart & Connected - we are developing smart, connected sensors that enable actionable insights for commercial vehicle operators. For example, our wireless sensors can collect information through a vehicle-area network and allow fleet managers to proactively monitor the health of their vehicles and conduct proactive maintenance, such as being able to identify when a tire is at high risk of bursting. Our leadership position in wireless sensing allows us to access new data sources that have historically been costly and difficult to gather using traditional wire harnesses. |
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| • | Autonomy - we are developing sensors to enable light passenger cars, off-road vehicles, and material handling equipment to operate more autonomously. For example, we have recently launched a steer-by-wire application to enable worksite automation in the construction and agriculture industries. Within automotive, we are also developing a portfolio of sensors to actively monitor the health of a vehicle when it is not being operated by an active driver. |
Each of these trends is expected to significantly transform our industries and magnetic-hydraulic circuit protection, micro electromechanical systems, ceramic capacitance, Microfused Silicon Strain Gage, and wireless communication protocol—many of our customers businesses. These megatrends are also creating greater secular demand for our products, resulting in content growth that enables us to outgrow end-market volume production in many of the markets we serve, a defining characteristic of our company.
Content growth is a term that we leverage across multipleuse to describe the impact of an increasing quantity and value of our products used in customer systems and applications, enabling usand to optimizea large extent independent of normal demand fluctuations in the markets we serve. Content growth of our research, development,sensor products results from technological advancements and engineering investmentsenhancements in a customer’s system or application, where our sensor is an integral component, to help comply with evolving and achieve economies of scale.tightening regulations, meet changing performance standards, and enable new and emerging technologies that together, or in part, provide cleaner, more efficient, safer, and more comfortable functionality.
Our primary products include low-, medium-, and high-pressure sensors, speed and position sensors, bimetal electromechanical controls, temperature sensors, power conversion and control products, thermal and magnetic-hydraulic circuit breakers, pressure switches, and interconnection products. We develop customized, innovative solutions for specific customer requirements or applications across a variety of end markets, including automotive, heavy vehicle off-road ("HVOR"), appliance and heating, ventilation, and air conditioning (“HVAC”), industrial, and aerospace, among others.
Our Performance Sensing business supplies automotive and HVOR sensors, including pressure sensors, speed and position sensors, temperature sensors, and pressure switches. Our Sensing Solutions business supplies bimetal electromechanical controls, industrial and aerospace sensors, power conversion and control products, thermal and magnetic-hydraulic circuit breakers, and interconnection products.
We have long-standing relationships with a geographically diverse base of leading global original equipment manufacturers (“OEMs”("OEMs") and other multinational companies. In geographic and product markets where we lack an established base of customers, we rely on third-party distributors to sell our products. Only a small portion of our revenues are sold through distributors. We have had relationships with our top ten customers for an average of 30 years. Our largest customer accounted for approximately 7% of our net revenue for the year ended December 31, 2019.
We operate in, and report financial information for, the following two segments: Performance Sensing and Sensing Solutions.
Performance Sensing
Performance Sensing, which accounted for approximately 74% of our net revenue in fiscal year 2019, primarily serves the automotive and HVOR industries through development and manufacture of sensors, high-voltage contactors, and other products used in mission-critical systems and applications such as those in subsystems of automobiles, on-road trucks, and off-road equipment (e.g., tire pressure monitoring, thermal management, air conditioning, and regenerative braking). Our products are used in subsystems that, among other things, improve operating performance and efficiency as well as address environmental or safety concerns.
Our customers include leading global automotive, on-road truck, construction, and agriculture OEMs, the companies that supply parts directly to OEMs, which are known as Tier 1 suppliers, and various aftermarket distributors. We believe large OEMs and other multinational companies are increasingly demanding a global presence to supply sensors and sensor-based solutions for their key global platforms. We believe that we are one of the largest suppliers of sensors and sensor-based solutions in the majority of the key markets in which we compete.
The global sensor market is characterized by a broad range of products and applications across a diverse set of market segments. According to an October 2019 report prepared by Strategy Analytics, Inc., the global automotive sensor market was $24.1 billion in 2019, compared to $23.9 billion in 2018.
Automotive and HVOR sensors support a wide variety of systems and applications, and many are critical components that are essential to the proper functioning of the products in which they are incorporated. Sensor application-specific products require close engineering collaboration between the sensor supplier and the OEM or their Tier 1 suppliers. As a result, OEMs and Tier 1 suppliers make significant investments in selecting, integrating, and testing sensors as part of their product development. Switching to a different sensor results in considerable additional work, both in terms of sensor customization and platform/product retesting and certification. This results in high switching costs for automotive and HVOR manufacturers once a sensor is designed in to a particular product or platform. We believe this is one of the reasons that sensors are rarely changed during a platform life-cycle, which in the case of the automotive industry typically lasts five to seven years. Given the importance of reliability and the fact that the sensors must be supported through the length of a product life, our experience has been that OEMs and Tier 1 suppliers tend to work with suppliers that have a long track record of quality and on-time delivery and the scale and resources to meet their needs as the automobile platform evolves and grows. In addition, the automotive industry provides one of the largest markets for sensors, giving participants with a presence in this market significant scale advantages over those participating only in smaller, more niche industrial and medical markets.
Net revenue growth from the automotive and HVOR sensor markets served by Performance Sensing has historically been driven, we believe, by three principal trends, including (1) growth in the number of vehicles produced globally, (2) expansion in the number and type of sensors per vehicle, and (3) efforts toward commercializing higher value sensors. However, we believe that the automotive and HVOR sensor markets are and will continue to be substantially impacted by current megatrends, primarily Clean & Efficient and Electrification in the near-term. We are investing in existing and new technologies intended to respond to these megatrends and which we believe will drive future revenue growth. In addition, our presence in emerging markets positions us to take advantage of future growth opportunities in these regions.
Light vehicle production: From the recession in 2008 and 2009 until recently, global production of light vehicles had consistently demonstrated annual growth. However, according to the fourth quarter 2019 LMC Automotive "Global Car & Truck Forecast," the production of global light vehicles in fiscal year 2019 decreased from the prior year by 5.0% to approximately 89.4 million units. Despite this decline, we expect global production of light vehicles to increase over the long term due to population growth and increased usage of cars in emerging markets.
Number of sensors per vehicle: We believe that sensor usage and content growth will continue to be driven by increasing installation in vehicles of emissions, efficiency, safety, and comfort-related control systems that depend on sensors for proper functioning, such as electronic stability control, tire pressure monitoring, advanced driver assistance, transmission, and advanced combustion and exhaust after-treatment, as well as user interfaces in HVOR applications. For example, government
regulation of emissions, including fuel economy standards such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the United States (the "U.S.") and emissions requirements such as "Euro 6d" in Europe, "China National 6" in China, and "Bharat Stage VI" in India drive cleaner, more efficient systems.
Other applications that are driving increased sensor content in vehicles include braking systems and electrification systems. Braking systems are gradually transitioning from traditional hydraulic brakes towards electromechanical braking and regenerative braking systems, thus driving more content in pressure and force sensing. Furthermore, electrified vehicles are driving more sophisticated thermal management systems to control heating and cooling throughout the vehicle, and more content in battery management systems to optimize drive range and safety in electrical protection as battery voltages increase. Our fiscal year 2018 acquisition of GIGAVAC supports growth in this electrical protection domain with its contactor and fuse technologies.
Higher value sensors: We believe that our revenue growth has been augmented by a continuing shift away from legacy electromechanical sensors to more sensor-based solutions that include controllers, receivers, and software, and will continue to grow as our sensors and controllers get "smarter" with more embedded algorithms.
New Technology: Automobiles and heavy vehicles continue to evolve with new alternative technologies being developed to make these vehicles more efficient, robust, cost effective, and safe. We believe that this trend has the potential to drive growth in our business for the foreseeable future, particularly in the areas of Electrification, Smart & Connected, and Autonomy. Moreover, we believe our broad customer base, global diversification, and evolving portfolio provide the foundation that will allow us to grow with these megatrends across a diverse set of markets.
For example, we expect this growth to include content growth in both hybrid and electric vehicles. Hybrid vehicles require systems and sensors to drive high efficiency across the powertrain, managing better diagnostics, more efficient combustion, and reduced emissions. Also, sensor content on vehicle climate control and thermal management systems, where our market share is high, is increasing. This is driven by the need for high efficiency control of thermal management in hybrid heating and cooling systems. Additionally, as long-range plug-in hybrid and full battery electric vehicles gain market share, multiple instances of efficient thermal management across the battery, electronics, and cabin systems are required to protect and manage the vehicle, which drives additional core Sensata sensor and sensor-based solution content available in the market today. Other new emerging opportunities to improve battery life could also provide the potential for additional content per vehicle.
Other safety and efficiency systems are also evolving on hybrid and electric vehicles. New and emerging energy recuperation technologies, such as regenerative motors, require additional sensing content to manage and efficiently switch between traditional braking systems and regenerative braking. Additionally, semi-automated vehicles containing advanced driver assistance systems benefit from more efficient and faster electromechanical braking systems, driving additional sensor content to control these brakes. Each of these systems enable more efficient use of energy, enabling greater electric vehicle range.
New content in high voltage electrical protection and sensor-based solutions from our fiscal year 2018 acquisition of GIGAVAC, LLC addresses many of the needs in evolving electric vehicle powertrain systems with higher voltage systems that must be properly controlled and protected as vehicle voltages and electrical currents increase. This protection safeguards the expensive electronics used to power the vehicle and allowing for an increase in power levels to improve charging times.
Emerging Markets: We have a long-standing position in emerging markets, including a presence in China for more than 20 years. With our presence in China, we believe that our automotive and HVOR businesses are well positioned to grow. With sustained vehicle modernization and tightening regulations in China, we expect our content per vehicle in China will continue to increase, moving towards the levels we see in developed markets.
Product Categories
The following table presents the key products, solutions, applications, systems, and end markets related to the sensor product category:
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| Key Products/Solutions | | Key Applications/Systems | | Key End Markets |
Pressure sensors Microfused strain gage Ceramic capacitive Micro-electromechanical Speed and position sensors Magnetic speed and position sensors Mechanical/electrical control systems High temperature sensors | | Thermal management and air conditioning systems Transmission Engine oil Suspension Fuel delivery Braking Tire pressure monitoring Exhaust after-treatment | | Automotive HVOR |
The table below sets forth the amount of net revenue generated by our sensor product category in Performance Sensing, reconciled to total segment net revenue, for the years ended December 31, 2019, 2018, and 2017:
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| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | |
| Sensors | $ | 2,489,644 |
| | $ | 2,532,631 |
| | $ | 2,341,017 |
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| Other | 56,372 |
| | 95,020 |
| | 119,583 |
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| Performance Sensing net revenue | $ | 2,546,016 |
| | $ | 2,627,651 |
| | $ | 2,460,600 |
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Competitors
Within each of the principal product categories in Performance Sensing, we compete with a variety of independent suppliers. We believe that the key competitive factors in the markets served by this segment are product performance in mission-critical operating environments, quality, reliability, and commercial competitiveness. We believe that our ability to design and produce customized solutions globally, breadth and scale of product offerings, technical expertise and development capability, product service and responsiveness, and a commercially competitive offering, make us well positioned to succeed in these markets.
Sensing Solutions
Sensing Solutions, which accounted for approximately 26% of our net revenue in fiscal year 2019, primarily serves the industrial and aerospace industries through development and manufacture of a broad portfolio of application-specific sensor and control products used in the aerospace market and a diverse range of industrial markets, including the small appliance, heating, ventilation and air conditioning ("HVAC"), semiconductor, material handling, factory automation, and water management markets. Some of the products the segment sells include pressure, temperature, and position sensors, motor and compressor protectors, solid state relays, bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, power inverters, and charge controllers. We believe that we are one of the largest suppliers of controls in the majority of the key applications and systems in which we compete.
Our customers include a wide range of industrial and commercial manufacturers and suppliers across multiple end markets, primarily OEMs in the climate control, appliance, semiconductor, medical, energy and infrastructure, data/telecom, material handling, factory automation, and aerospace industries, as well as Tier 1 aerospace and motor and compressor suppliers.
Our products perform many functions including prevention of damage from excess heat or electrical current, optimization of system performance, low-power circuit control, and power conversion from direct current ("DC") power to alternating current ("AC") power. Demand for our products is driven by many of the same factors as in the automotive and HVOR sensor markets: regulation of emissions, greater energy efficiency, and safety, as well as consumer demand for new features.
We continue to focus our efforts on expanding our presence in all global geographies, both emerging and developed and serving our global customers in a highly efficient and cost-effective manner. Our customers include established multinationals as well as local producers in emerging markets such as China, India, Eastern Europe, and Turkey. China continues to remain a priority for us because of its export focus and the increasing domestic consumption of products that use our devices.
Product Categories
The following table presents the significant product categories offered by Sensing Solutions and the corresponding key products, solutions, applications, systems, and end markets:
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| Key Products/Solutions | | Key Applications/Systems | | Key End Markets |
| Product category: Controls |
Bimetal electromechanical controls Motor protectors Motor starters Thermostats Switches
Circuit breakers Thermal circuit breakers Magnetic-hydraulic circuit breakers | | HVAC/Refrigeration
Industrial equipment Small/large appliances
Lighting
DC motors
Commercial and military aircraft
Marine/industrial Data and telecom equipment Medical equipment Recreational vehicles | | Aerospace and defense Industrial HVAC/Refrigeration Automotive Marine Medical Energy/solar |
| Product category: Sensors |
Linear and rotary position sensors Linear variable differential transformers Pressure sensors Temperature sensors Aircraft controls | | HVAC/Refrigeration Air compressors Hydraulic machinery Motion control systems Pumps and storage tanks Commercial and military aircraft | | Aerospace and defense Industrial equipment HVAC/Refrigeration Motors Marine Energy |
The table below sets forth the amount of net revenue generated by our sensors and controls product categories in Sensing Solutions, reconciled to total segment net revenue, for the years ended December 31, 2019, 2018, and 2017:
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| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | |
| Controls | $ | 481,720 |
| | $ | 508,745 |
| | $ | 497,853 |
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| Sensors | 223,282 |
| | 222,649 |
| | 201,846 |
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| Other | 199,613 |
| | 162,582 |
| | 146,434 |
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| Sensing Solutions net revenue | $ | 904,615 |
| | $ | 893,976 |
| | $ | 846,133 |
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Competitors
Within each of the principal product categories in Sensing Solutions, we compete with divisions of large multinational industrial corporations and companies with smaller market share that compete primarily in specific markets, applications, systems, or products. We believe that the key competitive factors in these markets are product performance, quality, and reliability.
Technology and Intellectual Property
We develop products that address increasingly complex engineering requirements by investing substantiallyand operating performance requirements. We believe that continued focused investment in research and development ("R&D") is critical to our future growth and application engineering. By locatingmaintaining our globalleadership 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 continuously 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 teamscore technology platforms to specific applications and engineering major upgrades that improve the functionality or reduce the cost of existing products. In addition, we constantly 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 relate to products that are not currently within our core business. Expenses related to these activities are less likely to result in close proximity to key customers inincreased revenue that our more mainstream development activities.
regional business centers, weWe are exposed to many development opportunities at an early stage for several reasons: (1) we are the incumbent in many systems for our key customers; (2) we have strong design and service capability; and (3) our global engineering teams are located in close proximity to key customers in regional business centers. We work closely with our customers to deliver solutions that meet their needs. As a result of the long development lead times and embedded nature of our products, we
collaborate closely with our customers throughout the design and development phase of their products. Systems development by our customers typically requires significant multi-year investment for certification and qualification, which are often government or customer mandated. We believe the capital commitment and time required for this process significantly increases the switching costs once a customer has designed and installed a particular sensor or control into a system.
We are a global business, with significant operations around the world. As of December 31, 2017, 39.6%, 35.5%, and 24.9% of our fixed assets were located in the Americas, Asia, and Europe, respectively. We have a diverse revenue mix by geography, customer, and end market. We generated 41.3%, 27.3%, and 31.4% of our net revenue in the Americas, Asia, and Europe, respectively, for the year ended December 31, 2017. Our largest customer accounted for approximately 8% of our net revenue for the year ended December 31, 2017. Our net revenue for the year ended December 31, 2017 was derived from the following end markets: 24.0% from European automotive, 18.6% from North American automotive, 19.1% from Asia and rest of world automotive, 14.3% from HVOR, 9.4% from industrial, 6.3% from appliance and HVAC, 4.6% from aerospace, and 3.7% from all other end markets. Within many of our end markets, we are a significant supplier to multiple OEMs, reducing our exposure to global fluctuations in market share within individual end markets.
Acquisition History
Since our inception in 2006, we have completed the following significant acquisitions:
|
| | | | | | | | | | |
| | | | | Segment | | |
| Date | | Acquired Entity | | Performance Sensing | | Sensing Solutions | | Purchase Price (in Millions) |
| December 19, 2006 | | First Technology Automotive and Special Products ("FTAS") | | X | | X | | $ | 88.5 |
|
| July 27, 2007 | | Airpax Holdings, Inc. ("Airpax") | | | | X | | $ | 277.3 |
|
| January 28, 2011 | | Automotive on Board ("MSP") | | X | | | | $ | 152.5 |
|
| August 1, 2011 | | Sensor-NITE Group Companies ("HTS") | | X | | | | $ | 324.0 |
|
| January 2, 2014 | | Wabash Worldwide Holding Corp. ("Wabash") | | X | | | | $ | 59.6 |
|
| May 29, 2014 | | Magnum Energy Incorporated ("Magnum") | | | | X | | $ | 60.6 |
|
| August 4, 2014 | | CoActive U.S. Holdings Inc. ("DeltaTech Controls") | | X | | | | $ | 177.8 |
|
| October 14, 2014 | | August Cayman Company, Inc. ("Schrader") | | X | | | | $ | 1,004.7 |
|
| December 1, 2015 | | Custom Sensors & Technologies ("CST") (1) | | X | | X | | $ | 1,000.8 |
|
| |
(1) | Included the acquisition of all of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China. |
Performance Sensing Business
Overview
Our Performance Sensing business accounted for approximately 74% of our net revenue in fiscal year 2017, and is a leading supplier of automotive and HVOR sensors, including pressure sensors, speed and position sensors, temperature sensors, and pressure switches. These products are used in a wide variety of automotive and HVOR applications, including air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission. We believe that we are one of the largest suppliers of pressure and high temperature sensors in the majority of the key applications in which we compete.
Our customers consist primarily of leading global automotive and HVOR OEMs and their Tier 1 suppliers. Our products are ultimately used by the majority of global automotive OEMs, providing us with a balanced customer portfolio, which, we believe, helps to protect us against global shifts in market share between different OEMs.
Refer to Note 18, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details of the Performance Sensing segment profit for the years ended December 31, 2017, 2016, and 2015 and total assets as of December 31, 2017 and 2016.
Performance Sensing Business Markets
Sensors are customized devices that translate a physical phenomenon, such as pressure, temperature, or position, into electronic signals that microprocessors or computer-based control systems can act upon. The market is characterized by a broad range of products and applications across a diverse set of end markets. We believe large OEMs and other multinational companies are increasingly demanding a global presence to supply sensors for their key global platforms.
As automobiles and heavy vehicles evolve, we believe the need for cleaner, high-efficiency powertrains will help drive our growth for the foreseeable future. We expect this growth to include content growth in both pure gasoline and hybrid-electric powertrains. These vehicles require systems and sensors to drive high efficiency across the powertrain, managing better diagnostics, more efficient combustion, and reduced emissions.
As new alternative powertrain technologies develop, opportunities are emerging to make electrified powertrains more efficient, robust, cost effective, and safe, which we believe has the potential to positively impact our business in the future. Sensor content on vehicle climate control systems, where we enjoy high market share, is increasing as electrified vehicles require greater efficiency. Other new emerging opportunities to improve on-vehicle energy density and battery life could also provide the potential for additional content per vehicle.
With our increasing presence in China, we believe that our automotive and HVOR businesses are well positioned to grow. With sustained vehicle modernization in China, we expect our content per vehicle in China will mirror our global content in efficient powertrains and electrification, as well as content in tire pressure monitoring.
In addition, we are taking steps and making investments with the intent of positioning ourselves to capitalize on what we believe will be a large, attractive market for autonomous vehicles. We continue to engage with customers who are seeking enabling sensor technology for autonomous driving.
Moreover, we believe our broad customer base, global diversification, and evolving portfolio provide the foundation that will allow us to grow with these megatrends across a diverse set of end markets.
Automotive and HVOR sensors are included in the Performance Sensing business results, while industrial and aerospace sensors are included in the Sensing Solutions business results. Refer to the Sensing Solutions Business Markets section for discussion of industrial and aerospace sensors.
Automotive and HVOR Sensors
Net revenue growth from the global automotive and HVOR sensor end markets, which include applications in powertrain, tire, air conditioning, and chassis control, among others, is driven, we believe, by three principal trends. First, global production of light vehicles has consistently demonstrated annual growth since the global recession in 2008 and 2009 and are expected to continue to increase over the long-term due to population growth and increased usage of cars in emerging markets. Second, the number of sensors used per vehicle has expanded, driven by a combination of factors including government regulation of emissions, greater efficiency, and safety, consumer demand for new applications including electric and hybrid-electric vehicles as well as trends toward autonomous vehicles and productivity and enhanced user interfaces in HVOR applications. For example, fuel economy standards such as the Corporate Average Fuel Economy ("CAFE") requirements in the U.S. and emissions requirements such as "Euro 6d" in Europe and "China National 6" in China lead to sensor-rich automobile powertrain strategies. Finally, revenue growth has been augmented by a continuing shift away from legacy electromechanical products towards higher-value electronic solid-state sensors.
According to the fourth quarter 2017 LMC Automotive "Global Car & Truck Forecast," the production of global light vehicles in 2017 was approximately 95.2 million units, an increase of 2.3% from 2016.
The automotive and HVOR sensor markets are characterized by high switching costs and barriers to entry, benefiting incumbent market leaders. Sensors are critical components that enable a wide variety of applications, many of which are essential to the proper functioning of the product in which they are incorporated. Sensor application-specific products require close engineering collaboration between the sensor supplier and the OEM or the Tier 1 supplier. As a result, OEMs and Tier 1 suppliers make significant investments in selecting, integrating, and testing sensors as part of their product development. Switching to a different sensor results in considerable additional work, both in terms of sensor customization and extensive platform/product retesting and certification. This results in high switching costs for automotive and HVOR manufacturers once a sensor is designed-in. We believe the foregoing is one of the reasons that sensors are rarely changed during a platform life-cycle, which in the case of the automotive end market typically lasts five to seven years. Given the importance of reliability and the fact that the sensors must be supported through the length of a product life, our experience has been that OEMs and Tier 1 suppliers tend to work with suppliers that have a long track record of quality and on-time delivery and the scale and resources
to meet their needs as the automobile platform evolves and grows. In addition, the automotive segment is one of the largest markets for sensors, giving participants with a presence in this end market significant scale advantages over those participating only in smaller, more niche industrial and medical markets.
According to an October 2017 report prepared by Strategy Analytics, Inc., the global automotive sensor market was $22.4 billion in 2017, compared to $21.5 billion in 2016. We believe the increase in the number of sensors per vehicle and the level of global vehicle sales are the primary drivers of the increase in the global automotive sensor market. We believe that the increasing installation in vehicles of emissions, efficiency, safety, and comfort-related features that depend on sensors for proper functioning, such as electronic stability control, tire pressure monitoring, advanced driver assistance, transmission, and advanced combustion and exhaust after-treatment, will continue to drive increased sensor usage and content growth.
Performance Sensing Products
We offer the following significant products in the Performance Sensing business:
|
| | | | |
Product Categories | | Key Applications/Solutions | | Key End-Markets |
Pressure sensors | | Air conditioning systems
Transmission
Engine oil
Suspension
Fuel rail
Braking
Tire pressure monitoring
Exhaust after-treatment
| | Automotive
HVOR
Motorcycle
|
Speed and position sensors | | Transmission
Braking
Engine
| | Automotive
HVOR
|
Temperature sensors | | Exhaust after-treatment | | Automotive
HVOR
|
Pressure switches | | Air conditioning systems
Power steering
Transmission
| | Automotive
HVOR
|
The table below sets forth the amount of net revenue we generated from each of these product categories in each of the last three fiscal years:
|
| | | | | | | | | | | |
| Product Category | For the year ended December 31, |
| (Amounts in thousands) | 2017 | | 2016 | | 2015 |
Pressure sensors (1) | $ | 1,773,401 |
| | $ | 1,696,215 |
| | $ | 1,631,678 |
|
| Speed and position sensors | 309,135 |
| | 305,287 |
| | 328,102 |
|
| Temperature sensors | 186,793 |
| | 185,289 |
| | 191,369 |
|
| Pressure switches | 61,997 |
| | 56,005 |
| | 55,607 |
|
| Other | 129,274 |
| | 142,584 |
| | 139,470 |
|
| Total | $ | 2,460,600 |
| | $ | 2,385,380 |
| | $ | 2,346,226 |
|
(1) Certain products, totaling $28.5 million, that were categorized as pressure sensors in 2016 have been recast to other.
Sensing Solutions Business
Overview
Our Sensing Solutions business accounted for approximately 26% of our net revenue in fiscal year 2017, and is a leading provider of bimetal electromechanical controls, industrial and aerospace sensors, power conversion and control products, thermal and magnetic-hydraulic circuit breakers, and interconnection products. We market and manufacture a broad portfolio of application-specific products, including motor and compressor protectors, motor starters, temperature sensors and switches/thermostats, pressure sensors and switches, electronic HVAC sensors and controls, linear and rotary position sensors, charge controllers, solid state relays, circuit breakers, semiconductor burn-in test sockets, and power inverters. Our control products are sold into industrial, aerospace, military, commercial, medical device, and residential end markets. We derive most of our Sensing Solutions business revenue from sales of products that prevent damage from excess heat or electrical current in a variety of applications within these end markets, such as internal and external motor and compressor protectors, circuit
protection, motor starters, thermostats, switches, semiconductor testing, and light industrial systems. Our industrial and aerospace sensors, including pressure sensors, temperature sensors, and linear and rotary position sensors, provide real time information about the state of a specific system or subsystem, so control adjustments can be made to optimize system performance. We believe that we are one of the largest suppliers of controls in the majority of the key applications in which we compete.
Our Sensing Solutions business benefits from strong agency relationships. For example, a number of electrical standards for motor control products, including portions of the Underwriters’ Laboratories ("UL") Standards for Safety, have been written based on the performance and specifications of our control products. We also have U.S. and Canadian Component Recognitions from UL, a U.S.-based organization that issues safety standards for many electrical products in the U.S., for many of our control products, so that customers can use Klixon® and Airpax® products throughout North America. Where our component parts are detailed in our customers' certifications from UL, changes to their certifications may be necessary in order for them to incorporate competitors' motor protection offerings. Similarly, our aerospace products undergo exhaustive qualification procedures to customer or military performance standards; requiring a significant investment in a re-qualification effort to incorporate competitors’ offerings.
We continue to focus our efforts on expanding our presence in all global geographies, both emerging and mature. Our customers include established multinationals, as well as local producers in emerging markets such as China, India, Eastern Europe, and Turkey. China continues to remain a priority for us because of its export focus and domestic consumption of products that use our devices. In addition, we continue to focus on managing our costs and increasing our productivity in these lower-cost manufacturing regions.
Refer to Note 18, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details of the Sensing Solutions segment profit for the years ended December 31, 2017, 2016, and 2015 and total assets as of December 31, 2017 and 2016.
Sensing Solutions Business Markets
Sensing Solutions products include controls, which are customized devices that protect equipment and electrical architecture from excessive heat or current, and sensors, which measure specific fluid- or air-based system parameters, including pressure and temperature, as well as measure position. Our products help our customers' systems run safely and in an efficient and environmentally-friendly manner. Our product lines encompass bimetal electromechanical controls, industrial and aerospace sensors, power conversion and control products, thermal and magnetic-hydraulic circuit breakers, and interconnection products, each of which serves a highly diversified base of customers, end markets, applications, and geographies.
Bimetal Electromechanical Controls
Bimetal electromechanical controls include motor protectors, motor starters, thermostats, and switches, each of which helps prevent damage from excessive heat or current. Our bimetal electromechanical controls business serves a diverse group of end markets, including commercial and residential HVAC and refrigeration systems, lighting, industrial motors, household appliances, and commercial and military aircraft. The demand for many of these products tends to follow the general economic environment and is affected by the increasing significance of new electronically-controlled applications.
Industrial and Aerospace Sensors
Industrial and aerospace sensors employ similar technology to automotive and HVOR sensors discussed in the Performance Sensing Business section above, but often require different customization in terms of packaging, calibration, and electrical output. Applications in which these sensors are used include fluid- and air-based system measurement, motion control systems, pumps and storage tanks, where measurement of pressure and temperature is required for optimum performance, and commercial and military aircraft controls, where high reliability is required. End markets served by this business include: commercial and residential HVAC and refrigeration systems, where refrigerant, water, or air is the sensed media used to optimize performance of the heating and cooling application; discrete industrial equipment where fluid- or air-based subsystems are used (e.g., air compressors and hydraulic machinery such as molding and metal machining); and commercial and military aircraft.
Linear and rotary position sensors translate linear or angular mechanical position to an electrical signal, and are typically used in systems where high reliability is desired, such as commercial and military aircraft controls. The primary uses for our linear and rotary position sensors are in harsh environments in the aerospace and energy and infrastructure end markets.
We believe that sensor usage in industrial and commercial applications is driven by many of the same factors as in the
automotive sensor market: regulation of emissions, greater energy efficiency, and safety, as well as consumer demand for new features. For example, many HVAC/Refrigeration ("HVAC/R") and industrial systems are converting to more efficient variable speed control, which inherently requires more sensor feedback than traditional fixed speed control systems. Global trends towards environmentally friendly refrigerants also require more sensors to deliver the desired system performance.
Power Conversion and Control
Power conversion and control products include power inverters, charge controllers, and solid state relays.
Our power inverter products enable conversion of electric power from direct current ("DC") power to alternating current ("AC") power, or AC power to DC power. Power inverters are used mainly in applications where DC power, such as that stored in a battery, must be converted for use in an electrical device that runs on AC power, or in applications where AC power is converted to DC power to charge batteries or power DC loads. Typically, converting AC power to DC power also uses a charge controller.
Specific uses for power inverters and charge controllers include powering applications in utility/service trucks or recreational vehicles and providing power conversion and charge control for off-grid and grid-tie battery back-up systems. Demand for these products is driven by economic development, the need to meet new energy efficiency standards, electrification of auxiliary loads on work trucks, emerging opportunities for residential energy storage and off-grid power systems, and a growing interest in clean energy to replace generators, which increases demand for both mobile and stationary power.
Solid state relays are used where it is necessary to control a circuit by a low-power signal, or where several circuits must also be controlled by one signal. Solid state relays have certain advantages over mechanical relays, including long operation life, silent operation, low power, and low electrical interference. Applications for solid state relays primarily include those in the industrial and commercial equipment end markets.
Thermal and Magnetic-Hydraulic Circuit Breakers
Our circuit breaker portfolio includes thermal circuit breakers and customized magnetic-hydraulic circuit breakers, which help prevent damage from thermal or electrical overload. We provide thermal circuit breakers to the commercial and military aircraft markets as well as the industrial and agricultural markets. Our magnetic-hydraulic circuit breaker business serves a broad spectrum of OEMs and other multinational companies in the aerospace, telecommunication, industrial, recreational vehicle, HVAC, refrigeration, marine, medical, information processing, electronic power supply, power generation, over-the-road trucking, construction, agricultural, and alternative energy markets. Demand for these products tends to follow the general economic environment.
Interconnection
Our interconnection products consist of semiconductor burn-in test sockets used by semiconductor manufacturers to verify packaged semiconductor reliability. Demand in the semiconductor market is driven by consumer and business computational, entertainment, transportation, and communication needs. These needs are driven by the desire to have smaller, lighter, faster, more functional, and energy conscious devices that make users more productive and interconnected to society.
Sensing Solutions Products
We offer the following significant products in the Sensing Solutions business:
|
| | | | |
Product Categories | | Key Applications/Solutions | | Key End-Markets |
Bimetal electromechanical controls | | Motor and compressor protectors
Motor starters
Thermostats
Switches
| | HVAC/R
Small/large appliances
Lighting
Industrial and auxiliary DC motors
Commercial and military aircraft
Marine/industrial
|
Industrial and aerospace sensors | | Fluid- or air-based system measurement
Motion control systems
Pumps and storage tanks
Linear and rotary position sensors
| | HVAC/R
Industrial equipment
Commercial and military aircraft
|
Power conversion and control | | DC/AC inverters
Charge controllers
Solid state relays
| | Utility work vehicles
Recreational vehicles
Solar power
Industrial and commercial equipment
|
Thermal and magnetic-hydraulic circuit breakers | | Thermal circuit breakers
Magnetic-hydraulic circuit breakers
| | Commercial and military aircraft
Data and telecommunications
Industrial/medical/alternative energy
Recreational/marine/industrial
HVAC/R
Power supply/generation
HVOR
|
Interconnection | | Semiconductor testing | | Semiconductor manufacturing |
The table below sets forth the amount of net revenue we generated from each of these product categories in each of the last three fiscal years:
|
| | | | | | | | | | | |
| Product Category | For the year ended December 31, |
| (Amounts in thousands) | 2017 | | 2016 | | 2015 |
| Bimetal electromechanical controls | $ | 333,907 |
| | $ | 321,202 |
| | $ | 318,721 |
|
| Industrial and aerospace sensors | 201,835 |
| | 193,843 |
| | 69,102 |
|
| Power conversion and control | 127,348 |
| | 120,357 |
| | 58,180 |
|
| Thermal and magnetic-hydraulic circuit breakers | 107,097 |
| | 109,719 |
| | 110,980 |
|
| Interconnection | 59,725 |
| | 57,518 |
| | 61,738 |
|
| Other | 16,221 |
| | 14,269 |
| | 10,014 |
|
| Total | $ | 846,133 |
| | $ | 816,908 |
| | $ | 628,735 |
|
Technology and Intellectual Property
We rely primarily on patents, and trade secret laws,secrets, manufacturing know-how, confidentiality procedures, and licensing arrangements to maintain and protect our intellectual property rights. While we consider our patents to be valuable assets, we do not believe that our overall competitive position is dependent on patent protection or that our overall operations arebusiness is dependent upon any single patent or group of related patents. Many of our patents protect specific functionality in our products, and others consist of processes or techniques that result in reduced manufacturing costs. Our
The following table presents information on our patents generally relate to improvements on earlier filed Sensata, acquired, or competitor patents. Asand patent applications as of December 31, 2017, we had approximately 315 U.S. and 370 non-U.S. patents and approximately 41 U.S. and 227 non-U.S. pending patent applications that were filed within the last five years. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. 2019:
|
| | | | | |
| | U.S. | | Non-U.S. |
| Patents | 296 |
| | 383 |
|
| Pending patent applications, filed within the last five years | 64 |
| | 234 |
|
Our patents have expiration dates ranging from 20182020 to 2042. We incurred Researchalso own a portfolio of trademarks and Development expense of $130.2 million, $126.7 million,license various patents and $123.7 million for the years ended December 31, 2017, 2016,trademarks. "Sensata" and 2015, respectively.our logo are trademarks.
We use licensing arrangements with respect to certain technology provided in our sensor products and to a lesser extent, our control products. In 2006, we entered into a perpetual, royalty-free cross-license agreement with our former owner, Texas Instruments Incorporated, ("TI"), which permits each party to use specified technology owned by the other party in its business. No license may be terminated under the agreement, even in the event of a material breach.
Raw Materials
We purchase sense element assemblies,use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products in both our Performance Sensing and Sensing Solutions segments, including those containing certain commodities, resins, and rare earth metals, which aremay experience significant volatility in their price and availability.
The price and availability of raw materials and manufactured components used primarily in our monosilicon strain gage pressure sensors, from Measurement Specialties, Inc. and its affiliates ("MEAS") and also manufacture them internally as a second source. In March 2013, we entered into an intellectual property licensing arrangement (the "License Agreement") with MEAS that provides for an indefinite duration license and ismay be subject to royaltieschange due to, among other things, new laws or regulations, including the impact of tariffs, trade barriers, and disputes, and global economic or political events including strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in foreign currency exchange rates, and prevailing price levels. It is generally difficult to pass increased prices for manufactured components and raw materials through 2019 and thereafter is royalty-free. Pursuant to the terms of the License Agreement, we are authorized to produce our entire need for these sense elements within the passenger vehicle and heavy duty truck fields of use. The License Agreement can be terminated by either partycustomers in the eventform of an uncured material breach. The sense element assemblies subject toprice increases. Therefore, a significant increase in the License Agreement accounted for $413.2 million, $397.7 million,price or a decrease in the availability of these items could materially increase our operating costs and $386.3 million in net revenue for the years ended December 31, 2017, 2016,materially and 2015,adversely affect our business and results of which $64.8 million, $150.6 million, and $206.7 million, respectively, was related to products that were manufactured by MEAS, and $348.4 million, $247.1 million, and $179.6 million, respectively, was related to products that were manufactured by us.operations.
Seasonality
Because of the diverse global nature of the markets in which we operate, our net revenue is only moderately impacted by seasonality. However, our Sensing Solutions business hasexperiences some seasonal elements,seasonality, specifically in its air conditioning and refrigeration products, which tend to peak in the first two quarters of the year as end market inventory is built up for spring and summer sales. In addition, our Performance Sensing businessnet revenue tends to be weaker in the third quarter of the year as automotive OEMs retool production lines for the coming model year.
SalesEmployees
As of December 31, 2019, we had approximately 21,050 employees, of whom approximately 8% were located in the U.S. As of December 31, 2019, approximately 115 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils. We also engage contract workers in multiple locations, primarily to cost-effectively manage variations in manufacturing volume, but also to perform engineering and Marketingother general services. As of December 31, 2019, we had approximately 2,000 contract workers on a worldwide basis. We believe that our relations with our employees are good. However, as discussed in Item 1A, "Risk Factors," included elsewhere in this Annual Report on Form 10-K (this "Report"), the loss of key employees or material work stoppages at our or our customers' manufacturing sites could have a material adverse impact on our financial condition and results of operations.
Environmental Regulations
Our operations and facilities are subject to numerous environmental, health, and safety laws and regulations, both domestic and foreign, including those governing air emissions, chemical usage, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations.
Many of our products are governed by material content restrictions and reporting requirements, examples of which include: European Union regulations, such as Registration, Evaluation, Authorization, and Restriction of Chemicals ("REACH"), Restriction of Hazardous Substances ("RoHS"), and End of Life Vehicle ("ELV"); U.S. regulations, such as the conflict minerals requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and similar regulations in other countries. Further, numerous customers, across all end markets, are requiring us to provide declarations of compliance or, in some cases, extra material content documentation as a requirement of doing business with them.
Compliance with these laws and meeting customer requirements has increased our cost of doing business in a variety of ways and may continue to do so in the future. We do not currently expect any material capital expenditures during fiscal year 2020 for environmental control facilities. We also do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material adverse effect in the foreseeable future on our business or the markets we serve, nor on our results of operations, capital expenditures, earnings, competitive position, or financial standing.
Governmental Regulations
We are subject to compliance with laws and regulations controlling the import and export of goods and services. Certain of our products are subject to International Traffic in Arms Regulation ("ITAR"). The export of many such ITAR-controlled products requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. The State Department makes licensing decisions based on type of product, destination of end use, end user, national security, and foreign policy. We have a trade compliance team and other systems in place to apply for licenses and otherwise comply with import and export regulations. Any failure to maintain compliance with domestic and foreign trade regulations could limit our ability to import or export raw material and finished goods across various jurisdictions. These laws and regulations are subject to change, and any such change may require us to change technology or incur expenditures to comply with such laws and regulations.
Cross-border Merger
Sensata plc is the surviving entity in a cross-border merger completed on March 28, 2018 (the "Merger") with Sensata Technologies Holding N.V. The Merger changed our location of incorporation from the Netherlands to England and Wales. No changes were made to the business being conducted by us prior to the Merger.
Available Information
We make available free of charge on our Internet website (www.sensata.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). Our website and the information contained or incorporated therein are not intended to be incorporated into this Report.
The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on, or accessible through, this website or our website are not incorporated into this filing. Further, our references to the URLs for the SEC's website and our website are intended to be inactive textual references only.
Business and Operational Risks
Our business is subject to numerous global risks, including regulatory, political, economic, governmental, and military concerns and instability.
Our business, including our employees, customers, and suppliers, are located throughout the world. As a result, we are exposed to numerous global, regional, and local risks that could decrease revenue and/or increase expenses, and therefore decrease our profitability, including, without limitation:
trade regulations, including customs, import, and export matters;
tariffs, trade barriers, and disputes, including recent disputes between the United States (the "U.S.") and China;
local employment costs, regulations, and conditions;
difficulties with, and costs for, protecting our intellectual property;
challenges in collecting accounts receivable;
tax laws and regulatory changes, including examinations by taxing authorities, variations in tax laws from country to country, changes to the terms of income tax treaties, and difficulties in the tax-efficient repatriation of earnings generated or held in a number of jurisdictions;
natural disasters;
instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the upcoming exit of the United Kingdom (the "U.K.") from the European Union (the "EU"); and
impact of each of the foregoing on our business operations, manufacturing, and supply chain.
The salesU.K.'s withdrawal from the EU ("Brexit") was completed on January 31, 2020, opening a standstill transition period that is currently set to last until December 31, 2020. During this transition period, the U.K.'s trading relationship with the EU will remain unchanged, allowing time to agree and marketing function withinimplement a new future trading relationship. An extension of the transition period of up to two years is possible, but the current political environment in the U.K. suggests that an extension is not likely to be negotiated. In addition to uncertainty regarding the timing of the transition, there is substantial uncertainty about the final agreements that will be reached by the U.K. and the EU during the transition period on topics such as financial laws and regulations, tax and free trade agreements, immigration laws, and employment laws. We are incorporated in the U.K., and we have significant operations and a substantial workforce therein and therefore enjoy certain benefits based on the U.K.’s membership in the EU. The lack of clarity about the future trading agreements between the U.K. and the EU creates uncertainty for us, as the outcome of these negotiations may affect our business and operations. Additionally, there is organized into regions—a risk that other countries may decide to leave the Americas, Asia, and Europe—but also organizes globally across all geographies according to market segments, so as to facilitate knowledge sharing and coordinate activities involvingEU. The uncertainty surrounding Brexit not only potentially affects our larger customers through global account managers.
Customers
Our customer basebusiness in the Performance SensingU.K. and the EU, but may have a material adverse effect on global economic conditions and the stability of global financial markets, which in turn could have a material adverse effect on our business, includes a wide rangefinancial condition, and results of OEMs and Tier 1 suppliersoperations.
In addition, we have sizable operations in the automotive and HVOR end markets. Our customers in the Sensing Solutions business include a wide range of industrial and commercial manufacturers and suppliers across multiple end markets, primarily OEMs in the climate control, appliance, semiconductor, medical, energy and infrastructure, data/telecom, and aerospace industries, as well as Tier 1 aerospace and motor and compressor suppliers. In geographic and product markets where we lack an established base of customers, we rely on third-party distributors to sell our sensor and control products. We have had relationships with our top ten customers for an average of 28 years. Our largest customer accounted for approximately 8%China, including two principal manufacturing sites. Approximately 17% of our net revenue in fiscal year 2019 was generated in China. Economic and political conditions in China have been and may continue to be volatile and uncertain, especially as the U.S. and China continue to discuss and have differences in trade policies. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report on Form 10-K (this "Report"), increased tariff costs have increased our cost of revenue as a percentage of net revenue in fiscal year 2019. In addition, the legal and regulatory system in China is still developing and is subject to change. Our operations and transactions with customers in China could continue to be adversely affected by increased tariffs, and could be otherwise adversely affected by other changes to market conditions, changes to the regulatory environment, or interpretation of Chinese law.
Adverse conditions in the industries upon which we are dependent, including the automotive industry, have had, and may in the future have, adverse effects on our business.
We are dependent on market dynamics to sell our products, and our operating results could be adversely affected by cyclical and reduced demand in these markets. Periodic downturns in our customers’ industries could significantly reduce
demand for certain of our products, which could have a material adverse effect on our results of operations, financial condition, and cash flows.
Much of our business depends on, and is directly affected by, the global automobile industry. Sales in our automotive end markets accounted for approximately 59% of our total net revenue in fiscal year 2019. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report, demand in the automotive end market we serve has declined 5.6% from the prior year. We are partially offsetting this market decline with content growth, but there can be no assurance that this will continue.
Continued declines in demand such as discussed above, and other adverse developments like those we have seen in past years in the automotive industry, including but not limited to customer bankruptcies and increased demands on us for lower prices, could have adverse effects on our results of operations and could impact our liquidity and our ability to meet restrictive debt covenants. In addition, these same conditions could adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.
Continued pricing and other pressures from our customers may adversely affect our business.
Many of our customers, including automotive manufacturers and other industrial and commercial original equipment manufacturers ("OEMs"), demand annual price reductions. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, these price reductions may have a material adverse effect on our results of operations and cash flows. In addition, our customers occasionally require engineering, design, or production changes. In some circumstances, we may be unable to cover the costs of these changes with price increases. Further, as our customers grow larger, they may increasingly require us to provide them with our products on an exclusive basis, which could limit sales, cause an increase in the number of products we must carry and, consequently, increase our inventory levels and working capital requirements. Certain of our customers, particularly in the automotive industry, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as a condition to engage in future business transactions, many of which are increasing warranty requirements. As a result, we may find it difficult to enter into agreements with such customers on terms that are commercially reasonable to us.
We may incur material losses and costs as a result of product liability, warranty, and recall claims that may be brought against us.
We have been, and will continue to be, exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in death, bodily injury, and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates to product safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all of the repair or replacement costs of these products under warranty when the product supplied did not perform as represented. In addition, a product recall could generate substantial negative publicity about our business and interfere with our manufacturing plans and product delivery obligations as we seek to repair affected products. Our costs associated with product liability, warranty, and recall claims could be material.
We are dependent on market acceptance of our new product introductions and product innovations for future revenue.
Substantially all markets in which we operate are impacted by technological change or change in consumer tastes and preferences, which are rapid in certain markets. Our operating results depend substantially upon our ability to continually design, develop, introduce, and sell new and innovative products; to modify existing products; and to customize products to meet customer requirements driven by such change. There are numerous risks inherent in these processes, including the risk that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market profitable new products and applications before our competitors or in time to satisfy customer demands.
Increasing costs for, or limitations on the supply of or access to, manufactured components and raw materials may adversely affect our business and results of operations.
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including those containing certain commodities, resins, and rare earth metals, which may experience significant volatility in their price and availability. We have entered into hedge arrangements for certain metals used in our products in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the future. Such hedges might not be economically successful. In addition, these hedges do not qualify as accounting hedges in accordance with U.S. generally
accepted accounting principles. Accordingly, the change in fair value of these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to quarter. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Report for additional information related to accounting for hedges of commodity prices, and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report, for an analysis of the sensitivity on pretax earnings of changes in the forward prices on these hedges.
The price and availability of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations, including the impact of tariffs, trade barriers, and disputes, and global economic or political events including government actions, labor strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in foreign currency exchange rates, and prevailing price levels. It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Therefore, a significant increase in the price or a decrease in the availability of these items could materially increase our operating costs and materially and adversely affect our business and results of operations.
In connection with the implementation of our corporate strategies, we face risks associated with the acquisition or disposition of businesses, the entry into new lines of business, the integration of acquired businesses, and the growth and development of these businesses.
In pursuing our corporate strategy, we often acquire other businesses or dispose of or exit businesses we currently own. The success of this strategy is dependent upon our ability to identify appropriate acquisition and disposition targets, negotiate transactions on favorable terms, complete transactions and, in the case of acquisitions, successfully integrate them into our existing businesses. If a proposed transaction is not consummated, the time and resources spent pursuing it could adversely result in missed opportunities to locate and acquire other businesses. If acquisitions are made, there can be no assurance that we will realize the anticipated benefits of such acquisitions, including, but not limited to, revenue growth, operational efficiencies, or expected synergies. If we dispose of or otherwise exit certain businesses, we may incur significant write-offs, including those related to goodwill and other intangible assets, and face other risks, including difficulties in the separation of operations, services, products, and personnel; the diversion of management's attention from other business concerns; the disruption of our business; and the potential loss of key employees. There can be no assurance that we will be successful in addressing these or any other significant risks encountered.
Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional indebtedness, and/or by issuing additional equity securities. In addition, we could face financial risks associated with incurring additional indebtedness such as reducing our liquidity, limiting our access to financing markets, and increasing the amount of service on our debt. The availability of debt to finance future acquisitions may be restricted, and our ability to make future acquisitions may be limited.
There can be no assurance that any anticipated synergies or cost savings related to acquisitions will be achieved or that they will be achieved in our estimated time frame. We may not be able to successfully integrate and streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect. In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.
We also may seek to restructure our business in the future by disposing of certain assets or by consolidating operations. There can be no assurance that any restructuring of our business will not adversely affect our financial condition, leverage, or results of operations. In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.
Further, from time to time, either through acquisitions or internal development, we enter new lines of business or offer new products and services within existing lines of business. These new lines of business or new products and services present us with additional risks, particularly in instances where the markets are not fully developed. Such risks include the investment of significant time and resources; the possibility that these efforts will be not be successful; the possibility that the marketplace does not accept our products or services or that we are unable to retain customers that adopt our new products or services; and the risk of additional liabilities associated with these efforts. In addition, many of the businesses that we acquire and develop will likely have significantly smaller scales of operations prior to the implementation of our growth strategy. If we are not able to manage the growing complexity of these businesses, including improving, refining, or revising our systems and operational practices, and enlarging the scale and scope of the businesses, our business may be adversely affected. Other risks include developing knowledge of and experience in the new business, integrating the acquired business into our systems and culture, recruiting professionals, and developing and capitalizing on new relationships with experienced market participants. External factors, such as compliance with new or revised regulations, competitive alternatives, and shifting market preferences may also
impact the successful implementation of a new line of business. Failure to manage these risks in the acquisition or development of new businesses could materially and adversely affect our business, results of operations, and financial condition.
Restructuring our business or divesting some of our businesses or product lines in the future may have a material adverse effect on our results of operations, financial condition, and cash flows.
We continue to evaluate the strategic fit of specific businesses and products that may result in additional divestitures. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products, and personnel; the diversion of management's attention from other business concerns; the disruption of our business; and the potential loss of key employees. There can be no assurance that we will be successful in addressing these or any other significant risks encountered.
We also may seek to restructure our business in the future by relocating operations, disposing of certain assets, or consolidating operations. There can be no assurance that any restructuring of our business will not adversely affect our financial condition, leverage, or results of operations. In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.
Natural disasters or other disasters outside of our control could cause significant business interruptions resulting in harm to our business operations and financial condition.
Our operations and those of our suppliers and customers, and the supply chains that support their operations, may potentially suffer interruptions caused by natural disasters such as earthquakes, tsunamis, hurricanes, typhoons, or floods; or other disasters such as fires, explosions, disease, and acts of terrorism or war that are outside of our control, including government reactions due to such disasters. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial condition, and/or cash flows could be materially adversely affected.
In addition, the ongoing coronavirus outbreak emanating from China at the beginning of 2020 has resulted in increased travel restrictions and extended shutdown of certain businesses in the region. These or any further political or governmental developments or health concerns in China or other countries in which we operate could result in social, economic and labor instability. These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
Labor disruptions or increased labor costs could adversely affect our business.
As of December 31, 2019, we had approximately 21,050 employees, of whom approximately 8% were located in the U.S. As of December 31, 2019, approximately 115 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils.
A material labor disruption or work stoppage at one or more of our manufacturing or business facilities could have a material adverse effect on our business. In addition, work stoppages occur relatively frequently in the industries in which many of our customers operate, such as the automotive industry. If one or more of our larger customers were to experience a material work stoppage for any reason, that customer may halt or limit the purchase of our products. This could cause us to reduce production levels or shut down production facilities relating to those products, which could have a material adverse effect on our business, results of operations, and/or financial condition.
We operate in markets that are highly competitive and competitive pressures could require us to lower our prices or result in reduced demand for our products.
We operate in markets that are highly competitive, and we compete on the basis of product performance in mission-critical operating environments, quality, service, reliability, and/or commercial competitiveness across the industries and end markets we serve. A significant element of our competitive strategy is to design and manufacture high-quality products that meet the needs of our customers at a commercially competitive price, particularly in markets where low-cost, country-based suppliers, primarily in China with respect to the Sensing Solutions segment, have entered the markets or increased their per-unit sales in these markets by delivering products at low cost to local OEMs. In addition, certain of our competitors in the automotive sensor market are influenced or controlled by major OEMs or suppliers, thereby limiting our access to these customers. Many of our customers also rely on us as their sole source of supply for many of the products that we have historically sold to them. These customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products internally, primarily to reduce risk of delivery interruptions or as a means of extracting price reductions from us. Certain of our customers currently have, or may develop in the future, the capability to internally produce
the products that we sell to them and may compete with us with respect to those and other products and with respect to other customers. Competitive pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit margins and/or resulting in a loss of market share.
We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders or for which we are currently engaged in development.
Our ability to generate revenue from products pending customer awards is subject to a number of important risks and uncertainties, many of which are beyond our control, including the number of products our customers will actually produce, as well as the timing of such production. Many of our customer agreements provide for the supply of a certain share of the customer’s requirements for a particular application or platform, rather than for a specific quantity of products. In some cases, we have no remedy if a customer chooses to purchase less than we expect. In cases where customers do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes may be limited to increased pricing on those products that the customer does purchase from us or renegotiating other contract terms. There is no assurance that such price increases or new terms will offset a shortfall in expected revenue. In addition, some of our customers may have the right to discontinue a program or replace us with another supplier under certain circumstances. As a result, products for which we are currently incurring development expenses may not be manufactured by our customers at all, or may be manufactured in smaller amounts than currently anticipated. Therefore, our anticipated future revenue from products relating to existing customer awards or product development relationships may not result in firm orders from customers for the originally contracted amount. We also incur capital expenditures and other costs and price our products based on estimated production volumes. If actual production volumes were significantly lower than estimated, our anticipated revenue and gross margin from those new products would be adversely affected. We cannot predict the ultimate demand for our customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost increases to our customers.
Security breaches and other disruptions to our information technology ("IT") infrastructure could interfere with our operations, compromise confidential information, and expose us to liability, which could materially adversely impact our business and reputation.
Security breaches and other disruptions to our IT infrastructure could interfere with our operations; compromise information belonging to us, our employees, customers, and suppliers; and expose us to liability that could adversely impact our business and reputation.
In the ordinary course of business, we rely on IT networks and systems, some of which are managed by third parties, to process, transmit, and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information and customer and employee data, and may have access to confidential or personal information that is subject to privacy and security laws, regulations, and customer-imposed controls. We also operate in countries where these threats, specifically the theft of our intellectual property, may pose a greater risk.
Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems), our IT networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due to attacks by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events. We also face the challenge of supporting our older systems and implementing necessary upgrades.
Moreover, as we continue to develop products containing complex information technology systems designed to support today���s increasingly connected vehicles, these systems also could be susceptible to similar interruptions, including the possibility of unauthorized access. Further, as we transition to offering more cloud-based solutions that are dependent on the Internet or other networks to operate with increased users, we may become a greater target for cyber threats, such as malware, denial of service, external adversaries or insider threats.
We are at risk of attack by a growing list of adversaries through increasingly sophisticated methods. Because the techniques used to obtain unauthorized access or sabotage systems change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. In addition, we may not be able to detect breaches in our IT systems or assess the severity or impact of a breach in a timely manner. We regularly experience attacks to our systems and networks and have from time to time experienced cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to our IT systems, and similar incidents, which to date have not had a material impact on our business. If we are unable to efficiently and effectively maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access. While we select our third party vendors carefully, problems with the IT systems of our vendors, including breakdowns or other disruptions in communication services provided by a vendor,
failure of a vendor to handle current or higher volumes, cyber-attacks, and security breaches at a vendor could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Additionally, we are an acquisitive organization and the process of integrating the information systems of the businesses we acquire is complex and exposes us to additional risk as we might not adequately identify weaknesses in the targets’ information systems, which could expose us to unexpected liabilities or make our own systems more vulnerable to attack.
These types of incidents affecting us or our third-party vendors could result in intellectual property or other confidential information being lost or stolen, including client, employee, or company data. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could materially adversely affect our business. Further, to the extent that any disruption or security breach results in a loss of, or damage to, our data, or an inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against us, and ultimately harm our business, financial condition, and/or results of operations.
Improper disclosure of confidential, personal, or proprietary data could result in regulatory scrutiny, legal liability, or harm to our reputation.
One of our significant responsibilities is to maintain the security and privacy of our employees’ and customers’ confidential and proprietary information, including confidential information about our employees’ compensation, medical information, and other personally identifiable information. We maintain policies, procedures, and technological safeguards designed to protect the security and privacy of this information. Nonetheless, we cannot eliminate the risk of human error, employee or vendor malfeasance, or cyber-attacks that could result in improper access to or disclosure of confidential, personal, or proprietary information. Such access or disclosure could harm our reputation and subject us to liability under our contracts and laws and regulations that protect personal data, resulting in increased costs, loss of revenue, and loss of customers. The release of confidential information as a result of a security breach could also lead to litigation or other proceedings against us by affected individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business.
In many jurisdictions, including in the EU and the U.S., we are subject to laws and regulations relating to the collection, use, retention, security, and transfer of this information. These laws and regulations are frequently changing and are becoming increasingly complex and sometimes conflict among the various jurisdictions and countries in which we operate, which makes compliance challenging and expensive.
Additionally, certain jurisdictions’ regulations include notice provisions that may require us to inform affected customers or employees in the event of a breach of confidential information before we fully understand or appreciate the extent of the breach. These notice provisions present operational challenges and related risks.
In particular, the EU’s General Data Protection Regulation ("GDPR") went into effect in May 2018 and the California Consumer Privacy Act went into effect in January 2020. Non-compliance could result in proceedings against us by governmental entities or others. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impair our reputation in the marketplace. Further, regulatory initiatives in the area of data protection are more frequently including provisions allowing authorities to impose substantial fines and penalties, and therefore, failure to comply could also have a significant financial impact.
Financial Risks
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
A portion of our net revenue, expenses, receivables, and payables are denominated in currencies other than the U.S. dollar (the "USD"). We, therefore, face exposure to adverse movements in exchange rates of currencies other than the USD, which may change over time and could affect our financial results and cash flows. For financial reporting purposes, we, and each of our subsidiaries, operate under a USD functional currency because of the significant influence of the USD on our operations. In certain instances, we enter into transactions that are denominated in a currency other than the USD. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in USD using the exchange rate in effect at that date. At each balance sheet date, recognized monetary balances denominated in a currency other than the USD are adjusted to USD using the exchange rate at the balance sheet date, with gains or losses recognized in other, net in the consolidated statements of operations. During times of a weakening USD, our revenue recognized in currencies other than the USD may increase because the non-U.S. currency will translate into more USD.
Conversely, during times of a strengthening USD, our revenue recognized in currencies other than the USD may decrease because the local currency will translate into fewer USD.
Our level of indebtedness could adversely affect our financial condition and our ability to operate our business.
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"), a $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.
As of December 31, 2019, we had $3,291.8 million of gross outstanding indebtedness, including $460.7 million of indebtedness under the Term Loan, $500.0 million in aggregate principal amount of 4.875% senior notes due 2023 issued under an indenture dated as of April 17, 2013 (the "4.875% Senior Notes"), $400.0 million in aggregate principal amount of 5.625% senior notes due 2024 issued under an indenture dated as of October 14, 2014 (the "5.625% Senior Notes"), $700.0 million in aggregate principal amount of 5.0% senior notes due 2025 issued under an indenture dated as of March 26, 2015 (the "5.0% Senior Notes"), $750.0 million in aggregate principal amount of 6.25% senior notes due 2026 issued under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes,"), $450.0 million in aggregate principal amount of 4.375% senior notes due 2030 issued under an indenture dated as of September 20, 2019 (the "4.375% Senior Notes" and together with the 4.875% Senior Notes, the 5.625% Senior Notes, the 5.0% Senior Notes, and the 6.25% Senior Notes, the "Senior Notes"), and $31.1 million of finance lease and other financing obligations.
We may incur additional indebtedness in the future. Our substantial indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our debt obligations;
restrict us from making strategic acquisitions;
limit our ability to repurchase shares;
limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, thereby placing us at a competitive disadvantage if our competitors are not as highly-leveraged;
increase our vulnerability to general adverse economic and market conditions; or
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness if we do not maintain specified financial ratios or are not able to refinance our indebtedness as it comes due, thereby reducing the availability of our cash flows for other purposes.
In addition, the Accordion permits us to incur additional secured credit facilities in certain circumstances in the future, subject to certain limitations as defined in the indentures under which the Senior Notes were issued (the "Senior Notes Indentures"). This could allow us to issue additional secured debt or increase the capacity of the Revolving Credit Facility. As of December 31, 2019, we had $416.1 million available to us under the Revolving Credit Facility.
If we increase our indebtedness by borrowing under the Revolving Credit Facility or incur other new indebtedness under the Accordion, the risks described above would increase. Refer to Note 14, "Debt," of our Financial Statements for additional information related to our outstanding indebtedness.
Our business may not generate sufficient cash flows from operations, or future borrowings under the Senior Secured Credit Facilities or from other sources may not be available to us in an amount sufficient to enable us to service and/or repay our indebtedness when it becomes due, or to fund our other liquidity needs, including capital expenditures.
We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital expenditures and business plan. If we complete additional acquisitions, our debt service requirements could also increase. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity investments, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
Changes in U.S. trade policy, including the imposition of tariffs, may have a material impact on our results of operations.
Existing free trade laws and regulations, such as the United States-Mexico-Canada Agreement and its predecessor agreement, the North American Free Trade Agreement, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as China and Mexico, could have a material adverse affect on our business and financial results.
For example, the U.S. government has taken certain actions with respect to its trade policies and tariffs with China, and may take further actions with respect to these policies in the future. Some of these tariffs affect the material costs of products we import from China. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report, increased tariff costs have increased our cost of revenue as a percentage of net revenue in fiscal year 2019.
Further tariffs may be imposed on other imports of our products or our business may be further impacted by retaliatory trade measures taken by China or other countries in response to existing or future U.S. tariffs. We may raise our prices on products subject to such tariffs to share the cost with our customers, which could harm our operating performance or cause our customers to seek alternative suppliers. In addition, we may seek to shift some of our China manufacturing to other countries, which could result in additional costs and disruption to our operations. We also sell our products globally and, therefore, our export sales could be impacted by the tariffs. Any material reduction in sales may have a material adverse effect on our results of operations.
We are evaluating U.S. government policy, which is subject to change, and adjusting our operational strategies to mitigate the impact of these tariffs; however, there can be no assurances that any mitigation strategies employed will remain available under government policy or that we will be able to offset tariff-related costs or maintain competitive pricing of our products. We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions upon the import or export of our products in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could have a material adverse effect on our business, operating results and financial condition.
Our failure to comply with the covenants contained in our credit arrangements, including non-compliance attributable to events beyond our control, could result in an event of default, which could materially and adversely affect our operating results and our financial condition.
The Revolving Credit Facility requires us to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 20% of the commitments under the Revolving Credit Facility. The Revolving Credit Facility and the Senior Notes Indentures also require us to comply with various operational and other covenants.
If we experience an event of default under any of our debt instruments that is not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to become due and payable immediately, which, in turn, would result in cross-defaults under our other debt instruments. Our assets and cash flows may not be sufficient to fully repay borrowings if accelerated upon an event of default.
If, when required, we are unable to repay, refinance, or restructure our indebtedness under, or amend the covenants contained in, the Credit Agreement, or if a default otherwise occurs, the lenders under the Senior Secured Credit Facilities could: elect to terminate their commitments thereunder; cease making further loans; declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable; institute foreclosure proceedings against those assets that secure the borrowings under the Senior Secured Credit Facilities; and prevent us from making payments on the Senior Notes. Any such actions could force us into bankruptcy or liquidation, and we might not be able to repay our obligations in such an event.
We have recorded a significant amount of goodwill and other identifiable intangible assets, and we may be required to recognize goodwill or intangible asset impairments, which would reduce our earnings.
We have recorded a significant amount of goodwill and other identifiable intangible assets. Goodwill and other intangible assets, net totaled approximately $3.9 billion as of December 31, 2019, or 57% of our total assets. Goodwill, which represents
the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, was approximately $3.1 billion as of December 31, 2019, or 45% of our total assets. Goodwill and other identifiable intangible assets were recognized at fair value as of the corresponding acquisition date. Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in laws or regulations, significant unexpected or planned changes in the use of assets, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income, which may impact our ability to raise capital. Should certain assumptions used in the development of the fair value of our reporting units change, we may be required to recognize goodwill or other intangible asset impairments. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," of our Financial Statements for additional information related to our goodwill and other identifiable intangible assets. Refer to Critical Accounting Policies and Estimates, included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report for additional information related to the assumptions used in the development of the fair value of our reporting units.
Our global effective tax rate is subject to a variety of different factors that could create volatility in that tax rate, expose us to greater than anticipated tax liabilities, or cause us to adjust previously recognized tax assets and liabilities.
We are subject to income taxes in the U.K., China, Mexico, the U.S., and many other jurisdictions. As a result, our global effective tax rate from period to period can be affected by many factors, including changes in tax legislation, changes in tax rates and tax laws, our jurisdictional mix of earnings, the use of global funding structures, the tax characteristics of our income, the effects on our revenues and costs of complying with transfer pricing requirements under differing laws of various countries, consequences of acquisitions and dispositions of businesses and business segments, and the taxation of subsidiary income in the jurisdiction of its parent company regardless of whether or not distributed. Significant judgment is required in determining our worldwide provision for income taxes, and our determination of the amount of our tax liability is always subject to review by applicable tax authorities. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information related to our accounting for income taxes.
We could be subject to future audits conducted by these foreign and domestic tax authorities, and resolution of such audits could impact our tax rate in future periods. This may include reclassification or other changes (such as those in applicable accounting rules) that increase the amounts that we have previously provided for income taxes in our consolidated financial statements.
We believe that our redomicile into the U.K. and related transactions should continue to support our ability to maintain a competitive global tax rate since the U.K. has implemented a dividend exemption system that generally does not subject non-U.K. earnings to U.K. tax when such earnings are repatriated to the U.K. in the form of dividends from non-U.K. subsidiaries. This system should allow us to optimize our capital allocation through global funding structures. However, we cannot provide any assurances as to what our tax rate will be in any period because of, among other things, uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions, as well as changes in U.S. and other tax laws, treaties, and regulations. Our actual global tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of the jurisdictions where we operate could change in the future, and such changes could cause a material change in our tax rate.
Tax laws, regulations, and treaties where we do business may be subject to significant changes. These changes could materially impact our prospective tax profile, and our ability to mitigate any such changes may be limited. We continuously monitor all global regulatory developments and consider alternatives to limit their detrimental impacts. However, not all unfavorable developments can be moderated and we may consequently experience adverse effects on our effective tax rate and cash flows. Therefore, we cannot provide any assurances as to what our tax rate will be in any future period.
For example, the European Commission (“EC”) has been conducting investigations of state aid and have focused on whether EU sovereign country laws or rulings provide favorable treatment to taxpayers conflicting with its interpretation of EU law. EC findings may have retroactive effect and can cause increases in tax liabilities where we considered ourselves in full compliance with local legislation. Furthermore, the Organization for Economic Co-operation and Development (“OECD”), representing a number of jurisdictions where we conduct business, is recommending changes to long-accepted tax principles applied by most multinational corporations. As currently drafted, OECD guidelines would precipitate incremental future tax liabilities to Sensata. However, the OECD guidelines’ timing and precise impact to us remains unclear. We continue to monitor developments and shall react accordingly.
In addition, we could be subject to future audits conducted by foreign and domestic tax authorities, and the resolution of such audits could impact our tax rate in future periods, as would any reclassification or other changes (such as those in applicable accounting rules) that increases the amounts we have provided for income taxes in our consolidated financial statements. There can be no assurance that we would be successful in attempting to mitigate the adverse impacts resulting from
any changes in law, audits and other matters. Our inability to mitigate the negative consequences of any changes in the law, audits and other matters could cause our global tax rate to increase, our use of cash to increase and our financial condition and results of operations to suffer.
We are a holding company and, therefore, may not be able to receive dividends or other payments in needed amounts from our subsidiaries.
We are organized as a holding company, a legal entity separate and distinct from our operating entities. As a holding company without significant operations of its own, our principal assets are the shares of capital stock of our subsidiaries. We rely on dividends, interest, and other payments from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt, repurchasing ordinary shares, and corporate expenses. Certain of our subsidiaries are subject to regulatory requirements of the jurisdictions in which they operate or other restrictions that may limit the amounts that subsidiaries can pay in dividends or other payments to us. No assurance can be given that there will not be further changes in law, regulatory actions, or other circumstances that could restrict the ability of our subsidiaries to pay dividends or otherwise make payments to us. Furthermore, no assurance can be given that our subsidiaries may be able to make timely payments to us in order for us to meet our obligations.
Legal and Regulatory Risks
We are subject to risks associated with our non-U.S. operations, including changes in local government regulations and policies, which could adversely impact the results of operations from our international businesses.
Our subsidiaries located outside of the U.S. generated approximately 61% of our net revenue in fiscal year 2019, and we expect sales from non-U.S. markets to continue to represent a significant portion of our total net revenue. International sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, and repatriation of earnings.
In addition, other risks are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of legal disputes through certain foreign legal systems, the collection of receivables, exposure to possible expropriation or other government actions, unsettled political conditions, and possible terrorist attacks. These and other factors may have a material adverse effect on our non-U.S. operations and, therefore, on our business and results of operations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K.'s Bribery Act, and similar worldwide anti-bribery laws.
The U.S. FCPA, the U.K.'s Bribery Act, and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our training and compliance program, we cannot provide assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations, financial condition, and/or cash flows.
Export of our products is subject to various export control regulations and may require a license from the U.S. Department of State, the U.S. Department of Commerce, or the U.S. Department of the Treasury. Any failure to comply with such regulations could result in governmental enforcement actions, fines, penalties, or other remedies, which could have a material adverse effect on our business, results of operations, and financial condition.
Certain of our products require us to comply with the U.S. Export Administration Regulations, International Traffic in Arms Regulation ("ITAR"), and the sanctions, regulations, and embargoes administered by the Office of Foreign Assets Control ("OFAC"). Our products that have military applications are on the munitions list of ITAR and require an individual validated license in order to be exported to certain jurisdictions. These restrictions also apply to technical data for design, development, production, use, repair, and maintenance of such ITAR-controlled products. The export of ITAR-controlled products or technical data requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. Any delays in obtaining, or our inability to obtain, such licenses could result in a material reduction in revenue.
We also export products that are subject to other export regulations. Any changes in these export regulations may further restrict the export of our products, and we may cease to be able to procure export licenses for our products under existing regulations. This area remains fluid in terms of regulatory developments. Should we need an export license under existing
regulations, the length of time required by the licensing process can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. We have no control over the time it takes to process an export license. Any restriction on the export of a significant product line or a significant amount of our products could cause a significant reduction in revenue.
We have discovered in the past, and may discover in the future, deficiencies in our OFAC and ITAR compliance programs. Although we continue to enhance these compliance programs, we cannot assure you that any such enhancements will ensure that we are in compliance with applicable laws and regulations at all times, or that applicable authorities will not raise compliance concerns or perform audits to confirm our compliance with applicable laws and regulations. Any failure by us to comply with applicable laws and regulations could result in governmental enforcement actions, fines or penalties, criminal and/or civil proceedings, or other remedies, any of which could have a material adverse effect on our business, results of operations, and/or financial condition.
Changes in existing environmental or safety laws, regulations, and programs could reduce demand for our products, which could cause our revenue to decline.
A significant amount of our business is generated either directly or indirectly as a result of existing laws, regulations, and programs related to environmental protection, fuel economy, energy efficiency, and safety regulation. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation, or enforcement of these programs, could result in a decline in demand for environmental and/or safety products, which may have a material adverse effect on our revenue.
Our operations expose us to the risk of material environmental liabilities, litigation, government enforcement actions, and reputational risk.
We are subject to numerous federal, state, and local environmental protection and health and safety laws and regulations in the various countries where we operate and where our products are sold. These laws and regulations govern, among other things:
•the generation, storage, use, and transportation of hazardous materials;
•emissions or discharges of substances into the environment;
•investigation and remediation of hazardous substances or materials at various sites;
•greenhouse gas emissions;
•product hazardous material content; and
•the health and safety of our employees.
We may not have been, or we may not always be, in compliance with all environmental and health and safety laws and regulations. If we violate these laws, we could be fined, criminally charged, or otherwise sanctioned by regulators. In addition, environmental and health and safety laws are becoming more stringent, resulting in increased costs and compliance burdens.
Certain environmental laws assess liability on current or previous owners or operators of real property for the costs of investigation, removal, and remediation of hazardous substances or materials at their properties or properties at which they have disposed of hazardous substances. Liability for investigation, removal, and remediation costs under certain federal and state laws is retroactive, strict, and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.
We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our results of operations, financial condition, and cash flows, or that we will not be subject to additional environmental claims for personal injury, property damage, and/or cleanup in the future based on our past, present, or future business activities.
Our products are subject to various requirements related to chemical usage, hazardous material content, and recycling.
The EU, China, and other jurisdictions in which our products are sold have enacted or are proposing to enact laws addressing environmental and other impacts from product disposal, use of hazardous materials in products, use of chemicals in manufacturing, recycling of products at the end of their useful life, and other related matters. These laws include but are not limited to the EU Restriction of Hazardous Substances ("RoHS"), End of Life Vehicle ("ELV"), and Waste Electrical and
Electronic Equipment Directives; the EU Registration, Evaluation, Authorization, and Restriction of Chemicals ("REACH") regulation; and the China law on Management Methods for Controlling Pollution by Electronic Information Products. These laws prohibit the use of certain substances in the manufacture of our products and directly and indirectly impose a variety of requirements for modification of manufacturing processes, registration, chemical testing, labeling, and other matters. These laws continue to proliferate and expand in these and other jurisdictions to address other materials and aspects of our product manufacturing and sale. These laws could make the manufacture or sale of our products more expensive or impossible, could limit our ability to sell our products in certain jurisdictions, and could result in liability for product recalls, penalties, or other claims.
Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our products and technology.
The electronics industry is characterized by litigation regarding patent and other intellectual property rights. Within this industry, companies have become more aggressive in asserting and defending patent claims against competitors. There can be no assurance that we will not be subject to future litigation alleging infringement or invalidity of certain of our intellectual property rights, or that we will not have to pursue litigation to protect our property rights. Depending on the importance of the technology, product, patent, trademark, or trade secret in question, an unfavorable outcome regarding one of these matters may have a material adverse effect on our results of operations, financial condition, and/or cash flows.
We may be subject to claims that our products or processes infringe on the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages, modify our products or processes, or prevent us from selling our products.
Third parties may claim that our processes and products infringe their intellectual property rights. Whether or not these claims have merit, we may be subject to costly and time consuming legal proceedings, and this could divert management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages, make future royalty payments, and/or could be prevented from selling some or all of our products. We also may be obligated to indemnify our business partners or customers in any such litigation. Furthermore, we may need to obtain licenses from these third parties or substantially re-engineer or rename our products in order to avoid infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer or rename our products successfully. If we are prevented from selling some or all of our products, our sales could be materially adversely affected.
We are a defendant to a variety of litigation in the course of our business that could cause a material adverse effect on our results of operations, financial condition, and/or cash flows.
In the normal course of business, we are, from time to time, a defendant in litigation, including litigation alleging the infringement of intellectual property rights, anti-competitive behavior, product liability, breach of contract, and employment-related claims. In certain circumstances, patent infringement and antitrust laws permit successful plaintiffs to recover treble damages. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could cause a material adverse effect on our results of operations, financial condition, and/or cash flows. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to lawsuits in which we are involved.
U.K. Domicile Risks
As a public limited company incorporated under the laws of England and Wales, we may have less flexibility with respect to certain aspects of capital management.
English law imposes additional restrictions on certain corporate actions. For example, English law provides that a board of directors may only allot, or issue, securities with the prior authorization of shareholders, such authorization being up to the aggregate nominal amount of shares and for a maximum period of five years, each as specified in the articles of association or relevant shareholder resolution. English law also generally provides shareholders with preemptive rights when new shares are issued for cash; however, it is possible for the articles of association, or shareholders at a general meeting, to exclude preemptive rights. Such an exclusion of preemptive rights may be for a maximum period of up to five years as specified in the articles of association or relevant shareholder resolution. We currently only have authorization to issue shares under our equity plan excluding preemptive rights until our next annual general meeting. This authorization and exclusion needs to be renewed by our shareholders periodically and we intend to renew the authorization and exclusion at each annual general meeting.
English law also requires us to have available "distributable reserves" to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company or other actions. While we intend to maintain a sufficient level of distributable reserves, there is no assurance that we will continue to generate sufficient earnings in order to maintain the necessary level of distributable reserves to make share repurchases or pay dividends.
English law also generally prohibits a company from repurchasing its own shares by way of "off-market purchases" without the prior approval of our shareholders. Such approval lasts for a maximum period of up to five years. Our shares are traded on the New York Stock Exchange, which is not a recognized investment exchange in the U.K. Consequently, any repurchase of our shares is currently considered an "off-market purchase." Our current authorization expires on May 31, 2023, and we intend to renew this authorization periodically.
As a public limited company incorporated under the laws of England and Wales, the enforcement of civil liabilities against us may be more difficult.
Because we are a public limited company incorporated under the laws of England and Wales, investors could experience more difficulty enforcing judgments obtained against us in U.S. courts than would have been the case for a U.S. company. In addition, it may be more difficult (or impossible) to bring some types of claims against us in courts in England than it would be to bring similar claims against a U.S. company in a U.S. court.
As a public limited company incorporated under the laws of England and Wales, it may not be possible to effect service of process upon us within the U.S. to enforce judgments of U.S. courts against us based on the civil liability provisions of the U.S. federal securities laws.
There is doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities solely based on the U.S. federal securities laws. The English courts will, however, treat any amount payable by us under U.S. judgment as a debt and new proceedings can be commenced in the English courts to enforce this debt against us. The following criteria must be satisfied for the English court to enforce the debt created by the U.S. judgment:
the U.S. court having had jurisdiction over the original proceedings according to English conflicts of laws principles and rules of English private international law at the time when proceedings were initiated;
the U.S. proceedings not having been brought in breach of a jurisdiction or arbitration clause except with the agreement of the defendant or the defendant’s subsequent submission to the jurisdiction of the court;
the U.S. judgment being final and conclusive on the merits in the sense of being final and unalterable in the court which pronounced it and being for a definite sum of money;
the recognition or enforcement, as the case may be, of the U.S. judgment not contravening English public policy in a sufficiently significant way or contravening the Human Rights Act 1998 (or any subordinate legislation made thereunder, to the extent applicable);
the U.S. judgment not being for a sum payable in respect of taxes, or other charges of a like nature, or in respect of a penalty or fine, or otherwise based on a U.S. law that an English court considers to be a penal or revenue law;
the U.S. judgment not having been arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damages sustained, and not otherwise being a judgment contrary to section 5 of the Protection of Trading Interests Act 1980 or is a judgment based on measures designated by the Secretary of State under Section 1 of that Act;
the U.S. judgment not having been obtained by fraud or in breach of English principles of natural justice;
the U.S. judgment not being a judgment on a matter previously determined by an English court, or another court whose judgment is entitled to recognition (or enforcement as the case may be) in England, in proceedings involving the same parties that conflicts with an earlier judgment of such court;
the party seeking enforcement (being a party who is not ordinarily resident in some part of the U.K. or resident in an EU Member State) providing security for costs, if ordered to do so by the English courts; and
the English enforcement proceedings being commenced within the relevant limitation period.
If an English court gives judgment for the sum payable under a U.S. judgment, the English judgment will be enforceable by methods generally available for this purpose. These methods generally permit the English court discretion to prescribe the manner of enforcement. In addition, in any enforcement proceedings, the judgment debtor may raise any counterclaim that could have been brought if the action had been originally brought in England unless the subject of the counterclaim was in issue and denied in the U.S. proceedings.
| |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
As of December 31, 2019, we occupied principal manufacturing facilities and business centers in the following locations:
|
| | | | | | | | | | |
| | | | | Operating Segment | | Approximate Square Footage (in thousands) |
| | | | | Performance Sensing | | Sensing Solutions | |
| Country | | Location | | | | Owned | | Leased |
| Bulgaria | | Botevgrad | | X | | | | 169 | | — |
| Bulgaria | | Plovdiv | | X | | | | 125 | | — |
| Bulgaria | | Sofia | | X | | | | — | | 117 |
| China | | Baoying (1) | | X | | X | | 296 | | 385 |
| China | | Changzhou | | X | | X | | 335 | | 236 |
| Malaysia | | Subang Jaya | | X | | | | 138 | | — |
| Mexico | | Aguascalientes | | X | | X | | 489 | | — |
| Mexico | | Tijuana | | X | | X | | — | | 287 |
| Netherlands | | Hengelo | | X | | X | | — | | 94 |
| United Kingdom | | Antrim | | X | | | | — | | 126 |
| United Kingdom | | Carrickfergus | | X | | | | 63 | | — |
| United Kingdom | | Swindon (2) | | X | | | | — | | 34 |
| United States | | Attleboro, MA (3) | | X | | X | | — | | 443 |
| United States | | Carpinteria, CA | | X | | X | | — | | 50 |
| United States | | Thousand Oaks, CA | | X | | X | | — | | 115 |
| | | | | | | | | 1,615 | | 1,887 |
| |
(1) | The owned portion of the properties in this location serves the Sensing Solutions segment only. |
| |
(2) | Our United Kingdom headquarters is located in this facility. |
| |
(3) | Our United States headquarters is located in this facility. |
These facilities are primarily devoted to research, development, engineering, manufacturing, and assembly. In addition to these primary facilities, we occupy other manufacturing, warehousing, administrative, and sales facilities that we do not consider to be principal.
We consider our manufacturing facilities sufficient to meet our current operational requirements. An increase in demand for our products may require us to expand our production capacity, which could require us to identify and acquire or lease additional manufacturing facilities. We believe that suitable additional or substitute facilities will be available as required; however, if we are unable to acquire, integrate, and move into production the facilities, equipment, and personnel necessary to meet such an increase in demand, our customer relationships, results of operations, and/or financial condition may suffer materially. Leases covering our currently occupied principal leased facilities expire at varying dates within the next 17 years. We do not anticipate difficulty in retaining occupancy through lease renewals, month-to-month occupancy, or by replacing the leased facilities with equivalent facilities.
A significant portion of our owned properties and equipment is subject to a lien under our senior secured credit facilities. Refer to Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K for additional information related to our senior secured credit facilities.
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. From time to time, we also are involved in disagreements with vendors and customers. Information on certain legal proceedings in which we are involved is included in Note 15, "Commitments and Contingencies," of our audited consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial condition, or cash flows.
| |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our ordinary shares trade on the New York Stock Exchange under the symbol "ST."
Performance Graph
The following graph compares the total shareholder return of our ordinary shares since December 31, 2014 to the total shareholder return since that date of the Standard & Poor’s ("S&P") 500 Stock Index and the S&P 500 Industrial Index. The graph assumes that the value of the investment in our ordinary shares and each index was $100.00 on December 31, 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total Shareholder Return of $100.00 Investment from December 31, 2014 |
| | | As of December 31, |
| | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Sensata | | $ | 100.00 |
| | $ | 87.88 |
| | $ | 74.32 |
| | $ | 97.52 |
| | $ | 85.56 |
| | $ | 102.79 |
|
| S&P 500 | | $ | 100.00 |
| | $ | 101.38 |
| | $ | 113.49 |
| | $ | 138.26 |
| | $ | 132.19 |
| | $ | 173.80 |
|
| S&P 500 Industrial | | $ | 100.00 |
| | $ | 97.44 |
| | $ | 115.81 |
| | $ | 140.14 |
| | $ | 121.47 |
| | $ | 157.09 |
|
The information in the graph and table above is not "soliciting material," is not deemed "filed" with the United States Securities and Exchange Commission, and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K (this "Report"), except to the extent that we specifically incorporate such information by reference. The total shareholder return shown on the graph represents past performance and should not be considered an indication of future price performance.
Stockholders
As of January 31, 2020, there were four holders of record of our ordinary shares, primarily Cede & Co. (which acts as nominee shareholder for the Depository Trust Company).
Dividends
We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare any such dividends in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including restrictions under the terms of the agreements governing our indebtedness. In that regard, our indirect, wholly-owned subsidiary, Sensata Technologies B.V. ("STBV"), is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us. Refer to Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto included elsewhere in this Report for additional information related to our dividend restrictions.
In addition, under Dutch law, STBV and certain of our other subsidiaries that are Dutch private limited liability companies may only pay dividends or make other distributions to the extent that the shareholders' equity of such subsidiary exceeds the reserves required to be maintained by law or under its articles of association.
Under the laws of England and Wales, we are able to declare dividends, make distributions, or repurchase shares only out of distributable reserves on our statutory balance sheet. Distributable reserves are a company’s accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Realized reserves are determined in accordance with generally accepted accounting principles at the time the relevant accounts are prepared. We are not permitted to make a distribution if, at the time, the amount of our net assets is less than the aggregate of our issued and paid-up share capital and undistributable reserves or to the extent that the distribution will reduce our net assets below such amount. Subject to these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition, and any other factors deemed relevant by our shareholders and Board of Directors.
Under current United Kingdom ("U.K.") tax legislation, any future dividends paid by us will not be subject to withholding or deduction on account of U.K. tax, irrespective of the tax residence or the individual circumstances of the recipient shareholder. Shareholders may need to review their facts and circumstances to determine their exposure to U.K. income taxes going forward on any potential dividend income received from us.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased (in shares) | | Weighted-Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plan or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Programs (in millions) (2) |
| October 1 through October 31, 2019 | | 695,385 |
| (1) | $ | 49.44 |
| | 694,684 |
| | $ | 387.3 |
|
| November 1 through November 30, 2019 | | 564,412 |
| | $ | 52.44 |
| | 564,412 |
| | $ | 357.7 |
|
| December 1 through December 31, 2019 | | 389,251 |
| | $ | 51.93 |
| | 389,251 |
| | $ | 337.5 |
|
| Quarter total | | 1,649,048 |
| | $ | 51.06 |
| | 1,648,347 |
| | $ | 337.5 |
|
__________________________
| |
(1) | Upon the vesting of restricted securities, we collect and pay withholding tax for employees by withholding shares to cover such tax. The number of shares presented includes 701 shares withheld in this manner with an aggregate value of $35 thousand, based on the closing price of our ordinary shares on the date of withholding. These withholdings took place outside of a publicly announced repurchase plan. |
| |
(2) | Other than shares withheld to cover required tax withholding upon the vesting of restricted securities, all purchases during the three months ended December 31, 2019 were conducted pursuant to a $500.0 million share repurchase program authorized by our Board of Directors and publicly announced on July 30, 2019. This share repurchase program does not have an established expiration date. |
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
We have derived the selected consolidated statements of operations and other financial data for the years ended December 31, 2017.2019, 2018, and 2017 and the selected consolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report"). We have derived the selected consolidated statements of operations and other financial data for the years ended December 31, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017, 2016, and 2015 from audited consolidated financial statements not included in this Report.
You should read the following information in conjunction with our Financial Statements and Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report. Our historical results are not necessarily indicative of the results to be expected in any future period.
|
| | | | | | | | | | | | | | | | | | | |
| | Sensata Technologies Holding plc (Consolidated) (a) |
| | For the year ended December 31, |
| (In thousands, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of operations data: (b) | | | | | | | | | |
| Net revenue | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
|
| Operating costs and expenses: | | | | | | | | | |
| Cost of revenue | 2,267,433 |
| | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
| | 1,976,845 |
|
| Research and development | 148,425 |
| | 147,279 |
| | 130,127 |
| | 126,656 |
| | 123,603 |
|
| Selling, general and administrative | 281,442 |
| | 305,558 |
| | 301,896 |
| | 293,506 |
| | 270,773 |
|
| Amortization of intangible assets | 142,886 |
| | 139,326 |
| | 161,050 |
| | 201,498 |
| | 186,632 |
|
Restructuring and other charges, net (c) | 53,560 |
| | (47,818 | ) | | 18,975 |
| | 4,113 |
| | 21,919 |
|
| Total operating costs and expenses | 2,893,746 |
| | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
| | 2,579,772 |
|
| Operating income | 556,885 |
| | 710,419 |
| | 555,787 |
| | 492,356 |
| | 395,189 |
|
| Interest expense, net | (158,554 | ) | | (153,679 | ) | | (159,761 | ) | | (165,818 | ) | | (137,626 | ) |
Other, net(d) | (7,908 | ) | | (30,365 | ) | | 6,415 |
| | (5,093 | ) | | (51,934 | ) |
| Income before taxes | 390,423 |
| | 526,375 |
| | 402,441 |
| | 321,445 |
| | 205,629 |
|
Provision for/(benefit from) income taxes (e) | 107,709 |
| | (72,620 | ) | | (5,916 | ) | | 59,011 |
| | (142,067 | ) |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
|
| Basic net income per share | $ | 1.76 |
| | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
|
| Diluted net income per share | $ | 1.75 |
| | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
|
| Weighted-average ordinary shares outstanding—basic | 160,946 |
| | 168,570 |
| | 171,165 |
| | 170,709 |
| | 169,977 |
|
| Weighted-average ordinary shares outstanding—diluted | 161,968 |
| | 169,859 |
| | 172,169 |
| | 171,460 |
| | 171,513 |
|
Other financial data: (b) | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | |
| Operating activities | $ | 619,562 |
| | $ | 620,563 |
| | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
|
| Investing activities | $ | (208,777 | ) | | $ | (237,606 | ) | | $ | (140,722 | ) | | $ | (174,778 | ) | | $ | (1,166,369 | ) |
| Financing activities | $ | (366,499 | ) | | $ | (406,213 | ) | | $ | (15,263 | ) | | $ | (337,582 | ) | | $ | 764,172 |
|
| Additions to property, plant and equipment and capitalized software | $ | (161,259 | ) | | $ | (159,787 | ) | | $ | (144,584 | ) | | $ | (130,217 | ) | | $ | (177,196 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance sheet data: (b) | | | | | | | | | |
| Cash and cash equivalents | $ | 774,119 |
| | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
|
Working capital (f) | $ | 1,330,906 |
| | $ | 1,277,211 |
| | $ | 1,218,796 |
| | $ | 758,189 |
| | $ | 412,748 |
|
| Total assets | $ | 6,834,519 |
| | $ | 6,797,687 |
| | $ | 6,641,525 |
| | $ | 6,240,976 |
| | $ | 6,298,910 |
|
| Total debt, net including finance lease and other financing obligations | $ | 3,255,613 |
| | $ | 3,264,941 |
| | $ | 3,270,269 |
| | $ | 3,273,594 |
| | $ | 3,600,991 |
|
| Total shareholders’ equity | $ | 2,573,755 |
| | $ | 2,608,434 |
| | $ | 2,345,626 |
| | $ | 1,942,007 |
| | $ | 1,668,576 |
|
| |
| (a) | On March 28, 2018, the cross-border merger of Sensata Technologies Holding N.V. ("Sensata N.V.") and Sensata Technologies Holding plc ("Sensata plc") was completed, with Sensata plc being the surviving entity (the "Merger"). On the date of the Merger, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by Sensata N.V. prior to the Merger. Due to the various legal aspects of the Merger, Sensata plc retains the historical data of Sensata N.V., and no recasting or adjustment is required as a result of the Merger. |
| |
| (b) | We acquired certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in fiscal year 2015, and GIGAVAC, LLC ("GIGAVAC") in fiscal year 2018. Pro forma amounts are not shown. We sold the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") in fiscal year 2018. Prior year amounts have not been recast. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
| |
| (c) | Restructuring and other charges, net for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 consisted of the following (refer also to Note 5, "Restructuring and Other Charges, Net," of our Financial Statements): |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Severance costs, net (i) | $ | 29,240 |
| | $ | 7,566 |
| | $ | 11,125 |
| | $ | 813 |
| | $ | 19,829 |
|
Facility and other exit costs (ii) | 808 |
| | 877 |
| | 7,850 |
| | 3,300 |
| | 798 |
|
Gain on sale of Valves Business (iii) | — |
| | (64,423 | ) | | — |
| | — |
| | — |
|
Other (iv) | 23,512 |
| | 8,162 |
| | — |
| | — |
| | 1,292 |
|
| Restructuring and other charges, net | $ | 53,560 |
| | $ | (47,818 | ) | | $ | 18,975 |
| | $ | 4,113 |
| | $ | 21,919 |
|
| |
| (i) | Includes termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions. For the year ended December 31, 2019, these amounts also included $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the United States (the "U.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 in Germany. For the year ended December 31, 2017, these amounts also included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of CST. For the year ended December 31, 2015, these amounts also included $7.6 million of severance charges incurred in order to integrate acquired businesses with ours and $4.0 million of severance charges related to the closure of our Schrader Brazil manufacturing facility. |
| |
| (ii) | For the year ended December 31, 2017, these amounts included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. For the year ended December 31, 2016 these amounts primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. |
| |
| (iii) | In the year ended December 31, 2018, we completed the sale of the Valves Business. |
| |
| (iv) | In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC. |
| |
| (d) | Other, net for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 consisted of the following: |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
(Loss)/gain related to foreign currency exchange rates(i) | $ | (4,577 | ) | | $ | (16,835 | ) | | $ | 2,423 |
| | $ | (12,471 | ) | | $ | (6,007 | ) |
| Gain/(loss) on commodity forward contracts | 4,888 |
| | (8,481 | ) | | 9,989 |
| | 7,399 |
| | (18,468 | ) |
| Loss on debt financing | (4,364 | ) | | (2,350 | ) | | (2,670 | ) | | — |
| | (25,538 | ) |
| Net periodic benefit cost, excluding service cost | (3,186 | ) | | (3,585 | ) | | (3,402 | ) | | (192 | ) | | (1,605 | ) |
| Other | (669 | ) | | 886 |
| | 75 |
| | 171 |
| | (316 | ) |
| Other, net | $ | (7,908 | ) | | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) | | $ | (51,934 | ) |
| |
| (i) | Includes net losses and gains on foreign currency remeasurement and foreign currency forward contracts. Refer to Note 6, "Other, Net," of our Financial Statements for additional information. |
| |
| (e) | For the year ended December 31, 2018, this amount included an income tax benefit of $122.1 million related to the realization of U.S. deferred tax assets previously offset by a valuation allowance. For the year ended December 31, 2017, this amount included an income tax benefit of $73.7 million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information. For the year ended December 31, 2015, this amount included an income tax benefit of $180.0 million, primarily related to the release of a portion of our U.S. valuation allowance in connection with the acquisition of CST. |
| |
| (f) | We define working capital as current assets less current liabilities. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1, "Business," Item 6, "Selected Financial Data," and our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report").
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors," included elsewhere in this Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V.") and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us," is a global industrial technology company that develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and for end users.
Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Our sensors, sensor-based solutions, and controls are included in mission-critical solutions that play a key role in the four key megatrends that are shaping our markets as discussed in further detail in Item 1, "Business," included elsewhere in this Report. Each of these trends is expected to significantly transform our industries and many of our customers businesses. These megatrends are also creating greater secular demand for our products, which enables us to outgrow end-market volume production in many of the markets we serve, a defining characteristic of our company. The most relevant megatrends in the short term include those which result from mandates to make products cleaner and more efficient, as well as the move towards electrification in the automotive, industrial, and heavy vehicle and off-road ("HVOR") industries.
We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the United States (the "U.S."), "Euro 6d" requirements in Europe, "China National 6" requirements in China, and "Bharat Stage VI" requirements in India, 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 demand in many of our key end markets, which we expect will continue to offer us significant growth opportunities.
The technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the systems in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for our customers once a particular sensor has been designed and installed in a system. As a result, our sensors are rarely substituted during a product lifecycle, which in the case of the automotive market typically lasts five to seven years. We focus on new applications that will help us secure new business, drive long-term growth, and provide an opportunity to define a leading application technology in collaboration with our customers.
Our strategies of leveraging core technology platforms and focusing on high-volume applications enable us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration and transformation to best-cost manufacturing locations, global best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
In August 2018 we completed the divestiture of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. In October 2018 we acquired GIGAVAC, LLC ("GIGAVAC"), a leading producer of high voltage contactors and fuses that are mission-critical components
for electric vehicles and equipment. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to these transactions.
Selected Segment Information
We operate in, and report financial information for, the following two 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, |
| | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Amount | | Percent of Total | | Amount | | Percent of Total | | Amount | | Percent of Total |
| Net revenue: | | | | | | | | | | | |
| Performance Sensing | $ | 2,546.0 |
| | 73.8 | % | | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % |
| Sensing Solutions | 904.6 |
| | 26.2 |
| | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
|
| Total net revenue | $ | 3,450.6 |
| | 100.0 | % | | $ | 3,521.6 |
| | 100.0 | % | | $ | 3,306.7 |
| | 100.0 | % |
The following table presents segment operating income in U.S. dollars ("USD") and as a percentage of segment net revenue for the identified periods:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue |
| Segment operating income: | | | | | | | | | | | |
| Performance Sensing | $ | 648.7 |
| | 25.5 | % | | $ | 712.7 |
| | 27.1 | % | | $ | 664.2 |
| | 27.0 | % |
| Sensing Solutions | 291.3 |
| | 32.2 | % | | 293.0 |
| | 32.8 | % | | 277.5 |
| | 32.8 | % |
| Total segment operating income | $ | 940.0 |
| | | | $ | 1,005.7 |
| | | | $ | 941.6 |
| | |
For a reconciliation of total segment operating income to consolidated operating income, refer to Note 20, "Segment Reporting," of our Financial Statements.
Selected Geographic InformationIssuer Purchases of Equity Securities
Refer to Note 18, "Segment Reporting," |
| | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased (in shares) | | Weighted-Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plan or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Programs (in millions) (2) |
| October 1 through October 31, 2019 | | 695,385 |
| (1) | $ | 49.44 |
| | 694,684 |
| | $ | 387.3 |
|
| November 1 through November 30, 2019 | | 564,412 |
| | $ | 52.44 |
| | 564,412 |
| | $ | 357.7 |
|
| December 1 through December 31, 2019 | | 389,251 |
| | $ | 51.93 |
| | 389,251 |
| | $ | 337.5 |
|
| Quarter total | | 1,649,048 |
| | $ | 51.06 |
| | 1,648,347 |
| | $ | 337.5 |
|
__________________________
| |
(1) | Upon the vesting of restricted securities, we collect and pay withholding tax for employees by withholding shares to cover such tax. The number of shares presented includes 701 shares withheld in this manner with an aggregate value of $35 thousand, based on the closing price of our ordinary shares on the date of withholding. These withholdings took place outside of a publicly announced repurchase plan. |
| |
(2) | Other than shares withheld to cover required tax withholding upon the vesting of restricted securities, all purchases during the three months ended December 31, 2019 were conducted pursuant to a $500.0 million share repurchase program authorized by our Board of Directors and publicly announced on July 30, 2019. This share repurchase program does not have an established expiration date. |
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
We have derived the selected consolidated statements of operations and other financial data for the years ended December 31, 2019, 2018, and 2017 and the selected consolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K for details(this "Report"). We have derived the selected consolidated statements of our net revenue by selected geographic areasoperations and other financial data for the years ended December 31, 2017, 2016 and 2015 and PP&E, net bythe selected geographic areaconsolidated balance sheet data as of December 31, 2017, 2016, and 2016.
Competition
Within each of the principal product categories in our Performance Sensing business, we compete with a variety of independent suppliers as well as the in-house operations of Tier 1 systems suppliers. We believe that the key competitive factors in this market are product performance, quality, and reliability, the ability to produce customized solutions on a global basis, technical expertise and development capability, breadth and scale of product offerings, product service and responsiveness, and price.
Within each of the principal product categories in our Sensing Solutions business, we compete with divisions of large multinational industrial corporations and companies with smaller market share, which compete primarily in specific end markets or applications. We believe that the key competitive factors in these markets are product performance, quality, and reliability, although manufacturers in certain markets also compete based on price. Physical proximity to the facilities of the OEM/Tier 1 manufacturer customer has, in our experience, also increasingly become a basis for competition. We have additionally found that certain of the product categories have specific competitive factors. For example, for thermal circuit breaker, thermostat, and switch products, strength of technology, quality, and the ability to provide custom solutions are particularly important. With hydraulic-magnetic circuit breakers, as another example, we have encountered heightened competition on price and a greater emphasis on agency approvals, including approvals by UL and military agencies, and similar organizations outside of the U.S., such as Verband der Elektrotechnik, Elektronik und Informationstechnik, and TÜV Rheinland in Europe, China Compulsory Certification in China, and Canadian Standards Association in Canada.
Employees
As of December 31, 2017, we had approximately 22,100 employees, of whom approximately 8% were located in the U.S. As of December 31, 2017, approximately 530 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils. We also engage contract workers in multiple locations, primarily to cost-effectively manage variations in manufacturing volume, but also to perform engineering and other general services. As of December 31, 2017, we had approximately 2,030 contract workers on a worldwide basis. We believe that our relations with our employees are good.
Environmental Matters and Governmental Regulation
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations. As of December 31, 2017, compliance with federal, state, and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on our capital expenditures, earnings, or competitive position. We have not budgeted any material capital expenditures for environmental control facilities during 2018.
Our products are governed by material content restrictions and reporting requirements, examples of which include: European Union regulations, such as REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals), RoHS (Restriction of Hazardous Substances), and ELV (End of Life Vehicles); U.S. regulations, such as the conflict minerals requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and similar regulations in other countries. Numerous customers, across all end markets, are requiring us to provide declarations of compliance or, in some cases, full material content disclosure as a requirement of doing business with them.
We are subject to compliance with laws and regulations controlling the export of goods and services. Certain of our products are subject to International Traffic in Arms Regulation (“ITAR”). The export of many such ITAR-controlled products requires an individual validated license2015 from the U.S. State Department’s Directorate of Defense Trade Controls. The State Department makes licensing decisions based on type of product, destination of end use, end user, national security, and foreign policy. The length of time involved in the licensing process varies but currently averages approximately six to eight weeks. The license processing time could result in delays in the shipping of products. These laws and regulations are subject to change, and any such change may require us to change technology or incur expenditures to comply with such laws and regulations.
Available Information
We make available free of charge on our Internet website (www.sensata.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). Our website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.
The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-551-8300. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on, or accessible through, this website are not incorporated into this filing. Further, our references to the URLs for the SEC's website and our website are intended to be inactive textual references only.
Risks Related to our Industry and Business Operations
Our business is subject to numerous global risks, including regulatory, political, economic, and military concerns and instability.
Our business, including our employees, customers, and suppliers, are located throughout the world. As a result, we are exposed to numerous global and local risks that could decrease revenue and/or increase expenses and therefore, decrease our profitability, including, without limitation:
trade regulations, including customs, import, and export matters;
tariffs, trade barriers and disputes;
local employment costs, regulations, and conditions;
difficulties with, and costs for, protecting our intellectual property;
challenges in collecting accounts receivable;
tax law and regulatory changes, including examinations by taxing authorities, variations in tax laws from country to country, changes to the terms of income tax treaties, and difficulties in the tax-efficient repatriation of cash generated or held in a number of jurisdictions;
natural disasters;
instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the upcoming exit of the United Kingdom (the "U.K.") from the European Union (the "E.U."); and
impact of each of the foregoing on our outsourcing and procurement arrangements.
We have sizeable operations in China, including two principal manufacturing sites. In addition, approximately 15% of our net revenue in fiscal year 2017 was derived from sales to customers in China. Economic conditions in China have been and may continue to be volatile and uncertain. In addition, the legal and regulatory system in China is still developing and subject to change. Accordingly, our operations and transactions with customers in China could be adversely affected by changes to market conditions, changes to the regulatory environment, or interpretation of Chinese law.
Adverse conditions in the industries upon which we are dependent, including the automotive industry, have had, and may in the future have, adverse effects on our business.
We are dependent on end market dynamics to sell our products, and our operating results could be adversely affected by cyclical and reduced demand in these markets. Periodic downturns in our customers’ industries could significantly reduce demand for certain of our products, which could have a material adverse effect on our results of operations, financial position, and cash flows.
Much of our business depends on, and is directly affected by, the global automobile industry. Sales in our automotive end markets accounted for approximately 62% of our total net revenue in fiscal year 2017. Adverse developments like those we have seen in past years in the automotive industry, including but not limited to declines in demand, customer bankruptcies, and increased demands on us for pricing decreases, could have adverse effects on our results of operations and could impact our liquidity and our ability to meet restrictive debt covenants. In addition, these same conditions could adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.
Continued pricing and other pressures from our customers may adversely affect our business.
Many of our customers, including automotive manufacturers and other industrial and commercial original equipment manufacturers ("OEMs"), have policies that require annual price reductions. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, the required price reductions will impact, and may have a material adverse effect on, our results of operations and cash flows. In addition, our customers occasionally require engineering, design, or production changes. In some circumstances, we may be unable to cover the costs of these changes with
price increases. Further, as our customers grow larger, they may increasingly require us to provide them with our products on an exclusive basis, which could limit sales, cause an increase in the number of products we must carry and, consequently, increase our inventory levels and working capital requirements. Certain of our customers, particularly in the automotive industry, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as a condition to engage in future business transactions. As a result, we may find it difficult to enter into agreements with such customers on terms that are commercially reasonable to us.
We operate in markets that are highly competitive, and competitive pressures could require us to lower our prices or result in reduced demand for our products.
We operate in markets that are highly competitive, and we compete on the basis of product performance, quality, service, and/or price across the industries and markets we serve. A significant element of our competitive strategy is to manufacture high-quality products at best cost, particularly in markets where low-cost country-based suppliers, primarily in China with respect to the Sensing Solutions business, have entered the markets or increased their per-unit sales in these markets by delivering products at low costs to local OEMs. In addition, certain of our competitors in the automotive sensor market are influenced or controlled by major OEMs or suppliers, thereby limiting our access to these customers. Many of our customers also rely on us as their sole source of supply for many of the products that we have historically sold to them. These customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products internally, primarily to reduce risk of delivery interruptions or as a means of extracting price reductions from us. Certain of our customers currently have, or may develop in the future, the capability to internally produce the products that we sell to them and may compete with us with respect to those and other products and with respect to other customers. Competitive pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit margins and/or resulting in a loss of market share.
Increasing costs for, or limitations on the supply of or access to, manufactured components and raw materials may adversely affect our business and results of operations.
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including those containing silver, gold, platinum, palladium, copper, aluminum, nickel, zinc, resins, and certain rare earth metals, which may experience significant volatility in their price and availability. We have entered into hedge arrangements in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the future. Such hedges might not be economically successful. In addition, these hedges do not qualify as accounting hedges in accordance with United States ("U.S.") generally accepted accounting principles. Accordingly, the change in fair value of these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to quarter. Refer to Note 16, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements not included in this Report.
You should read the following information in conjunction with our Financial Statements and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," each included elsewhere in this Annual Report on Form 10-K for further discussion of accounting for hedges of commodity prices, and an analysis of the sensitivity on pretax earnings of changes in the forward prices on these hedges, respectively.
The availability and price of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations, global economic or political events including strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates, and prevailing price levels. It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Therefore, a significant increase in the price or a decrease in the availability of these items could materially increase our operating costs and materially and adversely affect our business and results of operations.
Natural disasters or other disasters outside of our control could cause significant business interruptions resulting in harm to our business operations and financial condition.
Our operations and those of our suppliers and customers, and the supply chains that support their operations, may potentially suffer interruptions caused by natural disasters such as earthquakes, tsunamis, hurricanes, typhoons, or floods; or other disasters such as fires, explosions, disease, acts of terrorism or war that are outside of our control. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and/or cash flows could be materially adversely affected.
Labor disruptions or increased labor costs could adversely affect our business.
As of December 31, 2017, we had approximately 22,100 employees, of whom approximately 8% were located in the U.S. As of December 31, 2017, approximately 530 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils.
A material labor disruption or work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, work stoppages occur relatively frequently in the industries in which many of our customers operate, such as the automotive industry. If one or more of our larger customers were to experience a material work stoppage for any reason, that customer may halt or limit the purchase of our products. This could cause us to shut down production facilities relating to those products, which could have a material adverse effect on our business, results of operations, and/or financial condition.
We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders or for which we are currently engaged in development.
Our ability to generate revenue from products pending customer awards is subject to a number of important risks and uncertainties, many of which are beyond our control, including the number of products our customers will actually produce, as well as the timing of such production. Many of our customer agreements provide for supplying a certain share of the customer’s requirements for a particular application or platform, rather than for manufacturing a specific quantity of products. In some cases, we have no remedy if a customer chooses to purchase less than we expect. In cases where customers do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes is limited to increased pricing on those products that the customer does purchase from us or renegotiating other contract terms. There is no assurance that such price increases or new terms will offset a shortfall in expected revenue. In addition, some of our customers may have the right to discontinue a program or replace us with another supplier under certain circumstances. As a result, products for which we are currently incurring development expenses may not be manufactured by customers at all, or may be manufactured in smaller amounts than currently anticipated. Therefore, our anticipated future revenue from products relating to existing customer awards or product development relationships may not result in firm orders from customers for the originally contracted amount. We also incur capital expenditures and other costs, and price our products, based on estimated production volumes. If actual production volumes were significantly lower than estimated, our anticipated revenue and gross margin from those new products would be adversely affected. We cannot predict the ultimate demand for our customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost increases to our customers.
We are dependent on market acceptance of our new product introductions and product innovations for future revenue.
Substantially all markets in which we operate are impacted by technological change or change in consumer tastes and preferences, which are rapid in certain end markets. Our operating results depend substantially upon our ability to continually design, develop, introduce, and sell new and innovative products; to modify existing products; and to customize products to meet customer requirements driven by such change. There are numerous risks inherent in these processes, including the risk that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market profitable new products and applications before our competitors or in time to satisfy customer demands.
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations, compromise confidential information, and expose us to liability which could materially adversely impact our business and reputation.
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations; compromise information belonging to us, our employees, customers, and suppliers; and expose us to liability that could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit, and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information and customer and employee data, and may have access to confidential or personal information that is subject to privacy and security laws, regulations, and customer-imposed controls. We also face the challenge of supporting our older systems and implementing necessary upgrades. Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems) that are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due to attacks by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could materially adversely affect our business. Further, to the extent that any disruption or security breach results in a loss of, or damage to, our data, or an inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against the Company, and ultimately harm our business, financial condition, and/or results of operations.
Our level of indebtedness could adversely affect our financial condition and our ability to operate our business.
As of December 31, 2017, we had $3,312.5 million of gross outstanding indebtedness, including $927.8 million of indebtedness under the term loan (the "Term Loan") provided by the eighth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement"), $500.0 million aggregate principal amount of 4.875% senior notes due 2023 issued under an indenture dated as of April 17, 2013 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 issued under an indenture dated as of October 14, 2014 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 issued under an indenture dated as of March 26, 2015 (the "5.0% Senior Notes"), $750.0 million aggregate principal amount of 6.25% senior notes due 2026 issued under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes", and together with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes"), and $34.7 million of capital lease and other financing obligations. We may incur additional indebtedness in the future. Our substantial indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our debt obligations;
restrict us from making strategic acquisitions;
limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, thereby placing us at a competitive disadvantage if our competitors are not as highly-leveraged;
increase our vulnerability to general adverse economic and industry conditions; or
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness if we do not maintain specified financial ratios or are not able to refinance our indebtedness as it comes due, thereby reducing the availability of our cash flows for other purposes.
In addition, the senior secured credit facilities provided for under the Credit Agreement (the "Senior Secured Credit Facilities"), permit us to incur additional indebtedness in the future, including borrowings under the Revolving Credit Facility and $1.0 billion in incremental facilities (the "Accordion") under which additional term loans may be issued or the capacity of the Revolving Credit Facility may be increased. As of December 31, 2017, we had $415.3 million available to us under the Revolving Credit Facility.
If we increase our indebtedness by borrowing under the Revolving Credit Facility or incur other new indebtedness under the Accordion, the risks described above would increase. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our outstanding indebtedness.
Our business may not generate sufficient cash flows from operations, or future borrowings under the Senior Secured Credit Facilities or from other sources may not be available to us in an amount sufficient to enable us to service and/or repay our indebtedness when it becomes due, or to fund our other liquidity needs, including capital expenditures.
We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital expenditures and business plan. If we complete additional acquisitions, our debt service requirements could also increase. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity investments, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
Our failure to comply with the covenants contained in our credit arrangements, including non-compliance attributable to events beyond our control, could result in an event of default, which could materially and adversely affect our operating results and our financial condition.
The Revolving Credit Facility requires us to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 10% of the commitments under the Revolving Credit Facility. In addition, Sensata Technologies B.V. and its Restricted Subsidiaries (as defined in the Credit Agreement) are required to satisfy this covenant, on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings. Additionally, the Revolving Credit Facility and the indentures governing the Senior Notes require us to comply with various operational and other covenants.
If we experienced an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to become due and payable immediately, which, in turn, would result in cross defaults under our other debt instruments. Our assets and cash flows may not be sufficient to fully repay borrowings if accelerated upon an event of default.
If, when required, we are unable to repay, refinance, or restructure our indebtedness under, or amend the covenants contained in, the Credit Agreement, or if a default otherwise occurs, the lenders under the Senior Secured Credit Facilities could: elect to terminate their commitments thereunder; cease making further loans; declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable; institute foreclosure proceedings against those assets that secure the borrowings under the Senior Secured Credit Facilities; and prevent us from making payments on the Senior Notes. Any such actions could force us into bankruptcy or liquidation, and we might not be able to repay our obligations in such an event.
Risks Related to Prior and Future Acquisitions and Divestitures
Integration of acquired companies, and any future acquisitions, joint ventures, and/or dispositions, may require significant resources and/or result in significant unanticipated losses, costs, or liabilities, and we may not realize all of the anticipated operating synergies and cost savings from acquisitions.
We have grown, and in the future we intend to continue to grow, by making acquisitions or entering into joint ventures or similar arrangements. There can be no assurance that our acquisitions will perform as expected in the future. Any future acquisitions will depend on our ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition, and to finance those acquisitions. We also will face competition for suitable acquisition candidates, which may increase our costs. In addition, acquisitions or investments require significant managerial attention, which may be diverted from our other operations. Furthermore, acquisitions of businesses or facilities entail a number of additional risks, including:
•problems with effective integration of operations;
•the inability to maintain key pre-acquisition customer, supplier, and employee relationships;
•increased operating costs; and
•exposure to unanticipated liabilities.
Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional indebtedness, and/or by issuing additional equity securities. In addition, we could face financial risks associated with incurring additional indebtedness such as reducing our liquidity, limiting our access to financing markets, and increasing the amount of service on our debt. The availability of debt to finance future acquisitions may be restricted, and our ability to make future acquisitions may be limited.
There can be no assurance that any anticipated synergies or cost savings generated through acquisitions will be achieved or that they will be achieved in our estimated time frame. We may not be able to successfully integrate and streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect. In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.
Restructuring our business or divesting some of our businesses or product lines in the future may have a material adverse effect on our results of operations, financial position, and cash flows.
We continue to evaluate the strategic fit of specific businesses and products that may result in additional divestitures. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial position. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products, and personnel; the diversion of management's attention from other business concerns; the disruption of our business; and the potential loss of key employees. There can be no assurance that we will be successful in addressing these or any other significant risks encountered.
We also may seek to restructure our business in the future by disposing of certain assets or by consolidating operations. There can be no assurance that any restructuring of our business will not adversely affect our financial position, leverage, or results of operations. In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.
If the acquisitions of August Cayman Company, Inc. (“Schrader”) and the acquired assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") do not achieve their intended results, our business, financial condition, and results of operations could be materially and adversely affected.
The integrations of Schrader and CST into our operations are significant undertakings and continue to require attention from our management team. Actual synergies and the expenses required to realize these synergies could differ materially from our expectations, and we cannot assure you that these synergies will not have other adverse effects on our business. Failure to achieve the anticipated benefits of these acquisitions could result in increased costs or decreased revenue and could materially adversely affect our business, financial condition, and/or results of operations.
Risks Related to Legal and Regulatory Matters
We are subject to risks associated with our non-U.S. operations, including changes in local government regulations and policies, exchange controls, and foreign exchange exposure, which could adversely impact the reported results of operations from our international businesses.
Our subsidiaries located outside of the U.S. generated approximately 65% of our net revenue in fiscal year 2017, and we expect sales from non-U.S. markets to continue to represent a significant portion of our total net revenue. International sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, and repatriation of earnings.
A portion of our net revenue, expenses, receivables, and payables are denominated in currencies other than the U.S. dollar ("USD"). We are, therefore, subject to foreign currency risks and foreign exchange exposure. Changes in the relative values of currencies occur from time to time and could affect our operating results. For financial reporting purposes, we, and each of our subsidiaries, operate under a USD functional currency because of the significant influence of USD on our operations. In certain instances, we enter into transactions that are denominated in a currency other than USD. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in USD using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than USD are adjusted to USD using the exchange rate at the balance sheet date, with gains or losses recorded in Other, net in the consolidated statements of operations. During times of a weakening USD, our reported international sales and earnings may increase because the non-U.S. currency will translate into more USD. Conversely, during times of a strengthening USD, our reported international sales and earnings may decrease because the local currency will translate into fewer USD.
There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of legal disputes through certain foreign legal systems, the collection of receivables, exposure to possible expropriation or other government actions, unsettled political conditions, and possible terrorist attacks. These and other factors may have a material adverse effect on our non-U.S. operations and, therefore, on our business and results of operations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (the "FCPA"), the United Kingdom's Bribery Act, and similar worldwide anti-bribery laws.
The U.S. FCPA, the United Kingdom's Bribery Act, and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our training and compliance program, we cannot provide assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations, financial position, and/or cash flows.
Export of our products is subject to various export control regulations and may require a license from either the U.S. Department of State, the U.S. Department of Commerce, or the U.S. Department of the Treasury. Any failure to comply with such regulations could result in governmental enforcement actions, fines, penalties, or other remedies, which could have a material adverse effect on our business, results of operations, and financial condition.
We must comply with the U.S. Export Administration Regulations, International Traffic in Arms Regulation ("ITAR"), and the sanctions, regulations, and embargoes administered by the Office of Foreign Assets Control (“OFAC”). Certain of our products that have military applications are on the munitions list of ITAR and require an individual validated license in order to be exported to certain jurisdictions. These restrictions also apply to technical data for design, development, production, use,
repair, and maintenance of such ITAR-controlled products. The export of ITAR-controlled products or technical data requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. Any delays in obtaining, or our inability to obtain, such licenses could result in a material reduction in revenue.
We export products that are subject to other export regulations. Any changes in these export regulations may further restrict the export of our products, and we may cease to be able to procure export licenses for our products under existing regulations. This area remains fluid in terms of regulatory developments. Should we need an export license under existing regulations, the length of time required by the licensing process can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. We have no control over the time it takes to process an export license. Any restriction on the export of a significant product line or a significant amount of our products could cause a significant reduction in revenue.
We have discovered in the past, and may discover in the future, deficiencies in our OFAC and ITAR compliance programs. Although we continue to enhance these compliance programs, we cannot assure you that any such enhancements will ensure that we are in compliance with applicable laws and regulations at all times, or that applicable authorities will not raise compliance concerns or perform audits to confirm our compliance with applicable laws and regulations. Any failure by us to comply with applicable laws and regulations could result in governmental enforcement actions, fines or penalties, criminal and/or civil proceedings, or other remedies, any of which could have a material adverse effect on our business, results of operations, and/or financial condition.
Changes in existing environmental and/or safety laws, regulations, and programs could reduce demand for environmental and/or safety-related products, which could cause our revenue to decline.
A significant amount of our business is generated either directly or indirectly as a result of existing laws, regulations, and programs related to environmental protection, fuel economy, energy efficiency, and safety regulation. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation, or enforcement of these programs, could result in a decline in demand for environmental and/or safety products, which may have a material adverse effect on our revenue.
Our operations expose us to the risk of material environmental liabilities, litigation, government enforcement actions, and reputational risk.
We are subject to numerous federal, state, and local environmental protection and health and safety laws and regulations in the various countries where we operate and where our products are sold. These laws and regulations govern, among other things:
•the generation, storage, use, and transportation of hazardous materials;
•emissions or discharges of substances into the environment;
•investigation and remediation of hazardous substances or materials at various sites;
•greenhouse gas emissions;
•product hazardous material content; and
•the health and safety of our employees.
We may not have been, or we may not always be, in compliance with all environmental and health and safety laws and regulations. If we violate these laws, we could be fined, criminally charged, or otherwise sanctioned by regulators. In addition, environmental and health and safety laws are becoming more stringent, resulting in increased costs and compliance burdens.
Certain environmental laws assess liability on current or previous owners or operators of real property for the costs of investigation, removal, and remediation of hazardous substances or materials at their properties or properties at which they have disposed of hazardous substances. Liability for investigation, removal, and remediation costs under certain federal and state laws is retroactive, strict, and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.
We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our results of operations, financial position, and cash flows, or that we will not be subject to additional environmental claims for personal injury, property damage, and/or cleanup in the future based on our past, present, or future business activities.
We may be adversely affected by environmental, safety, and governmental regulations or concerns.
We are subject to the requirements of environmental and occupational safety and health laws and regulations in the U.S. and other countries, as well as product performance standards established by quasi-governmental and industrial standards organizations. We cannot assure you that we have been, and will continue to be, in compliance with all of these requirements on account of circumstances or events that have occurred or exist but that we are unaware of, or that we will not incur material costs or liabilities in connection with these requirements in excess of amounts we have accrued. In addition, these requirements are complex, change frequently, and have tended to become more stringent over time. These requirements may change in the future in a manner that could have a material adverse effect on our business, results of operations, and financial condition. We have made, and may be required in the future to make, capital and other expenditures to comply with environmental requirements. In addition, certain of our subsidiaries are subject to pending litigation raising various environmental and human health and safety claims. We cannot assure you that our costs to defend and/or settle these claims will not be material.
Our products are subject to various requirements related to chemical usage, hazardous material content, and recycling.
The E.U., China, and other jurisdictions in which our products are sold have enacted or are proposing to enact laws addressing environmental and other impacts from product disposal, use of hazardous materials in products, use of chemicals in manufacturing, recycling of products at the end of their useful life, and other related matters. These laws include but are not limited to the E.U. Restriction of Hazardous Substances ("RoHS"), End of Life Vehicle ("ELV"), and Waste Electrical and Electronic Equipment Directives; the E.U. Registration, Evaluation, Authorization, and Restriction of Chemicals ("REACH") regulation; and the China law on Management Methods for Controlling Pollution by Electronic Information Products. These laws prohibit the use of certain substances in the manufacture of our products and directly and indirectly impose a variety of requirements for modification of manufacturing processes, registration, chemical testing, labeling, and other matters. These laws continue to proliferate and expand in these and other jurisdictions to address other materials and other aspects of our product manufacturing and sale. These laws could make the manufacture or sale of our products more expensive or impossible, could limit our ability to sell our products in certain jurisdictions, and could result in liability for product recalls, penalties, or other claims.
Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our products and technology.
The electronics industry is characterized by litigation regarding patent and other intellectual property rights. Within this industry, companies have become more aggressive in asserting and defending patent claims against competitors. There can be no assurance that we will not be subject to future litigation alleging infringement or invalidity of certain of our intellectual property rights, or that we will not have to pursue litigation to protect our property rights. Depending on the importance of the technology, product, patent, trademark, or trade secret in question, an unfavorable outcome regarding one of these matters may have a material adverse effect on our results of operations, financial position, and/or cash flows.
We may be subject to claims that our products or processes infringe on the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages, modify our products or processes, or prevent us from selling our products.
Third parties may claim that our processes and products infringe on their intellectual property rights. Whether or not these claims have merit, we may be subject to costly and time consuming legal proceedings, and this could divert management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages, make future royalty payments, and/or could be prevented from selling some or all of our products. We also may be obligated to indemnify our business partners or customers in any such litigation. Furthermore, we may need to obtain licenses from these third parties or substantially re-engineer or rename our products in order to avoid infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer or rename our products successfully. If we are prevented from selling some or all of our products, our sales could be materially adversely affected.
We may incur material losses and costs as a result of product liability, warranty, and recall claims that may be brought against us.
We have been, and may continue to be, exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in death, bodily injury, and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates to product
safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all of the repair or replacement costs of these products under warranty when the product supplied did not perform as represented. In addition, a product recall could generate substantial negative publicity about our business and interfere with our manufacturing plans and product delivery obligations as we seek to repair affected products. Our costs associated with product liability, warranty, and recall claims could be material.
We are a defendant to a variety of litigation in the course of our business that could cause a material adverse effect on our results of operations, financial position, and/or cash flows.
In the normal course of business, we are, from time to time, a defendant in litigation, including litigation alleging the infringement of intellectual property rights, anti-competitive behavior, product liability, breach of contract, and employment-related claims. In certain circumstances, patent infringement and antitrust laws permit successful plaintiffs to recover treble damages. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could cause a material adverse effect on our results of operations, financial position, and/or cash flows.
We have recorded a significant amount of goodwill and other identifiable intangible assets, and we may be required to recognize goodwill or intangible asset impairments, which would reduce our earnings.
We have recorded a significant amount of goodwill and other identifiable intangible assets. Goodwill and other intangible assets, net totaled approximately $3.9 billion as of December 31, 2017, or 59% of our total assets. Goodwill, which represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, was approximately $3.0 billion as of December 31, 2017, or 45% of our total assets. Goodwill and other identifiable intangible assets were recognized at fair value as of the corresponding acquisition date. Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in laws or regulations, significant unexpected or planned changes in the use of assets, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income, which may impact our ability to raise capital. Although no impairment charges have been recorded during the past three fiscal years, should certain assumptions used in the development of the fair value of our reporting units change, we may be required to recognize goodwill or other intangible asset impairments. Refer to Note 5, "Goodwill and Other Intangible Assets," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on our goodwill and other identifiable intangible assets. Refer to Critical Accounting Policies and Estimates, included in Item 7, "Management's"Management’s Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report on Form 10-K for further discussionReport. Our historical results are not necessarily indicative of the assumptions usedresults to be expected in the development of the fair value of our reporting units.any future period.
New legislation on tax reform could have a material impact on the Company's financial position and/or results of operations.On December 22, 2017, President Donald Trump signed into U.S. law the Tax Cuts and Jobs Act of 2017 (“Tax Reform”). The exact ramifications of the legislation is subject to interpretation and could have a material impact on our financial position and/or results of operations. We continue to analyze the full impact of enacted legislation and additional guidance as provided. Refer to Note 9, |
| | | | | | | | | | | | | | | | | | | |
| | Sensata Technologies Holding plc (Consolidated) (a) |
| | For the year ended December 31, |
| (In thousands, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of operations data: (b) | | | | | | | | | |
| Net revenue | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
|
| Operating costs and expenses: | | | | | | | | | |
| Cost of revenue | 2,267,433 |
| | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
| | 1,976,845 |
|
| Research and development | 148,425 |
| | 147,279 |
| | 130,127 |
| | 126,656 |
| | 123,603 |
|
| Selling, general and administrative | 281,442 |
| | 305,558 |
| | 301,896 |
| | 293,506 |
| | 270,773 |
|
| Amortization of intangible assets | 142,886 |
| | 139,326 |
| | 161,050 |
| | 201,498 |
| | 186,632 |
|
Restructuring and other charges, net (c) | 53,560 |
| | (47,818 | ) | | 18,975 |
| | 4,113 |
| | 21,919 |
|
| Total operating costs and expenses | 2,893,746 |
| | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
| | 2,579,772 |
|
| Operating income | 556,885 |
| | 710,419 |
| | 555,787 |
| | 492,356 |
| | 395,189 |
|
| Interest expense, net | (158,554 | ) | | (153,679 | ) | | (159,761 | ) | | (165,818 | ) | | (137,626 | ) |
Other, net(d) | (7,908 | ) | | (30,365 | ) | | 6,415 |
| | (5,093 | ) | | (51,934 | ) |
| Income before taxes | 390,423 |
| | 526,375 |
| | 402,441 |
| | 321,445 |
| | 205,629 |
|
Provision for/(benefit from) income taxes (e) | 107,709 |
| | (72,620 | ) | | (5,916 | ) | | 59,011 |
| | (142,067 | ) |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
|
| Basic net income per share | $ | 1.76 |
| | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
|
| Diluted net income per share | $ | 1.75 |
| | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
|
| Weighted-average ordinary shares outstanding—basic | 160,946 |
| | 168,570 |
| | 171,165 |
| | 170,709 |
| | 169,977 |
|
| Weighted-average ordinary shares outstanding—diluted | 161,968 |
| | 169,859 |
| | 172,169 |
| | 171,460 |
| | 171,513 |
|
Other financial data: (b) | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | |
| Operating activities | $ | 619,562 |
| | $ | 620,563 |
| | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
|
| Investing activities | $ | (208,777 | ) | | $ | (237,606 | ) | | $ | (140,722 | ) | | $ | (174,778 | ) | | $ | (1,166,369 | ) |
| Financing activities | $ | (366,499 | ) | | $ | (406,213 | ) | | $ | (15,263 | ) | | $ | (337,582 | ) | | $ | 764,172 |
|
| Additions to property, plant and equipment and capitalized software | $ | (161,259 | ) | | $ | (159,787 | ) | | $ | (144,584 | ) | | $ | (130,217 | ) | | $ | (177,196 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance sheet data: (b) | | | | | | | | | |
| Cash and cash equivalents | $ | 774,119 |
| | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
|
Working capital (f) | $ | 1,330,906 |
| | $ | 1,277,211 |
| | $ | 1,218,796 |
| | $ | 758,189 |
| | $ | 412,748 |
|
| Total assets | $ | 6,834,519 |
| | $ | 6,797,687 |
| | $ | 6,641,525 |
| | $ | 6,240,976 |
| | $ | 6,298,910 |
|
| Total debt, net including finance lease and other financing obligations | $ | 3,255,613 |
| | $ | 3,264,941 |
| | $ | 3,270,269 |
| | $ | 3,273,594 |
| | $ | 3,600,991 |
|
| Total shareholders’ equity | $ | 2,573,755 |
| | $ | 2,608,434 |
| | $ | 2,345,626 |
| | $ | 1,942,007 |
| | $ | 1,668,576 |
|
| |
| (a) | On March 28, 2018, the cross-border merger of Sensata Technologies Holding N.V. ("Sensata N.V.") and Sensata Technologies Holding plc ("Sensata plc") was completed, with Sensata plc being the surviving entity (the "Merger"). On the date of the Merger, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by Sensata N.V. prior to the Merger. Due to the various legal aspects of the Merger, Sensata plc retains the historical data of Sensata N.V., and no recasting or adjustment is required as a result of the Merger. |
| |
| (b) | We acquired certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in fiscal year 2015, and GIGAVAC, LLC ("GIGAVAC") in fiscal year 2018. Pro forma amounts are not shown. We sold the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") in fiscal year 2018. Prior year amounts have not been recast. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
| |
| (c) | Restructuring and other charges, net for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 consisted of the following (refer also to Note 5, "Restructuring and Other Charges, Net," of our Financial Statements): |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Severance costs, net (i) | $ | 29,240 |
| | $ | 7,566 |
| | $ | 11,125 |
| | $ | 813 |
| | $ | 19,829 |
|
Facility and other exit costs (ii) | 808 |
| | 877 |
| | 7,850 |
| | 3,300 |
| | 798 |
|
Gain on sale of Valves Business (iii) | — |
| | (64,423 | ) | | — |
| | — |
| | — |
|
Other (iv) | 23,512 |
| | 8,162 |
| | — |
| | — |
| | 1,292 |
|
| Restructuring and other charges, net | $ | 53,560 |
| | $ | (47,818 | ) | | $ | 18,975 |
| | $ | 4,113 |
| | $ | 21,919 |
|
| |
| (i) | Includes termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions. For the year ended December 31, 2019, these amounts also included $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the United States (the "U.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 in Germany. For the year ended December 31, 2017, these amounts also included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of CST. For the year ended December 31, 2015, these amounts also included $7.6 million of severance charges incurred in order to integrate acquired businesses with ours and $4.0 million of severance charges related to the closure of our Schrader Brazil manufacturing facility. |
| |
| (ii) | For the year ended December 31, 2017, these amounts included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. For the year ended December 31, 2016 these amounts primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. |
| |
| (iii) | In the year ended December 31, 2018, we completed the sale of the Valves Business. |
| |
| (iv) | In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC. |
| |
| (d) | Other, net for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 consisted of the following: |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
(Loss)/gain related to foreign currency exchange rates(i) | $ | (4,577 | ) | | $ | (16,835 | ) | | $ | 2,423 |
| | $ | (12,471 | ) | | $ | (6,007 | ) |
| Gain/(loss) on commodity forward contracts | 4,888 |
| | (8,481 | ) | | 9,989 |
| | 7,399 |
| | (18,468 | ) |
| Loss on debt financing | (4,364 | ) | | (2,350 | ) | | (2,670 | ) | | — |
| | (25,538 | ) |
| Net periodic benefit cost, excluding service cost | (3,186 | ) | | (3,585 | ) | | (3,402 | ) | | (192 | ) | | (1,605 | ) |
| Other | (669 | ) | | 886 |
| | 75 |
| | 171 |
| | (316 | ) |
| Other, net | $ | (7,908 | ) | | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) | | $ | (51,934 | ) |
| |
| (i) | Includes net losses and gains on foreign currency remeasurement and foreign currency forward contracts. Refer to Note 6, "Other, Net," of our Financial Statements for additional information. |
| |
| (e) | For the year ended December 31, 2018, this amount included an income tax benefit of $122.1 million related to the realization of U.S. deferred tax assets previously offset by a valuation allowance. For the year ended December 31, 2017, this amount included an income tax benefit of $73.7 million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information. For the year ended December 31, 2015, this amount included an income tax benefit of $180.0 million, primarily related to the release of a portion of our U.S. valuation allowance in connection with the acquisition of CST. |
| |
| (f) | We define working capital as current assets less current liabilities. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1, "Business," Item 6, "Selected Financial Data," and our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K for further(this "Report").
The statements in this discussion of the Tax Reform.
Taxing authorities could challengeregarding industry outlook, our historicalexpectations regarding our future performance, liquidity and future tax positions or our allocation of taxable income among our subsidiaries, or tax laws to which wecapital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject could changeto numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in a manner adverse to us.Item 1A, "Risk Factors," included elsewhere in this Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V.") and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us," is a Dutch public limited liabilityglobal industrial technology company that operates throughdevelops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and for end users.
Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various subsidiariessensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Our sensors, sensor-based solutions, and controls are included in mission-critical solutions that play a number of countries throughout the world. Consequently, we are subject to tax laws, treaties, and regulationskey role in the countriesfour key megatrends that are shaping our markets as discussed in which we operate, and these laws and treaties are subject to interpretation. We have taken, and will continue to take, tax positions based on our interpretation of such tax laws. There can be no assurance that a taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. Should we be assessed with additional taxes, this may resultfurther detail in a material adverse effect on our results of operations, financial condition, and/or cash flows.
We conduct operations through manufacturing and distribution subsidiaries in numerous tax jurisdictions around the world. Our transfer pricing arrangements are not generally binding on applicable tax authorities. Our transfer pricing methodology is based on economic studies. The prices charged for products, services, and financing among our companies, or
the royalty rates and other amounts paid for intellectual property rights, could be challenged by the various tax authorities, resulting in additional tax liabilities, interest, and penalties.
Tax laws are subject to change in the various countries in which we operate. Such future changes could be unfavorable and result in an increased tax burden to us. Refer to Note 9, "Income Taxes,Item 1, "Business," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion related to income taxes.
Changes to current policies by the U.S. government could adversely affect our business.
Possible changes to current policies by the U.S. government could affect our business, including potentially through increased import tariffs and other influences on U.S. trade relations with other countries (e.g., Mexico and China). The imposition of tariffs or other trade barriers could increase our costs in certain markets, and may cause our customers to find alternative sourcing. In addition, other countries may change their own policies on business and foreign investment in companies in their respective countries. Additionally, it is possible that U.S. policy changes and uncertainty about such changes could increase market volatility and currency exchange rate fluctuations. Market volatility and currency exchange rate fluctuations could impact our results of operations and/or financial condition.
The vote by the United Kingdom to leave the European Union could adversely affect us.
The U.K. held a referendum on June 23, 2016 on its membership in the E.U., in which a majority of voters in the U.K. voted to exit the E.U. (commonly referred to as "Brexit"). The U.K.'s departure from the E.U. is currently scheduled to take place on Friday, March 29, 2019. The U.K. and the E.U. continue to have negotiations regarding various transition issues and are in the process of creating a plan for a two-year transition period following the scheduled exit. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. The referendum also has given rise to calls for the governments of other E.U. member states to consider withdrawal from the E.U.
The effects of Brexit will depend on the negotiations between the U.K. and the E.U. and any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. Brexit could adversely affect European or worldwide economic or market conditions and contribute to instability in global financial markets. We have substantial sales and operations in both the E.U. and the U.K. AnyReport. Each of these effects of Brexit, and others we cannot anticipate, could adversely affecttrends is expected to significantly transform our business, business opportunities, results of operations, and/or financial condition.
Risks Related to our Domicile in the Netherlands
We are a Dutch public limited liability company, and it may be difficult for shareholders to obtain or enforce judgments against us in the U.S.
Sensata Technologies Holding, N.V. is incorporated under the laws of the Netherlands, and a substantial portion of our assets are located outside of the U.S. As a result, although we have appointed an agent for service of process in the U.S., it may be difficult or impossible for U.S. investors to effect service of process upon us within the U.S. or to realize any judgment against us in the U.S., including for civil liabilities under U.S. securities laws. Therefore, any judgment obtained against us in any U.S. federal or state court may have to be enforced in the courts of the Netherlands, or such other foreign jurisdiction, as applicable. Because there is no treaty or other applicable convention between the U.S. and the Netherlands with respect to the recognition and enforcement of legal judgments regarding civil or commercial matters, a judgment rendered by any U.S. federal or state court will not be enforced by the courts of the Netherlands unless the underlying claim is relitigated before a Dutch court. Under current practice, however, a Dutch court will generally grant the same judgment without a review of the merits of the underlying claim (i) if that judgment resulted from legal proceedings compatible with Dutch notions of due process, (ii) if that judgment does not contravene public policy of the Netherlands, and (iii) if the jurisdiction of the U.S. federal or state court has been based on internationally accepted principles of private international law.
To date, we are aware of only limited published case law in which Dutch courts have considered whether such a judgment rendered by a U.S. federal or state court would be enforceable in the Netherlands. In all of these cases, Dutch lower courts applied the aforementioned criteria with respect to the U.S. judgment. If all three criteria noted above were satisfied, the Dutch courts granted the same judgment without a review of the merits of the underlying claim.
Investors should not assume, however, that the courts of the Netherlands, or such other foreign jurisdiction, would enforce judgments of U.S. courts obtained against us predicated upon the civil liability provisions of the U.S. securities laws, or that such courts would enforce, in original actions, liabilities against us predicated solely upon such laws.
Our shareholders’ rights and responsibilities are governed by Dutch law and differ in some respects from the rights and responsibilities of shareholders under U.S. law, and shareholder rights under Dutch law may not be as clearly established as shareholder rights are established under the laws of some U.S. jurisdictions.
Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The rights of our shareholders and the responsibilities of members of our Board of Directors under Dutch law may not be as clearly established as under the laws of some U.S. jurisdictions. In the performance of its duties, our Board of Directors is required by Dutch law to consider the interests of our company and our business, including our shareholders, our employees, and other stakeholders, in all cases with reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, the interests of our shareholders.
In addition, the rights of holders of ordinary shares,industries and many of the rights of shareholders as they relate to, for example, the exercise of shareholder rights,our customers businesses. These megatrends are governed by Dutch law and our articles of association and differ from the rights of shareholders under U.S. law. For example, Dutch law does not grant appraisal rights to a company’s shareholders who wish to challenge the consideration to be paid upon a merger or consolidation of the company.
The provisions of Dutch corporate law and our articles of association have the effect of concentrating control over certain corporate decisions and transactions in the hands of our Board of Directors. As a result, holders of our shares may have more difficulty in protecting their interests in the face of actions by members of our Board of Directors than if we were incorporated in the U.S.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
As of December 31, 2017, we occupied 19 principal manufacturing facilities and business centers totaling approximately 3,577 thousand square feet, with the majority devoted to research, development, engineering, manufacturing, and assembly. We lease approximately 433 thousand square feet for our United States headquarters in Attleboro, Massachusetts. Of our principal facilities, approximately 1,483 thousand square feet are owned and approximately 2,094 thousand square feet are leased. A significant portion of our owned properties and equipment is subject to a lien under the Senior Secured Credit Facilities. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on the Senior Secured Credit Facilities. We consider our manufacturing facilities sufficient to meet our current operational requirements. The table below lists the location of our principal executive and operating facilities:
|
| | | | | | | | | | |
| | | | Operating Segment | | | | |
Country | | Location | | Performance Sensing | | Sensing Solutions | | Owned or Leased | | Approximate Square Footage (in thousands)
|
Bulgaria | | Botevgrad | | X | | | | Owned | | 137 |
Bulgaria | | Plovdiv | | X | | | | Owned | | 125 |
Bulgaria | | Sofia | | X | | | | Leased | | 108 |
China | | Baoying | | | | X | | Owned | | 296 |
China | | Baoying | | X | | X | | Leased | | 385 |
China | | Changzhou | | X | | X | | Leased | | 488 |
France | | Pontarlier | | X | | | | Owned | | 178 |
Germany | | Berlin | | X | | | | Leased | | 33 |
Malaysia | | Subang Jaya | | X | | | | Owned | | 123 |
Mexico | | Aguascalientes | | X | | X | | Owned | | 411 |
Mexico | | Tijuana (1)
| | X | | X | | Leased | | 287 |
Netherlands | | Hengelo | | X | | X | | Leased | | 94 |
United Kingdom | | Antrim | | X | | | | Leased | | 117 |
United Kingdom | | Carrickfergus | | X | | | | Owned | | 63 |
United Kingdom | | Swindon | | X | | | | Leased | | 34 |
United States | | Attleboro, MA | | X | | X | | Leased | | 433 |
United States | | Altavista, VA | | X | | | | Owned | | 150 |
United States | | Thousand Oaks, CA | | X | | X | | Leased | | 115 |
| |
(1)
| This location includes two principal manufacturing facilities. |
Leases covering our currently occupied principal leased facilities expire at varying dates within the next 19 years. We do not anticipate difficulty in retaining occupancy through lease renewals, month-to-month occupancy, or by replacing the leased facilities with equivalent facilities. An increase inalso creating greater secular demand for our products, may requirewhich enables us to expandoutgrow end-market volume production in many of the markets we serve, a defining characteristic of our production capacity,company. The most relevant megatrends in the short term include those which could requireresult from mandates to make products cleaner and more efficient, as well as the move towards electrification in the automotive, industrial, and heavy vehicle and off-road ("HVOR") industries.
We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the United States (the "U.S."), "Euro 6d" requirements in Europe, "China National 6" requirements in China, and "Bharat Stage VI" requirements in India, 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 demand in many of our key end markets, which we expect will continue to offer us significant growth opportunities.
The technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the systems in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for our customers once a particular sensor has been designed and installed in a system. As a result, our sensors are rarely substituted during a product lifecycle, which in the case of the automotive market typically lasts five to seven years. We focus on new applications that will help us secure new business, drive long-term growth, and provide an opportunity to define a leading application technology in collaboration with our customers.
Our strategies of leveraging core technology platforms and focusing on high-volume applications enable us to identify and acquire or lease additional manufacturing facilities. We believe that suitable additional or substitute facilities will be availableprovide our customers with highly-customized products at a relatively low cost, as required; however, if we are unablecompared to acquire, integrate, and move into production the facilities, equipment, and personnel necessary to meet such an increasecosts of the systems in demand, our customer relationships, results of operations, and/or financial condition may suffer materially.
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused bywhich our products but some involve allegations of personal injury or wrongful death. From time to time, we are also involved in disagreements with vendors and customers. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our result of operations, financial position, or cash flows.
The Internal Revenue Code requires that companies disclose in their Annual Report on Form 10-K whether they have been required to pay penalties to the Internal Revenue Service (“IRS”) for certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.embedded. We have not been requiredachieved our current cost position through a continuous process of migration and transformation to pay any such penalties.best-cost manufacturing locations, global best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.In August 2018 we completed the divestiture of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. In October 2018 we acquired GIGAVAC, LLC ("GIGAVAC"), a leading producer of high voltage contactors and fuses that are mission-critical components
PART IIfor electric vehicles and equipment. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to these transactions.
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
MarketSelected Segment Information
Our ordinary shares tradeWe operate in, and report financial information for, the following two 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 New York Stock Exchange (“NYSE”) under the symbol “ST.” effect of rounding.
The following table sets forth the high and low intraday sales prices per share of our ordinary shares, as reportedpresents net revenue by the NYSE,segment for the periods indicated:identified periods:
|
| | | | | | | |
| Price Range |
| High | | Low |
| 2016 | | | |
| Quarter ended March 31, 2016 | $ | 45.60 |
| | $ | 29.92 |
|
| Quarter ended June 30, 2016 | $ | 39.89 |
| | $ | 32.07 |
|
| Quarter ended September 30, 2016 | $ | 40.69 |
| | $ | 33.81 |
|
| Quarter ended December 31, 2016 | $ | 41.43 |
| | $ | 35.10 |
|
| 2017 | | | |
| Quarter ended March 31, 2017 | $ | 45.30 |
| | $ | 39.19 |
|
| Quarter ended June 30, 2017 | $ | 43.93 |
| | $ | 38.71 |
|
| Quarter ended September 30, 2017 | $ | 48.52 |
| | $ | 42.80 |
|
| Quarter ended December 31, 2017 | $ | 53.30 |
| | $ | 46.90 |
|
Performance Graph |
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Amount | | Percent of Total | | Amount | | Percent of Total | | Amount | | Percent of Total |
| Net revenue: | | | | | | | | | | | |
| Performance Sensing | $ | 2,546.0 |
| | 73.8 | % | | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % |
| Sensing Solutions | 904.6 |
| | 26.2 |
| | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
|
| Total net revenue | $ | 3,450.6 |
| | 100.0 | % | | $ | 3,521.6 |
| | 100.0 | % | | $ | 3,306.7 |
| | 100.0 | % |
The following graph comparestable presents segment operating income in U.S. dollars ("USD") and as a percentage of segment net revenue for the total shareholder return of our ordinary shares since December 31, 2012, to the total shareholder return since that date on the Standard & Poor’s ("S&P") 500 Stock Index and the S&P 500 Industrial Index. The graph assumes that the value of the investment in our ordinary shares and each index was $100.00 on December 31, 2012.
identified periods:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total Shareholder Return of $100.00 Investment from December 31, 2012 |
| | | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
| Sensata | | $ | 100.00 |
| | $ | 119.37 |
| | $ | 161.36 |
| | $ | 141.81 |
| | $ | 119.92 |
| | $ | 157.36 |
|
| S&P 500 | | $ | 100.00 |
| | $ | 129.60 |
| | $ | 144.36 |
| | $ | 143.31 |
| | $ | 156.98 |
| | $ | 187.47 |
|
| S&P 500 Industrial | | $ | 100.00 |
| | $ | 137.63 |
| | $ | 147.98 |
| | $ | 141.00 |
| | $ | 163.67 |
| | $ | 194.01 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue |
| Segment operating income: | | | | | | | | | | | |
| Performance Sensing | $ | 648.7 |
| | 25.5 | % | | $ | 712.7 |
| | 27.1 | % | | $ | 664.2 |
| | 27.0 | % |
| Sensing Solutions | 291.3 |
| | 32.2 | % | | 293.0 |
| | 32.8 | % | | 277.5 |
| | 32.8 | % |
| Total segment operating income | $ | 940.0 |
| | | | $ | 1,005.7 |
| | | | $ | 941.6 |
| | |
The information in the graph and table above is not “soliciting material,” is not deemed “filed” with the United States ("U.S.") Securities and Exchange Commission, and is notFor a reconciliation of total segment operating income to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference. The total shareholder return shown on the graph represents past performance and should not be considered an indication of future price performance.
Stockholders
As of January 12, 2018, there was one primary holder of record of our ordinary shares, Cede & Co. (which acts as nominee shareholder for the Depository Trust Company), and approximately 43,900 beneficial owners, including beneficial owners whose shares are held in "street name" by banks, brokers, and other financial institutions.
Dividends
We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare any such dividends in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including restrictions under the terms of the agreements governing our indebtedness. In that regard, our indirect, wholly-owned subsidiary, Sensata Technologies B.V. ("STBV"), is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us. Referconsolidated operating income, refer to Note 8, "Debt,20, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on our dividend restrictions.
In addition, under Dutch law, STBV, Sensata Technologies Intermediate Holding B.V., and certain of our other subsidiaries that are Dutch private limited liability companies may only pay dividends or make other distributions to the extent that the shareholders' equity of such subsidiary exceeds the reserves required to be maintained by law or under its articles of association.
Under Dutch law, we may only pay dividends out of profits as shown in our adopted annual accounts prepared in accordance with International Financial Reporting Standards. Should we wish to do so, we would only be able to declare and pay dividends to the extent our equity exceeds the sum of the paid and called up portion of our ordinary share capital and the reserves that must be maintained in accordance with the provisions of Dutch law and our articles of association. Subject to these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition, and any other factors deemed relevant by our shareholders and Board of Directors.Statements.
U.S. holders of our ordinary shares are generally not subject to any Dutch taxes on income or capital gains derived from ownership or disposal of such ordinary shares. However, we are generally required to withhold Dutch income tax (at a rate of 15%) on actual or deemed dividend distributions. There is no reciprocal tax treaty between the U.S. and the Netherlands regarding withholding.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased | | Weighted- Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plan or Programs | | Approximate Dollar Value of Shares that
May Yet Be Purchased
Under the Plan or Programs (in millions) |
| October 1 through October 31, 2017 | — |
| | $ | — |
| | — |
| | $ | 250.0 |
|
| November 1 through November 30, 2017 | — |
| | $ | — |
| | — |
| | $ | 250.0 |
|
| December 1 through December 31, 2017 | 1,827 |
| (1) | $ | 51.28 |
| | — |
| | $ | 250.0 |
|
| Total | | 1,827 |
| | $ | 51.28 |
| | — |
| | $ | 250.0 |
|
|
| | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased (in shares) | | Weighted-Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plan or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Programs (in millions) (2) |
| October 1 through October 31, 2019 | | 695,385 |
| (1) | $ | 49.44 |
| | 694,684 |
| | $ | 387.3 |
|
| November 1 through November 30, 2019 | | 564,412 |
| | $ | 52.44 |
| | 564,412 |
| | $ | 357.7 |
|
| December 1 through December 31, 2019 | | 389,251 |
| | $ | 51.93 |
| | 389,251 |
| | $ | 337.5 |
|
| Quarter total | | 1,649,048 |
| | $ | 51.06 |
| | 1,648,347 |
| | $ | 337.5 |
|
____________________________________________
(1) Pursuant to the “withhold to cover” method for collecting and paying withholding taxes for our employees upon the vesting of restricted securities, we withheld from certain employees the ordinary shares noted in the table above to cover such tax withholdings. These transactions took place outside of a publicly-announced repurchase plan. The weighted-average price per ordinary share listed in the above table is the weighted-average of the fair market prices at which we calculated the number of ordinary shares withheld to cover tax for the employees. | |
(1) | Upon the vesting of restricted securities, we collect and pay withholding tax for employees by withholding shares to cover such tax. The number of shares presented includes 701 shares withheld in this manner with an aggregate value of $35 thousand, based on the closing price of our ordinary shares on the date of withholding. These withholdings took place outside of a publicly announced repurchase plan. |
| |
(2) | Other than shares withheld to cover required tax withholding upon the vesting of restricted securities, all purchases during the three months ended December 31, 2019 were conducted pursuant to a $500.0 million share repurchase program authorized by our Board of Directors and publicly announced on July 30, 2019. This share repurchase program does not have an established expiration date. |
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
We have derived the selected consolidated statementstatements of operations and other financial data for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017 and the selected consolidated balance sheet data as of December 31, 20172019 and 2016,2018 from our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K.10-K (this "Report"). We have derived the selected consolidated statementstatements of operations and other financial data for the years ended December 31, 20142016 and 2013,2015 and the selected consolidated balance sheet data as of December 31, 2015, 2014,2017, 2016, and 2013,2015 from audited consolidated financial statements not included in this Annual Report on Form 10-K.Report.
You should read the following information in conjunction with our Financial Statements and Item 7, “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and accompanying notes thereto" included elsewhere in this Annual Report on Form 10-K.Report. Our historical results are not necessarily indicative of the results to be expected in any future period.
| | | | Sensata Technologies Holding N.V. (consolidated) | Sensata Technologies Holding plc (Consolidated) (a) |
| | For the year ended December 31, | For the year ended December 31, |
| (Amounts in thousands, except per share data) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
Statement of Operations Data(a): | | | | | | | | | | |
| (In thousands, except per share data) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of operations data: (b) | | | | | | | | | | |
| Net revenue | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
| $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
|
| Operating costs and expenses: | | | | | | | | | | | | | | | | | | |
| Cost of revenue | 2,141,308 |
| | 2,084,261 |
| | 1,977,799 |
| | 1,567,334 |
| | 1,256,249 |
| 2,267,433 |
| | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
| | 1,976,845 |
|
| Research and development | 130,204 |
| | 126,665 |
| | 123,666 |
| | 82,178 |
| | 57,950 |
| 148,425 |
| | 147,279 |
| | 130,127 |
| | 126,656 |
| | 123,603 |
|
| Selling, general and administrative | 302,811 |
| | 293,587 |
| | 271,361 |
| | 220,105 |
| | 163,145 |
| 281,442 |
| | 305,558 |
| | 301,896 |
| | 293,506 |
| | 270,773 |
|
| Amortization of intangible assets | 161,050 |
| | 201,498 |
| | 186,632 |
| | 146,704 |
| | 134,387 |
| 142,886 |
| | 139,326 |
| | 161,050 |
| | 201,498 |
| | 186,632 |
|
| Restructuring and special charges | 18,975 |
| | 4,113 |
| | 21,919 |
| | 21,893 |
| | 5,520 |
| |
Restructuring and other charges, net (c) | | 53,560 |
| | (47,818 | ) | | 18,975 |
| | 4,113 |
| | 21,919 |
|
| Total operating costs and expenses | 2,754,348 |
| | 2,710,124 |
| | 2,581,377 |
| | 2,038,214 |
| | 1,617,251 |
| 2,893,746 |
| | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
| | 2,579,772 |
|
| Profit from operations | 552,385 |
| | 492,164 |
| | 393,584 |
| | 371,589 |
| | 363,481 |
| |
| Operating income | | 556,885 |
| | 710,419 |
| | 555,787 |
| | 492,356 |
| | 395,189 |
|
| Interest expense, net | (159,761 | ) | | (165,818 | ) | | (137,626 | ) | | (106,104 | ) | | (93,915 | ) | (158,554 | ) | | (153,679 | ) | | (159,761 | ) | | (165,818 | ) | | (137,626 | ) |
Other, net(b)(d) | 9,817 |
| | (4,901 | ) | | (50,329 | ) | | (12,059 | ) | | (35,629 | ) | (7,908 | ) | | (30,365 | ) | | 6,415 |
| | (5,093 | ) | | (51,934 | ) |
| Income before taxes | 402,441 |
| | 321,445 |
| | 205,629 |
| | 253,426 |
| | 233,937 |
| 390,423 |
| | 526,375 |
| | 402,441 |
| | 321,445 |
| | 205,629 |
|
(Benefit from)/provision for income taxes (c) | (5,916 | ) | | 59,011 |
| | (142,067 | ) | | (30,323 | ) | | 45,812 |
| |
Provision for/(benefit from) income taxes (e) | | 107,709 |
| | (72,620 | ) | | (5,916 | ) | | 59,011 |
| | (142,067 | ) |
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
| $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
|
| Basic net income per share | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
| | $ | 1.67 |
| | $ | 1.07 |
| $ | 1.76 |
| | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
|
| Diluted net income per share | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
| | $ | 1.65 |
| | $ | 1.05 |
| $ | 1.75 |
| | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
|
| Weighted-average ordinary shares outstanding—basic | 171,165 |
| | 170,709 |
| | 169,977 |
| | 170,113 |
| | 176,091 |
| 160,946 |
| | 168,570 |
| | 171,165 |
| | 170,709 |
| | 169,977 |
|
| Weighted-average ordinary shares outstanding—diluted | 172,169 |
| | 171,460 |
| | 171,513 |
| | 172,217 |
| | 179,024 |
| 161,968 |
| | 169,859 |
| | 172,169 |
| | 171,460 |
| | 171,513 |
|
Other Financial Data(a): | | | | | | | | | | |
Other financial data: (b) | | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | | | | | | | | | | |
| Operating activities | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
| | $ | 382,568 |
| | $ | 395,838 |
| $ | 619,562 |
| | $ | 620,563 |
| | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
|
| Investing activities | (140,722 | ) | | (174,778 | ) | | (1,166,369 | ) | | (1,430,065 | ) | | (87,650 | ) | $ | (208,777 | ) | | $ | (237,606 | ) | | $ | (140,722 | ) | | $ | (174,778 | ) | | $ | (1,166,369 | ) |
| Financing activities | (15,263 | ) | | (337,582 | ) | | 764,172 |
| | 940,930 |
| | (403,831 | ) | $ | (366,499 | ) | | $ | (406,213 | ) | | $ | (15,263 | ) | | $ | (337,582 | ) | | $ | 764,172 |
|
| Capital expenditures | (144,584 | ) | | (130,217 | ) | | (177,196 | ) | | (144,211 | ) | | (82,784 | ) | |
| Additions to property, plant and equipment and capitalized software | | $ | (161,259 | ) | | $ | (159,787 | ) | | $ | (144,584 | ) | | $ | (130,217 | ) | | $ | (177,196 | ) |
| | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | As of December 31, |
Balance Sheet Data (as of December 31)(a): | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance sheet data: (b) | | | | | | | | | | |
| Cash and cash equivalents | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
| | $ | 211,329 |
| | $ | 317,896 |
| $ | 774,119 |
| | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
|
Working capital(d) | 1,218,796 |
| | 758,189 |
| | 412,748 |
| | 441,258 |
| | 537,139 |
| |
Working capital (f) | | $ | 1,330,906 |
| | $ | 1,277,211 |
| | $ | 1,218,796 |
| | $ | 758,189 |
| | $ | 412,748 |
|
| Total assets | 6,641,525 |
| | 6,240,976 |
| | 6,298,910 |
| | 5,087,507 |
| | 3,479,692 |
| $ | 6,834,519 |
| | $ | 6,797,687 |
| | $ | 6,641,525 |
| | $ | 6,240,976 |
| | $ | 6,298,910 |
|
| Total debt, net including capital lease and other financing obligations | 3,270,269 |
| | 3,273,594 |
| | 3,600,991 |
| | 2,812,734 |
| | 1,704,834 |
| |
| Total debt, net including finance lease and other financing obligations | | $ | 3,255,613 |
| | $ | 3,264,941 |
| | $ | 3,270,269 |
| | $ | 3,273,594 |
| | $ | 3,600,991 |
|
| Total shareholders’ equity | 2,345,626 |
| | 1,942,007 |
| | 1,668,576 |
| | 1,302,892 |
| | 1,141,588 |
| $ | 2,573,755 |
| | $ | 2,608,434 |
| | $ | 2,345,626 |
| | $ | 1,942,007 |
| | $ | 1,668,576 |
|
__________________
| |
| (a) | Amounts shown reflectOn March 28, 2018, the acquisitionscross-border merger of Wabash WorldwideSensata Technologies Holding Corp.N.V. ("Wabash"Sensata N.V.") and Sensata Technologies Holding plc ("Sensata plc") was completed, with Sensata plc being the surviving entity (the "Merger"). On the date of the Merger, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., Magnum Energy Incorporated ("Magnum"), CoActive US Holdings, Inc. ("DeltaTech Controls")with no changes made to the business being conducted by Sensata N.V. prior to the Merger. Due to the various legal aspects of the Merger, Sensata plc retains the historical data of Sensata N.V., and August Cayman Company, Inc. ("Schrader") in 2014 andno recasting or adjustment is required as a result of the Merger. |
| |
| (b) | We acquired certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in 2015.fiscal year 2015, and GIGAVAC, LLC ("GIGAVAC") in fiscal year 2018. Pro forma amounts are not shown. We sold the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") in fiscal year 2018. Prior year amounts have not been recast. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
| |
(b)(c) | Restructuring and other charges, net for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 consisted of the following (refer also to Note 5, "Restructuring and Other Charges, Net," of our Financial Statements): |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Severance costs, net (i) | $ | 29,240 |
| | $ | 7,566 |
| | $ | 11,125 |
| | $ | 813 |
| | $ | 19,829 |
|
Facility and other exit costs (ii) | 808 |
| | 877 |
| | 7,850 |
| | 3,300 |
| | 798 |
|
Gain on sale of Valves Business (iii) | — |
| | (64,423 | ) | | — |
| | — |
| | — |
|
Other (iv) | 23,512 |
| | 8,162 |
| | — |
| | — |
| | 1,292 |
|
| Restructuring and other charges, net | $ | 53,560 |
| | $ | (47,818 | ) | | $ | 18,975 |
| | $ | 4,113 |
| | $ | 21,919 |
|
| |
| (i) | Includes termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions. For the year ended December 31, 2019, these amounts also included $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the United States (the "U.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 in Germany. For the year ended December 31, 2017, these amounts also included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of CST. For the year ended December 31, 2015, these amounts also included $7.6 million of severance charges incurred in order to integrate acquired businesses with ours and $4.0 million of severance charges related to the closure of our Schrader Brazil manufacturing facility. |
| |
| (ii) | For the year ended December 31, 2017, these amounts included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. For the year ended December 31, 2016 these amounts primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. |
| |
| (iii) | In the year ended December 31, 2018, we completed the sale of the Valves Business. |
| |
| (iv) | In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC. |
| |
| (d) | Other, net for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 2014, and 2013 primarily includes: (losses) recognized on debt financing transactionsconsisted of $(2.7) million, $0.0 million, $(25.5) million, $(1.9) million, and $(9.0) million, respectively; gains/(losses) on commodity forward contracts of $10.0 million, $7.4 million, $(18.5) million, $(9.0) million, and $(23.2) million, respectively; and gains/(losses) related to foreign currency exchange rates (including gains andthe following: |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
(Loss)/gain related to foreign currency exchange rates(i) | $ | (4,577 | ) | | $ | (16,835 | ) | | $ | 2,423 |
| | $ | (12,471 | ) | | $ | (6,007 | ) |
| Gain/(loss) on commodity forward contracts | 4,888 |
| | (8,481 | ) | | 9,989 |
| | 7,399 |
| | (18,468 | ) |
| Loss on debt financing | (4,364 | ) | | (2,350 | ) | | (2,670 | ) | | — |
| | (25,538 | ) |
| Net periodic benefit cost, excluding service cost | (3,186 | ) | | (3,585 | ) | | (3,402 | ) | | (192 | ) | | (1,605 | ) |
| Other | (669 | ) | | 886 |
| | 75 |
| | 171 |
| | (316 | ) |
| Other, net | $ | (7,908 | ) | | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) | | $ | (51,934 | ) |
| |
| (i) | Includes net losses related to currency remeasurement of net monetary assets and gains and losses on foreign currency remeasurement and foreign currency forward contracts) of $2.4 million, $(12.5) million, $(6.0) million, $(1.4) million, and $(2.4) million, respectively.contracts. Refer to Note 2, "Significant Accounting Policies,6, "Other, Net," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further details of amounts included in Other, net.additional information. |
| |
(c)(e) | For the year ended December 31, 2017, the benefit from2018, this amount included an income taxes includes a nettax benefit of approximately$122.1 million related to the realization of U.S. deferred tax assets previously offset by a valuation allowance. For the year ended December 31, 2017, this amount included an income tax benefit of $73.7 million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information. For the year ended December 31, 2015, the benefit fromthis amount included an income taxes includes a nettax benefit of approximately $180.0 million, primarily related to the release of a portion of our United States ("U.S.") valuation allowance in connection with the acquisition of CST. For the year ended December 31, 2014, the benefit from income taxes includes a net benefit of approximately $71.1 million related to the release of a portion of our U.S. valuation allowance in connection with certain 2014 acquisitions. Refer to Note 9, "Income Taxes,"the acquisition of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.CST. |
| |
(d)(f) | We define working capital as current assets less current liabilities. Working capital amounts for prior years have not been recast to include assets designated as held for sale in any year. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1, "Business," Item 6, “Selected"Selected Financial Data,”" and our audited consolidated financial statements and the accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K.10-K (this "Report").
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in Item 1A, “Risk"Risk Factors,”" included elsewhere in this Annual Report on Form 10-K.Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V.") and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us," is a global industrial technology company engagedthat develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and for end users.
Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Our sensors, sensor-based solutions, and controls are included in mission-critical solutions that play a key role in the development, manufacture,four key megatrends that are shaping our markets as discussed in further detail in Item 1, "Business," included elsewhere in this Report. Each of these trends is expected to significantly transform our industries and salemany of sensors and controls. We can trace our origins backcustomers businesses. These megatrends are also creating greater secular demand for our products, which enables us to entities that have been engagedoutgrow end-market volume production in many of the markets we serve, a defining characteristic of our company. The most relevant megatrends in the sensorsshort term include those which result from mandates to make products cleaner and controls business since 1916.more efficient, as well as the move towards electrification in the automotive, industrial, and heavy vehicle and off-road ("HVOR") industries.
We conduct our operations through subsidiary companies that operate businessbelieve regulatory requirements for safer vehicles, higher fuel efficiency, and product development centers primarilylower emissions, such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the United States (the "U.S."), the Netherlands, Belgium, Bulgaria, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and manufacturing operations primarily"Euro 6d" requirements in Europe, "China National 6" requirements in China, Malaysia, Mexico, Bulgaria, France, Germany,and "Bharat Stage VI" requirements in India, as well as customer demand for operator productivity and convenience, drive the U.K.,need for advancements in powertrain management, efficiency, safety, and the U.S. We organize our operations into two businesses, Performance Sensing and Sensing Solutions.
We generated 41.3%, 27.3%, and 31.4% of our net revenueoperator controls. These advancements lead to sensor growth rates that we expect to exceed underlying demand in the Americas, Asia, and Europe, respectively, for the year ended December 31, 2017. Our largest customer accounted for approximately 8% of our net revenue for the year ended December 31, 2017. Our net revenue for the year ended December 31, 2017 was derived from the following end markets: 24.0% from European automotive, 18.6% from North American automotive, 19.1% from Asia and rest of world automotive, 14.3% from heavy vehicle off-road ("HVOR"), 9.4% from industrial, 6.3% from appliance and heating, ventilation, and air conditioning ("HVAC"), 4.6% from aerospace, and 3.7% from all other end markets. Within many of our key end markets, which we expect will continue to offer us significant growth opportunities.
The technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the systems in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for our customers once a significant supplierparticular sensor has been designed and installed in a system. As a result, our sensors are rarely substituted during a product lifecycle, which in the case of the automotive market typically lasts five to multiple original equipment manufacturers, reducingseven years. We focus on new applications that will help us secure new business, drive long-term growth, and provide an opportunity to define a leading application technology in collaboration with our exposurecustomers.
Our strategies of leveraging core technology platforms and focusing on high-volume applications enable us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration and transformation to best-cost manufacturing locations, global fluctuations in market share within individual end markets.best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
We produceIn August 2018 we completed the divestiture of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. In October 2018 we acquired GIGAVAC, LLC ("GIGAVAC"), a wide rangeleading producer of sensorshigh voltage contactors and controls for applications such as pressure, temperature, and speed and position sensors in automotive systems, thermal circuit breakers in aircraft, and bimetal current and temperature control devices in electric motors. We compete in growing global market segments driven by demand for productsfuses that are safe, efficient, environmentally friendly,mission-critical components
for electric vehicles and also influenced by the emerging trends in electrification and autonomy. We have a long-standing position in emerging markets, including a presence in China for more than 20 years.
equipment. Refer to Item 1, "Business,Note 17, "Acquisitions and Divestitures," included elsewhere in this Annual Report on Form 10-K for a more detailed discussion of our business, including our Performance Sensing and Sensing Solutions segments, andFinancial Statements for additional information about our acquisition history.related to these transactions.
Selected Segment Information
We manage ouroperate in, and report financial information for, the following two segments: Performance Sensing and Sensing Solutions businesses separately and report their results of operations as two segments. Solutions.
Set forth below is selected information for each of these segments for each of the periods presented. Amounts and percentages in the tabletables below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addappear to recalculate due to the effect of rounding.
The following table presents net revenue by segment and as a percentage of total net revenue for the identified periods:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2017 |
| 2016 |
| 2015 | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Amount | | Percent of
Net Revenue | | Amount | | Percent of
Net Revenue | | Amount | | Percent of
Net Revenue | Amount | | Percent of Total | | Amount | | Percent of Total | | Amount | | Percent of Total |
| Net revenue | | | | | | | | | | | | |
| Net revenue: | | | | | | | | | | | | |
| Performance Sensing | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % | | $ | 2,346.2 |
| | 78.9 | % | $ | 2,546.0 |
| | 73.8 | % | | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % |
| Sensing Solutions | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
| | 628.7 |
| | 21.1 |
| 904.6 |
| | 26.2 |
| | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
|
| Total | $ | 3,306.7 |
| | 100.0 | % | | $ | 3,202.3 |
| | 100.0 | % | | $ | 2,975.0 |
| | 100.0 | % | |
| Total net revenue | | $ | 3,450.6 |
| | 100.0 | % | | $ | 3,521.6 |
| | 100.0 | % | | $ | 3,306.7 |
| | 100.0 | % |
The following table presents segment profitoperating income in U.S. dollars ("USD") and segment profit as a percentage of segment net revenue for the identified periods:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| (Dollars in millions) | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment Net Revenue | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue |
| Segment profit | | | | | | | | | | | | |
| Segment operating income: | | | | | | | | | | | | |
| Performance Sensing | $ | 664.2 |
| | 27.0 | % | | $ | 615.5 |
| | 25.8 | % | | $ | 598.5 |
| | 25.5 | % | $ | 648.7 |
| | 25.5 | % | | $ | 712.7 |
| | 27.1 | % | | $ | 664.2 |
| | 27.0 | % |
| Sensing Solutions | 277.5 |
| | 32.8 | % | | 261.9 |
| | 32.1 | % | | 199.7 |
| | 31.8 | % | 291.3 |
| | 32.2 | % | | 293.0 |
| | 32.8 | % | | 277.5 |
| | 32.8 | % |
| Total | $ | 941.6 |
| | | | $ | 877.4 |
| | | | $ | 798.3 |
| | | |
| Total segment operating income | | $ | 940.0 |
| | | | $ | 1,005.7 |
| | | | $ | 941.6 |
| | |
For a reconciliation of total segment profitoperating income to profit from operations,consolidated operating income, refer to Note 18,20, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Financial Statements.
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, the geographic location of property, plant and equipment ("PP&E"), net as of December 31, 2019 and 2018 and the geographic location of net revenue generated for the years ended December 31, 2019, 2018, and 2017:
|
| | | | | | | | | | | | | | |
| | PP&E, net as of December 31, | | Net revenue for the year ended December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2017 |
| Americas | 34.8 | % | | 37.2 | % | | 42.3 | % | | 42.0 | % | | 41.3 | % |
| Europe | 23.2 | % | | 23.5 | % | | 28.1 | % | | 29.2 | % | | 31.4 | % |
| Asia and rest of world | 42.0 | % | | 39.3 | % | | 29.6 | % | | 28.8 | % | | 27.3 | % |
Refer to Note 20, "Segment Reporting," of our Financial Statements for additional information related to our PP&E, net by selected geographic area as of December 31, 2019 and 2018 and net revenue by selected geographic area for the years ended December 31, 2019, 2018, and 2017.
Net Revenue by End Market
Our net revenue for the years ended December 31, 2019, 2018, and 2017 was derived from the following end markets:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Percentage of total) | 2019 | | 2018 | | 2017 |
| Automotive | 58.8 | % | | 60.4 | % | | 61.7 | % |
| HVOR | 16.2 | % | | 15.6 | % | | 14.3 | % |
| Industrial | 10.2 | % | | 9.6 | % | | 9.4 | % |
| Appliance and heating, ventilation and air conditioning ("HVAC") | 5.8 | % | | 5.9 | % | | 6.3 | % |
| Aerospace | 5.1 | % | | 4.7 | % | | 4.6 | % |
| Other | 3.9 | % | | 3.8 | % | | 3.7 | % |
We are a significant supplier to multiple original equipment manufacturers within many of these end markets, thereby reducing customer concentration risk.
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 audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K,Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion ofadditional information on the accounting policies and estimates made related to these components.
Net revenue
We generate revenue primarily from the sale of sensor and control products across all major geographic areas. We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the Corporate Average Fuel Economy ("CAFE") requirements in the U.S., "Euro 6d" requirements in Europe, and "China National 6" requirements in China, as well as customer demand for operator productivity and convenience, drive the need for advancements in engine management, efficiency, safety features, and operator controls. These advancements lead to sensor growth rates that exceed underlying end market demand in many of our key markets that we expect will continue to offer us significant growth opportunities. The technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the system in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for customers once a particular sensor or control has been designed and installed in a system. As a result, our sensors and controls are rarely substituted during a product lifecycle, which in the case of the automotive end market typically lasts five to seven years. We focus on new applications that will help us secure new business and drive long-term growth. New applications for sensors typically provide an opportunity to define a leading application technology in collaboration with our customers.
tangible products. Because we derive a significant portion of our net revenue from sales in ourinto the automotive end markets (62% in 2017),
demand for our products is driven in large part bymarket, conditions in this industry.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 geographies.geographic regions. As a result, the drivers of demand for these products vary considerably and are influenced by the conditions in these industries, end markets, or geographic regions.
Our overall net revenue is generallyimpacted by various factors, which we characterize as either "organic" or "inorganic." Organic factors are reflective of our ongoing operations. Inorganic factors are either not reflective of our historical business or related to situations for which we have little to no control (e.g. changes in foreign currency exchange rates).
Our net revenue may also 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 core end markets, either worldwide or in particular geographies in which we operate;
the number of sensors, sensor-based solutions, and/or controls used within existing applications, or the development of new applications requiring sensors, sensor-based solutions, and/or controls, due to regulations or other factors;
the “mix”"mix" of products sold, including the proportion of new or upgraded products and their pricing relative to existing products;
changes in product sales prices (including quantity discounts, rebates, and cash discounts for prompt payment);
changes in the level of competition faced by our products, including the launch of new products by competitors; and
our ability to successfully develop, launch, and sell new products and applications;applications.
Our net revenue may be impacted by the following inorganic factors:
fluctuations in foreign currency exchange rates; and
acquisitions.acquisitions and divestitures.
While the factors described above may impact net revenue in each of our operating segments, the impact of these factors on our operating segments can differ. For more information about revenue risks relating to our business, refer to Item 1A, “Risk"Risk Factors,”" included elsewhere in this Annual Report on Form 10-K.Report.
Cost of revenue
Our strategy of leveraging core technology platforms and focusing on high-volume applications enables us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration to best-cost manufacturing locations, transformation of our supply chain to best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
We manufacture the majority of our products and subcontract only a limited number of products to third parties. As such, our cost of revenue consists principally of the following:
Production Materials Costs. We purchase much of the materials used in production on a global best-cost basis, but we are still impacted by global and local market conditions. A portion of our production materials contains resins and metals, such as copper, nickel, zinc, aluminum, gold, silver, platinum, and palladium, and the cost of these materials may vary with underlying commodities pricing. However, we enter into forward contracts to economically hedge a portion of our exposure to the potential change in prices associated with certain of these commodities. The terms of these contracts fix the price at a future date for various notional amounts associated with these commodities. Gains and losses recognized on these non-designated derivatives are included in Other, net.
Employee Costs. Employee costs include wages and benefits for employees involved in our manufacturing operations. These costs generally fluctuate on an aggregate basis in direct correlation with changes in production volumes. As a percentage of revenue, these costs may decline as a result of economies of scale associated with higher production volumes, and conversely, may increase with lower production volumes. These costs also will fluctuate based on local market conditions. We rely on contract workers for direct labor in certain geographies. As of December 31, 2017, we had approximately 1,780 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.
Other. Our remaining cost of revenue primarily consists of:
| |
| • | Production Materials Costs. We purchase much of the materials used in production on a global best-cost basis, but we are still impacted by global and local market conditions. A portion of our production materials contains certain commodities, resins, and rare earth metals, and the cost of these materials may vary with underlying pricing. However, we enter into forward contracts to economically hedge a portion of our exposure to the potential change in prices associated with certain of these commodities. The terms of these contracts fix the price at a future date for various notional amounts associated with these commodities. Gains and losses recognized on these derivatives are recorded in other, net and are not included in cost of revenue. Refer to Note 6, "Other, Net" of our Financial Statements for additional information. |
| |
| • | Employee Costs. Employee costs include wages and benefits for employees involved in our manufacturing operations and certain 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 of December 31, 2019, we had approximately 1,825 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. |
| |
| • | 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;assets used in the manufacturing process;
freight costs;
warehousing expenses;
maintenance and repair expenses;
operating supplies; and
other general manufacturing expenses, such as expenses for energy consumption and operating lease expense.
The main factors that influence ourChanges in cost of revenue as a percentpercentage of net revenue include:have historically been impacted by a number of factors, including:
changes in the price of raw materials, including certain metals;the impact of changes in costs to import such raw materials, such as tariffs;
price reductions provided to our customers;
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;
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 costlower-cost manufacturing facilities;
product lifecycles, as we typically incur higher cost of revenue associated with excess manufacturing capacity during the initial stages of product launches and during the phase-out of discontinued products;
the increase in the carrying value of inventory that is adjusted to fair value as a result of the application of purchase accounting associated with acquisitions;
changes in depreciation expense, including amountsthose arising from the adjustment of Property, Plant & Equipment ("PP&E")&E to fair value associated with acquisitions;
fluctuations in foreign currency exchange rates;
changes in product mix;
changes in logistics costs; and
acquisitions asand divestitures – acquired and divested businesses may generate higher or lower cost of revenue as a percentage of net revenue than our historical rates.core business.
Research and development ("R&D") expense
We develop products that address increasingly complex engineering and operating performance requirements. We believe that continued focused investment in R&D activities is critical to our future growthOur research and maintaining our leadership position. Our development ("R&D&D") efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. We continuously develop our technologies to meet an evolving set of customer requirements and new product introductions. In addition, we constantly consider new technologies where we may have expertise for potential investment or acquisition.
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 relate to products that are not currently within our core business. Expenses related to these activities are less likely to result in increased revenue that our more mainstream development activities.
R&D expense consists of costs related to direct product design, development, and process engineering. Costs related to modifications of existing products for use by new and existing customers in familiar applications are presented in cost of revenue and are not included in R&D expense. The level of R&D expense in any period is related to the number of products in development, the stage of the development process, the complexity of the underlying technology, the potential scale of the product upon successful commercialization, and the level of our exploratory research. We conduct such activities in areas that we believe will increase our longer-term net revenue growth. Our development
Selling, general and administrative expense is typically associated with engineering core technology platforms to specific applications and engineering major upgrades that improve the functionality or reduce the cost of existing products.
Costs related to modifications of existing products for use by new and existing customers in familiar applications are recorded in cost of revenue and not included in R&D expense.
Selling, general and administrative ("SG&A") expense
SG&A expense consists of all expenditures incurred in connection with the sale and marketing of our products, as well as administrative overhead costs, including:
salary and benefit costs for sales and marketing personnel and administrative staff, including cash and share-based incentive compensation expense (expenses relating to our sales personnel 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);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 percentpercentage of net revenue have historically been impacted by a number of factors, including:
changes in sales volume, as higher volumes enable us to spread the fixed portion of our selling, marketing, and administrative expense over higher revenue;revenue (e.g. expenses relating to our sales and marketing personnel can fluctuate due to prolonged trends in sales volume, while expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume);
price reductions provided to our customers;
changes in the mix of products we sell, as some products may require more customer support and sales effort than others;
changes in our customer base, as new customers may require different levels of sales and marketing attention;
new product launches in existing and new markets, as these launches typically involve a more intense sales and marketing activity before they are integrated into customer applications;applications and systems;
changes in our customer credit issues requiring increases to the allowance for doubtful accounts;
pricing changes;
volumebase, as new customers may require different levels of sales and timing of acquisitions; andmarketing attention;
fluctuations in foreign currency exchange rates.rates; and
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, and amortization of assets held under capital leases.improvements. Depreciation expense is included in either cost of revenue or SG&A expense depending on the use of the asset as a manufacturing or administrative asset.
Depreciation expense will change depending onvary according to the age of existing PP&E and the level of capital expenditures. Depreciation expense is computed using the straight-line method. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on methods for calculating depreciation expense.
Amortization expense
We have recognized a significant amount of identifiable definite-lived intangible assets, which are recorded at fair value on the date of the related acquisition. Definite-lived, acquisition-relatedassets. 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 ana definite-lived intangible asset is concentrated towards the beginning of that intangible asset's useful life.
Capitalized software and capitalized software licenses are presented on the consolidated balance sheets as intangible assets. Capitalized software licenses are amortized on a straight-line basis over the lesser of the term of the license or the estimated useful life of the software. Capitalized software is amortized on a straight-line basis over its estimated useful life.
Restructuring and specialother charges, net
Restructuring and specialother charges, consistnet consists of severance, outplacement, other separation benefits, certain pension settlement and curtailment gains or losses, and facility exit and other exit costs. RestructuringThese charges may be incurred as part of an announced restructuring plan, or may be individual charges recordedrecognized 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, including, for example, a loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation. Refer to Note 17, “Restructuring15, "Commitments and Special Charges,”Contingencies," of our audited consolidated financial statements included elsewhereFinancial Statements for additional information.
Amounts recognized in this Annual Report on Form 10-K for discussionrestructuring and other charges, net will vary according to the extent of our restructuring programs and special charges.other exit activities as well as the existence and frequency of divested businesses and any gains or losses resulting therefrom.
Interest expense, net
We are a highly leveraged company, and interest expense is a significant portion of our results of operations. As of December 31, 20172019 and 2016,2018, we had gross outstanding indebtedness of $3,312.5$3,291.8 million and $3,324.9$3,303.3 million, respectively. This indebtedness consists of a secured credit facility and senior unsecured notes. Refer to Note 8,14, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for details of this indebtedness.additional information.
The term loan (the "Term Loan") provided by the eighth amendment (the "Eighth Amendment") to the credit agreement dated as of May 12, 2011governing our secured credit facility (as amended, the "Credit Agreement") and theprovides for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of a term loan facility (the "Term Loan"), a $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. Refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk,” included elsewhere in this Annual Report on Form 10-K for more information regarding our exposure to potential changes in variable interest rates.
Refer to Debt Instruments included elsewhere in this Management's Discussion and Analysis, and Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding our debt transactions, including the Eighth Amendment.
Other, net
Other, net primarily includes gains and losses associated with the remeasurement of non-U.S. dollar denominated net monetary assets and liabilities into U.S. dollars, changes in the fair value of non-designated derivative financial instruments, and debt financing transactions.
We derive a significant portion of our net revenue from markets outsiderates, which drives some of the U.S. For financial reporting purposes, the functional currency of all our subsidiaries is the U.S. dollar ("USD") because of the significant influence of the USD on our operations. In certain instances, we enter into transactions that are denominated in a currency other than USD. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in USD using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than USD are adjusted to USD using the exchange rate at the balance sheet date, with gains or losses recognized within Other, net in the consolidated statements of operations.
To mitigate the potential exposure to variability in cash flows and earnings related to changes in foreign currency exchange rates, we enter into foreign currency exchange rate forward contracts that may or may not be designated as cash flow hedges. The change in fair value of foreign currency forward contracts that are not designated for hedge accounting purposes is recognized in Other, net, and is driven by changes in the forward prices for the foreign exchange rates that we hedge. We cannot predict the future trends in foreign exchange rates, and there can be no assurance that gains or losses experienced in past periods will not recur in future periods.
We enter into forward contracts with third parties to offset a portion of our exposure to the potential change in prices associated with certain commodities, including silver, gold, platinum, palladium, copper, aluminum, and nickel, used in the manufacturing of our products. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. These derivatives are not designated as accounting hedges. Changes in the fair value of these forward contracts are recognized within Other, net, and are driven by changes in the forward prices for the commodities that we hedge. We cannot predict the future trends in commodity prices, and there can be no assurance that commodity gains or losses experienced in past periods will not recur in future periods.
We periodically enter into debt financing transactions. In accounting for these transactions, costs may be recorded as a reduction of debt on the consolidated balance sheets, or they may be recorded in the consolidated statements of operations as
Other, net or Interestinterest expense, net, depending on the type of transaction and the nature of the costs. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our debt financing transactions.
Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the amounts recorded in Other, net. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report for more information regarding our exposure to potential changes in variable interest rates.
Interest income, which is netted against interest expense on Form 10-K for further discussionthe consolidated statements of operations, relates to interest earned on our cash and cash equivalent balances, and varies according to the sensitivity of amounts recordedbalances 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 movementschanges 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 for additional information related to the components of other, net. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for additional information related to our exposure to potential changes in foreign currency exchange rates and commodity prices and foreign exchange rates.prices. Refer to Note 14, "Debt," of our Financial Statements for additional information related to our debt financing transactions.
Provision for income taxes
We are subject to income tax in the various jurisdictions in which we operate. We have a low effective cashThe provision for income taxes consists of:
current tax rate dueexpense, 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 cash taxes are 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 the U.K.United Kingdom (the "U.K.") and China andas well as favorable tax status in Mexico. In addition, the Dutchour tax structure takes advantage of participation exemption permitsregimes that permit the paymentreceipt of intercompany dividends without incurring taxable income in the Netherlands.those jurisdictions.
While the extent of our future tax liability is uncertain, the impact of purchase accounting for past and future acquisitions, changes to debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by our various subsidiaries are among the factors that will determine the future book and taxable income of each respective subsidiaryof our subsidiaries and of Sensata as a whole.
Our effective tax rate will generally not equal the U.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:
changes in tax law, including the recently enacted U.S. Tax Cuts and Jobs Act;
establishing or releasing a portion of the valuation allowance related to our gross deferred tax assets;
because we operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, Malaysia,and the U.K., and Bulgaria, that historically have had statutory tax rates lowerdifferent than the historical U.S. statutory tax rate. This can result in a foreign tax rate we generally have seen an effectivedifferential that may reflect a tax benefit or detriment. This foreign tax rate benefit, which changesdifferential can change from year to year based upon the jurisdictional mix of earnings;
earnings and changes in current and future enacted tax rates, tax holidays, and favorable tax regimes available to certain of our foreign subsidiaries;
as incomechanges in tax audits relatedlaws, including emerging Organization for Economic Co-operation and Development guidelines and European Commission challenges to our subsidiaries are closed, either as a result of negotiated settlements or final assessments, we may recognize a tax expense or benefit;
due to lapses of the applicable statute of limitations related to unrecognized tax benefits, we may recognize a tax benefit, including a benefit from the reversal of interest and penalties;
in certain jurisdictions, we record withholding and other taxes on intercompany payments, including dividends; andsovereign European Union member states;
losses incurred in certain jurisdictions, predominantly the U.S., are notwhich cannot be currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in the foreseeable future.future;
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.
Seasonality
Refer to Item 1, "Business," included elsewhere in this Report for discussion of our assessment of seasonality related to our business.
Inflation
We do not believe that inflation has had a material effect on our financial condition or results of operations in recent years.
Legal Proceedings
Refer to Item 3, "Legal Proceedings," included elsewhere in this Report for discussion of legal proceedings related to our business.
Results of Operations
Our discussion and analysis of results of operations and financial condition are based upon our audited consolidated financial statements. These financial statementsFinancial Statements. The Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statementsthe Financial Statements requires us to make estimates and judgments that affect the amounts reported in the financial statements.therein. We base our estimates on historical experiencesexperience and assumptions believed to be reasonable under the circumstances, and we re-evaluate such estimates on an ongoing basis. These estimates form the basis for our judgments that affect the amounts reported in the financial statements. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully described in Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K,Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis.Analysis of Financial Condition and Results of Operations.
The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue. We have derived these results of operations for the years ended December 31, 2017, 2016, and 2015from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Financial Statements. Amounts and percentages in the table and
discussion below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addappear to recalculate due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,460.6 |
|
| 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % | | $ | 2,346.2 |
| | 78.9 | % |
| Sensing Solutions | 846.1 |
|
| 25.6 |
| | 816.9 |
| | 25.5 |
| | 628.7 |
| | 21.1 |
|
| Net revenue | 3,306.7 |
|
| 100.0 | % | | 3,202.3 |
| | 100.0 | % | | 2,975.0 |
| | 100.0 | % |
| Operating costs and expenses: |
|
|
| | | | | | | | |
| Cost of revenue | 2,141.3 |
|
| 64.8 |
| | 2,084.3 |
| | 65.1 |
| | 1,977.8 |
| | 66.5 |
|
| Research and development | 130.2 |
|
| 3.9 |
| | 126.7 |
| | 4.0 |
| | 123.7 |
| | 4.2 |
|
| Selling, general and administrative | 302.8 |
|
| 9.2 |
| | 293.6 |
| | 9.2 |
| | 271.4 |
| | 9.1 |
|
| Amortization of intangible assets | 161.1 |
|
| 4.9 |
| | 201.5 |
| | 6.3 |
| | 186.6 |
| | 6.3 |
|
| Restructuring and special charges | 19.0 |
|
| 0.6 |
| | 4.1 |
| | 0.1 |
| | 21.9 |
| | 0.7 |
|
| Total operating costs and expenses | 2,754.3 |
|
| 83.3 |
| | 2,710.1 |
| | 84.6 |
| | 2,581.4 |
| | 86.8 |
|
| Profit from operations | 552.4 |
|
| 16.7 |
| | 492.2 |
| | 15.4 |
| | 393.6 |
| | 13.2 |
|
| Interest expense, net | (159.8 | ) |
| (4.8 | ) | | (165.8 | ) | | (5.2 | ) | | (137.6 | ) | | (4.6 | ) |
| Other, net | 9.8 |
|
| 0.3 |
| | (4.9 | ) | | (0.2 | ) | | (50.3 | ) | | (1.7 | ) |
| Income before taxes | 402.4 |
|
| 12.2 |
| | 321.4 |
| | 10.0 |
| | 205.6 |
| | 6.9 |
|
| (Benefit from)/provision for income taxes | (5.9 | ) |
| (0.2 | ) | | 59.0 |
| | 1.8 |
| | (142.1 | ) | | (4.8 | ) |
| Net income | $ | 408.4 |
|
| 12.3 | % | | $ | 262.4 |
| | 8.2 | % | | $ | 347.7 |
| | 11.7 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue: |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,546.0 |
|
| 73.8 | % | | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % |
| Sensing Solutions | 904.6 |
|
| 26.2 |
| | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
|
| Total net revenue | 3,450.6 |
|
| 100.0 | % | | 3,521.6 |
| | 100.0 | % | | 3,306.7 |
| | 100.0 | % |
| Operating costs and expenses | 2,893.7 |
|
| 83.9 |
| | 2,811.2 |
| | 79.8 |
| | 2,750.9 |
| | 83.2 |
|
| Operating income | 556.9 |
|
| 16.1 |
| | 710.4 |
| | 20.2 |
| | 555.8 |
| | 16.8 |
|
| Interest expense, net | (158.6 | ) |
| (4.6 | ) | | (153.7 | ) | | (4.4 | ) | | (159.8 | ) | | (4.8 | ) |
| Other, net | (7.9 | ) |
| (0.2 | ) | | (30.4 | ) | | (0.9 | ) | | 6.4 |
| | 0.2 |
|
| Income before taxes | 390.4 |
|
| 11.3 |
| | 526.4 |
| | 14.9 |
| | 402.4 |
| | 12.2 |
|
| Provision for/(benefit from) income taxes | 107.7 |
|
| 3.1 |
| | (72.6 | ) | | (2.1 | ) | | (5.9 | ) | | (0.2 | ) |
| Net income | $ | 282.7 |
|
| 8.2 | % | | $ | 599.0 |
| | 17.0 | % | | $ | 408.4 |
| | 12.3 | % |
Net revenue - Overall
Net revenue for fiscal year 2017 increased $104.4 million, or 3.3%, to $3,306.7 million from $3,202.3 million for fiscal year 2016. The increase in net revenue was composedfollowing table presents a reconciliation of a 3.2% increase in Performance Sensing and a 3.6% increase in Sensing Solutions. Excluding a 0.7% decline due to changes in foreign currency exchange rates, particularly related to the Euro and Chinese Renminbi, organic revenue growth was 4.0% when compared(or decline), a financial measure not presented in accordance with U.S. GAAP, to fiscal year 2016. Organicreported net revenue growth is(or decline), a non-GAAP financial measure.measure determined in accordance with U.S. GAAP, for fiscal years 2019 and 2018. Refer to the section entitled Non-GAAP Financial Measures below for furtheradditional information onrelated to our use of organic revenue growth (or decline).
|
| | | | | | | | | | | | | | | | | |
| | 2019 compared to 2018 | | 2018 compared to 2017 |
| | Total | | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions |
| Reported net revenue (decline)/growth | (2.0 | )% | | (3.1 | )% | | 1.2 | % | | 6.5 | % | | 6.8 | % | | 5.7 | % |
| Percent impact of: | | | | | | | | | | | |
Acquisitions and divestitures, net (1) | (0.2 | ) | | (1.9 | ) | | 4.6 |
| | (0.8 | ) | | (1.3 | ) | | 0.7 |
|
Foreign currency remeasurement (2) | (0.7 | ) | | (0.7 | ) | | (0.7 | ) | | 1.3 |
| | 1.5 |
| | 0.8 |
|
| Organic revenue (decline)/growth | (1.1 | )% | | (0.5 | )% | | (2.7 | )% | | 6.0 | % | | 6.6 | % | | 4.2 | % |
| |
(1) | Represents the percentage change in net revenue attributed to the effect of acquisitions and divestitures for the 12 months immediately following the respective transaction dates. The percentage amounts presented relate to the divestiture of the Valves Business in August 2018 and the acquisition of GIGAVAC in October 2018, each of which is discussed in Note 17, "Acquisitions and Divestitures," of our Financial Statements. |
| |
(2) | Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign denominated revenue transactions into USD, which is the functional currency of the Company and each of its subsidiaries. The USD to Chinese Renminbi exchange rate was a significant driver for both periods presented. The Euro to USD exchange rate was also a significant driver for fiscal year 2018 compared to fiscal year 2017. |
We are currently confronting numerous operational limitations due to the outbreak of the coronavirus in China in early 2020. We have two manufacturing locations and one business center located in Baoying, Changzhou and Shanghai, China, respectively, that have been, and continue to be, impacted due to national and regional Chinese government declarations requiring closures, quarantines and travel restrictions. Numerous variables and uncertainties related to this measure.
Netoutbreak limit our ability to calculate the overall impact on our business; however, we expect that the impact on our revenue for fiscal year 2016 increased $227.3 million, or 7.6%, to $3,202.3 million from $2,975.0 million for fiscal year 2015. The increase in net revenue was composed of a 1.7% increase inboth Performance Sensing and a 29.9% increaseSensing Solutions will be material in Sensing Solutions. Excluding 7.9% growth due to the net impactfirst quarter of an acquisition and exited businesses and a 1.9% decline due to changes in foreign currency rates, particularly the Euro to U.S. dollar, organic revenue growth was 1.6% when compared to fiscal year 2015.2020. Although we are taking numerous actions to address the situation, we currently do not expect this region, market and the impact to be fully recovered by the end of 2020.
Net revenue - Performance Sensing
For fiscal year 2019, Performance Sensing net revenue for fiscal year 2017 increased $75.2 million,declined 3.1%, or 3.2%0.5% on an organic basis. Our automotive business, which reported net revenue decline of 4.3%, or 0.9% on an organic basis, outperformed the automotive end market, which declined 5.6%. We refer to $2,460.6 million from $2,385.4 million for fiscal year 2016. Excluding a 0.7% declinethis outperformance, which relates to content growth partially offset by pricing, as "outgrowth." The outgrowth of the automotive market was largely due to changescontent growth in foreign currency exchange rates, particularly relatedall of our major end markets, most notably China. Our HVOR business, which reported net revenue growth of 1.6%, or 0.9% on an organic basis, outperformed the HVOR end market, which declined 5.5%. This outgrowth was primarily due to content growth in China as well as in the agriculture and on-road truck markets. In addition, price reductions of 1.6%, primarily to automotive customers, contributed to the Euro and Chinese Renminbi, organic revenue growth was 3.9% when compared to fiscal year 2016. Organic revenue growth is a non-GAAP financial measure. Refer to the section entitled Non-GAAP Financial Measures for further information on our use of this measure.
Performance Sensing organic revenue growth in 2017 was driven primarily by our heavy vehicle off road ("HVOR") business, mainly as a result of the combination of stronger markets anddecline. We expect sustained content growth over the next few years in both our automotive and HVOR businesses as we continue to design and develop solutions for existing and new customers in the construction, agriculture,clean & efficient and on-road truck markets in North America, andelectrification megatrends.
For fiscal year 2018, Performance Sensing net revenue increased 6.8%, or 6.6% on an organic basis. Organic revenue growth was primarily attributable to content growth in our automotive business, primarilyprincipally in China and North America, as well as a combination of market and content growth in our HVOR business, partially offset by price reductions of 1.9%, primarily related to automotive customers. In addition, we believe thatOur HVOR business benefited from production growth in the major markets within HVOR have been recovering, including theconstruction, North American Class 8on-road truck, market, which had beenand agriculture markets, and we generated content growth from sales to on-road truck customers, particularly weak in fiscal year 2016 and represents a significant part of our HVOR business. The price reductions referenced above were consistent with our expectations for future pricing pressures.
Performance Sensing net revenue for fiscal year 2016 increased $39.2 million, or 1.7%, to $2,385.4 million from $2,346.2 million for fiscal year 2015. Excluding 1.9% growth due to the net impact of an acquisition and exited businesses and a 2.1% decline due to changes in foreign currency exchange rates, particularly the Euro to U.S. dollar, organic revenue growth was 1.9% when compared to fiscal year 2015.
We acquired CST (as defined in Note 6, "Acquisitions," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K) in the fourth quarter of 2015. A portion of CST is being integrated into the Performance Sensing segment. The increase in revenue related to this acquisition in fiscal year 2016 was partially offset by the decrease in revenue related to the exit from unprofitable businesses during fiscal year 2016.
Performance Sensing organic revenue growth in 2016 was primarily driven by content and market growth, particularly in our automotive end markets in China and North America.Europe, as well as off-road customers in the agriculture industry.
Sensing Solutions
For fiscal year 2019, Sensing Solutions net revenue increased 1.2% but declined 2.7% on an organic basis. This growthorganic revenue decline was partially offset by a decline in our HVOR business as a result ofprimarily attributable to weakness in the North American Class 8 truck and global constructionindustrial markets which waswe serve partially offset by content growth in this business. In addition, priceboth our industrial and aerospace businesses. This market weakness is consistent with trends in certain indicators of demand, such as global manufacturing Purchasing Managers' Index ("PMI") data, which is signaling continued demand contraction,
consistent with slowing customer production and reductions in inventory. Our industrial growth in China is particularly weak as exports out of 1.8%, primarily related to automotive customers,China have further reduced organic revenue growth.slowed as a result of tariffs and global trade actions.
Net revenue - Sensing Solutions
For fiscal year 2018, Sensing Solutions net revenue for fiscal year 2017 increased $29.2 million,5.7%, or 3.6%, to $846.1 million from $816.9 million for fiscal year 2016. Excluding a 0.5% decline due to changes in foreign currency exchange rates, particularly related to the Chinese Renminbi,4.2% on an organic revenue growth was 4.1% when compared to fiscal year 2016.basis. Organic revenue growth is a non-GAAP financial measure. Refer to the section entitled Non-GAAP Financial Measures for further information on our use of this measure. The organic revenue growth was primarily due to market strength across all of our key end markets, particularly in China, as well as content growth in our HVACindustrial sensing, aerospace, and industrial markets.semiconductor businesses.
Sensing Solutions net revenueOperating costs and expenses
Operating costs and expenses for fiscal year 2016 increased $188.2 million, or 29.9%,the years ended December 31, 2019, 2018, and 2017 are presented in the following table (amounts and percentages have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to $816.9 million from $628.7 million for fiscal year 2015. Excluding 30.5% growthrecalculate due to the impacteffect of the acquisition of CST in the fourth quarter of 2015 and a 1.2% decline due to changes in foreign currency exchange rates, organic revenue growth was 0.6% when compared to fiscal year 2015. After experiencing an organic revenue decline in the first half of 2016, Sensing Solutions organic revenue grew in the second half of 2016 primarily due to a stabilizing market in China and broadly stronger demand for our electromechanical control and pressure sensor products.rounding):
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Operating costs and expenses: | | | | | | | | | | | |
| Cost of revenue | $ | 2,267.4 |
| | 65.7 | % | | $ | 2,266.9 |
| | 64.4 | % | | $ | 2,138.9 |
| | 64.7 | % |
| Research and development | 148.4 |
| | 4.3 |
| | 147.3 |
| | 4.2 |
| | 130.1 |
| | 3.9 |
|
| Selling, general and administrative | 281.4 |
| | 8.2 |
| | 305.6 |
| | 8.7 |
| | 301.9 |
| | 9.1 |
|
| Amortization of intangible assets | 142.9 |
| | 4.1 |
| | 139.3 |
| | 4.0 |
| | 161.1 |
| | 4.9 |
|
| Restructuring and other charges, net | 53.6 |
| | 1.6 |
| | (47.8 | ) | | (1.4 | ) | | 19.0 |
| | 0.6 |
|
| Total operating costs and expenses | $ | 2,893.7 |
| | 83.9 | % | | $ | 2,811.2 |
| | 79.8 | % | | $ | 2,750.9 |
| | 83.2 | % |
Cost of revenue
Cost of revenue for fiscal years 2017, 2016, and 2015 was $2,141.3 million (64.8% of net revenue), $2,084.3 million (65.1% of net revenue), and $1,977.8 million (66.5% of net revenue), respectively.
Cost of revenue decreased as a percentage of net revenue inFor fiscal year 2017 primarily due to improved operating efficiencies and synergies from the continued integration of acquired businesses, partially offset by the negative impact of price reductions.
We anticipate that2019, cost of revenue as a percentage of net revenue will furtherincreased from fiscal year 2018, primarily as a result of organic revenue decline, as we continuenegative mix due to create new product designslaunches, the impact of acquisitions and drive operational efficienciesdivestitures, and improvements in productivity, including lowering materialincreased tariff costs, and as we integrate recently acquired businesses. We generally complete integration activities within 18 to 24 months after the related acquisition. However, the integrations of certain acquisitions, for example Schrader and CST, are anticipated to take three to four years due to their size and scope.
Cost of revenue decreased as a percentage of net revenue in fiscal year 2016 primarily due to lower material and logistics costs and improved operating efficiencies, partially offset by the negative effectpositive impact of changes in foreign currency exchange rates and amounts accrued in 2016 related to the Automotive customer claim (as described in Note 14, "Commitments and Contingencies," of our audited consolidated financial statements included in our Annual Report on Form 10-K for thelower variable compensation.
For fiscal year ended December 31, 2016). In addition, there were certain charges recorded in2018, cost of revenue inas a percentage of net revenue decreased from fiscal year 2015 that did not recur in fiscal year 2016, including a $6.0 million charge related2017, primarily due to the settlement in the third quarterfavorable impact of 2015 of litigation broughtforeign currency exchange rates, partially offset by Bridgestone, a $5.0 million charge related to the write-down of certain assets associated with the announcement in the second quarter of 2015 of the shutdown of our Schrader Brazil manufacturing facility, and a $4.0 million charge taken in the second quarter of 2015 related to a warranty claim by a U.S. automaker.
Refer to Note 14, "Commitments and Contingencies," of the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for discussion of the settlement of the Bridgestone litigation and the charge taken related to the U.S. automaker warranty claim. Refer to Note 17, "Restructuring and Special
Charges," of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for discussion of the charge related to the announcement of the shutdown of the Schrader Brazil manufacturing facility.higher trade tariffs.
Research and development expense
For fiscal year 2019, R&D expense for fiscal years 2017, 2016,was relatively consistent with the prior period as increased design and 2015 was $130.2 million, $126.7 million, and $123.7 million, respectively.
R&D expense has increased over the last three years due to continued investmentdevelopment effort to support new platformdesign wins and technology developmentsfund development activities to intersect emerging megatrends shaping our end markets was offset by the positive impact of changes in foreign currency exchange rates, primarily the Euro and British Pound Sterling.
For fiscal year 2018, R&D expense increased due to higher spend, particularly related to new business wins, both in our recently acquiredthe emerging megatrends, and existing businesses, in order to drive future revenue growth.the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
For fiscal year 2019, SG&A expense fordeclined from fiscal years 2017, 2016,year 2018, primarily due to lower variable compensation, lower selling costs, the divestiture of the Valves Business, the favorable impact of foreign currency exchange rates (primarily the Euro, Chinese Renminbi, and 2015 was $302.8 millionBritish Pound Sterling), $293.6 million, and $271.4 million, respectively.lower costs related to our redomicile in the prior year, partially offset by additional SG&A expense related to GIGAVAC.
For fiscal year 2018, SG&A expense increased infrom fiscal year 2017, primarily due to $6.6 million inthe unfavorable impact of foreign currency exchange rates (primarily the Euro), higher share-based compensation expense, transaction costs associated withrelated to the proposedacquisition of GIGAVAC, and higher selling costs, partially offset by lower variable compensation, lower costs related to the cross-border merger between Sensata N.V. and Sensata Technologies Holding plc as discussed in Note 1, "Business Description and Basis of Presentation," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. SG&A expense was also impacted by higher variable compensation costs (including share-based compensation)(the "Merger"), partially offset by lower integration costs.
SG&A expense increased in 2016 primarily due tocosts, synergies from the acquisitionintegration of CST, which added $35.6 million in SG&A expense (excluding integration costs),acquired businesses, and increased compensation costs, partially offset by lower acquisition related transaction costs, the impact of the write-off in 2015 of a $5.0 million tax indemnification asset related to a pre-acquisition tax liability that was favorably resolved, and the positive effect of changes in foreign currency exchange rates. productivity improvements.
Amortization of intangible assets
AmortizationFor fiscal year 2019, amortization expense associatedincreased from fiscal year 2018, due to the intangible assets acquired with GIGAVAC, partially offset by the effect of the economic benefit method of amortization.
For fiscal year 2018, amortization expense decreased from fiscal year 2017, due to the effect of the economic-benefit method of amortization and the impact of certain definite-lived intangible assets for fiscal years 2017, 2016, and 2015 was $161.1 million, $201.5 million, and $186.6 million, respectively.
Amortization expense has decreased in fiscal year 2017 as certain intangible assets, primarily related to the Sensors & Controls and High Temperature Sensing acquisitions in 2006 and 2011, respectively, are at, or are nearing,reaching the end of their useful lives.
We expect amortization expense to decrease tobe approximately $137.7$127.8 million in fiscal year 2018 for these same reasons.
Amortization expense increased in 2016 primarily due to amortization of intangible assets recognized as a result of acquisitions, partially offset by a difference in the pattern of economic benefits over which intangible assets were amortized (i.e. as intangible assets age, there is generally less economic benefit associated with them, and accordingly less amortization expense as compared to previous years).
2020. Refer to Note 5,11, "Goodwill and Other Intangible Assets, Net," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for additional information regarding definite-lived intangible assets and the related amortization.
Restructuring and specialother charges, net
Restructuring and specialother charges, net for fiscalthe years ended December 31, 2019, 2018, and 2017 2016, and 2015 were $19.0 million, $4.1 million, and $21.9 million, respectively.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):
Restructuring and special charges |
| | | | | | | | | | | |
| | For the year ended December 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
Severance costs, net (1) | $ | 29.2 |
| | $ | 7.6 |
| | $ | 11.1 |
|
Facility and other exit costs (2) | 0.8 |
| | 0.9 |
| | 7.9 |
|
Gain on sale of Valves Business (3)(5) | — |
| | (64.4 | ) | | — |
|
Other (4)(5) | 23.5 |
| | 8.2 |
| | — |
|
| Restructuring and other charges, net | $ | 53.6 |
| | $ | (47.8 | ) | | $ | 19.0 |
|
| |
(1) | Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.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 in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. |
| |
(3) | In the year ended December 31, 2018, we completed the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2019, these amounts include a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. |
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(5) | Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
Operating income
For fiscal year 2017 consisted primarily of severance charges of $11.1 million and facility exit costs of $7.9 million, each of which related2019, operating income decreased from fiscal year 2018, due primarily to the closing of our facility in Minden, Germany that was partdivestiture of the acquisition of CST and the closing of our manufacturing facility in Bydgoszcz, Poland. Charges related to the closing of our facility in Minden, Germany for the year ended December 31, 2017 consisted of severance charges of $8.4 million and facility exit costs of $3.2 million. Charges related to the closing of our facility in Bydgoszcz, Poland for the year ended December 31, 2017 consisted of severance charges of $0.8 million and facility exit costs of $2.3 million.
Restructuring and special charges for fiscal year 2016 primarily included facility exit costs related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico and severance charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations
throughout the world. We completed the cessation of manufacturing in our Dominican Republic facilityValves Business in the third quarter of 2016.2018 (including the gain on sale), net productivity headwinds partly due to the scaling up of new product launches, the loss recognized in connection with the supply agreement termination related to litigation with Metal Seal, higher severance charges, the impact of increased tariffs, and lower volume, partially offset by lower variable compensation, lower selling expenses, the favorable impact of foreign currency rates, and the impact of the acquisition of GIGAVAC.
Restructuring and special charges for
For fiscal year 2015 included $7.6 million2018, operating income increased from fiscal year 2017, due primarily to higher volume, the divestiture of severance charges incurred in order to integrate acquired businesses with ours, $4.0 million of severance charges incurredthe Valves Business in the secondthird quarter of 2015 related to2018 (including the announced closinggain on sale), the favorable impact of our Schrader Brazil manufacturing facility, with the remainder primarily associated with the termination of a limited number of employees in various locations throughout the world.foreign currency rates, and lower amortization expense, partially offset by higher R&D expense.
Interest expense, net
InterestFor fiscal year 2019, interest expense, net forincreased from fiscal years 2017, 2016, and 2015 was $159.8year 2018, due primarily to an increase in interest expense related to higher variable interest rates as well as the impact of the refinancing of a portion of our Term Loan (variable rate debt) through the issuance of $450.0 million $165.8 million, and $137.6 million, respectively.in aggregate principal amount of 4.375% senior notes due 2030 (the "4.375% Senior Notes") (fixed rate debt). The 4.375% Senior Notes accrue interest at a higher rate than the average rate of the Term Loan in fiscal year 2019.
InterestFor fiscal year 2018, interest expense, net decreased infrom fiscal year 2017, due primarily as a result of higherto an increase in interest income due to increasinghigher average cash balances and rising interest rates.
Interest expense, net increased in fiscal year 2016 primarily as a result of the issuance of new debt related to the acquisition of CST in the fourth quarter of 2015,2018, partially offset by lower interest rates due to the refinancing of certain debt instrumentsan increase in 2015. In addition, 2015 included approximately $8.8 million in fees associated with bridge financing obtained for the acquisition of CST that was not ultimately utilized.
Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on our financing transactions. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-K for an analysis of the sensitivity of our interest expense related to changes inhigher variable interest rates.
Other, net
Other, net for fiscal years 2017, 2016, and 2015 consisted of net gains/(losses) of $9.8 million, $(4.9) million, and $(50.3) million, respectively.
The change in Other, net in fiscal year 2017 compared to fiscal year 2016 relates primarily to fluctuations in foreign currency exchange rates, net of any offsetting hedge gain or loss.
The change in Other, net in fiscal year 2016 compared to fiscal year 2015 relates primarily to commodity forward contracts and losses on debt financing transactions incurred during fiscal year 2015 that did not recur in fiscal year 2016.
Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on the gains and losses included within Other, net. Refer to Note 8, "Debt," and Note 16, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on losses related to our debt financing transactions and gains and losses related to commodity and foreign exchange forward contracts, respectively. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-K for an analysis of the sensitivity of Other, net to changes in foreign currency exchange rates and commodity prices.
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for fiscal years 2017, 2016, and 2015 was $(5.9) million, $59.0 million, and $(142.1) million, respectively. The change in the (benefit from)/provision for income taxes in fiscal year 2017 is primarily due to the enactment of U.S. tax legislation during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax liabilities associated with indefinite lived intangible assets, including goodwill, from a rate of 35 percent to 21 percent.
(Benefit from)/provision for income taxes consists of current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions and withholding taxes on interest and royalty income, and deferred tax expense (or benefit), which relates to adjustments in book-to-tax basis differences, mainly the step-up in fair value of fixed and intangible assets, including goodwill, acquired in connection with business combination transactions, utilization of net operating losses, prospective changes in U.S. tax rates due to newly enacted legislation, and adjustments to our U.S. valuation allowance in connection with acquisitions made by our U.S. subsidiaries.
Our income tax expense for fiscal years 2017, 2016, and 2015 was less than the amounts computed at the U.S. statutory rate by $146.8 million, $53.5 million, and $214.0 million, respectively. The most significant reconciling items are noted below.
Foreign tax rate differential. We operate in locations outside the U.S., including China, the U.K., the Netherlands, South Korea, Malaysia, Bermuda, and Bulgaria, that have statutory tax rates lower than the historical U.S. statutory rate, resulting in an effective rate benefit. This benefit can change from year to year based upon the jurisdictional mix of earnings. In fiscal years 2017, 2016, and 2015, this benefit was $112.0 million, $86.3 million, and $66.4 million, respectively.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. From 2016 through 2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of 15%. The impact of the tax holidays and exemptions on our effective rate is included in the foreign tax rate differential line in the reconciliation of the statutory rate to effective rate.
Certain income of our U.K. subsidiaries are eligible for lower tax rates under the “patent box” regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate.
Release of valuation allowances. During the years ended December 31, 2019, 2018, and 2017 2016, and 2015, we released a portionconsisted of our valuation allowance and recognized a deferred tax benefit of $12.2 million, $1.9 million, and $180.0 million, respectively. The deferred tax benefits in fiscal years 2016 and 2015 arose primarily in connection with the 2015 acquisition of CST and the 2014 acquisitions of Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities were established and related primarilyfollowing (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the step-upeffect of intangiblerounding):
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| | | | | | | | | | | |
| | For the year ended December 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
Currency remeasurement (loss)/gain on net monetary assets (1) | $ | (6.8 | ) | | $ | (18.9 | ) | | $ | 18.0 |
|
Gain/(loss) on foreign currency forward contracts (2) | 2.2 |
| | 2.1 |
| | (15.6 | ) |
Gain/(loss) on commodity forward contracts (2) | 4.9 |
| | (8.5 | ) | | 10.0 |
|
Loss on debt financing (3) | (4.4 | ) | | (2.4 | ) | | (2.7 | ) |
| Net periodic benefit cost, excluding service cost | (3.2 | ) | | (3.6 | ) | | (3.4 | ) |
| Other | (0.7 | ) | | 0.9 |
| | 0.1 |
|
| Other, net | $ | (7.9 | ) | | $ | (30.4 | ) | | $ | 6.4 |
|
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(1) | Relates to the remeasurement of non-USD denominated monetary assets and liabilities into USD. |
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(2) | Relates to changes in the fair value of derivative financial instruments that are not designated as hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to gains and losses related to our commodity and foreign currency exchange forward contracts. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. |
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(3) | Refer to Note 14, "Debt," of our Financial Statements for additional information related to our debt financing transactions. |
Provision for/(benefit from) income taxes
The components of provision for/(benefit from) income taxes for book purposes.
Losses not tax benefited. Losses incurred in certain jurisdictions, predominantly the U.S., are not currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in the foreseeable future. For the years ended December 31, 2019, 2018, and 2017 2016, and 2015, this resultedare described in a deferred tax expense of $8.8 million, $32.5 million, and $56.8 million, respectively.
Withholding taxesmore detail in the table below (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not creditable. Withholding taxes may applyappear to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are expensed if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been givenrecalculate due to the withholding taxes associated with the remittanceeffect of presently unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned.rounding):
Refer to Note 9, “Income Taxes,” of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on the tax rate reconciliation. |
| | | | | | | | | | | |
| | For the year ended December 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
Tax computed at statutory rate of 21% in 2019 and 2018 and 35% in 2017 (1) | $ | 82.0 |
| | $ | 110.5 |
| | $ | 140.9 |
|
| Reserve for tax exposure | 20.1 |
| | 10.8 |
| | 38.0 |
|
Valuation allowances (2) | 19.6 |
| | (123.4 | ) | | (3.4 | ) |
Foreign tax rate differential (3) | (19.1 | ) | | (41.2 | ) | | (112.0 | ) |
| Withholding taxes not creditable | 9.5 |
| | 8.7 |
| | 3.9 |
|
Research and development incentives (4) | (8.4 | ) | | (19.5 | ) | | (5.9 | ) |
| Change in tax laws or rates | 5.1 |
| | (22.3 | ) | | 3.9 |
|
U.S. Tax Reform Act impact (5) | — |
| | — |
| | (73.7 | ) |
Other (6) | (1.1 | ) | | 3.7 |
| | 2.4 |
|
| Provision for/(benefit from) income taxes | $ | 107.7 |
| | $ | (72.6 | ) | | $ | (5.9 | ) |
| |
(1) | Represents the product of the applicable statutory tax rate and income before taxes, as reported in the consolidated statements of operations. In fiscal year 2018 the statutory tax rate declined to 21% (i.e., compared to 35% in previous fiscal years) due to the effect of the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act"). |
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(2) | During the years ended December 31, 2019, 2018, and 2017, we established/(released) a portion of our valuation allowance and recognized a deferred tax expense/(benefit). The valuation allowance as of December 31, 2019 and 2018 was $146.8 million and $157.0 million, respectively. The remaining valuation allowance mainly relates to foreign tax credit and capital loss carryforwards and suspended interest deductions. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future provision for/(benefit from) income taxes. |
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(3) | We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory 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 holidays in their respective jurisdictions. |
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(4) | Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance. |
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(5) | Relates to the enactment of the Tax Reform Act during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax assets and liabilities associated with indefinite-lived intangible assets, including goodwill, from a rate of 35% to 21%. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. |
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(6) | Refer to Note 7, "Income Taxes," of our Financial Statements for 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.
The valuation allowance as of December 31, 2017 and 2016 was $277.3 million and $299.7 million, respectively. It is more likely than not that the related net operating losses will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future (benefit from)/provision for income taxes.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth, adjusted operating income, adjusted operating margin, adjusted net income, and organic revenue growth,adjusted earnings per share ("EPS"), which are used by our management, Board of Directors, and investors,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 further discussed below. Adjusted net income and organic revenue growtha factor in determining compensation for certain employees.
Our non-GAAP financial measures should be considered as supplemental in nature and are not intended to be viewedconsidered in isolation or as a substitute for reported net revenue growth, operating income, operating margin, net income, or net revenue growth prepareddiluted EPS, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth, adjusted operating income, adjusted operating margin, adjusted net income, and organic revenue growthadjusted EPS may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue, calculated in accordance with U.S. GAAP, excluding the period-over-period impact of acquisitions, net of exited businesses that occurred within the previous 12 months, and the effect of changes in foreign currency exchange rates betweenrate differences as well as the current yearnet impact of material acquisitions and prior year periods.divestitures for the 12-month period following the respective transaction date(s). Refer to the Net revenue section above for a reconciliation of organic revenue growth to reported revenue growth.
We believe that organic revenue growth provides investors with helpful information with respect to our operating performance, and we use organic revenue growth to evaluate our ongoing operations andas well as for internal planning and forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior yearprior-year period.
Adjusted netoperating income,
We define adjusted operating margin, adjusted net income, as follows: net income before certain restructuring and special charges, financing and other transaction costs, deferred (gain)/loss on other hedges, depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory, deferred income tax and other tax (benefit)/expense, amortization of deferred financing costs, and other amounts as outlined in the reconciliation below.adjusted EPS
Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS as a measuremeasures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, and in communications with our Board of Directors and investors concerning our financial performance.performance, and as a factor in determining compensation for certain employees. We believe investors and securities analysts also use adjusted net incomethese non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies. Adjusted net income isThese non-GAAP financial measures are not a measuremeasures of liquidity. The use of adjusted net income hasthese non-GAAP financial measures have limitations, and this performance measurethey should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as operating income, operating margin, net income.income, or diluted EPS. We believe that these measures are useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends.
Our definition ofWe define adjusted operating income as operating income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted operating margin is calculated by dividing adjusted operating income by net revenue.
We define adjusted net income excludes the deferred (benefit from)/provision foras follows: net income, taxes and other tax (benefit)/expense. Our deferred (benefit from)/provision for income taxes includesdetermined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments for book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets and goodwill, utilization of net operating losses, and adjustments to our U.S. valuation allowance in connection with certain acquisitions. Other tax (benefit)/expense includes certain adjustments to unrecognized tax positions. As we treat deferred income tax and other tax (benefit)/expense as an adjustment to computewhich are described below. Adjusted EPS is calculated by dividing adjusted net income by the deferred income tax effect associated withnumber of diluted weighted-average ordinary shares outstanding in the reconciling items presented below would not change adjusted net income for any period presented. Refer to note (g) to the table below for the theoretical current income tax expense/(benefit) associated with the reconciling items indicated, which relate to jurisdictions where such items would provide tax expense/(benefit).period.
Non-GAAP adjustments
Many of theseour non-GAAP adjustments to net income relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain operations,business, supply chain, or corporate activities, and various financing transactions. We describe these adjustments in more detail below.
Restructuring related and other - includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. Restructuring related and other does not, however, include charges related to the integration of acquired businesses, including such charges that are recognized as restructuring and other charges, net in the consolidated statements of operations.
Financing and other transaction costs – includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, losses or gains related to the termination of a long-term unfavorable supply
agreement, 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 commodities and other 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 inventory). The following unaudited table provides a reconciliationcurrent tax effect of step-up depreciation and amortization was not material, individually or in the aggregate, in any period presented.
Deferred income 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 U.S. valuation allowance in connection with certain acquisitions and U.S. tax law changes. Other tax related items include certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
Amortization of debt issuance costs.
Where applicable, the current tax effect of non-GAAP adjustments.
Our definition of adjusted net income excludes the deferred provision for/(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 most directly comparabledeferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented.
Non-GAAP reconciliations
The following tables provide reconciliations of certain financial measure presentedmeasures calculated in accordance with U.S. GAAP:GAAP to the related non-GAAP financial measures for the periods presented (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, |
| (Amounts in thousands) | 2017 | | 2016 | | 2015 |
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
|
| Non-GAAP adjustments | | | | | |
Restructuring and special charges(a)(g) | 21,331 |
| | 14,982 |
| | 42,332 |
|
Financing and other transaction costs(b) | 9,267 |
| | 1,508 |
| | 43,850 |
|
Deferred (gain)/loss on other hedges(c) | (7,365 | ) | | (19,347 | ) | | 11,864 |
|
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory(d)(g) | 165,040 |
| | 210,847 |
| | 193,370 |
|
Deferred income tax and other tax (benefit)/expense(e) | (55,156 | ) | | 17,086 |
| | (173,550 | ) |
Amortization of deferred financing costs(f) | 7,241 |
| | 7,334 |
| | 6,456 |
|
| Total adjustments | 140,358 |
| | 232,410 |
| | 124,322 |
|
| Adjusted net income | $ | 548,715 |
| | $ | 494,844 |
| | $ | 472,018 |
|
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2019 |
| (Dollars 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 (a) | | 61.9 |
| | 1.8 |
| | 62.2 |
| | 0.38 |
|
Financing and other transaction costs (b)(c) | | 28.9 |
| | 0.8 |
| | 34.9 |
| | 0.22 |
|
Step-up depreciation and amortization (c) | | 139.6 |
| | 4.0 |
| | 139.6 |
| | 0.86 |
|
Deferred gain on derivative instruments (c) | | (1.6 | ) | | (0.0 | ) | | (6.5 | ) | | (0.04 | ) |
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.8 |
| | 0.05 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | 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 |
|
| |
| (a) | The following unaudited table provides a detailRefer to summary of restructuring related and other charges for each of the components of our restructuring and special charges non-GAAP adjustment for fiscal years 2019, 2018, and 2017 2016, and 2015 as shown in the above table: |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Amounts in thousands) | 2017 | | 2016 | | 2015 |
Severance costs(i) | $ | 3,026 |
| | $ | 21 |
| | $ | 15,560 |
|
Facility related costs(ii) | 13,962 |
| | 10,945 |
| | 11,353 |
|
Special charges and other(iii) | 4,343 |
| | 4,016 |
| | 15,419 |
|
| Total restructuring and special charges | $ | 21,331 |
| | $ | 14,982 |
| | $ | 42,332 |
|
__________________
| |
i. | Consists primarily of severance charges incurred and accounted for as part of ongoing benefit arrangements, excluding those costs recorded in connection with the integration of acquired businesses. Fiscal year 2015 also includes $4.0 million in severance charges associated with our decision to close our Schrader Brazil manufacturing facility and exit that business (refer also to Note 17, "Restructuring and Special Charges" of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K). |
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ii. | Consists primarily of costs associated with line moves and the closing or relocation of various facilities throughout the world. In fiscal year 2017, these costs include $6.0 million related to transitioning certain of our distribution centers within Europe, $3.7 million of costs related to the closing of our facility in Bydgoszcz, Poland, and $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. In fiscal year 2016, these costs include $3.7 million of costs associated with the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico, $1.1 million in non-severance related costs associated with the closing of our Schrader Brazil manufacturing facility, and $3.8 million of costs associated with other exited product lines. In fiscal year 2015, these costs include non-severance related costs associated with our decision to close our Schrader Brazil manufacturing facility, including a $5.0 million charge to write-down certain assets (refer to Note 17, "Restructuring and Special Charges," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information). |
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iii. | Consists of other amounts that do not fall within one of the other specific categories, including, in fiscal year 2015, losses associated with the settlement of certain preacquisition loss contingencies, including the U.S. automaker warranty claim ($4.0 million) and the Bridgestone intellectual property litigation ($6.0 million). Refer to Note 14, "Commitments and Contingencies," of our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.below. |
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| (b) | Includes lossesPrimarily included a $17.8 million loss related to debt financing transactions, coststhe termination of a supply agreement in connection with the Metal Seal litigation and $6.1 million of deferred compensation incurred in connection with secondary offering orthe acquisition of GIGAVAC, each of which were recorded in restructuring and other equity transactions, and costscharges, net in the consolidated statements of operations. Also included a loss of $4.4 million associated with acquisition activity. Costs associated witha debt financing transactions, which include losses of $2.7 million in fiscal year 2017 and $34.3 million in fiscal year 2015, are generallytransaction, recorded in either Other,other, net or Interest expense, net. Costs associated with equity transactions, which include $6.6 millionin the consolidated statement of expenses incurred in fiscal year 2017 in connection with the proposed cross-border merger, are generally recorded in SG&A expense. Costs associated with acquisition activity, which include $9.4 million in fiscal year 2015, are generally recorded in SG&A expense.operations. |
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| (c) | Reflects primarily unrealized and deferred losses/(gains), net on commodityThere was no current tax effect related to the following categories of non-GAAP adjustments: financing and other hedges.transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
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| (d) | Represents depreciationA majority of this adjustment related to $27.6 million of deferred tax provision, $18.2 million of uncertain tax positions recorded in fiscal year 2019, and amortization$9.4 million of current tax expense related to the step-up in fair valuerepatriation of fixedprofits from certain |
subsidiaries in China to their parent companies in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as to fund our deployment of capital.
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| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2018 |
| (Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
| Reported (GAAP) | | $ | 710.4 |
| | 20.2 | % | | $ | 599.0 |
| | $ | 3.53 |
|
| Non-GAAP adjustments: | | | | | | | | |
Restructuring related and other (a) | | 25.4 |
| | 0.7 |
| | 28.0 |
| | 0.17 |
|
Financing and other transaction costs (b)(c) | | (47.0 | ) | | (1.3 | ) | | (40.3 | ) | | (0.24 | ) |
Step-up depreciation and amortization (c) | | 141.2 |
| | 4.0 |
| | 141.2 |
| | 0.83 |
|
Deferred loss on derivative instruments (c) | | 2.0 |
| | 0.1 |
| | 12.5 |
| | 0.07 |
|
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.3 |
| | 0.04 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | (128.3 | ) | | (0.76 | ) |
| Total adjustments | | 121.5 |
| | 3.5 |
| | 20.4 |
| | 0.12 |
|
| Adjusted (non-GAAP) | | $ | 832.0 |
| | 23.6 | % | | $ | 619.4 |
| | $ | 3.65 |
|
| |
| (a) | Refer to summary of restructuring related and intangible assetsother charges for each of the fiscal years 2019, 2018, and inventory related to acquisitions.2017 below. |
| |
(e)(b) | RepresentsPrimarily included a $64.4 million gain on the sale of the Valves Business, $5.9 million of transaction costs related to this sale, and $2.2 million of deferred income taxcompensation incurred in connection with the acquisition of GIGAVAC, all of which were recorded in restructuring and other tax expense/(benefit),charges, net in the consolidated statements of operations. Also included are: costs associated with debt financing transactions of $2.4 million, which were recorded in other, net in the consolidated statements of operations; costs to complete the Merger of $4.1 million, which were recorded in SG&A expense in the consolidated statements of operations; and costs associated with acquisition activity, including provisions for, and interest expense and penalties related to, certain unrecognized tax benefits (or benefits from their release). Our deferred income tax includes adjustments for measuring book-to-tax basis differences primarily$2.5 million of transaction costs related to the acquisition of GIGAVAC in fiscal year 2018, which were recorded in SG&A expense in the consolidated statements of operations. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in fair valuethe aggregate. |
| |
| (d) | We recognized a deferred tax benefit of fixed and intangible assets and goodwill, utilization$144.1 million, which primarily included a $122.1 million deferred tax benefit related to the release of net operating losses and adjustments toa portion of our U.S. valuation allowance as discussed in connectionNote 7, "Income Taxes," of our Financial Statements. Also included in our fiscal year 2018 results is $10.0 million of current tax expense related to the repatriation of profits from certain subsidiaries in China to their parent companies, primarily in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as to fund our deployment of capital. |
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2017 |
| (Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
| Reported (GAAP) | | $ | 555.8 |
| | 16.8 | % | | $ | 408.4 |
| | $ | 2.37 |
|
| Non-GAAP adjustments: | | | | | | | | |
Restructuring related and other (a) | | 21.3 |
| | 0.6 |
| | 21.3 |
| | 0.12 |
|
Financing and other transaction costs (b)(c) | | 6.6 |
| | 0.2 |
| | 9.3 |
| | 0.05 |
|
Step-up depreciation and amortization (c) | | 165.0 |
| | 5.0 |
| | 165.0 |
| | 0.96 |
|
Deferred loss/(gain) on derivative instruments (c) | | 2.6 |
| | 0.1 |
| | (7.4 | ) | | (0.04 | ) |
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.2 |
| | 0.04 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | (55.2 | ) | | (0.32 | ) |
| Total adjustments | | 195.6 |
| | 5.9 |
| | 140.4 |
| | 0.82 |
|
| Adjusted (non-GAAP) | | $ | 751.4 |
| | 22.7 | % | | $ | 548.7 |
| | $ | 3.19 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included $6.6 million of costs to complete the Merger and $2.7 million of costs associated with certain acquisitions. Otherdebt financing transactions. |
| |
| (c) | There was no current tax expense/(benefit) includes certain adjustmentseffect related to unrecognizedthe following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax positions. Fiscal year 2017 includeseffect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | Primarily included $73.7 million of income tax benefits related to the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate from 35 percent35% to 21 percent in21% as a part of the Tax CutsReform Act. |
The following table presents the components of our restructuring related and other non-GAAP adjustment to net income for fiscal years 2019, 2018, and 2017 (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) | 2019 | | 2018 | | 2017 |
Business and corporate repositioning (i) | $ | 40.1 |
| | $ | 8.8 |
| | $ | 3.9 |
|
Supply chain repositioning and transition (ii) | 16.0 |
| | 15.3 |
| | 11.4 |
|
Preacquisition legal matters (iii) | 5.3 |
| | 2.9 |
| | 4.7 |
|
| Other | 2.7 |
| | 1.0 |
| | 1.4 |
|
Income tax effect (iv) | (1.8 | ) | | — |
| | — |
|
Total non-GAAP restructuring related and other (v) | $ | 62.2 |
| | $ | 28.0 |
| | $ | 21.3 |
|
| |
| i. | Fiscal year 2019 primarily includes approximately $12.7 million of benefits provided under a voluntary retirement incentive program, $10.2 million of costs associated with business and Jobs Actcorporate workforce rationalization, and $9.5 million of 2017. Fiscal years 2016costs (both termination and 2015 include $1.9 million and $180.0 million, respectively, of deferred income tax benefitsother costs) related to the releaseshutdown and relocation of portions of our U.S. valuation allowancean operating site in connection with our 2015 acquisition of CST and our 2014 acquisitions of Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities were established related primarily to the step-up of intangible assets for book purposes.Germany. Refer to Note 9, “Income Taxes,” of5, "Restructuring and Other Charges, Net," included in our audited consolidated financial statements included elsewhereFinancial Statements for additional information about the voluntary retirement incentive program. Amounts presented in this Annual Report on Form 10-K for more details.fiscal years 2018 and 2017 primarily represent costs related to business and corporate workforce rationalization. |
| |
(f)ii. | Represents amortization expenseFiscal years 2019, 2018, and 2017 primarily include costs related to deferred financingoptimization of our manufacturing processes to increase productivity and rationalize our manufacturing footprint of $14.1 million, $14.0 million, and $10.0 million, respectively. The remaining amounts presented primarily represent costs and debt discounts.related to supply chain workforce rationalization. |
| |
(g)iii. | The theoretical current income tax expense/(benefit)Represents charges incurred related to legal matters associated with an acquired business, 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 2017 primarily includes $3.0 million of costs associated with the reconciling items presented above is shown below for each period presented. The theoretical current incomeclosing of our Schrader Brazil manufacturing facility. |
| |
| iv. | We treat deferred taxes as a non-GAAP adjustment. Accordingly, the tax (benefit)/expense was calculated by multiplyingeffect of the reconciling items, which relaterestructuring related and other non-GAAP adjustment refers only to jurisdictions where such items would providethe current tax (benefit)/expense, byeffect. With respect to the applicableyears ended December 31, 2018 and 2017, the current tax rates.effect was not material, individually or in the aggregate. |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Amounts in thousands) | 2017 | | 2016 | | 2015 |
| Restructuring and special charges | $ | (456 | ) | | $ | (1,001 | ) | | $ | (2,119 | ) |
| Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory | $ | (22 | ) | | $ | (149 | ) | | $ | (595 | ) |
| |
| 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. |
Liquidity and Capital Resources
WeAs of December 31, 2019 and 2018 we held cash and cash equivalents of $753.1 million and $351.4 million at December 31, 2017 and 2016, respectively, of which $260.9 million and $37.8 million, respectively, was held in the Netherlands, $9.0 million and $5.7 million, respectively, was held by U.S. subsidiaries, and $483.2 million and $307.9 million, respectively, was held by other foreign subsidiaries. following regions:
|
| | | | | | | |
| | As of December 31, |
| (in millions) | 2019 | | 2018 |
| United Kingdom | $ | 8.8 |
| | $ | 8.8 |
|
| United States | 7.0 |
| | 4.6 |
|
| The Netherlands | 522.9 |
| | 482.1 |
|
| China | 119.3 |
| | 125.2 |
|
| Other | 116.1 |
| | 109.1 |
|
| Total | $ | 774.1 |
| | $ | 729.8 |
|
The amount of cash and cash equivalents held in the Netherlands and in our U.S. and other foreign subsidiariesthese geographic regions fluctuates throughout the year due to a variety of factors, includingsuch as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business, and, if applicable,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 timingextent the remittance of debt issuances and payments, repurchases of ordinary shares, and other financing transactions.such earnings cannot be recovered in a tax free manner.
Cash Flows
The table below summarizes our primary sources and uses of cash for the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017. We have derived thesethe summarized statements of cash flows from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Financial Statements. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addappear to recalculate due to the effect of rounding.
| | | | For the year ended December 31, | For the year ended December 31, |
| (Amounts in millions) | 2017 | | 2016 | | 2015 | |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Net cash provided by/(used in): | | | | | | | | | | |
| Operating activities: | | | | | | | | | | |
| Net income adjusted for non-cash items | $ | 652.5 |
| | $ | 615.5 |
| | $ | 508.7 |
| $ | 630.3 |
| | $ | 687.5 |
| | $ | 652.5 |
|
| Changes in operating assets and liabilities, net of effects of acquisitions | (94.8 | ) | | (93.9 | ) | | 24.4 |
| |
| Changes in operating assets and liabilities, net | | (10.7 | ) | | (66.9 | ) | | (94.8 | ) |
| Operating activities | 557.6 |
| | 521.5 |
| | 533.1 |
| 619.6 |
| | 620.6 |
| | 557.6 |
|
| Investing activities | (140.7 | ) | | (174.8 | ) | | (1,166.4 | ) | (208.8 | ) | | (237.6 | ) | | (140.7 | ) |
| Financing activities | (15.3 | ) | | (337.6 | ) | | 764.2 |
| (366.5 | ) | | (406.2 | ) | | (15.3 | ) |
| Net change | $ | 401.7 |
| | $ | 9.2 |
| | $ | 130.9 |
| $ | 44.3 |
| | $ | (23.3 | ) | | $ | 401.7 |
|
Operating Activities
NetThe decrease in cash provided by operating activities duringin fiscal year 2019 compared to fiscal year 2018 relates primarily to lower operating profitability and the years ended December 31, 2017, 2016,timing of supplier payments and 2015 was $557.6 million, $521.5 million, and $533.1 million, respectively.customer receipts.
The increase in cash provided by operating activities in fiscal year 20172018 compared to fiscal year 20162017 relates primarily to improved operating profitability partially offset by a build up of inventory to support anticipated line moves, higher cash paid for interest, and higher cash paid related to severance obligations. The higher cash paid for interest relates to the $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes"), for which interest payments are due semi-annually on February 15 and August 15 of each year. The payment made on February 15, 2016 did not represent payment for a full six-month period, as the 6.25% Senior Notes were issued on November 27, 2015.
The decrease in net cash provided by operating activities in fiscal year 2016 compared to fiscal year 2015 is primarily due to a build up of inventory to support anticipated line moves and timing of supplier payments and customer receipts, partially offset by higher net income (after adjusting for non-cash items).
receipts.
Investing Activities
NetInvesting activities include additions to PP&E and capitalized software, the acquisition or divestiture of a business or assets, and the acquisition or sale of certain debt and equity securities.
In fiscal year 2019, net cash used in investing activities duringdecreased primarily due to lower cash used in acquisitions, as the years ended December 31, 2017, 2016,GIGAVAC merger was completed in fiscal year 2018. This was partially offset by the impact of the divestiture of the Valves Business, for which proceeds were received in fiscal year 2018, cash paid for the acquisition of assets from Metal Seal (as further discussed in Note 15, "Commitments and 2015 was $140.7 million, $174.8 million,Contingencies" of the Financial Statements), and $1,166.4 million, respectively, which included $144.6 million, $130.2 million,cash used to acquire debt and $177.2 million, respectively, in capital expenditures. Capital expenditures primarily relate to investments associated with increasing our manufacturing capacity. equity securities.
In fiscal year 2018, net cash used in investing activities increased primarily due to the cash used in the merger with GIGAVAC, partially offset by proceeds from the divestiture of the Valves Business. In addition, more cash was used to purchase PP&E and capitalized software in fiscal year 2018 compared to fiscal year 2017.
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the divestiture of the Valves Business and the acquisition of GIGAVAC.
In fiscal year 2020, we anticipate capital expendituresadditions to PP&E and capitalized software of approximately $150.0$165.0 million to $160.0$175.0 million, which we expect to be funded with cash flows from operations.
In addition, in 2016, net cash used in investing activities included an investment of $50.0 million in preferred stock of Quanergy Systems, Inc. Refer to Note 15, "Fair Value Measures," for further discussion of this investment.
In 2015, we used $996.9 million, net of cash received, to acquire CST.
Financing Activities
Net cash (used in)/provided by financing activities during the years ended December 31, 2017, 2016, and 2015 was $(15.3) million, $(337.6) million, and $764.2 million, respectively.
NetIn fiscal year 2019, net cash used in financing activities indecreased primarily due to a lower volume of ordinary share repurchases.
In fiscal year 2017 consisted primarily of $943.6 million in payments on debt, partially offset by $927.8 million of proceeds from the issuance of debt. These cash flows result from the repricing of the term loan provided pursuant to the sixth amendment (the “Sixth Amendment”) of the Credit Agreement, and the resulting issuance of the Term Loan pursuant to the Eighth Amendment. Refer to Debt Instruments below and Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the terms of these amendments.
Net2018, net cash used in financing activities in fiscal year 2016 consistedincreased primarily of $336.3 million in payments on debt, including $280.0 million in payments on the Revolving Credit Facility and $44.9 million in payments on the term loan issued pursuant to the Sixth Amendment.
Net cash provided by financing activities in fiscal year 2015 consisted primarily of $2,795.1 million of proceeds from the issuance of debt, partially offset by $2,000.3 million in payments on debt. These issuances and payments include amounts related to certain debt instruments that were refinanced in 2015, including $700.0 million aggregate principal amount of 6.5% senior notes due 2019 that were tendered and redeemed in March and April 2015 using the proceeds from the issuance and sale of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and $990.1 million of previously existing term loans that were prepaid in May 2015 with the proceeds from the entry into the term loan issued pursuant to the Sixth Amendment.
In addition, proceeds from the issuance of debt in fiscal year 2015 include $750.0 million of proceeds from the issuance and saleas a result of the 6.25% Senior Notes in November 2015,commencement of our share buyback program, and $355.0 million in total aggregate borrowings on the Revolving Credit Facility in 2015. Cash payments on debt also include $205.0 million in total aggregate payments onresulting ordinary share repurchases during the Revolving Credit Facility in 2015, and $75.0 million of payments on our then-existing term loan prior to its refinancing.year.
Indebtedness and Liquidity
Our liquidity requirements are significant due to the highly leveraged nature of our company. The following table details our gross outstanding indebtedness as of December 31, 2017,2019, and the associated interest expense for fiscalthe year 2017:then ended:
|
| | | | | | | |
| Description | Balance at December 31, 2017 | | Interest expense, net for fiscal year 2017 |
| (Amounts in thousands) | | | |
| Term loan | $ | 927,794 |
| | $ | 30,692 |
|
| 4.875% Senior Notes | 500,000 |
| | 24,375 |
|
| 5.625% Senior Notes | 400,000 |
| | 22,500 |
|
| 5.0% Senior Notes | 700,000 |
| | 35,000 |
|
| 6.25% Senior Notes | 750,000 |
| | 46,875 |
|
| Capital lease and other financing obligations | 34,657 |
| | 3,155 |
|
| Total | $ | 3,312,451 |
| | 162,597 |
|
Other interest expense, net (1) | | | (2,836 | ) |
| Total interest expense, net |
|
| | $ | 159,761 |
|
|
| | | | | | | |
| (in millions) | Balance as of December 31, 2019 | | Interest Expense, net for the year ended December 31, 2019 |
| Term Loan | $ | 460.7 |
| | $ | 32.7 |
|
| 4.875% Senior Notes | 500.0 |
| | 24.4 |
|
| 5.625% Senior Notes | 400.0 |
| | 22.5 |
|
| 5.0% Senior Notes | 700.0 |
| | 35.0 |
|
| 6.25% Senior Notes | 750.0 |
| | 46.9 |
|
| 4.375% Senior Notes | 450.0 |
| | 5.5 |
|
| Finance lease and other financing obligations | 31.1 |
| | 3.0 |
|
| Total gross outstanding indebtedness | $ | 3,291.8 |
| |
|
|
Other interest expense, net (1) | | | (11.4 | ) |
| Interest expense, net |
|
| | $ | 158.6 |
|
(1) Other interest expense, net includes interest income, amortization of deferred financing costs and discounts, and interest costs capitalized in accordance with ASC Subtopic 835-20, Capitalization of Interest. | |
(1) | Other interest expense, net includes interest income, amortization of debt issuance costs, and interest costs capitalized in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest. |
Debt Instruments
Summarized information regarding our debt instruments is described below. Refer to Note 8, “Debt,”14, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further details ofadditional information related to the terms of the $500 million 4.875% senior notes due 2023 (the "4.875% Senior Notes"), the $400 million 5.625% senior notes due 2024 (the "5.625% Senior Notes"), the 5.0% Senior Notes, and the 6.25% Senior Notes (collectively, the "Senior Notes"), the Senior Secured Credit Facilities (as defined below), and the term loans.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of the Credit Agreement which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of a $1,100.0 million term loan facility and the Revolving Credit Facility. The Senior Secured Credit Facilities also allowed for future additional borrowings under certain circumstances.debt instruments.
Term Loan
In May 2015, we entered into the Sixth Amendment, pursuant to which all term loans outstanding on that date were prepaid in full, and a new term loan was entered into in an aggregate principal amount of $990.1 million, equal to the sum of the outstanding balances of the term loans that were prepaid. The term loan was offered at 99.75% of par with a maturity date of October 14, 2021. The principal amount of the term loan amortized in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount, with the balance due at maturity.
On November 7, 2017, we entered into the Eighth Amendment, which resulted in a newly issued term loan (the “Term Loan”) with interest rates that differed from those under the Sixth Amendment. Pursuant to the Eighth Amendment, the applicable margins for the Term Loan as of December 31, 2017 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, (a decrease from 1.25% and 2.25%, respectively, pursuant to the Sixth Amendment) subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively (a decrease from 1.75% and 0.75%, respectively, pursuant to the Sixth Amendment).
As a result of the Eighth Amendment, a prepayment premium of 1.0% was added with respect to any Term Loan repricing event that occurs within six months after the effective date of the Eighth Amendment. Refer to Note 8, “Debt,” of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details of the terms of the Eighth Amendment.
At December 31, 2017, the Term Loan accrued interest at a rate of 3.21%.
4.875% Senior Notes
In April 2013, we completed the issuance and sale of the 4.875% Senior Notes, which were offered at par, and mature on October 15, 2023. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014, we completed the issuance and sale of the 5.625% Senior Notes, which were offered at par, and mature on November 1, 2024. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015, we completed the issuance and sale of the 5.0% Senior Notes, which were offered at par, and mature on October 1, 2025. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were offered at par, and mature on February 15, 2026. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Revolving Credit Facility
As of December 31, 2017, there was $415.3 million of availability under the Revolving Credit Facility (net of $4.7 million of letters of credit). Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2017, no amounts had been drawn against these outstanding letters of credit.
Capital ResourcesLegal Proceedings
Refer to Item 3, "Legal Proceedings," included elsewhere in this Report for discussion of legal proceedings related to our business.
Results of Operations
Our sourcesdiscussion and analysis of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. In addition, the Senior Secured Credit Facilities provide for incremental facilities (the “Accordion”), under which additional term loans may be issued or the capacity of the Revolving Credit Facility may be increased. Pursuant to the Eighth Amendment, the Accordion was increased from $230.0 million to $1,000.0 million, all of which remained available for issuance as of December 31, 2017.
We believe, based on our current level of operations as reflected in our results of operations forare based upon our Financial Statements. The Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of the year ended December 31, 2017, and taking into consideration the restrictions and covenants discussed below, 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 enableFinancial Statements requires us to paymake estimates and judgments that affect the amounts reported therein. We base our indebtednessestimates on historical experience and assumptions believed to be reasonable under the circumstances, and we re-evaluate such estimates on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully described in Note 2, "Significant Accounting Policies," of our Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue. We have derived these results of operations from our Financial Statements. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to fundrecalculate due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue: |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,546.0 |
|
| 73.8 | % | | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % |
| Sensing Solutions | 904.6 |
|
| 26.2 |
| | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
|
| Total net revenue | 3,450.6 |
|
| 100.0 | % | | 3,521.6 |
| | 100.0 | % | | 3,306.7 |
| | 100.0 | % |
| Operating costs and expenses | 2,893.7 |
|
| 83.9 |
| | 2,811.2 |
| | 79.8 |
| | 2,750.9 |
| | 83.2 |
|
| Operating income | 556.9 |
|
| 16.1 |
| | 710.4 |
| | 20.2 |
| | 555.8 |
| | 16.8 |
|
| Interest expense, net | (158.6 | ) |
| (4.6 | ) | | (153.7 | ) | | (4.4 | ) | | (159.8 | ) | | (4.8 | ) |
| Other, net | (7.9 | ) |
| (0.2 | ) | | (30.4 | ) | | (0.9 | ) | | 6.4 |
| | 0.2 |
|
| Income before taxes | 390.4 |
|
| 11.3 |
| | 526.4 |
| | 14.9 |
| | 402.4 |
| | 12.2 |
|
| Provision for/(benefit from) income taxes | 107.7 |
|
| 3.1 |
| | (72.6 | ) | | (2.1 | ) | | (5.9 | ) | | (0.2 | ) |
| Net income | $ | 282.7 |
|
| 8.2 | % | | $ | 599.0 |
| | 17.0 | % | | $ | 408.4 |
| | 12.3 | % |
Net revenue
The following table presents a reconciliation of organic revenue growth (or decline), a financial measure not presented in accordance with U.S. GAAP, to reported net revenue growth (or decline), a financial measure determined in accordance with U.S. GAAP, for fiscal years 2019 and 2018. Refer to the section entitled Non-GAAP Financial Measures below for additional information related to our other liquidity needs. Further, our highly leveraged nature mayuse of organic revenue growth (or decline).
|
| | | | | | | | | | | | | | | | | |
| | 2019 compared to 2018 | | 2018 compared to 2017 |
| | Total | | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions |
| Reported net revenue (decline)/growth | (2.0 | )% | | (3.1 | )% | | 1.2 | % | | 6.5 | % | | 6.8 | % | | 5.7 | % |
| Percent impact of: | | | | | | | | | | | |
Acquisitions and divestitures, net (1) | (0.2 | ) | | (1.9 | ) | | 4.6 |
| | (0.8 | ) | | (1.3 | ) | | 0.7 |
|
Foreign currency remeasurement (2) | (0.7 | ) | | (0.7 | ) | | (0.7 | ) | | 1.3 |
| | 1.5 |
| | 0.8 |
|
| Organic revenue (decline)/growth | (1.1 | )% | | (0.5 | )% | | (2.7 | )% | | 6.0 | % | | 6.6 | % | | 4.2 | % |
| |
(1) | Represents the percentage change in net revenue attributed to the effect of acquisitions and divestitures for the 12 months immediately following the respective transaction dates. The percentage amounts presented relate to the divestiture of the Valves Business in August 2018 and the acquisition of GIGAVAC in October 2018, each of which is discussed in Note 17, "Acquisitions and Divestitures," of our Financial Statements. |
| |
(2) | Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign denominated revenue transactions into USD, which is the functional currency of the Company and each of its subsidiaries. The USD to Chinese Renminbi exchange rate was a significant driver for both periods presented. The Euro to USD exchange rate was also a significant driver for fiscal year 2018 compared to fiscal year 2017. |
We are currently confronting numerous operational limitations due to the outbreak of the coronavirus in China in early 2020. We have two manufacturing locations and one business center located in Baoying, Changzhou and Shanghai, China, respectively, that have been, and continue to be, impacted due to national and regional Chinese government declarations requiring closures, quarantines and travel restrictions. Numerous variables and uncertainties related to this outbreak limit our ability to procure additional financingcalculate the overall impact on our business; however, we expect that the impact on our revenue in both Performance Sensing and Sensing Solutions will be material in the future.
The Credit Agreement stipulates certain eventsfirst quarter of fiscal year 2020. Although we are taking numerous actions to address the situation, we currently do not expect this region, market and conditions that may require usthe impact to use excess cash flow, as definedbe fully recovered by the termsend of 2020.
Performance Sensing
For fiscal year 2019, Performance Sensing net revenue declined 3.1%, or 0.5% on an organic basis. Our automotive business, which reported net revenue decline of 4.3%, or 0.9% on an organic basis, outperformed the automotive end market, which declined 5.6%. We refer to this outperformance, which relates to content growth partially offset by pricing, as "outgrowth." The outgrowth of the Credit Agreement, generated by operating, investing, or financing activities,automotive market was largely due to prepay some orcontent growth in all of our major end markets, most notably China. Our HVOR business, which reported net revenue growth of 1.6%, or 0.9% on an organic basis, outperformed the outstanding borrowings underHVOR end market, which declined 5.5%. This outgrowth was primarily due to content growth in China as well as in the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepaymentsagriculture and on-road truck markets. In addition, price reductions of 1.6%, primarily to automotive customers, contributed to the outstanding borrowings underPerformance Sensing organic revenue decline. We expect sustained content growth over the Senior Secured Credit Facilities uponnext few years in both our automotive and HVOR businesses as we continue to design and develop solutions for existing and new customers in the clean & efficient and electrification megatrends.
For fiscal year 2018, Performance Sensing net revenue increased 6.8%, or 6.6% on an organic basis. Organic revenue growth was primarily attributable to content growth in our automotive business, principally in China and North America, as well as a combination of market and content growth in our HVOR business, partially offset by price reductions of 1.9%, primarily related to automotive customers. Our HVOR business benefited from production growth in the construction, North American on-road truck, and agriculture markets, and we generated content growth from sales to on-road truck customers, particularly in China and Europe, as well as off-road customers in the agriculture industry.
Sensing Solutions
For fiscal year 2019, Sensing Solutions net revenue increased 1.2% but declined 2.7% on an organic basis. This organic revenue decline was primarily attributable to weakness in the industrial markets we serve partially offset by content growth in both our industrial and aerospace businesses. This market weakness is consistent with trends in certain asset dispositionsindicators of demand, such as global manufacturing Purchasing Managers' Index ("PMI") data, which is signaling continued demand contraction,
consistent with slowing customer production and casualty events,reductions in each case subjectinventory. Our industrial growth in China is particularly weak as exports out of China have further slowed as a result of tariffs and global trade actions.
For fiscal year 2018, Sensing Solutions net revenue increased 5.7%, or 4.2% on an organic basis. Organic revenue growth was primarily due to certain reinvestment rights,growth in our industrial sensing, aerospace, and semiconductor businesses.
Operating costs and expenses
Operating costs and expenses for the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the yearyears ended December 31, 2017.
Our ability to raise additional financing,2019, 2018, and our borrowing costs, may be impacted by short-term2017 are presented in the following table (amounts and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of January 26, 2018, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our borrowing costs, but will not reduce availability under the Credit Agreement.
Wepercentages have a $250.0 million share repurchase program in place. Under this program, we may repurchase ordinary shares from time to time, at such times and in amounts to be determined by our management,been calculated based on market conditions, legal requirements,unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Operating costs and expenses: | | | | | | | | | | | |
| Cost of revenue | $ | 2,267.4 |
| | 65.7 | % | | $ | 2,266.9 |
| | 64.4 | % | | $ | 2,138.9 |
| | 64.7 | % |
| Research and development | 148.4 |
| | 4.3 |
| | 147.3 |
| | 4.2 |
| | 130.1 |
| | 3.9 |
|
| Selling, general and administrative | 281.4 |
| | 8.2 |
| | 305.6 |
| | 8.7 |
| | 301.9 |
| | 9.1 |
|
| Amortization of intangible assets | 142.9 |
| | 4.1 |
| | 139.3 |
| | 4.0 |
| | 161.1 |
| | 4.9 |
|
| Restructuring and other charges, net | 53.6 |
| | 1.6 |
| | (47.8 | ) | | (1.4 | ) | | 19.0 |
| | 0.6 |
|
| Total operating costs and expenses | $ | 2,893.7 |
| | 83.9 | % | | $ | 2,811.2 |
| | 79.8 | % | | $ | 2,750.9 |
| | 83.2 | % |
Cost of revenue
For fiscal year 2019, cost of revenue as a percentage of net revenue increased from fiscal year 2018, primarily as a result of organic revenue decline, negative mix due to new product launches, the impact of acquisitions and other corporate considerations, ondivestitures, and increased tariff costs, partially offset by the open market orpositive impact of changes in privately negotiated transactions. We expect that any future repurchasesforeign currency exchange rates and lower variable compensation.
For fiscal year 2018, cost of ordinary shares will be fundedrevenue as a percentage of net revenue decreased from fiscal year 2017, primarily due to the favorable impact of foreign currency exchange rates, partially offset by cashhigher trade tariffs.
Research and development expense
For fiscal year 2019, R&D expense was relatively consistent with the prior period as increased design and development effort to support new design wins and fund development activities to intersect emerging megatrends shaping our end markets was offset by the positive impact of changes in foreign currency exchange rates, primarily the Euro and British Pound Sterling.
For fiscal year 2018, R&D expense increased due to higher spend, particularly related to the emerging megatrends, and the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
For fiscal year 2019, SG&A expense declined from operations. The share repurchase program may be modifiedfiscal year 2018, primarily due to lower variable compensation, lower selling costs, the divestiture of the Valves Business, the favorable impact of foreign currency exchange rates (primarily the Euro, Chinese Renminbi, and British Pound Sterling), and lower costs related to our redomicile in the prior year, partially offset by additional SG&A expense related to GIGAVAC.
For fiscal year 2018, SG&A expense increased from fiscal year 2017, primarily due to the unfavorable impact of foreign currency exchange rates (primarily the Euro), higher share-based compensation expense, transaction costs related to the acquisition of GIGAVAC, and higher selling costs, partially offset by lower variable compensation, lower costs related to the cross-border merger between Sensata N.V. and Sensata plc (the "Merger"), lower integration costs, synergies from the integration of acquired businesses, and productivity improvements.
Amortization of intangible assets
For fiscal year 2019, amortization expense increased from fiscal year 2018, due to the intangible assets acquired with GIGAVAC, partially offset by the effect of the economic benefit method of amortization.
or terminated by our BoardFor fiscal year 2018, amortization expense decreased from fiscal year 2017, due to the effect of Directors at any time. the economic-benefit method of amortization and the impact of certain definite-lived intangible assets reaching the end of their useful lives.
We did not repurchase any ordinary shares under this programexpect amortization expense to be approximately $127.8 million in fiscal year 2020. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," of our Financial Statements for additional information regarding definite-lived intangible assets and the related amortization.
Restructuring and other charges, net
Restructuring and other charges, net for the years 2017, 2016, or 2015. Atended December 31, 2019, 2018, and 2017 $250.0consisted 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) | 2019 | | 2018 | | 2017 |
Severance costs, net (1) | $ | 29.2 |
| | $ | 7.6 |
| | $ | 11.1 |
|
Facility and other exit costs (2) | 0.8 |
| | 0.9 |
| | 7.9 |
|
Gain on sale of Valves Business (3)(5) | — |
| | (64.4 | ) | | — |
|
Other (4)(5) | 23.5 |
| | 8.2 |
| | — |
|
| Restructuring and other charges, net | $ | 53.6 |
| | $ | (47.8 | ) | | $ | 19.0 |
|
| |
(1) | Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.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 in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. |
| |
(3) | In the year ended December 31, 2018, we completed the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2019, these amounts include a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. |
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(5) | Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
Operating income
For fiscal year 2019, operating income decreased from fiscal year 2018, due primarily to the divestiture of the Valves Business in the third quarter of 2018 (including the gain on sale), net productivity headwinds partly due to the scaling up of new product launches, the loss recognized in connection with the supply agreement termination related to litigation with Metal Seal, higher severance charges, the impact of increased tariffs, and lower volume, partially offset by lower variable compensation, lower selling expenses, the favorable impact of foreign currency rates, and the impact of the acquisition of GIGAVAC.
For fiscal year 2018, operating income increased from fiscal year 2017, due primarily to higher volume, the divestiture of the Valves Business in the third quarter of 2018 (including the gain on sale), the favorable impact of foreign currency rates, and lower amortization expense, partially offset by higher R&D expense.
Interest expense, net
For fiscal year 2019, interest expense, net increased from fiscal year 2018, due primarily to an increase in interest expense related to higher variable interest rates as well as the impact of the refinancing of a portion of our Term Loan (variable rate debt) through the issuance of $450.0 million remained availablein aggregate principal amount of 4.375% senior notes due 2030 (the "4.375% Senior Notes") (fixed rate debt). The 4.375% Senior Notes accrue interest at a higher rate than the average rate of the Term Loan in fiscal year 2019.
For fiscal year 2018, interest expense, net decreased from fiscal year 2017, due primarily to an increase in interest income due to higher average cash balances in fiscal year 2018, partially offset by an increase in interest expense related to higher variable interest rates.
Other, net
Other, net for share repurchase under this program.the years ended December 31, 2019, 2018, and 2017 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) | 2019 | | 2018 | | 2017 |
Currency remeasurement (loss)/gain on net monetary assets (1) | $ | (6.8 | ) | | $ | (18.9 | ) | | $ | 18.0 |
|
Gain/(loss) on foreign currency forward contracts (2) | 2.2 |
| | 2.1 |
| | (15.6 | ) |
Gain/(loss) on commodity forward contracts (2) | 4.9 |
| | (8.5 | ) | | 10.0 |
|
Loss on debt financing (3) | (4.4 | ) | | (2.4 | ) | | (2.7 | ) |
| Net periodic benefit cost, excluding service cost | (3.2 | ) | | (3.6 | ) | | (3.4 | ) |
| Other | (0.7 | ) | | 0.9 |
| | 0.1 |
|
| Other, net | $ | (7.9 | ) | | $ | (30.4 | ) | | $ | 6.4 |
|
| |
(1) | Relates to the remeasurement of non-USD denominated monetary assets and liabilities into USD. |
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(2) | Relates to changes in the fair value of derivative financial instruments that are not designated as hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to gains and losses related to our commodity and foreign currency exchange forward contracts. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. |
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(3) | Refer to Note 14, "Debt," of our Financial Statements for additional information related to our debt financing transactions. |
Provision for/(benefit from) income taxes
The Credit Agreementcomponents of provision for/(benefit from) income taxes for the years ended December 31, 2019, 2018, and the indentures under which the Senior Notes were issued (the "Senior Notes Indentures") contain restrictions and covenants that limit the ability of STBV and its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, make capital expenditures, pay dividends, and make other restricted payments. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, and which2017 are described in more detail in the table below and in Note 8, "Debt,"(amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, were taken into consideration in establishing our share repurchase program, and are evaluated periodically with respect to future potential funding. rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
Tax computed at statutory rate of 21% in 2019 and 2018 and 35% in 2017 (1) | $ | 82.0 |
| | $ | 110.5 |
| | $ | 140.9 |
|
| Reserve for tax exposure | 20.1 |
| | 10.8 |
| | 38.0 |
|
Valuation allowances (2) | 19.6 |
| | (123.4 | ) | | (3.4 | ) |
Foreign tax rate differential (3) | (19.1 | ) | | (41.2 | ) | | (112.0 | ) |
| Withholding taxes not creditable | 9.5 |
| | 8.7 |
| | 3.9 |
|
Research and development incentives (4) | (8.4 | ) | | (19.5 | ) | | (5.9 | ) |
| Change in tax laws or rates | 5.1 |
| | (22.3 | ) | | 3.9 |
|
U.S. Tax Reform Act impact (5) | — |
| | — |
| | (73.7 | ) |
Other (6) | (1.1 | ) | | 3.7 |
| | 2.4 |
|
| Provision for/(benefit from) income taxes | $ | 107.7 |
| | $ | (72.6 | ) | | $ | (5.9 | ) |
| |
(1) | Represents the product of the applicable statutory tax rate and income before taxes, as reported in the consolidated statements of operations. In fiscal year 2018 the statutory tax rate declined to 21% (i.e., compared to 35% in previous fiscal years) due to the effect of the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act"). |
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(2) | During the years ended December 31, 2019, 2018, and 2017, we established/(released) a portion of our valuation allowance and recognized a deferred tax expense/(benefit). The valuation allowance as of December 31, 2019 and 2018 was $146.8 million and $157.0 million, respectively. The remaining valuation allowance mainly relates to foreign tax credit and capital loss carryforwards and suspended interest deductions. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future provision for/(benefit from) income taxes. |
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(3) | We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory 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 holidays in their respective jurisdictions. |
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(4) | Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance. |
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(5) | Relates to the enactment of the Tax Reform Act during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax assets and liabilities associated with indefinite-lived intangible assets, including goodwill, from a rate of 35% to 21%. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. |
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(6) | Refer to Note 7, "Income Taxes," of our Financial Statements for 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, adjusted operating income, adjusted operating margin, adjusted net income, and adjusted earnings per share ("EPS"), which are used by our management, Board of Directors, and investors. We use these restrictionsnon-GAAP financial measures internally to make operating and covenants will preventstrategic 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.
Our non-GAAP financial measures should be considered as supplemental in nature and are not intended to be considered in isolation or as a substitute for reported net revenue growth, operating income, operating margin, net income, or diluted EPS, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth, adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue, calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign 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). Refer to the Net revenue section above for a reconciliation of organic revenue growth to reported revenue growth.
We believe that organic revenue growth provides investors with helpful information with respect to our operating performance, and we use organic revenue growth to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.
Adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS
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 a factor 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. The use of these non-GAAP financial measures have limitations, and they should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as operating income, operating margin, net income, or diluted EPS. We believe that these measures are useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends.
We define adjusted operating income as operating income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted operating margin is calculated by dividing adjusted operating income by net revenue.
We define adjusted net income as follows: net income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted EPS is calculated by dividing adjusted net income by the number of diluted weighted-average ordinary shares outstanding in the period.
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 funding share repurchases undertime to time to reflect changes in overall market conditions and the competitive environment facing our share repurchase programbusiness. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain business, supply chain, or corporate activities, and various financing transactions. We describe these adjustments in more detail below.
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 available cashfinancial planning, and cash flows from operations, should we decide to do so.
STBV is limited in its abilityreview and assessment of our operating and financial performance, including the performance of our segments. Restructuring related and other does not, however, include charges related to pay dividends or otherwise make distributions to its immediate parent companythe integration of acquired businesses, including such charges that are recognized as restructuring and ultimately, to us, under the Credit Agreement and the Senior Notes Indentures. Specifically, the Credit Agreement prohibits STBV from paying dividends or making any distributions to its parent companies except for limited purposes, including, but not limited to: (i) customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurredother charges, net in the ordinary courseconsolidated statements of operations.
Financing and other transaction costs – includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, losses or gains related to the termination of a long-term unfavorable supply
agreement, 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 commodities and other 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 inventory). The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate, not to exceed $20.0 million in any fiscal year, plus reasonableperiod presented.
Deferred income taxes and customary indemnification claims made by our directors or officers attributableother tax related – includes adjustments for book-to-tax basis differences due primarily to the ownershipstep-up in fair value of STBVfixed and its subsidiaries; (ii) franchiseintangible assets and goodwill, the utilization of net operating losses, and adjustments to our U.S. valuation allowance in connection with certain acquisitions and U.S. tax law changes. Other tax related items include certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
Amortization of debt issuance costs.
Where applicable, the current tax effect of non-GAAP adjustments.
Our definition of adjusted net income excludes the deferred provision for/(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 provide reconciliations of certain advisory fees, and customary compensationfinancial measures calculated in accordance with U.S. GAAP to the related non-GAAP financial measures for the periods presented (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of officers and employees of suchrounding):
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2019 |
| (Dollars 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 (a) | | 61.9 |
| | 1.8 |
| | 62.2 |
| | 0.38 |
|
Financing and other transaction costs (b)(c) | | 28.9 |
| | 0.8 |
| | 34.9 |
| | 0.22 |
|
Step-up depreciation and amortization (c) | | 139.6 |
| | 4.0 |
| | 139.6 |
| | 0.86 |
|
Deferred gain on derivative instruments (c) | | (1.6 | ) | | (0.0 | ) | | (6.5 | ) | | (0.04 | ) |
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.8 |
| | 0.05 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | 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 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation and $6.1 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, each of which were recorded in restructuring and other charges, net in the consolidated statements of operations. Also included a loss of $4.4 million associated with a debt financing transaction, recorded in other, net in the consolidated statement of operations. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | A majority of this adjustment related to $27.6 million of deferred tax provision, $18.2 million of uncertain tax positions recorded in fiscal year 2019, and $9.4 million of current tax expense related to the repatriation of profits from certain |
subsidiaries in China to their parent companies in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the extent such compensation is attributableChinese Renminbi as well as to fund our deployment of capital.
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2018 |
| (Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
| Reported (GAAP) | | $ | 710.4 |
| | 20.2 | % | | $ | 599.0 |
| | $ | 3.53 |
|
| Non-GAAP adjustments: | | | | | | | | |
Restructuring related and other (a) | | 25.4 |
| | 0.7 |
| | 28.0 |
| | 0.17 |
|
Financing and other transaction costs (b)(c) | | (47.0 | ) | | (1.3 | ) | | (40.3 | ) | | (0.24 | ) |
Step-up depreciation and amortization (c) | | 141.2 |
| | 4.0 |
| | 141.2 |
| | 0.83 |
|
Deferred loss on derivative instruments (c) | | 2.0 |
| | 0.1 |
| | 12.5 |
| | 0.07 |
|
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.3 |
| | 0.04 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | (128.3 | ) | | (0.76 | ) |
| Total adjustments | | 121.5 |
| | 3.5 |
| | 20.4 |
| | 0.12 |
|
| Adjusted (non-GAAP) | | $ | 832.0 |
| | 23.6 | % | | $ | 619.4 |
| | $ | 3.65 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included a $64.4 million gain on the sale of the Valves Business, $5.9 million of transaction costs related to this sale, and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, all of which were recorded in restructuring and other charges, net in the consolidated statements of operations. Also included are: costs associated with debt financing transactions of $2.4 million, which were recorded in other, net in the consolidated statements of operations; costs to complete the Merger of $4.1 million, which were recorded in SG&A expense in the consolidated statements of operations; and costs associated with acquisition activity, including $2.5 million of transaction costs related to the acquisition of GIGAVAC in fiscal year 2018, which were recorded in SG&A expense in the consolidated statements of operations. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | We recognized a deferred tax benefit of $144.1 million, which primarily included a $122.1 million deferred tax benefit related to the release of a portion of our U.S. valuation allowance as discussed in Note 7, "Income Taxes," of our Financial Statements. Also included in our fiscal year 2018 results is $10.0 million of current tax expense related to the repatriation of profits from certain subsidiaries in China to their parent companies, primarily in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as to fund our deployment of capital. |
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2017 |
| (Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
| Reported (GAAP) | | $ | 555.8 |
| | 16.8 | % | | $ | 408.4 |
| | $ | 2.37 |
|
| Non-GAAP adjustments: | | | | | | | | |
Restructuring related and other (a) | | 21.3 |
| | 0.6 |
| | 21.3 |
| | 0.12 |
|
Financing and other transaction costs (b)(c) | | 6.6 |
| | 0.2 |
| | 9.3 |
| | 0.05 |
|
Step-up depreciation and amortization (c) | | 165.0 |
| | 5.0 |
| | 165.0 |
| | 0.96 |
|
Deferred loss/(gain) on derivative instruments (c) | | 2.6 |
| | 0.1 |
| | (7.4 | ) | | (0.04 | ) |
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.2 |
| | 0.04 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | (55.2 | ) | | (0.32 | ) |
| Total adjustments | | 195.6 |
| | 5.9 |
| | 140.4 |
| | 0.82 |
|
| Adjusted (non-GAAP) | | $ | 751.4 |
| | 22.7 | % | | $ | 548.7 |
| | $ | 3.19 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included $6.6 million of costs to complete the Merger and $2.7 million of costs associated with debt financing transactions. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | Primarily included $73.7 million of income tax benefits related to the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate from 35% to 21% as a part of the Tax Reform Act. |
The following table presents the components of our restructuring related and other non-GAAP adjustment to net income for fiscal years 2019, 2018, and 2017 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the ownership or operationseffect of STBVrounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (in millions) | 2019 | | 2018 | | 2017 |
Business and corporate repositioning (i) | $ | 40.1 |
| | $ | 8.8 |
| | $ | 3.9 |
|
Supply chain repositioning and transition (ii) | 16.0 |
| | 15.3 |
| | 11.4 |
|
Preacquisition legal matters (iii) | 5.3 |
| | 2.9 |
| | 4.7 |
|
| Other | 2.7 |
| | 1.0 |
| | 1.4 |
|
Income tax effect (iv) | (1.8 | ) | | — |
| | — |
|
Total non-GAAP restructuring related and other (v) | $ | 62.2 |
| | $ | 28.0 |
| | $ | 21.3 |
|
| |
| i. | Fiscal year 2019 primarily includes approximately $12.7 million of benefits provided under a voluntary retirement incentive program, $10.2 million of costs associated with business and corporate workforce rationalization, and $9.5 million of costs (both termination and other costs) related to the shutdown and relocation of an operating site in Germany. Refer to Note 5, "Restructuring and Other Charges, Net," included in our Financial Statements for additional information about the voluntary retirement incentive program. Amounts presented in fiscal years 2018 and 2017 primarily represent costs related to business and corporate workforce rationalization. |
| |
| ii. | Fiscal years 2019, 2018, and 2017 primarily include costs related to optimization of our manufacturing processes to increase productivity and rationalize our manufacturing footprint of $14.1 million, $14.0 million, and $10.0 million, respectively. The remaining amounts presented primarily represent costs related to supply chain workforce rationalization. |
| |
| iii. | Represents charges incurred related to legal matters associated with an acquired business, 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 2017 primarily includes $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. |
| |
| iv. | We treat deferred taxes as a non-GAAP adjustment. Accordingly, the tax effect of the restructuring related and other non-GAAP adjustment refers only to the current tax effect. With respect to the years ended December 31, 2018 and 2017, the current tax effect was not material, individually or in the aggregate. |
| |
| 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. |
Liquidity and its subsidiaries; (iii) repurchase, retirement, or other acquisition of equity interest of the parent from certain present, future, and former employees, directors, managers, consultants of the parent companies, STBV, or its subsidiaries in an aggregate amount not to exceed $20.0 million in any fiscal year, plus the amount of cash proceeds from certain equity issuances to such persons, the amount of equity interests subject to a certain deferred compensation plan, and the amount of certain key-man life insurance proceeds; (iv) so long as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis, dividends and other distributions in an aggregate amount not to exceed $100.0 million, plus certain amounts, including the retained portion of excess cash flow; (v) dividends and other distributions in an aggregate amount not to exceed $50.0 million in any calendar year (subject to increase upon the achievement of certain ratios); and (vi) so long as no default or event of default exists, dividends and other distributions in an aggregate amount not to exceed $150.0 million.Capital Resources
As of December 31, 2017,2019 and 2018 we wereheld cash and cash equivalents in compliance with all the covenantsfollowing regions:
|
| | | | | | | |
| | As of December 31, |
| (in millions) | 2019 | | 2018 |
| United Kingdom | $ | 8.8 |
| | $ | 8.8 |
|
| United States | 7.0 |
| | 4.6 |
|
| The Netherlands | 522.9 |
| | 482.1 |
|
| China | 119.3 |
| | 125.2 |
|
| Other | 116.1 |
| | 109.1 |
|
| Total | $ | 774.1 |
| | $ | 729.8 |
|
The amount of cash and default provisions undercash equivalents held in these geographic regions fluctuates throughout the Credit Agreement. For more information onyear due to a variety of factors, such as our indebtednessuse of intercompany loans and related covenantsdividends and default provisions, referthe timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to Note 8, "Debt," of our audited consolidated financial statements, and Item 1A, “Risk Factors,” each included elsewherebe permanently reinvested in this Annual Report on Form 10-K.certain jurisdictions in which they were
Contractual Obligations and Commercial Commitmentsearned. 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.
Cash Flows
The table below reflectssummarizes our contractual obligations asprimary sources and uses of cash for the years ended December 31, 2017. Amounts we pay in future periods may vary2019, 2018, and 2017. We have derived the summarized statements of cash flows from those reflected in the table.our Financial Statements. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addappear to recalculate due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (Amounts in millions) | Total | | 1 Year or Less | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Debt obligations principal(1) | $ | 3,277.8 |
| | $ | 9.8 |
| | $ | 19.8 |
| | $ | 898.2 |
| | $ | 2,350.0 |
|
Debt obligations interest(2) | 1,096.0 |
| | 158.8 |
| | 314.2 |
| | 284.4 |
| | 338.6 |
|
Capital lease obligations principal(3) | 29.3 |
| | 3.1 |
| | 6.8 |
| | 6.5 |
| | 12.9 |
|
Capital lease obligations interest(3) | 11.8 |
| | 2.3 |
| | 4.1 |
| | 3.0 |
| | 2.4 |
|
Other financing obligations principal(4) | 5.4 |
| | 2.8 |
| | 2.5 |
| | 0.1 |
| | — |
|
Other financing obligations interest(4) | 0.9 |
| | 0.4 |
| | 0.5 |
| | 0.0 |
| | — |
|
Operating lease obligations(5) | 68.6 |
| | 12.9 |
| | 15.8 |
| | 9.4 |
| | 30.6 |
|
Non-cancelable purchase obligations(6) | 44.9 |
| | 17.3 |
| | 19.4 |
| | 8.1 |
| | 0.1 |
|
Total(7)(8) | $ | 4,534.7 |
| | $ | 207.4 |
| | $ | 383.1 |
| | $ | 1,209.7 |
| | $ | 2,734.6 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (in millions) | 2019 | | 2018 | | 2017 |
| Net cash provided by/(used in): | | | | | |
| Operating activities: | | | | | |
| Net income adjusted for non-cash items | $ | 630.3 |
| | $ | 687.5 |
| | $ | 652.5 |
|
| Changes in operating assets and liabilities, net | (10.7 | ) | | (66.9 | ) | | (94.8 | ) |
| Operating activities | 619.6 |
| | 620.6 |
| | 557.6 |
|
| Investing activities | (208.8 | ) | | (237.6 | ) | | (140.7 | ) |
| Financing activities | (366.5 | ) | | (406.2 | ) | | (15.3 | ) |
| Net change | $ | 44.3 |
| | $ | (23.3 | ) | | $ | 401.7 |
|
__________________Operating Activities
The decrease in cash provided by operating activities in fiscal year 2019 compared to fiscal year 2018 relates primarily to lower operating profitability and the timing of supplier payments and customer receipts.
The increase in cash provided by operating activities in fiscal year 2018 compared to fiscal year 2017 relates primarily to improved operating profitability and timing of supplier payments and customer receipts.
Investing Activities
Investing activities include additions to PP&E and capitalized software, the acquisition or divestiture of a business or assets, and the acquisition or sale of certain debt and equity securities.
In fiscal year 2019, net cash used in investing activities decreased primarily due to lower cash used in acquisitions, as the GIGAVAC merger was completed in fiscal year 2018. This was partially offset by the impact of the divestiture of the Valves Business, for which proceeds were received in fiscal year 2018, cash paid for the acquisition of assets from Metal Seal (as further discussed in Note 15, "Commitments and Contingencies" of the Financial Statements), and cash used to acquire debt and equity securities.
In fiscal year 2018, net cash used in investing activities increased primarily due to the cash used in the merger with GIGAVAC, partially offset by proceeds from the divestiture of the Valves Business. In addition, more cash was used to purchase PP&E and capitalized software in fiscal year 2018 compared to fiscal year 2017.
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the divestiture of the Valves Business and the acquisition of GIGAVAC.
In fiscal year 2020, 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.
Financing Activities
In fiscal year 2019, net cash used in financing activities decreased primarily due to a lower volume of ordinary share repurchases.
In fiscal year 2018, net cash used in financing activities increased primarily as a result of the commencement of our share buyback program, and the resulting ordinary share repurchases during the year.
Indebtedness and Liquidity
The following table details our gross outstanding indebtedness as of December 31, 2019, and the associated interest expense for the year then ended:
|
| | | | | | | |
| (in millions) | Balance as of December 31, 2019 | | Interest Expense, net for the year ended December 31, 2019 |
| Term Loan | $ | 460.7 |
| | $ | 32.7 |
|
| 4.875% Senior Notes | 500.0 |
| | 24.4 |
|
| 5.625% Senior Notes | 400.0 |
| | 22.5 |
|
| 5.0% Senior Notes | 700.0 |
| | 35.0 |
|
| 6.25% Senior Notes | 750.0 |
| | 46.9 |
|
| 4.375% Senior Notes | 450.0 |
| | 5.5 |
|
| Finance lease and other financing obligations | 31.1 |
| | 3.0 |
|
| Total gross outstanding indebtedness | $ | 3,291.8 |
| |
|
|
Other interest expense, net (1) | | | (11.4 | ) |
| Interest expense, net |
|
| | $ | 158.6 |
|
| |
(1) | Represents the contractually required principal payments,Other interest expense, net includes interest income, amortization of debt issuance costs, and interest costs capitalized in accordance with the required payment schedule, on our debt obligations in existence asFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of December 31, 2017. |
| |
(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2017Interest. Cash flows associated with the next interest payment to be made on our variable rate debt subsequent to December 31, 2017 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2017, plus the applicable spread.
|
| |
(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our capital lease obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the lease term at its expiration date.Debt Instruments Refer to Note 14, "Debt," of our Financial Statements for additional information related to the terms of our debt instruments. |
| |
(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the financing arrangements at their expiration dates.
|
| |
(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the lease obligations at the expiration date of their initial terms.
|
| |
(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, and no amounts were assumed to be prepaid.
|
| |
(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency exchange rates in effect as of December 31, 2017.
|
| |
(8) | This table does not include the contractual obligations associated with our defined benefit and other post-retirement benefit plans. As of December 31, 2017, we had recognized a net benefit liability of $43.4 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 10, "Pension and Other Post-Retirement Benefits," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $5.4 million of unrecognized tax benefits as of December 31, 2017, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing of the examination and the ultimate resolution of the examination is uncertain. Refer to Note 9, "Income Taxes," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on income taxes. |
Legal Proceedings
We accountRefer to Item 3, "Legal Proceedings," included elsewhere in this Report for litigationdiscussion of legal proceedings related to our business.
Results of Operations
Our discussion and claims lossesanalysis of results of operations are based upon our Financial Statements. The Financial Statements have been prepared in accordance with Accounting Standards CodificationU.S. generally accepted accounting principles ("ASC") Topic 450, Contingencies (“ASC 450”GAAP"). Under ASC 450,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, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
The table below presents our 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, |
| | 2019 | | 2018 | | 2017 |
| | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue: |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,546.0 |
|
| 73.8 | % | | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % |
| Sensing Solutions | 904.6 |
|
| 26.2 |
| | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
|
| Total net revenue | 3,450.6 |
|
| 100.0 | % | | 3,521.6 |
| | 100.0 | % | | 3,306.7 |
| | 100.0 | % |
| Operating costs and expenses | 2,893.7 |
|
| 83.9 |
| | 2,811.2 |
| | 79.8 |
| | 2,750.9 |
| | 83.2 |
|
| Operating income | 556.9 |
|
| 16.1 |
| | 710.4 |
| | 20.2 |
| | 555.8 |
| | 16.8 |
|
| Interest expense, net | (158.6 | ) |
| (4.6 | ) | | (153.7 | ) | | (4.4 | ) | | (159.8 | ) | | (4.8 | ) |
| Other, net | (7.9 | ) |
| (0.2 | ) | | (30.4 | ) | | (0.9 | ) | | 6.4 |
| | 0.2 |
|
| Income before taxes | 390.4 |
|
| 11.3 |
| | 526.4 |
| | 14.9 |
| | 402.4 |
| | 12.2 |
|
| Provision for/(benefit from) income taxes | 107.7 |
|
| 3.1 |
| | (72.6 | ) | | (2.1 | ) | | (5.9 | ) | | (0.2 | ) |
| Net income | $ | 282.7 |
|
| 8.2 | % | | $ | 599.0 |
| | 17.0 | % | | $ | 408.4 |
| | 12.3 | % |
Net revenue
The following table presents a reconciliation of organic revenue growth (or decline), a financial measure not presented in accordance with U.S. GAAP, to reported net revenue growth (or decline), a financial measure determined in accordance with U.S. GAAP, for fiscal years 2019 and 2018. Refer to the section entitled Non-GAAP Financial Measures below for additional information related to our use of organic revenue growth (or decline).
|
| | | | | | | | | | | | | | | | | |
| | 2019 compared to 2018 | | 2018 compared to 2017 |
| | Total | | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions |
| Reported net revenue (decline)/growth | (2.0 | )% | | (3.1 | )% | | 1.2 | % | | 6.5 | % | | 6.8 | % | | 5.7 | % |
| Percent impact of: | | | | | | | | | | | |
Acquisitions and divestitures, net (1) | (0.2 | ) | | (1.9 | ) | | 4.6 |
| | (0.8 | ) | | (1.3 | ) | | 0.7 |
|
Foreign currency remeasurement (2) | (0.7 | ) | | (0.7 | ) | | (0.7 | ) | | 1.3 |
| | 1.5 |
| | 0.8 |
|
| Organic revenue (decline)/growth | (1.1 | )% | | (0.5 | )% | | (2.7 | )% | | 6.0 | % | | 6.6 | % | | 4.2 | % |
| |
(1) | Represents the percentage change in net revenue attributed to the effect of acquisitions and divestitures for the 12 months immediately following the respective transaction dates. The percentage amounts presented relate to the divestiture of the Valves Business in August 2018 and the acquisition of GIGAVAC in October 2018, each of which is discussed in Note 17, "Acquisitions and Divestitures," of our Financial Statements. |
| |
(2) | Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign denominated revenue transactions into USD, which is the functional currency of the Company and each of its subsidiaries. The USD to Chinese Renminbi exchange rate was a significant driver for both periods presented. The Euro to USD exchange rate was also a significant driver for fiscal year 2018 compared to fiscal year 2017. |
We are currently confronting numerous operational limitations due to the outbreak of the coronavirus in China in early 2020. We have two manufacturing locations and one business center located in Baoying, Changzhou and Shanghai, China, respectively, that have been, and continue to be, impacted due to national and regional Chinese government declarations requiring closures, quarantines and travel restrictions. Numerous variables and uncertainties related to this outbreak limit our ability to calculate the overall impact on our business; however, we expect that the impact on our revenue in both Performance Sensing and Sensing Solutions will be material in the first quarter of fiscal year 2020. Although we are taking numerous actions to address the situation, we currently do not expect this region, market and the impact to be fully recovered by the end of 2020.
Performance Sensing
For fiscal year 2019, Performance Sensing net revenue declined 3.1%, or 0.5% on an organic basis. Our automotive business, which reported net revenue decline of 4.3%, or 0.9% on an organic basis, outperformed the automotive end market, which declined 5.6%. We refer to this outperformance, which relates to content growth partially offset by pricing, as "outgrowth." The outgrowth of the automotive market was largely due to content growth in all of our major end markets, most notably China. Our HVOR business, which reported net revenue growth of 1.6%, or 0.9% on an organic basis, outperformed the HVOR end market, which declined 5.5%. This outgrowth was primarily due to content growth in China as well as in the agriculture and on-road truck markets. In addition, price reductions of 1.6%, primarily to automotive customers, contributed to the Performance Sensing organic revenue decline. We expect sustained content growth over the next few years in both our automotive and HVOR businesses as we continue to design and develop solutions for existing and new customers in the clean & efficient and electrification megatrends.
For fiscal year 2018, Performance Sensing net revenue increased 6.8%, or 6.6% on an organic basis. Organic revenue growth was primarily attributable to content growth in our automotive business, principally in China and North America, as well as a combination of market and content growth in our HVOR business, partially offset by price reductions of 1.9%, primarily related to automotive customers. Our HVOR business benefited from production growth in the construction, North American on-road truck, and agriculture markets, and we generated content growth from sales to on-road truck customers, particularly in China and Europe, as well as off-road customers in the agriculture industry.
Sensing Solutions
For fiscal year 2019, Sensing Solutions net revenue increased 1.2% but declined 2.7% on an organic basis. This organic revenue decline was primarily attributable to weakness in the industrial markets we serve partially offset by content growth in both our industrial and aerospace businesses. This market weakness is consistent with trends in certain indicators of demand, such as global manufacturing Purchasing Managers' Index ("PMI") data, which is signaling continued demand contraction,
consistent with slowing customer production and reductions in inventory. Our industrial growth in China is particularly weak as exports out of China have further slowed as a result of tariffs and global trade actions.
For fiscal year 2018, Sensing Solutions net revenue increased 5.7%, or 4.2% on an organic basis. Organic revenue growth was primarily due to growth in our industrial sensing, aerospace, and semiconductor businesses.
Operating costs and expenses
Operating costs and expenses for the years ended December 31, 2019, 2018, and 2017 are presented in the following table (amounts and percentages have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Operating costs and expenses: | | | | | | | | | | | |
| Cost of revenue | $ | 2,267.4 |
| | 65.7 | % | | $ | 2,266.9 |
| | 64.4 | % | | $ | 2,138.9 |
| | 64.7 | % |
| Research and development | 148.4 |
| | 4.3 |
| | 147.3 |
| | 4.2 |
| | 130.1 |
| | 3.9 |
|
| Selling, general and administrative | 281.4 |
| | 8.2 |
| | 305.6 |
| | 8.7 |
| | 301.9 |
| | 9.1 |
|
| Amortization of intangible assets | 142.9 |
| | 4.1 |
| | 139.3 |
| | 4.0 |
| | 161.1 |
| | 4.9 |
|
| Restructuring and other charges, net | 53.6 |
| | 1.6 |
| | (47.8 | ) | | (1.4 | ) | | 19.0 |
| | 0.6 |
|
| Total operating costs and expenses | $ | 2,893.7 |
| | 83.9 | % | | $ | 2,811.2 |
| | 79.8 | % | | $ | 2,750.9 |
| | 83.2 | % |
Cost of revenue
For fiscal year 2019, cost of revenue as a percentage of net revenue increased from fiscal year 2018, primarily as a result of organic revenue decline, negative mix due to new product launches, the impact of acquisitions and divestitures, and increased tariff costs, partially offset by the positive impact of changes in foreign currency exchange rates and lower variable compensation.
For fiscal year 2018, cost of revenue as a percentage of net revenue decreased from fiscal year 2017, primarily due to the favorable impact of foreign currency exchange rates, partially offset by higher trade tariffs.
Research and development expense
For fiscal year 2019, R&D expense was relatively consistent with the prior period as increased design and development effort to support new design wins and fund development activities to intersect emerging megatrends shaping our end markets was offset by the positive impact of changes in foreign currency exchange rates, primarily the Euro and British Pound Sterling.
For fiscal year 2018, R&D expense increased due to higher spend, particularly related to the emerging megatrends, and the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
For fiscal year 2019, SG&A expense declined from fiscal year 2018, primarily due to lower variable compensation, lower selling costs, the divestiture of the Valves Business, the favorable impact of foreign currency exchange rates (primarily the Euro, Chinese Renminbi, and British Pound Sterling), and lower costs related to our redomicile in the prior year, partially offset by additional SG&A expense related to GIGAVAC.
For fiscal year 2018, SG&A expense increased from fiscal year 2017, primarily due to the unfavorable impact of foreign currency exchange rates (primarily the Euro), higher share-based compensation expense, transaction costs related to the acquisition of GIGAVAC, and higher selling costs, partially offset by lower variable compensation, lower costs related to the cross-border merger between Sensata N.V. and Sensata plc (the "Merger"), lower integration costs, synergies from the integration of acquired businesses, and productivity improvements.
Amortization of intangible assets
For fiscal year 2019, amortization expense increased from fiscal year 2018, due to the intangible assets acquired with GIGAVAC, partially offset by the effect of the economic benefit method of amortization.
For fiscal year 2018, amortization expense decreased from fiscal year 2017, due to the effect of the economic-benefit method of amortization and the impact of certain definite-lived intangible assets reaching the end of their useful lives.
We expect amortization expense to be approximately $127.8 million in fiscal year 2020. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," of our Financial Statements for additional information regarding definite-lived intangible assets and the related amortization.
Restructuring and other charges, net
Restructuring and other charges, net for the years ended December 31, 2019, 2018, and 2017 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) | 2019 | | 2018 | | 2017 |
Severance costs, net (1) | $ | 29.2 |
| | $ | 7.6 |
| | $ | 11.1 |
|
Facility and other exit costs (2) | 0.8 |
| | 0.9 |
| | 7.9 |
|
Gain on sale of Valves Business (3)(5) | — |
| | (64.4 | ) | | — |
|
Other (4)(5) | 23.5 |
| | 8.2 |
| | — |
|
| Restructuring and other charges, net | $ | 53.6 |
| | $ | (47.8 | ) | | $ | 19.0 |
|
| |
(1) | Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.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 in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. |
| |
(3) | In the year ended December 31, 2018, we completed the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2019, these amounts include a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC. |
| |
(5) | Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
Operating income
For fiscal year 2019, operating income decreased from fiscal year 2018, due primarily to the divestiture of the Valves Business in the third quarter of 2018 (including the gain on sale), net productivity headwinds partly due to the scaling up of new product launches, the loss contingency provisions are recorded for probablerecognized in connection with the supply agreement termination related to litigation with Metal Seal, higher severance charges, the impact of increased tariffs, and estimable losses at our best estimatelower volume, partially offset by lower variable compensation, lower selling expenses, the favorable impact of foreign currency rates, and the impact of the acquisition of GIGAVAC.
For fiscal year 2018, operating income increased from fiscal year 2017, due primarily to higher volume, the divestiture of the Valves Business in the third quarter of 2018 (including the gain on sale), the favorable impact of foreign currency rates, and lower amortization expense, partially offset by higher R&D expense.
Interest expense, net
For fiscal year 2019, interest expense, net increased from fiscal year 2018, due primarily to an increase in interest expense related to higher variable interest rates as well as the impact of the refinancing of a loss or, whenportion of our Term Loan (variable rate debt) through the issuance of $450.0 million in aggregate principal amount of 4.375% senior notes due 2030 (the "4.375% Senior Notes") (fixed rate debt). The 4.375% Senior Notes accrue interest at a best estimate cannot be made, at our estimatehigher rate than the average rate of the minimum loss. These estimates are often developed priorTerm Loan in fiscal year 2019.
For fiscal year 2018, interest expense, net decreased from fiscal year 2017, due primarily to knowingan increase in interest income due to higher average cash balances in fiscal year 2018, partially offset by an increase in interest expense related to higher variable interest rates.
Other, net
Other, net for the amountyears ended December 31, 2019, 2018, and 2017 consisted of the ultimate loss, requirefollowing (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the applicationeffect of considerable judgment, and are refinedrounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
Currency remeasurement (loss)/gain on net monetary assets (1) | $ | (6.8 | ) | | $ | (18.9 | ) | | $ | 18.0 |
|
Gain/(loss) on foreign currency forward contracts (2) | 2.2 |
| | 2.1 |
| | (15.6 | ) |
Gain/(loss) on commodity forward contracts (2) | 4.9 |
| | (8.5 | ) | | 10.0 |
|
Loss on debt financing (3) | (4.4 | ) | | (2.4 | ) | | (2.7 | ) |
| Net periodic benefit cost, excluding service cost | (3.2 | ) | | (3.6 | ) | | (3.4 | ) |
| Other | (0.7 | ) | | 0.9 |
| | 0.1 |
|
| Other, net | $ | (7.9 | ) | | $ | (30.4 | ) | | $ | 6.4 |
|
| |
(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 for additional information related to gains and losses related to our commodity and foreign currency exchange forward contracts. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. |
| |
(3) | Refer to Note 14, "Debt," of our Financial Statements for additional information related to our debt financing transactions. |
each accounting period as additional information becomes known. Accordingly, weProvision for/(benefit from) income taxes
The components of provision for/(benefit from) income taxes for the years ended December 31, 2019, 2018, and 2017 are often initially unabledescribed in more detail in the table below (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to develop a best estimaterecalculate due to the effect of loss and therefore the minimum amount, which could be an immaterial amount, is recorded. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resulting in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. There can be no assurances that our recorded provisions will be sufficient to cover the extent of our costs and potential liability.rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (In millions) | 2019 | | 2018 | | 2017 |
Tax computed at statutory rate of 21% in 2019 and 2018 and 35% in 2017 (1) | $ | 82.0 |
| | $ | 110.5 |
| | $ | 140.9 |
|
| Reserve for tax exposure | 20.1 |
| | 10.8 |
| | 38.0 |
|
Valuation allowances (2) | 19.6 |
| | (123.4 | ) | | (3.4 | ) |
Foreign tax rate differential (3) | (19.1 | ) | | (41.2 | ) | | (112.0 | ) |
| Withholding taxes not creditable | 9.5 |
| | 8.7 |
| | 3.9 |
|
Research and development incentives (4) | (8.4 | ) | | (19.5 | ) | | (5.9 | ) |
| Change in tax laws or rates | 5.1 |
| | (22.3 | ) | | 3.9 |
|
U.S. Tax Reform Act impact (5) | — |
| | — |
| | (73.7 | ) |
Other (6) | (1.1 | ) | | 3.7 |
| | 2.4 |
|
| Provision for/(benefit from) income taxes | $ | 107.7 |
| | $ | (72.6 | ) | | $ | (5.9 | ) |
| |
(1) | Represents the product of the applicable statutory tax rate and income before taxes, as reported in the consolidated statements of operations. In fiscal year 2018 the statutory tax rate declined to 21% (i.e., compared to 35% in previous fiscal years) due to the effect of the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act"). |
| |
(2) | During the years ended December 31, 2019, 2018, and 2017, we established/(released) a portion of our valuation allowance and recognized a deferred tax expense/(benefit). The valuation allowance as of December 31, 2019 and 2018 was $146.8 million and $157.0 million, respectively. The remaining valuation allowance mainly relates to foreign tax credit and capital loss carryforwards and suspended interest deductions. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future provision for/(benefit from) income taxes. |
| |
(3) | We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory 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 holidays in their respective jurisdictions. |
| |
(4) | Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance. |
| |
(5) | Relates to the enactment of the Tax Reform Act during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax assets and liabilities associated with indefinite-lived intangible assets, including goodwill, from a rate of 35% to 21%. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. |
| |
(6) | Refer to Note 7, "Income Taxes," of our Financial Statements for additional information related to other components of our rate reconciliation. |
We do not believe that inflation has hadthere 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, adjusted operating income, adjusted operating margin, adjusted net income, and adjusted earnings per share ("EPS"), 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.
Our non-GAAP financial measures should be considered as supplemental in nature and are not intended to be considered in isolation or as a substitute for reported net revenue growth, operating income, operating margin, net income, or diluted EPS, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth, adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue, calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign currency exchange rate differences as well as the net impact of material effectacquisitions and divestitures for the 12-month period following the respective transaction date(s). Refer to the Net revenue section above for a reconciliation of organic revenue growth to reported revenue growth.
We believe that organic revenue growth provides investors with helpful information with respect to our operating performance, and we use organic revenue growth to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.
Adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS
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 a factor 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. The use of these non-GAAP financial measures have limitations, and they should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as operating income, operating margin, net income, or diluted EPS. We believe that these measures are useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends.
We define adjusted operating income as operating income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted operating margin is calculated by dividing adjusted operating income by net revenue.
We define adjusted net income as follows: net income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted EPS is calculated by dividing adjusted net income by the number of diluted weighted-average ordinary shares outstanding in the period.
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.
Restructuring related and other - includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. Restructuring related and other does not, however, include charges related to the integration of acquired businesses, including such charges that are recognized as restructuring and other charges, net in the consolidated statements of operations.
Financing and other transaction costs – includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, losses or gains related to the termination of a long-term unfavorable supply
agreement, 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 commodities and other 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 inventory). The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate, in any period presented.
Deferred income 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 U.S. valuation allowance in connection with certain acquisitions and U.S. tax law changes. Other tax related items include certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
Amortization of debt issuance costs.
Where applicable, the current tax effect of non-GAAP adjustments.
Our definition of adjusted net income excludes the deferred provision for/(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 provide reconciliations of certain financial conditionmeasures calculated in accordance with U.S. GAAP to the related non-GAAP financial measures for the periods presented (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, 2019 |
| (Dollars 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 (a) | | 61.9 |
| | 1.8 |
| | 62.2 |
| | 0.38 |
|
Financing and other transaction costs (b)(c) | | 28.9 |
| | 0.8 |
| | 34.9 |
| | 0.22 |
|
Step-up depreciation and amortization (c) | | 139.6 |
| | 4.0 |
| | 139.6 |
| | 0.86 |
|
Deferred gain on derivative instruments (c) | | (1.6 | ) | | (0.0 | ) | | (6.5 | ) | | (0.04 | ) |
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.8 |
| | 0.05 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | 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 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation and $6.1 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, each of which were recorded in restructuring and other charges, net in the consolidated statements of operations. Also included a loss of $4.4 million associated with a debt financing transaction, recorded in other, net in the consolidated statement of operations. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | A majority of this adjustment related to $27.6 million of deferred tax provision, $18.2 million of uncertain tax positions recorded in fiscal year 2019, and $9.4 million of current tax expense related to the repatriation of profits from certain |
subsidiaries in China to their parent companies in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as to fund our deployment of capital.
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2018 |
| (Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
| Reported (GAAP) | | $ | 710.4 |
| | 20.2 | % | | $ | 599.0 |
| | $ | 3.53 |
|
| Non-GAAP adjustments: | | | | | | | | |
Restructuring related and other (a) | | 25.4 |
| | 0.7 |
| | 28.0 |
| | 0.17 |
|
Financing and other transaction costs (b)(c) | | (47.0 | ) | | (1.3 | ) | | (40.3 | ) | | (0.24 | ) |
Step-up depreciation and amortization (c) | | 141.2 |
| | 4.0 |
| | 141.2 |
| | 0.83 |
|
Deferred loss on derivative instruments (c) | | 2.0 |
| | 0.1 |
| | 12.5 |
| | 0.07 |
|
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.3 |
| | 0.04 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | (128.3 | ) | | (0.76 | ) |
| Total adjustments | | 121.5 |
| | 3.5 |
| | 20.4 |
| | 0.12 |
|
| Adjusted (non-GAAP) | | $ | 832.0 |
| | 23.6 | % | | $ | 619.4 |
| | $ | 3.65 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included a $64.4 million gain on the sale of the Valves Business, $5.9 million of transaction costs related to this sale, and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, all of which were recorded in restructuring and other charges, net in the consolidated statements of operations. Also included are: costs associated with debt financing transactions of $2.4 million, which were recorded in other, net in the consolidated statements of operations; costs to complete the Merger of $4.1 million, which were recorded in SG&A expense in the consolidated statements of operations; and costs associated with acquisition activity, including $2.5 million of transaction costs related to the acquisition of GIGAVAC in fiscal year 2018, which were recorded in SG&A expense in the consolidated statements of operations. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | We recognized a deferred tax benefit of $144.1 million, which primarily included a $122.1 million deferred tax benefit related to the release of a portion of our U.S. valuation allowance as discussed in Note 7, "Income Taxes," of our Financial Statements. Also included in our fiscal year 2018 results is $10.0 million of current tax expense related to the repatriation of profits from certain subsidiaries in China to their parent companies, primarily in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as to fund our deployment of capital. |
|
| | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2017 |
| (Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
| Reported (GAAP) | | $ | 555.8 |
| | 16.8 | % | | $ | 408.4 |
| | $ | 2.37 |
|
| Non-GAAP adjustments: | | | | | | | | |
Restructuring related and other (a) | | 21.3 |
| | 0.6 |
| | 21.3 |
| | 0.12 |
|
Financing and other transaction costs (b)(c) | | 6.6 |
| | 0.2 |
| | 9.3 |
| | 0.05 |
|
Step-up depreciation and amortization (c) | | 165.0 |
| | 5.0 |
| | 165.0 |
| | 0.96 |
|
Deferred loss/(gain) on derivative instruments (c) | | 2.6 |
| | 0.1 |
| | (7.4 | ) | | (0.04 | ) |
Amortization of debt issuance costs (c) | | — |
| | — |
| | 7.2 |
| | 0.04 |
|
Deferred taxes and other tax related (d) | | — |
| | — |
| | (55.2 | ) | | (0.32 | ) |
| Total adjustments | | 195.6 |
| | 5.9 |
| | 140.4 |
| | 0.82 |
|
| Adjusted (non-GAAP) | | $ | 751.4 |
| | 22.7 | % | | $ | 548.7 |
| | $ | 3.19 |
|
| |
| (a) | Refer to summary of restructuring related and other charges for each of the fiscal years 2019, 2018, and 2017 below. |
| |
| (b) | Primarily included $6.6 million of costs to complete the Merger and $2.7 million of costs associated with debt financing transactions. |
| |
| (c) | There was no current tax effect related to the following categories of non-GAAP adjustments: financing and other transaction costs; deferred gain or loss on derivative instruments; and amortization of debt issuance costs. The current tax effect of step-up depreciation and amortization was not material, individually or in the aggregate. |
| |
| (d) | Primarily included $73.7 million of income tax benefits related to the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate from 35% to 21% as a part of the Tax Reform Act. |
The following table presents the components of our restructuring related and other non-GAAP adjustment to net income for fiscal years 2019, 2018, and 2017 (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) | 2019 | | 2018 | | 2017 |
Business and corporate repositioning (i) | $ | 40.1 |
| | $ | 8.8 |
| | $ | 3.9 |
|
Supply chain repositioning and transition (ii) | 16.0 |
| | 15.3 |
| | 11.4 |
|
Preacquisition legal matters (iii) | 5.3 |
| | 2.9 |
| | 4.7 |
|
| Other | 2.7 |
| | 1.0 |
| | 1.4 |
|
Income tax effect (iv) | (1.8 | ) | | — |
| | — |
|
Total non-GAAP restructuring related and other (v) | $ | 62.2 |
| | $ | 28.0 |
| | $ | 21.3 |
|
| |
| i. | Fiscal year 2019 primarily includes approximately $12.7 million of benefits provided under a voluntary retirement incentive program, $10.2 million of costs associated with business and corporate workforce rationalization, and $9.5 million of costs (both termination and other costs) related to the shutdown and relocation of an operating site in Germany. Refer to Note 5, "Restructuring and Other Charges, Net," included in our Financial Statements for additional information about the voluntary retirement incentive program. Amounts presented in fiscal years 2018 and 2017 primarily represent costs related to business and corporate workforce rationalization. |
| |
| ii. | Fiscal years 2019, 2018, and 2017 primarily include costs related to optimization of our manufacturing processes to increase productivity and rationalize our manufacturing footprint of $14.1 million, $14.0 million, and $10.0 million, respectively. The remaining amounts presented primarily represent costs related to supply chain workforce rationalization. |
| |
| iii. | Represents charges incurred related to legal matters associated with an acquired business, 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 2017 primarily includes $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. |
| |
| iv. | We treat deferred taxes as a non-GAAP adjustment. Accordingly, the tax effect of the restructuring related and other non-GAAP adjustment refers only to the current tax effect. With respect to the years ended December 31, 2018 and 2017, the current tax effect was not material, individually or in the aggregate. |
| |
| 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. |
Liquidity and Capital Resources
As of December 31, 2019 and 2018 we held cash and cash equivalents in the following regions:
|
| | | | | | | |
| | As of December 31, |
| (in millions) | 2019 | | 2018 |
| United Kingdom | $ | 8.8 |
| | $ | 8.8 |
|
| United States | 7.0 |
| | 4.6 |
|
| The Netherlands | 522.9 |
| | 482.1 |
|
| China | 119.3 |
| | 125.2 |
|
| Other | 116.1 |
| | 109.1 |
|
| Total | $ | 774.1 |
| | $ | 729.8 |
|
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.
Cash Flows
The table below summarizes our primary sources and uses of cash for the years ended December 31, 2019, 2018, and 2017. We have derived the summarized statements of cash flows from our Financial Statements. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (in millions) | 2019 | | 2018 | | 2017 |
| Net cash provided by/(used in): | | | | | |
| Operating activities: | | | | | |
| Net income adjusted for non-cash items | $ | 630.3 |
| | $ | 687.5 |
| | $ | 652.5 |
|
| Changes in operating assets and liabilities, net | (10.7 | ) | | (66.9 | ) | | (94.8 | ) |
| Operating activities | 619.6 |
| | 620.6 |
| | 557.6 |
|
| Investing activities | (208.8 | ) | | (237.6 | ) | | (140.7 | ) |
| Financing activities | (366.5 | ) | | (406.2 | ) | | (15.3 | ) |
| Net change | $ | 44.3 |
| | $ | (23.3 | ) | | $ | 401.7 |
|
Operating Activities
The decrease in cash provided by operating activities in fiscal year 2019 compared to fiscal year 2018 relates primarily to lower operating profitability and the timing of supplier payments and customer receipts.
The increase in cash provided by operating activities in fiscal year 2018 compared to fiscal year 2017 relates primarily to improved operating profitability and timing of supplier payments and customer receipts.
Investing Activities
Investing activities include additions to PP&E and capitalized software, the acquisition or divestiture of a business or assets, and the acquisition or sale of certain debt and equity securities.
In fiscal year 2019, net cash used in investing activities decreased primarily due to lower cash used in acquisitions, as the GIGAVAC merger was completed in fiscal year 2018. This was partially offset by the impact of the divestiture of the Valves Business, for which proceeds were received in fiscal year 2018, cash paid for the acquisition of assets from Metal Seal (as further discussed in Note 15, "Commitments and Contingencies" of the Financial Statements), and cash used to acquire debt and equity securities.
In fiscal year 2018, net cash used in investing activities increased primarily due to the cash used in the merger with GIGAVAC, partially offset by proceeds from the divestiture of the Valves Business. In addition, more cash was used to purchase PP&E and capitalized software in fiscal year 2018 compared to fiscal year 2017.
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the divestiture of the Valves Business and the acquisition of GIGAVAC.
In fiscal year 2020, 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.
Financing Activities
In fiscal year 2019, net cash used in financing activities decreased primarily due to a lower volume of ordinary share repurchases.
In fiscal year 2018, net cash used in financing activities increased primarily as a result of the commencement of our share buyback program, and the resulting ordinary share repurchases during the year.
Indebtedness and Liquidity
The following table details our gross outstanding indebtedness as of December 31, 2019, and the associated interest expense for the year then ended:
|
| | | | | | | |
| (in millions) | Balance as of December 31, 2019 | | Interest Expense, net for the year ended December 31, 2019 |
| Term Loan | $ | 460.7 |
| | $ | 32.7 |
|
| 4.875% Senior Notes | 500.0 |
| | 24.4 |
|
| 5.625% Senior Notes | 400.0 |
| | 22.5 |
|
| 5.0% Senior Notes | 700.0 |
| | 35.0 |
|
| 6.25% Senior Notes | 750.0 |
| | 46.9 |
|
| 4.375% Senior Notes | 450.0 |
| | 5.5 |
|
| Finance lease and other financing obligations | 31.1 |
| | 3.0 |
|
| Total gross outstanding indebtedness | $ | 3,291.8 |
| |
|
|
Other interest expense, net (1) | | | (11.4 | ) |
| Interest expense, net |
|
| | $ | 158.6 |
|
| |
(1) | Other interest expense, net includes interest income, amortization of debt issuance costs, and interest costs capitalized in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest. |
Debt Instruments
Refer to Note 14, "Debt," of our Financial Statements for additional information related to the terms of our debt instruments.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. In addition, the Senior Secured Credit Facilities provide for the Accordion, under which additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased. Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the "Senior Notes Indentures"). As of December 31, 2019, availability under the Accordion was approximately $1.0 billion.
We believe, based on our current level of operations as reflected in our results of operations for the year ended December 31, 2019, and taking into consideration the restrictions and covenants discussed below and in recent years.Note 14, "Debt," of our Financial Statements, that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future.
Seasonality
BecauseThe Credit Agreement 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 diverse global natureoutstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the marketsoutstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in which we operate,each case subject to certain reinvestment rights, and upon the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2019.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our revenue is only moderatelysubsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of Sensata Technologies B.V. ("STBV") and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be impacted by seasonality. However,short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our Sensing Solutions business has some seasonal elements, specificallyperformance as measured by certain credit
metrics such as interest coverage and leverage ratios. As of January 31, 2020, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs, but will not reduce availability under the Credit Agreement.
The Credit Agreement and the the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14, "Debt," of our Financial Statements) that limit the ability of STBV and its air conditioningsubsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and refrigeration products,make other restricted payments. These restrictions and covenants, which tendare subject to peakimportant exceptions and qualifications set forth in the first two quartersCredit Agreement and Senior Notes Indentures, were taken into consideration in establishing our share repurchase programs, and are evaluated periodically with respect to future potential funding. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations, should we decide to do so. As of December 31, 2019, 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. 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. The authorized amount of our various share repurchase programs may be modified or terminated by our Board of Directors at any time.
During the year ended December 31, 2019, we repurchased ordinary shares under a $250.0 million share repurchase program authorized by our Board of Directors in October 2018 (the "October 2018 Program") and a $500.0 million share repurchase program authorized by our Board of Directors in July 2019 (the "July 2019 Program"). We repurchased approximately 7.2 million ordinary shares at a weighted-average price of $48.87 per share under these programs. The October 2018 Program was terminated upon commencement of the July 2019 Program.
During the year ended December 31, 2018, we repurchased approximately 7.6 million ordinary shares at a weighted-average price of $52.75 per share under a $400.0 million share repurchase program authorized by our Board of Directors in May 2018.
Contractual Obligations and Commercial Commitments
The table below reflects our contractual obligations as end market inventory is built up for spring and summer sales. In addition, our Performance Sensing business tends to be weakerof December 31, 2019. Amounts we pay in future periods may vary from those reflected in the third quartertable. 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.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | Less than One Year | | One to Three Years | | Three to Five Years | | More than Five Years |
Debt obligations principal(1) | $ | 3,260.7 |
| | $ | 4.6 |
| | $ | 9.3 |
| | $ | 909.3 |
| | $ | 2,337.6 |
|
Debt obligations interest(2) | 1,040.7 |
| | 164.7 |
| | 328.4 |
| | 304.8 |
| | 242.8 |
|
Finance lease obligations principal(3) | 30.6 |
| | 2.0 |
| | 3.0 |
| | 3.3 |
| | 22.4 |
|
Finance lease obligations interest(3) | 21.7 |
| | 2.6 |
| | 4.8 |
| | 4.3 |
| | 10.1 |
|
Other financing obligations principal(4) | 0.5 |
| | 0.4 |
| | 0.2 |
| | — |
| | — |
|
Other financing obligations interest(4) | 0.1 |
| | 0.1 |
| | 0.0 |
| | — |
| | — |
|
Operating lease obligations(5) | 74.0 |
| | 14.8 |
| | 20.1 |
| | 14.5 |
| | 24.5 |
|
Non-cancelable purchase obligations(6) | 61.5 |
| | 26.6 |
| | 29.4 |
| | 5.2 |
| | 0.3 |
|
Total contractual obligations(7)(8) | $ | 4,489.8 |
| | $ | 215.8 |
| | $ | 395.2 |
| | $ | 1,241.4 |
| | $ | 2,637.7 |
|
| |
(1) | Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2019. |
| |
(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2019. Cash flows associated with the next interest payment to be made on our |
variable rate debt subsequent to December 31, 2019 were calculated using the interest rates in effect as of the year as automotive original equipment manufacturers retool production lines forlatest interest rate reset date prior to December 31, 2019, plus the coming model year.applicable spread.
| |
(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our finance lease obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these financing arrangements beyond their current terms. |
| |
(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms. |
| |
(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the USD to local currency exchange rates in effect as of December 31, 2019. |
| |
(8) | This table does not include the contractual obligations associated with our pension and other post-retirement benefit plans. As of December 31, 2019, we had recognized a net benefit liability of $36.5 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional information related to our pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $26.0 million of unrecognized tax benefits as of December 31, 2019, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing and the ultimate resolution of the examination is uncertain. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information related to our unrecognized tax benefits. |
Critical Accounting Policies and Estimates
To prepareAs discussed in Note 2, "Significant Accounting Policies," of our Financial Statements, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in conformityaccordance with generally accepted accounting principles, we must make complex and subjective judgmentsU.S. GAAP requires us to exercise judgment in the selectionprocess of applying our accounting policies. It also requires that we make estimates and application of accounting policies.assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting policies and estimates that we believe are most critical to the portrayal of our financial positioncondition and results of operations are listed below. We believe these policies require ourthe most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which includes other significant accounting policies.
Revenue Recognition
The following discussion below details the most significant judgments and estimates we make regarding recognition of our revenue recognition accounting policies is based on the accounting principles that were used to prepare the fiscal year 2017 consolidated financial statements included in this Annual Report on Form 10-K. On January 1, 2018, we adoptedaccordance with FASB ASC Topic 606, Revenue from Contracts with Customers (". We adopted FASB ASC 606"). This standard replaces existingTopic 606 on January 1, 2018. Periods presented prior to January 1, 2018 are presented under the previous revenue recognition rulesguidance, including FASB ASC Topic 605, Revenue Recognition. The adoption of FASB ASC Topic 606 did not have a material effect on our financial position or results of operations, and no cumulative catch-up adjustment was recognized.
In accordance with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for discussion of recently issued accounting standards.
WeFASB 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 ("PO") 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 605, Revenue Recognition ("ASC 605"). Revenue and related cost of revenue from product sales606) are recognized when the significant risks and rewards of ownership have been transferred, titlecustomer POs. If this assessment were to change, it could result in a material change to the productamount of net revenue recognized in a period.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer PO, in another agreement that identifies terms and riskconditions of loss transfersthe transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our customer, and collection of sales proceeds is reasonably assured. Based on these criteria, revenue is generally recognized when the product is shipped from our warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement. Product sales are recorded net of trade discounts (including volume and early payment incentives),contracts, including sales returns value-added tax, and similar taxes. Sales to customers(which generally include a right of return for defective or non-conforming product. Sales returns haveproduct) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been significantmaterial. However, should our judgments and estimates regarding variable consideration change, it could result in relationa material change to ourthe amount of net revenue and have been within our estimates.recognized in a period.
Goodwill, Intangible Assets, and Long-Lived Assets
Businesses acquired are recordedrecognized at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. AsIn accordance with the requirements of December 31, 2017,FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and other intangible assets net totaled $3,005.5 milliondetermined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and $920.1 million, respectively,whenever events or approximately 45% and 14%, respectively,business conditions change that could indicate that the asset is impaired.
Goodwill
Our judgments regarding the existence of indicators of goodwill impairment are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our total assets.reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Identification of reporting units
Historically weunits. We have identified fivesix reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, Industrial Sensing, and Interconnection. In connection with our 2017 review of these reporting units, and considering the continued integration of the CST acquisition, we determined that the portion of the Power Management reporting unit that serves the aerospace end market should be reallocated into a separate reporting unit. As a result, a new reporting unit, Aerospace, was identified.
These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”).350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Assignment of assets, liabilities, and goodwill to reporting units
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to an existing reporting unit or create a new reporting unit. 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. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipmentPP&E associated with our corporate offices, and debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit.
Evaluation of goodwill for impairment
In accordance with the requirements of ASC 350, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis and whenever events or business conditions change that could indicate that the asset is impaired. Our judgments regarding the existence of impairment indicators are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
impairment. We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the two-step goodwill impairment test.
In the first step of the two-step goodwill impairment test,quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized forin an amount equal to that excess amount.excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination at the date
of assessment, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill.
2017 assessment of goodwill.We evaluated ourthe goodwill of each reporting unit for impairment as of October 1, 2017. In connection with this evaluation, we used the qualitative method of assessing goodwill for those reporting units that were not reorganized, and determined that it was not more likely than not that the fair values of each of our Performance Sensing, Electrical Protection, Industrial Sensing, and Interconnection2019. All reporting units were less than their net book values. In making this determination, we considered several factors, includingevaluated using the following:
the amount by which the fair values of the Performance Sensing, Electrical Protection, and Interconnection reporting units exceeded their carrying values (301%, 273%, and 328%, respectively) as of October 1, 2013, and the amount by which the Industrial Sensing reporting unit exceeded its carrying value (340%) as of December 1, 2014, indicating that there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be a potential impairment;
the carrying values of these reporting units as of October 1, 2017 compared to the previously calculated fair values as of October 1, 2013 (or December 1, 2014 in the case of Industrial Sensing);
public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses, such as significant declines in market capitalization or significant
goodwill impairment charges that could be an indication that the goodwill of our reporting units was potentially impaired;
demand in the debt markets for our senior notes, the strength of which indicates a view by investors of our strength as a company;
changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units;
changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and
whether there had been any significant increases to the weighted-average cost of capital ("WACC") rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.
Changes to the factors considered above could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.quantitative method. We may be unaware of one or more significant factors that, if we had been aware of, would cause our conclusion that it is not more likely than not that the fair values of our reporting units are less than their carrying values to change, which could result in a goodwill impairment charge in a future period.
For the Power Management and Aerospace reporting units, which were reorganized in 2017, we estimated the fair values of theseour reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future cash flows for each reporting unit for the subsequent five fiscal years (the “Discrete"Discrete Projection Period”Period"). We estimated the value of the cash flows beyond the fifth fiscal year (the “Terminal Year”"Terminal Year"), by applying a multiple to the projected Terminal Year net earnings before interest, taxes, depreciation, and amortization ("EBITDA").amortization. The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated WACCweighted-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 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.
The estimated relative fair values of the Power Management and Aerospace reporting units, as identified in connection with our 2017 annual impairment analysis, exceeded their carrying values by 63% and 37%, respectively. The carrying value of goodwill associated with the Power Management reporting unit, prior to reorganization, was assigned to each of the reorganized reporting units based on their estimated relative fair values.
We did not prepare updated goodwill impairment analyses as of December 31, 2017 for any reporting unit, as we did not become aware of any indicators after October 1, 2017 that would have required such analysis.
Assessment of fair value in prior years. In 2013 (and in 2014 for Industrial Sensing), we estimated the fair value of our reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future cash flows for each reporting unit for the Discrete Projection Period. We estimated the value of the cash flows beyond the Terminal Year, by applying a multiple to the projected Terminal Year EBITDA. The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated WACC appropriate for each reporting unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices.
We also estimated the fair value of our reporting units using the guideline company method. Under this method, we performed an analysis to identify a group of publicly-traded companies that were comparable to each reporting unit. We calculated an implied EBITDA multiple (e.g., invested capital/EBITDA) for each of the guideline companies and selected either the high, low, or average multiple, depending on various facts and circumstances surrounding the reporting unit, and applied it to that reporting unit's trailing twelve month EBITDA. Although we estimated the fair value of our reporting units using the guideline method, we did so for corroborative purposes and placed primary weight on the discounted cash flow method.
Types of events that could result in a goodwill impairment.As noted above, the assumptions used in the quantitative calculation of fair value of our reporting units, in prior years, including the long-range forecasts, the selection of the discount
rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair 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 Annual Report on Form 10-K could requirecause us to revise our long-term projections and could reduce the multiples used to determine Terminal Year value. Such revisions could result in a goodwill impairment charge in the future.
However, we do not consider any of our reporting units to be at risk of failing Step 1 of the goodwill impairment test.
Evaluation of other intangible assets for impairment
2017 assessment of indefinite-livedIndefinite-lived intangible assets. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review that requires us toin which we estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value. We
In performing the quantitative impairment review, we estimate the fair value by using the relief-from-royalty method, in which requires us towe make assumptions about future conditions impacting the fair value of theour indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
We evaluated our indefinite-lived intangible assets for impairment as of October 1, 20172019 (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 impairments of thesean impairment charge in the future.
Definite-lived intangible assets.
Impairment of 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 is less thanfalls below the carrying value of thean 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 cash flows from long-lived assets to determine whether the carrying values of such assets are recoverable over the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of the end markets we serve. If an asset is determined to be impaired, the impairment is the amount by which its carrying value exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We assessManagement judgment is required in determining various elements of our provision for income taxes, including the likelihood that ouramount 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 recovered from future taxablesustained 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 record a valuation allowancepenalties related to reduceuncertain tax positions within the provision for/(benefit from) income taxes line of the consolidated statements of operations.
We recognize deferred tax assets to an amountthe extent that in our judgment, iswe believe these assets are more likely than not to be recovered.
Managementrealized. In measuring our deferred tax assets, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations in various jurisdictions. Significant judgment is required in determining our provision for income taxes,considering the relative impact of these items along with the weight that should be given to each category. Ultimately, the ability to realize our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered. Our assessment of future taxable income, which is based on historical experience and current and anticipated market and economic conditions and trends.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 Benefit PlansBenefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. Changes in the funded status of a pension or other post-retirement benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date, and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations take into consideration various actuarial assumptions including future compensation levels and related expensethe probability of these plans recordedpayment between the measurement date and the expected date of payment. Accumulated benefit obligations differ from projected benefit obligations only in the financial statements are based on certain assumptions. that they include no assumptions about future compensation levels.
The most significant assumptions used to determine a plan's funded status and net periodic benefit cost relate to discount rate, expected return on plan assets, and rate of increase in healthcare costs. These assumptions are reviewed annually. Refer to Note 13, "Pension and Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. We reviewPost-Retirement Benefits," of our Financial Statements for additional information related to the values determined for each of these assumptions annually.
Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Actuarial gains and losses are recorded directly to other comprehensive loss. If the total net actuarial gain or loss included in accumulated other comprehensive loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pension cost over the average remaining service lives of the employees participating in the pension or post-retirement benefit plan.last three fiscal years.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations
of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the 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.
We have adopted useOther assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the Retirement Plan ("RP") 2014 mortality tables with the updated Mortality Projection ("MP") 2017 mortality improvement scale as issued by the Societyrecognition of Actuaries in 2017 for our U.S. defined benefit plans. The updated MP 2017 mortality improvement scale reflects improvements in longevity as compared to the MP 2016 mortality improvement scale the Society of Actuaries issued in 2016, primarily because it includes actual Social Security mortality data through 2015. The MP projection scale is used to factor in projected mortality improvements over time, based on age and date of birth (i.e., two-dimension generational).an actuarial gain or loss.
Future changes to assumptions, or differences between actual and expected outcomes, can significantly affect our future net periodic pensionbenefit cost, projected benefit obligations, and accumulated other comprehensive loss.
Share-Based Compensation
FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units,securities, and recognize as compensation expense that fair value over the requisite service period.
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 estimating the grant-date fair value of these optionsthis model are as follows:(1) the fair value of the underlying ordinary shares, (2) the time period for which we expect the stock options will be outstanding (the expected term,term), (3) the expected volatility risk-free interest rate, and expected dividend yield. Material changes to any of these assumptions may have a significant effect on our valuation of options, and, ultimately, the share-based compensation expense recorded in the consolidated statements of operations. Significant factors used in determining these assumptions are detailed below.
We use the closing price of our ordinary shares, on(4) the New York Stock Exchange (the "NYSE") onrisk-free interest rate, and (5) the date ofexpected dividend yield. Expected term and expected volatility are the grant asjudgments that we believe are the most critical and subjective in estimating fair value (and related share-based compensation expense) of ordinary shares in the Black-Scholes-Merton option-pricing model.
our stock option awards.
The expected term which is a key factor in measuring the fair valuedetermined based upon our own historical average term of exercised and related compensation cost of share-based payments, has been determined by comparing the terms of our options granted against those of publicly-traded companies within our industry.
outstanding stock options. We consider our own historical volatility, as well as the historical andour implied volatilities of publicly-traded companies within our industry,volatility, in estimating expected volatility for stock options. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility.
Other assumptions used include risk-free interest rate and expected dividend yield. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related 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 declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. SeeRefer to Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in this Annual Report on Form 10-K for further discussion ofadditional information related to limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the date of the grant. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessment is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation costexpense is recordedrecognized if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore, only recognize compensation costexpense 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.
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the saledivestiture of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Refer to Note 14,15, "Commitments and Contingencies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further discussion of specific indemnifications.additional information related to our off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently issued accounting standards adopted in the current period:
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. We adopted the provisions of FASB ASU No. 2016-02 on January 1, 2019 using the modified retrospective transition method. Refer to Note 2, "Significant Accounting Policies" and Note 21, "Leases," each of our Financial Statements, for additional information related to this adoption. We do not expect adoption of FASB ASU No. 2016-02 to have a material impact on our future results of operations.
No other recently issued accounting standards adopted in the current period had a material impact on our consolidated financial position or results of operations, and we do not believe they are reasonably likely to have a material effect on our future consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
In May 2014, the Financial Accounting Standards Board ("FASB")There are no recently issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which modifies how all entities recognize revenue, and consolidates into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605 and various other revenue accounting standards for specialized transactions and industries. FASB ASU No. 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitledadopted in exchange for those goods or services. FASB ASU No. 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustmentfuture periods that are expected to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of FASB ASU No. 2014-09 by one year. FASB ASU No. 2014-09 is now
effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We have developed an implementation plan to adopt this new guidance, which included an assessment of the impact of the new guidance on our financial position and results of operations. This implementation plan is substantially complete. We have determined that this standard will not have a material impact on our consolidated financial position or results of operations. We adopted FASB ASU No. 2014-09 on January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. FASB ASU No. 2016-02 requires lessees to classify most leases as either finance or operating leases and to initially recognize a lease liability and right-of-use asset. Entities may elect to account for certain short-term leases (with a term of 12 months or less) using a method similar to the current operating lease model. The statements of operations will include, for finance leases, separate recognition of interest on the lease liability and amortization of the right-of-use asset and for operating leases, a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis. At December 31, 2017, we are contractually obligated to make future payments of $68.6 million under our operating lease obligations in existence as of that date, primarily related to long-term leases. While we are in the early stages of our implementation process for FASB ASU No. 2016-02, and have not yet determined its impact on our financial position or results of operations, these leases would potentially be required to be presented on the balance sheet in accordance with the requirements of FASB ASU No. 2016-02. FASB ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. FASB ASU No. 2016-02 must be applied using a modified retrospective approach, which requires recognition and measurement of leases at the beginning of the earliest period presented, with certain practical expedients available.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. FASB ASU No. 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. We are still evaluating the impact that this guidance will have on our financial position or results of operations, and we have not yet determined whether we will early adopt FASB ASU No. 2017-12.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and transact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We generally managemonitor our exposure to these risks, through the use of derivative financial instruments. We do not enter intoand may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for trading or speculative purposes.hedge accounting treatment under Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging, which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major financial institutions of investment grade credit rating.
Interest Rate Risk
Given the leveraged nature of our company, we have exposure to changes in interest rates. From time to time, we may execute a variety of interest rate derivative instruments to manage interest rate risk. For example, in the past, we have entered into interest rate collars and interest rate caps to reduce exposure to variability in cash flows relating to interest payments on our outstanding debt. These derivatives are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging (“ASC 815”).
The significant components of our debt as of December 31, 2017 and 2016 are shown in the following tables (definitions and descriptions of all components of our debt can be foundAs discussed further in Note 8,14, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K):10-K, the credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for senior secured credit facilities consisting of a term loan facility (the "Term Loan"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
The Term Loan accrues interest at a variable rate that is currently based on LIBOR, plus an interest rate margin, in accordance with the terms of the Credit Agreement.
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| (Dollars in millions) | Maturity date | | Interest rate as of December 31, 2017 | | Outstanding balance as of December 31, 2017 (1) | | Fair value as of December 31, 2017 |
Term Loan (3) | October 14, 2021 | | 3.21 | % | | $ | 927.8 |
| | $ | 930.1 |
|
| 4.875% Senior Notes | October 15, 2023 | | 4.875 | % | | 500.0 |
| | 521.9 |
|
| 5.625% Senior Notes | November 1, 2024 | | 5.625 | % | | 400.0 |
| | 439.0 |
|
| 5.0% Senior Notes | October 1, 2025 | | 5.00 | % | | 700.0 |
| | 741.1 |
|
| 6.25% Senior Notes | February 15, 2026 | | 6.25 | % | | 750.0 |
| | 813.8 |
|
Total(2)(4) | | | | | $ | 3,277.8 |
| | $ | 3,445.9 |
|
_________________
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(1) | Outstanding balance is presented excluding discount and deferred financing costs. |
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(2) | Total outstanding balance excludes capital leases and other financing obligations of $34.7 million. |
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(3) | This component of our debt accrues interest at a variable rate calculated on the basis of a three hundred and sixty day year and actual days elapsed (which results in more interest, as applicable, being paid than if computed on the basis of a three hundred and sixty-five day year). |
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(4) | Total has been calculated based on unrounded amounts, and may not equal the sum of the rounded balances in this table. |
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| (Dollars in millions) | Interest rate as of December 31, 2016 | | Outstanding balance as of December 31, 2016 (1) | | Fair value as of December 31, 2016 |
Term loan(3) | 3.02 | % | | $ | 937.8 |
| | $ | 942.5 |
|
| 4.875% Senior Notes | 4.875 | % | | 500.0 |
| | 514.4 |
|
| 5.625% Senior Notes | 5.625 | % | | 400.0 |
| | 417.8 |
|
| 5.0% Senior Notes | 5.00 | % | | 700.0 |
| | 686.0 |
|
| 6.25% Senior Notes | 6.25 | % | | 750.0 |
| | 786.1 |
|
Total(2)(4) | | | $ | 3,287.8 |
| | $ | 3,346.7 |
|
_________________
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(1) | Outstanding balance is presented excluding discount and deferred financing costs. |
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(2) | Total outstanding balance excludes capital leases and other financing obligations of $37.1 million.
|
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(3) | This component of our debt accrues interest at a variable rate. |
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(4) | Total has been calculated based on unrounded amounts, and may not equal the sum of the rounded balances in this table. |
Sensitivity Analysis
As of December 31, 2017,2019, we had total variable rate debt with an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $927.8 million issued under$460.7 million. The applicable interest rate associated with the term loan (the “Term Loan”) provided pursuant to the eighth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement")Term Loan at December 31, 2019 was 3.59%. An increase of 100 basis points in the applicable interestthis rate would result in additional annual interest expense of $9.4$4.7 million in 2018. The nextfiscal year 2020. An additional 100 basis point increase in the applicable interestthis rate would result in incremental annual interest expense of $9.4$4.7 million in 2018.fiscal year 2020.
As of December 31, 2016,2018, we had total variable rate debt with an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $937.8 million issued under the term loan provided pursuant to the sixth amendment to the Credit Agreement. Considering the impact of our$917.8 million. The applicable interest rate floor, anassociated with the Term Loan at December 31, 2018 was 4.21%. An increase of 100 basis points in the applicable interestthis rate would have resulted in additional annual interest expense of $9.3 million. The nextmillion in fiscal year 2019. An additional 100 basis point increase in the applicable interestthis rate would have resulted in incremental annual interest expense of $9.3 million.million in fiscal year 2019.
Foreign Currency RisksRisk
We are exposed to market risk from changes in foreign currency exchange rates, which could affect operating results as well as our financial position and cash flows. We monitor our exposures to these market risks and may employ derivative financial instruments, such as swaps, collars, forwards, options, or other instruments, to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under ASC 815, which can result in volatility to earnings depending upon fluctuations in the underlying markets. Derivative financial instruments are executed solely as risk management tools and not for trading or speculative purposes.
Our significant foreign currency exposures include the Euro, Japanese yen, Mexican peso, Chinese renminbi, Korean won, Malaysian ringgit, British pound sterling, and Bulgarian lev.
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows, and variability in earnings,for non-trading purposes, we enteredenter into foreign currency exchange rate derivatives during the year ended December 31, 2017 that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. During 2017 weWe also enteredenter into foreign currency forward contracts that wereare not designated for hedge accounting purposes. In accordance with ASC 815, we recognizedRefer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the change in the fair value of these non-designated derivatives in the consolidated statement of operations.
The following foreign currency forward contracts were outstanding as of December 31, 2017:
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Notional
(in millions) | | Effective Date | | Maturity Date | | Index | | Weighted- Average Strike Rate | | Cash Flow Hedge Designation |
61.0 EUR | | December 27, 2017 | | January 31, 2018 | | Euro to U.S. Dollar Exchange Rate | | 1.19 USD | | Non-designated |
443.0 EUR | | Various from March 2016 to December 2017 | | Various from January 2018 to December 2019 | | Euro to U.S. Dollar Exchange Rate | | 1.15 USD | | Designated |
640.0 CNY | | December 26, 2017 | | January 31, 2018 | | U.S. Dollar to Chinese Renminbi Exchange Rate | | 6.57 CNY | | Non-designated |
960.0 CNY | | Various from October to December 2017 | | Various from January to December 2018 | | U.S. Dollar to Chinese Renminbi Exchange Rate | | 6.72 CNY | | Designated |
200.0 JPY | | December 27, 2017 | | January 31, 2018 | | U.S. Dollar to Japanese Yen Exchange Rate | | 112.83 JPY | | Non-designated |
40,954.5 KRW | | Various from March 2016 to December 2017 | | Various from January 2018 to November 2019 | | U.S. Dollar to Korean Won Exchange Rate | | 1,130.61 KRW | | Designated |
19.5 MYR | | Various from March to November 2016 | | Various from January to October 2018 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 4.21 MYR | | Designated |
215.0 MXN | | December 27, 2017 | | January 31, 2018 | | U.S. Dollar to Mexican Peso Exchange Rate | | 19.83 MXN | | Non-designated |
2,541.0 MXN | | Various from March 2016 to December 2017
| | Various from January 2018 to November 2019 | | U.S. Dollar to Mexican Peso Exchange Rate | | 20.25 MXN | | Designated |
35.5 GBP | | Various from March 2016 to December 2017 | | Various from January 2018 to November 2019 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.31 USD | | Designated |
The following foreign currency forward contracts were outstanding as of December 31, 2016:
|
| | | | | | | | | | |
Notional
(in millions) | | Effective Date | | Maturity Date | | Index | | Weighted- Average Strike Rate | | Cash Flow Hedge Designation |
97.7 EUR | | Various from February 2015 to December 2016 | | January 31, 2017 | | Euro to U.S. Dollar Exchange Rate | | 1.07 USD | | Non-designated |
444.9 EUR | | Various from March 2015 to December 2016 | | Various from February 2017 to December 2018 | | Euro to U.S. Dollar Exchange Rate | | 1.13 USD | | Designated |
545.0 CNY | | December 22, 2016 | | January 26, 2017 | | U.S. Dollar to Chinese Renminbi Exchange Rate
| | 7.01 CNY | | Non-designated |
720.0 JPY | | December 22, 2016 | | January 31, 2017 | | U.S. Dollar to Japanese Yen Exchange Rate | | 117.20 JPY | | Non-designated |
3,321.6 KRW | | Various from February 2015 to August 2016 | | January 31, 2017 | | U.S. Dollar to Korean Won Exchange Rate | | 1,158.87 KRW | | Non-designated |
50,239.2 KRW | | Various from March 2015 to December 2016 | | Various from February 2017 to November 2018 | | U.S. Dollar to Korean Won Exchange Rate | | 1,157.71 KRW | | Designated |
5.7 MYR | | Various from February 2015 to April 2016 | | January 31, 2017 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 4.02 MYR | | Non-designated |
81.8 MYR | | Various from March 2015 to November 2016 | | Various from February 2017 to October 2018 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 4.17 MYR | | Designated |
204.0 MXN | | Various from February 2015 to December 2016 | | January 31, 2017 | | U.S. Dollar to Mexican Peso Exchange Rate | | 18.62 MXN | | Non-designated |
2,072.7 MXN | | Various from March 2015 to December 2016 | | Various from February 2017 to December 2018 | | U.S. Dollar to Mexican Peso Exchange Rate | | 19.00 MXN | | Designated |
21.5 GBP | | Various from February 2015 to December 2016 | | January 31, 2017 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.27 USD | | Non-designated |
56.2 GBP | | Various from March 2015 to December 2016 | | Various from February 2017 to December 2018 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.40 USD | | Designated |
2019.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 20172019 and 20162018 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
| | | (Amounts in millions) | | | | (Decrease)/increase to future pre-tax earnings due to: | |
| | | Net asset (liability) balance as of December 31, 2017 | | 10% strengthening of the value of the foreign currency relative to the U.S. dollar | | 10% weakening of the value of the foreign currency relative to the U.S. dollar | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (In millions) | | Net Asset/(Liability) Balance as of December 31, 2019 | | 10% Strengthening of the Value of the Foreign Currency Relative to the United States ("U.S.") Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | (30.6 | ) | | $ | (61.5 | ) | | $ | 61.5 |
| $ | 12.6 |
| | $ | (41.2 | ) | | $ | 41.2 |
|
| Chinese Renminbi | | $ | (3.6 | ) | | $ | (24.4 | ) | | $ | 24.4 |
| $ | (0.7 | ) | | $ | (10.7 | ) | | $ | 10.7 |
|
| British Pound Sterling | | $ | 2.0 |
| | $ | 4.8 |
| | $ | (4.8 | ) | |
| Japanese Yen | | $ | 0.0 |
| | $ | 0.2 |
| | $ | (0.2 | ) | $ | 0.0 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Korean Won | | $ | (2.3 | ) | | $ | (3.9 | ) | | $ | 3.9 |
| $ | 0.3 |
| | $ | (2.1 | ) | | $ | 2.1 |
|
| Malaysian Ringgit | | $ | 0.2 |
| | $ | 0.5 |
| | $ | (0.5 | ) | $ | 0.0 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Mexican Peso | | $ | (2.6 | ) | | $ | 13.4 |
| | $ | (13.4 | ) | $ | 8.5 |
| | $ | 15.5 |
| | $ | (15.5 | ) |
| British Pound Sterling | | $ | 0.8 |
| | $ | 6.7 |
| | $ | (6.7 | ) |
| | | (Amounts in millions) | | | | (Decrease)/increase to future pre-tax earnings due to: | |
| | | Net asset (liability) balance as of December 31, 2016 | | 10% strengthening of the value of the foreign currency relative to the U.S. dollar | | 10% weakening of the value of the foreign currency relative to the U.S. dollar | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (In millions) | | Net Asset/(Liability) Balance as of December 31, 2018 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | 30.3 |
| | $ | (57.6 | ) | | $ | 57.6 |
| $ | 14.5 |
| | $ | (45.1 | ) | | $ | 45.1 |
|
| Chinese Renminbi | | $ | 0.1 |
| | $ | (7.8 | ) | | $ | 7.8 |
| $ | (0.3 | ) | | $ | (4.1 | ) | | $ | 4.1 |
|
| British Pound Sterling | | $ | (10.1 | ) | | $ | 9.6 |
| | $ | (9.6 | ) | |
| Japanese Yen | | $ | 0.0 |
| | $ | 0.6 |
| | $ | (0.6 | ) | |
| Korean Won | | $ | 1.9 |
| | $ | (4.4 | ) | | $ | 4.4 |
| $ | 0.3 |
| | $ | (2.8 | ) | | $ | 2.8 |
|
| Malaysian Ringgit | | $ | (1.8 | ) | | $ | 1.9 |
| | $ | (1.9 | ) | $ | 0.1 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Mexican Peso | | $ | (14.8 | ) | | $ | 10.6 |
| | $ | (10.6 | ) | $ | 0.7 |
| | $ | 14.2 |
| | $ | (14.2 | ) |
| British Pound Sterling | | $ | (2.6 | ) | | $ | 6.2 |
| | $ | (6.2 | ) |
Commodity Risk
We enter into forward contracts with third parties to offset a portion of our exposureare exposed to the potential change in prices associated with certain commodities including silver, gold, platinum, palladium, copper, aluminum, and nickel, used in the manufacturing of our products. The termsWe offset a portion of thesethis exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These derivativesforward contracts are not designated as accounting hedges. In accordance with ASC 815, we recognizeRefer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the change in fair valuecommodity forward contracts outstanding as of these derivatives in the consolidated statements of operations.December 31, 2019.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 20172019 and 20162018 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
|
| | | | | | | | | | | | | | |
| (Amounts in millions, except price per unit and notional amounts) | | | | Increase/(decrease) to pre-tax earnings due to |
| Commodity | | Net (liability)/asset balance as of December 31, 2017 | | Notional | | Weighted- Average Strike Price Per Unit | | Average Forward Price Per Unit as of December 31, 2017 | | Expiration | |
10% increase in the forward price | | 10% decrease in the forward price |
| Silver | | $(0.6) | | 1,117,049 troy oz. | | $17.75 | | $17.20 | | Various dates during 2018 and 2019 | | $1.9 | | $(1.9) |
| Gold | | $0.4 | | 12,200 troy oz. | | $1,288.85 | | $1,322.24 | | Various dates during 2018 and 2019 | | $1.6 | | $(1.6) |
| Nickel | | $0.3 | | 275,490 pounds | | $4.84 | | $5.83 | | Various dates during 2018 and 2019 | | $0.2 | | $(0.2) |
| Aluminum | | $0.9 | | 5,592,797 pounds | | $0.88 | | $1.04 | | Various dates during 2018 and 2019 | | $0.6 | | $(0.6) |
| Copper | | $4.4 | | 7,413,661 pounds | | $2.71 | | $3.30 | | Various dates during 2018 and 2019 | | $2.4 | | $(2.4) |
| Platinum | | $(0.3) | | 8,029 troy oz. | | $987.12 | | $943.94 | | Various dates during 2018 and 2019 | | $0.8 | | $(0.8) |
| Palladium | | $0.4 | | 1,935 troy oz. | | $819.85 | | $1,022.19 | | Various dates during 2018 and 2019 | | $0.2 | | $(0.2) |
|
| | | | | | | | | | | | | | |
| (Amounts in millions, except price per unit and notional amounts) | | | | Increase/(decrease) to pre-tax earnings due to |
| Commodity | | Net (liability)/asset balance as of December 31, 2016 | | Notional | | Weighted-
Average Strike
Price Per Unit | | Average Forward Price Per Unit as of December 31, 2016 | | Expiration | |
10% increase in the forward price | | 10% decrease in the forward price |
| Silver | | $(0.8) | | 1,069,914 troy oz. | | $17.09 | | $16.32 | | Various dates during 2017 and 2018 | | $1.7 | | $(1.7) |
| Gold | | $(0.9) | | 14,113 troy oz. | | $1,233.30 | | $1,167.90 | | Various dates during 2017 and 2018 | | $1.6 | | $(1.6) |
| Nickel | | $(0.1) | | 339,402 pounds | | $4.98 | | $4.58 | | Various dates during 2017 and 2018 | | $0.2 | | $(0.2) |
| Aluminum | | $0.1 | | 5,807,659 pounds | | $0.76 | | $0.77 | | Various dates during 2017 and 2018 | | $0.4 | | $(0.4) |
| Copper | | $1.4 | | 7,707,228 pounds | | $2.32 | | $2.51 | | Various dates during 2017 and 2018 | | $1.9 | | $(1.9) |
| Platinum | | $(0.9) | | 8,719 troy oz. | | $1,017.41 | | $911.87 | | Various dates during 2017 and 2018 | | $0.8 | | $(0.8) |
| Palladium | | $0.1 | | 1,923 troy oz. | | $641.43 | | $685.73 | | Various dates during 2017 and 2018 | | $0.1 | | $(0.1) |
|
| | | | | | | | | | | | | | | |
| | Net Asset/(Liability) Balance as of December 31, 2019 | | Average Forward Price Per Unit as of December 31, 2019 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (In millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | $ | 1.2 |
| | $ | 18.15 |
| | $ | 1.6 |
| | $ | (1.6 | ) |
| Gold | $ | 1.1 |
| | $ | 1,539.13 |
| | $ | 1.2 |
| | $ | (1.2 | ) |
| Nickel | $ | 0.0 |
| | $ | 6.41 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | $ | (0.2 | ) | | $ | 0.84 |
| | $ | 0.3 |
| | $ | (0.3 | ) |
| Copper | $ | (0.0 | ) | | $ | 2.81 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Platinum | $ | 0.6 |
| | $ | 986.68 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | $ | 0.4 |
| | $ | 1,873.95 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
|
| | | | | | | | | | | | | | | |
| | Net (Liability)/Asset Balance as of December 31, 2018 | | Average Forward Price Per Unit as of December 31, 2018 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (In millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | $ | (0.8 | ) | | $ | 15.72 |
| | $ | 1.7 |
| | $ | (1.7 | ) |
| Gold | $ | (0.0 | ) | | $ | 1,303.51 |
| | $ | 1.3 |
| | $ | (1.3 | ) |
| Nickel | $ | (0.2 | ) | | $ | 4.93 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | $ | (0.3 | ) | | $ | 0.86 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Copper | $ | (1.3 | ) | | $ | 2.71 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Platinum | $ | (0.9 | ) | | $ | 805.38 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | $ | 0.2 |
| | $ | 1,175.96 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following audited consolidated financial statements of Sensata Technologies Holding N.V.plc are included in this Annual Report on Form 10-K:
| |
| 2. | Financial Statement Schedules |
The following schedules are included elsewhere in this Annual Report on Form 10-K:
Schedule I — Condensed Financial Information of the RegistrantSchedules other than those listed above have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the audited consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Sensata Technologies Holding N.V.plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding N.V.plc (the Company) as of December 31, 20172019 and 2016, and2018, the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”"consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172019 and 2016,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 1, 201811, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
| |
| Valuation of goodwill |
| Description of the Matter | As of December 31, 2019, the Company’s goodwill balance was $3.1 billion. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. As discussed in Note 2 of the consolidated financial statements, goodwill is tested for impairment at the reporting unit level. The Company evaluated goodwill for impairment as of October 1, 2019. A quantitative goodwill impairment assessment was completed for all reporting units. |
| |
|
| |
| Auditing management’s goodwill impairment analysis was complex and judgmental due to the estimation required in determining the fair value of the reporting units. In particular, the fair value estimates included significant assumptions such as 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 which are affected by expectations about future market or economic conditions. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over management’s review of the data used in their valuation models and reviewed significant assumptions discussed above used in determining the reporting unit fair values. |
| |
| To test the estimated fair value of the Company’s reporting units, with the assistance of our valuation specialists, our audit procedures included, among others, assessing fair value methodologies and testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, the Company’s historical trends with consideration given to changes in the Company’s business, customer base or product mix and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also evaluated the reconciliation of the estimated aggregate fair value of the reporting units to the Company’s market capitalization. |
| |
| Income taxes – uncertain tax positions |
| Description of the Matter | As discussed in Note 7, at December 31, 2019, the Company had approximately $117.6 million of unrecognized tax benefits associated with uncertain tax positions. Uncertainty in a tax position may arise as tax laws are subject to interpretation. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-than-not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. |
| |
| Auditing the recognition and measurement of tax positions related to uncertain tax positions involved significant auditor judgment and use of tax professionals with specialized skills and knowledge because both the recognition and measurement of the tax positions are complex, highly judgmental and based on interpretations of tax laws and legal rulings. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to record the reserve for uncertain tax positions. For example, we tested controls over management’s evaluation of the technical merits of tax positions and identification of uncertain tax positions and the controls to measure the benefit of those tax positions, including management’s review of the inputs and calculations of unrecognized tax benefits resulting from uncertain tax positions. |
| |
| To test the amounts recorded as uncertain tax positions we involved our tax professionals to evaluate the technical merits of the Company’s tax positions. Our procedures included, among others, inspecting correspondence, assessments and settlements from the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also applied our knowledge and experience with the application of federal, foreign and state income tax laws to evaluate the Company’s accounting for those tax positions. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. We also evaluated the Company’s income tax disclosures included in Note 7 in relation to these matters. |
| |
|
| | | |
/s/ ERNSTErnst & YOUNGYoung LLP
| | | |
We have served as the Company's auditor since 20052005.
Boston, Massachusetts
February 1, 201811, 2020
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Balance Sheets
(In thousands, except per share amounts)
| | | | | | | As of December 31, |
| | December 31, 2017 | | December 31, 2016 | 2019 | | 2018 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 753,089 |
| | $ | 351,428 |
| $ | 774,119 |
| | $ | 729,833 |
|
| Accounts receivable, net of allowances of $12,947 and $11,811 as of December 31, 2017 and 2016, respectively | 556,541 |
| | 500,211 |
| |
| Accounts receivable, net of allowances of $15,129 and $13,762 as of December 31, 2019 and 2018, respectively | | 557,874 |
| | 581,769 |
|
| Inventories | 446,129 |
| | 389,844 |
| 506,678 |
| | 492,319 |
|
| Prepaid expenses and other current assets | 92,532 |
| | 100,002 |
| 126,981 |
| | 113,234 |
|
| Total current assets | 1,848,291 |
| | 1,341,485 |
| 1,965,652 |
| | 1,917,155 |
|
| Property, plant and equipment, net | 750,049 |
| | 724,046 |
| 830,998 |
| | 787,178 |
|
| Goodwill | 3,005,464 |
| | 3,005,464 |
| 3,093,598 |
| | 3,081,302 |
|
| Other intangible assets, net | 920,124 |
| | 1,075,431 |
| 770,904 |
| | 897,191 |
|
| Deferred income tax assets | 33,003 |
| | 20,695 |
| 21,150 |
| | 27,971 |
|
| Other assets | 84,594 |
| | 73,855 |
| 152,217 |
| | 86,890 |
|
| Total assets | $ | 6,641,525 |
| | $ | 6,240,976 |
| $ | 6,834,519 |
| | $ | 6,797,687 |
|
| Liabilities and shareholders’ equity | | | | | | |
| Current liabilities: | | | | | | |
| Current portion of long-term debt, capital lease and other financing obligations | $ | 15,720 |
| | $ | 14,643 |
| |
| Current portion of long-term debt, finance lease and other financing obligations | | $ | 6,918 |
| | $ | 14,561 |
|
| Accounts payable | 322,671 |
| | 299,198 |
| 376,968 |
| | 379,824 |
|
| Income taxes payable | 31,544 |
| | 23,889 |
| 35,234 |
| | 27,429 |
|
| Accrued expenses and other current liabilities | 259,560 |
| | 245,566 |
| 215,626 |
| | 218,130 |
|
| Total current liabilities | 629,495 |
| | 583,296 |
| 634,746 |
| | 639,944 |
|
| Deferred income tax liabilities | 338,228 |
| | 392,628 |
| 251,033 |
| | 225,694 |
|
| Pension and other post-retirement benefit obligations | 40,055 |
| | 34,878 |
| 36,100 |
| | 33,958 |
|
| Capital lease and other financing obligations, less current portion | 28,739 |
| | 32,369 |
| |
| Finance lease and other financing obligations, less current portion | | 28,810 |
| | 30,618 |
|
| Long-term debt, net | 3,225,810 |
| | 3,226,582 |
| 3,219,885 |
| | 3,219,762 |
|
| Other long-term liabilities | 33,572 |
| | 29,216 |
| 90,190 |
| | 39,277 |
|
| Total liabilities | 4,295,899 |
| | 4,298,969 |
| 4,260,764 |
| | 4,189,253 |
|
| Commitments and contingencies (Note 14) |
| |
| |
| Commitments and contingencies (Note 15) | |
| |
|
| Shareholders’ equity: | | | | | | |
| Ordinary shares, €0.01 nominal value per share, 400,000 shares authorized; 178,437 shares issued | 2,289 |
| | 2,289 |
| |
| Treasury shares, at cost, 7,076 and 7,557 shares as of December 31, 2017 and 2016, respectively | (288,478 | ) | | (306,505 | ) | |
| Ordinary shares, €0.01 nominal value per share, 177,069 shares authorized and 172,561 and 171,719 shares issued as of December 31, 2019 and 2018, respectively | | 2,212 |
| | 2,203 |
|
| Treasury shares, at cost, 14,733 and 7,571 shares as of December 31, 2019 and 2018, respectively | | (749,421 | ) | | (399,417 | ) |
| Additional paid-in capital | 1,663,367 |
| | 1,643,449 |
| 1,725,091 |
| | 1,691,190 |
|
| Retained earnings | 1,031,612 |
| | 636,841 |
| 1,616,357 |
| | 1,340,636 |
|
| Accumulated other comprehensive loss | (63,164 | ) | | (34,067 | ) | (20,484 | ) | | (26,178 | ) |
| Total shareholders’ equity | 2,345,626 |
| | 1,942,007 |
| 2,573,755 |
| | 2,608,434 |
|
| Total liabilities and shareholders’ equity | $ | 6,641,525 |
| | $ | 6,240,976 |
| $ | 6,834,519 |
| | $ | 6,797,687 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Operations
(In thousands, except per share amounts)
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Net revenue | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
| $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
| Operating costs and expenses: | | | | | | | | | | |
| Cost of revenue | 2,141,308 |
| | 2,084,261 |
| | 1,977,799 |
| 2,267,433 |
| | 2,266,863 |
| | 2,138,898 |
|
| Research and development | 130,204 |
| | 126,665 |
| | 123,666 |
| 148,425 |
| | 147,279 |
| | 130,127 |
|
| Selling, general and administrative | 302,811 |
| | 293,587 |
| | 271,361 |
| 281,442 |
| | 305,558 |
| | 301,896 |
|
| Amortization of intangible assets | 161,050 |
| | 201,498 |
| | 186,632 |
| 142,886 |
| | 139,326 |
| | 161,050 |
|
| Restructuring and special charges | 18,975 |
| | 4,113 |
| | 21,919 |
| |
| Restructuring and other charges, net | | 53,560 |
| | (47,818 | ) | | 18,975 |
|
| Total operating costs and expenses | 2,754,348 |
| | 2,710,124 |
| | 2,581,377 |
| 2,893,746 |
| | 2,811,208 |
| | 2,750,946 |
|
| Profit from operations | 552,385 |
| | 492,164 |
| | 393,584 |
| |
| Operating income | | 556,885 |
| | 710,419 |
| | 555,787 |
|
| Interest expense, net | (159,761 | ) | | (165,818 | ) | | (137,626 | ) | (158,554 | ) | | (153,679 | ) | | (159,761 | ) |
| Other, net | 9,817 |
| | (4,901 | ) | | (50,329 | ) | (7,908 | ) | | (30,365 | ) | | 6,415 |
|
| Income before taxes | 402,441 |
| | 321,445 |
| | 205,629 |
| 390,423 |
| | 526,375 |
| | 402,441 |
|
| (Benefit from)/provision for income taxes | (5,916 | ) | | 59,011 |
| | (142,067 | ) | |
| Provision for/(benefit from) income taxes | | 107,709 |
| | (72,620 | ) | | (5,916 | ) |
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Basic net income per share | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
| $ | 1.76 |
| | $ | 3.55 |
| | $ | 2.39 |
|
| Diluted net income per share | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
| $ | 1.75 |
| | $ | 3.53 |
| | $ | 2.37 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Other comprehensive loss, net of tax: | | | | | | |
| Deferred loss on derivative instruments, net of reclassifications | (28,202 | ) | | (3,829 | ) | | (13,726 | ) | |
| Other comprehensive income/(loss), net of tax: | | | | | | |
| Cash flow hedges | | 7,362 |
| | 37,363 |
| | (28,202 | ) |
| Defined benefit and retiree healthcare plans | (895 | ) | | (4,248 | ) | | (516 | ) | (1,668 | ) | | (377 | ) | | (895 | ) |
| Other comprehensive loss | (29,097 | ) | | (8,077 | ) | | (14,242 | ) | |
| Other comprehensive income/(loss) | | 5,694 |
| | 36,986 |
| | (29,097 | ) |
| Comprehensive income | $ | 379,260 |
| | $ | 254,357 |
| | $ | 333,454 |
| $ | 288,408 |
| | $ | 635,981 |
| | $ | 379,260 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Cash Flows
(In thousands)
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation | 109,321 |
| | 106,903 |
| | 96,051 |
| 115,862 |
| | 106,014 |
| | 109,321 |
|
| Amortization of deferred financing costs and debt discounts | 7,241 |
| | 7,334 |
| | 6,456 |
| |
| Gain on sale of assets | (1,180 | ) | | — |
| | — |
| |
| Amortization of debt issuance costs | | 7,804 |
| | 7,317 |
| | 7,241 |
|
| Gain on sale of business | | — |
| | (64,423 | ) | | — |
|
| Share-based compensation | 19,819 |
| | 17,425 |
| | 15,326 |
| 18,757 |
| | 23,825 |
| | 19,819 |
|
| Loss on debt financing | 2,670 |
| | — |
| | 34,335 |
| 4,364 |
| | 2,350 |
| | 2,670 |
|
| Amortization of inventory step-up to fair value | — |
| | 2,319 |
| | 1,820 |
| |
| Amortization of intangible assets | 161,050 |
| | 201,498 |
| | 186,632 |
| 142,886 |
| | 139,326 |
| | 161,050 |
|
| Deferred income taxes | (56,757 | ) | | 8,344 |
| | (179,009 | ) | 27,623 |
| | (144,068 | ) | | (56,757 | ) |
| Unrealized loss/(gain) on hedges and other non-cash items | 1,961 |
| | 9,198 |
| | (590 | ) | |
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | |
| Unrealized loss on derivative instruments and other | | 30,292 |
| | 18,176 |
| | 781 |
|
| Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | | |
| Accounts receivable, net | (56,330 | ) | | (33,013 | ) | | 18,618 |
| 26,605 |
| | (34,877 | ) | | (56,330 | ) |
| Inventories | (57,119 | ) | | (37,500 | ) | | 40,526 |
| (10,924 | ) | | (55,445 | ) | | (57,119 | ) |
| Prepaid expenses and other current assets | (12,412 | ) | | 6,956 |
| | (9,857 | ) | 10,073 |
| | (11,891 | ) | | (12,412 | ) |
| Accounts payable and accrued expenses | 23,841 |
| | (21,432 | ) | | (38,034 | ) | (34,563 | ) | | 48,371 |
| | 23,841 |
|
| Income taxes payable | 7,655 |
| | (1,938 | ) | | 14,452 |
| 2,308 |
| | (353 | ) | | 7,655 |
|
| Other | (471 | ) | | (7,003 | ) | | (1,291 | ) | (4,239 | ) | | (12,754 | ) | | (471 | ) |
| Net cash provided by operating activities | 557,646 |
| | 521,525 |
| | 533,131 |
| 619,562 |
| | 620,563 |
| | 557,646 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Acquisition of CST, net of cash received | — |
| | 4,688 |
| | (996,871 | ) | |
| Acquisition of Schrader, net of cash received | — |
| | — |
| | (958 | ) | |
| Other acquisitions, net of cash received | — |
| | — |
| | 3,881 |
| |
| Acquisitions, net of cash received | | (32,465 | ) | | (228,307 | ) | | — |
|
| Additions to property, plant and equipment and capitalized software | (144,584 | ) | | (130,217 | ) | | (177,196 | ) | (161,259 | ) | | (159,787 | ) | | (144,584 | ) |
| Investment in equity securities | — |
| | (50,000 | ) | | — |
| |
| Proceeds from sale of assets | 8,862 |
| | 751 |
| | 4,775 |
| |
| Investment in debt and equity securities | | (9,950 | ) | | — |
| | — |
|
| Proceeds from sale of business, net of cash sold | | — |
| | 149,777 |
| | — |
|
| Other | (5,000 | ) | | — |
| | — |
| (5,103 | ) | | 711 |
| | 3,862 |
|
| Net cash used in investing activities | (140,722 | ) | | (174,778 | ) | | (1,166,369 | ) | (208,777 | ) | | (237,606 | ) | | (140,722 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 7,450 |
| | 3,944 |
| | 19,411 |
| 15,150 |
| | 6,093 |
| | 7,450 |
|
| Payment of employee restricted stock tax withholdings | | (6,990 | ) | | (3,674 | ) | | (2,910 | ) |
| Proceeds from issuance of debt | 927,794 |
| | — |
| | 2,795,120 |
| 450,000 |
| | — |
| | 927,794 |
|
| Payments on debt | (943,554 | ) | | (336,256 | ) | | (2,000,257 | ) | (464,605 | ) | | (15,653 | ) | | (943,554 | ) |
| Payments to repurchase ordinary shares | (2,910 | ) | | (4,752 | ) | | (50 | ) | (350,004 | ) | | (399,417 | ) | | — |
|
| Payments of debt issuance cost | (919 | ) | | (518 | ) | | (50,052 | ) | |
| Payments of debt and equity issuance costs | | (10,050 | ) | | (9,931 | ) | | (4,043 | ) |
| Other | (3,124 | ) | | — |
| | — |
| — |
| | 16,369 |
| | — |
|
| Net cash (used in)/provided by financing activities | (15,263 | ) | | (337,582 | ) | | 764,172 |
| |
| Net cash used in financing activities | | (366,499 | ) | | (406,213 | ) | | (15,263 | ) |
| Net change in cash and cash equivalents | 401,661 |
| | 9,165 |
| | 130,934 |
| 44,286 |
| | (23,256 | ) | | 401,661 |
|
| Cash and cash equivalents, beginning of year | 351,428 |
| | 342,263 |
| | 211,329 |
| 729,833 |
| | 753,089 |
| | 351,428 |
|
| Cash and cash equivalents, end of year | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
| $ | 774,119 |
| �� | $ | 729,833 |
| | $ | 753,089 |
|
| Supplemental cash flow items: | | | | | | | | | | |
| Cash paid for interest | $ | 164,370 |
| | $ | 155,925 |
| | $ | 125,370 |
| $ | 169,543 |
| | $ | 163,478 |
| | $ | 164,370 |
|
| Cash paid for income taxes | $ | 48,482 |
| | $ | 43,152 |
| | $ | 41,301 |
| $ | 61,031 |
| | $ | 72,924 |
| | $ | 48,482 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
| | | | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Share-
holders’
Equity | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Shareholders’
Equity |
| | Number |
| Amount |
| Number |
| Amount |
| Number |
| Amount |
| Number |
| Amount |
|
| Balance as of December 31, 2014 | 178,437 |
| | $ | 2,289 |
| | (9,120 | ) | | $ | (365,272 | ) | | $ | 1,610,390 |
| | $ | 67,233 |
| | $ | (11,748 | ) | | $ | 1,302,892 |
| |
| Issuance of ordinary shares for employee stock plans | — |
| | — |
| | 5 |
| | 195 |
| | 72 |
| | — |
| | — |
| | 267 |
| |
| Surrender of shares for tax withholding | — |
| | — |
| | (54 | ) | | (2,507 | ) | | — |
| | — |
| | — |
| | (2,507 | ) | |
| Stock options exercised | — |
| | — |
| | 1,016 |
| | 38,199 |
| | 236 |
| | (19,291 | ) | | — |
| | 19,144 |
| |
| Vesting of restricted securities | — |
| | — |
| | 115 |
| | 4,391 |
| | — |
| | (4,391 | ) | | — |
| | — |
| |
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 15,326 |
| | — |
| | — |
| | 15,326 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 347,696 |
| | — |
| | 347,696 |
| |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,242 | ) | | (14,242 | ) | |
| Balance as of December 31, 2015 | 178,437 |
| | $ | 2,289 |
| | (8,038 | ) | | $ | (324,994 | ) |
| $ | 1,626,024 |
| | $ | 391,247 |
| | $ | (25,990 | ) | | $ | 1,668,576 |
| |
| Surrender of shares for tax withholding | — |
| | — |
| | (62 | ) | | (2,295 | ) |
| — |
| | — |
| | — |
| | (2,295 | ) | |
| Stock options exercised | — |
| | — |
| | 358 |
| | 13,698 |
|
| — |
| | (9,754 | ) | | — |
| | 3,944 |
| |
| Vesting of restricted securities | — |
| | — |
| | 185 |
| | 7,086 |
|
| — |
| | (7,086 | ) | | — |
| | — |
| |
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 17,425 |
| | — |
| | — |
| | 17,425 |
| |
| Net income | — |
| | — |
| | — |
| | — |
|
| — |
| | 262,434 |
| | — |
| | 262,434 |
| |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
|
| — |
| | — |
| | (8,077 | ) | | (8,077 | ) | |
| Balance as of December 31, 2016 | 178,437 |
| | $ | 2,289 |
| | (7,557 | ) | | $ | (306,505 | ) |
| $ | 1,643,449 |
| | $ | 636,841 |
| | $ | (34,067 | ) | | $ | 1,942,007 |
| 178,437 |
| | $ | 2,289 |
| | (7,557 | ) | | $ | (306,505 | ) |
| $ | 1,643,449 |
| | $ | 636,841 |
| | $ | (34,067 | ) | | $ | 1,942,007 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (67 | ) | | (2,910 | ) | | — |
| | — |
| | — |
| | (2,910 | ) | — |
| | — |
| | (67 | ) | | (2,910 | ) |
| — |
| | — |
| | — |
| | (2,910 | ) |
| Stock options exercised | — |
| | — |
| | 326 |
| | 12,465 |
| | 99 |
| | (5,114 | ) | | — |
| | 7,450 |
| — |
| | — |
| | 326 |
| | 12,465 |
|
| 99 |
| | (5,114 | ) | | — |
| | 7,450 |
|
| Vesting of restricted securities | — |
| | — |
| | 222 |
| | 8,472 |
| | — |
| | (8,472 | ) | | — |
| | — |
| — |
| | — |
| | 222 |
| | 8,472 |
|
| — |
| | (8,472 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
| — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 408,357 |
| | — |
| | 408,357 |
| — |
| | — |
| | — |
| | — |
|
| — |
| | 408,357 |
| | — |
| | 408,357 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (29,097 | ) | | (29,097 | ) | — |
| | — |
| | — |
| | — |
|
| — |
| �� | — |
| | (29,097 | ) | | (29,097 | ) |
| Balance as of December 31, 2017 | 178,437 |
| | $ | 2,289 |
| | (7,076 | ) | | $ | (288,478 | ) | | $ | 1,663,367 |
| | $ | 1,031,612 |
| | $ | (63,164 | ) | | $ | 2,345,626 |
| 178,437 |
| | 2,289 |
| | (7,076 | ) | | (288,478 | ) |
| 1,663,367 |
| | 1,031,612 |
| | (63,164 | ) | | 2,345,626 |
|
| Surrender of shares for tax withholding | | — |
| | — |
| | (71 | ) | | (3,674 | ) | | — |
| | — |
| | — |
| | (3,674 | ) |
| Stock options exercised | | 114 |
| | 1 |
| | 58 |
| | 2,250 |
| | 3,998 |
| | (156 | ) | | — |
| | 6,093 |
|
| Vesting of restricted securities | | 257 |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Retirement of ordinary shares due to Merger | | (7,018 | ) | | (89 | ) | | 7,018 |
| | 286,228 |
| | — |
| | (286,139 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | | — |
| | — |
| | (7,571 | ) | | (399,417 | ) | | — |
| | — |
| | — |
| | (399,417 | ) |
| Other retirements of ordinary shares | | (71 | ) | | (1 | ) | | 71 |
| | 3,674 |
| | — |
| | (3,673 | ) | | — |
| | — |
|
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 23,825 |
| | — |
| | — |
| | 23,825 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 598,995 |
| | — |
| | 598,995 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,986 |
| | 36,986 |
|
| Balance as of December 31, 2018 | | 171,719 |
| | 2,203 |
| | (7,571 | ) | | (399,417 | ) | | 1,691,190 |
| | 1,340,636 |
| | (26,178 | ) | | 2,608,434 |
|
| Surrender of shares for tax withholding | | — |
| | — |
| | (149 | ) | | (6,990 | ) | | — |
| | — |
| | — |
| | (6,990 | ) |
| Stock options exercised | | 537 |
| | 6 |
| | — |
| | — |
| | 15,144 |
| | — |
| | — |
| | 15,150 |
|
| Vesting of restricted securities | | 454 |
| | 5 |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | | — |
| | — |
| | (7,162 | ) | | (350,004 | ) | | — |
| | — |
| | — |
| | (350,004 | ) |
| Retirement of ordinary shares | | (149 | ) | | (2 | ) | | 149 |
| | 6,990 |
| | — |
| | (6,988 | ) | | — |
| | — |
|
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 18,757 |
| | — |
| | — |
| | 18,757 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 282,714 |
| | — |
| | 282,714 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,694 |
| | 5,694 |
|
| Balance as of December 31, 2019 | | 172,561 |
| | $ | 2,212 |
| | (14,733 | ) | | $ | (749,421 | ) | | $ | 1,725,091 |
| | $ | 1,616,357 |
| | $ | (20,484 | ) | | $ | 2,573,755 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts, or unless otherwise noted)
1. Business Description and Basis of Presentation
Description of Business
The accompanying audited consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding N.V.plc ("Sensata N.V."plc"), a public limited company incorporated under the laws of England and Wales, and its wholly-owned subsidiaries, collectively referred to as the “Company,” “Sensata,” “we,” “our,” or “us.”"Company," "Sensata," "we," "our," and "us."
Prior to March 28, 2018, our parent company issuer was Sensata Technologies Holding N.V. ("Sensata N.V. is"), which was incorporated under the laws of the Netherlands. On March 28, 2018, Sensata plc completed a cross-border merger (the "Merger") with Sensata N.V., which changed the location of our incorporation from the Netherlands to England and Wales, but did not change the business being conducted by us or our subsidiaries.
We are a global industrial technology company that develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and end users. Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Sensata plc conducts its operations through subsidiary companies that operate business and product development centers primarily in the United States (the "U.S."), the Netherlands, Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, and the United Kingdom (the "U.K."), and the United States (the "U.S."); and manufacturing operations primarily in Bulgaria, China, Malaysia, Mexico, Bulgaria, France, Germany, the U.K., and the U.S.
We organize our operations into two businesses,operate in, and report financial information for, the following 2 segments: Performance Sensing and Sensing Solutions.
On September 28, 2017, the board Refer to Note 20, "Segment Reporting," for additional information related to each of directors of Sensata N.V. unanimously approved a plan to change our parent company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V. are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being the surviving entity (the “Merger”).
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
Our Performance Sensing business is a manufacturer of pressure sensors, speed and position sensors, temperature sensors, and pressure switches used in subsystems of automobiles (e.g., powertrain, air conditioning, tire pressure monitoring, and ride stabilization) and heavy vehicle off-road ("HVOR"). These products help improve operating performance, for example, by making an automobile's heating and air conditioning systems work more efficiently, thereby improving gas mileage. These products are also used in systems that address environmental or safety concerns, for example, by reducing vehicle emissions or improving the stability control of the vehicle.
Our Sensing Solutions business is a manufacturer of various control products used in industrial, aerospace, military, commercial, medical device, and residential markets, and sensor products used in aerospace and industrial applications such as heating, ventilation, and air conditioning ("HVAC") systems and military and commercial aircraft. These products include motor and compressor protectors, motor starters, temperature sensors and switches/thermostats, pressure sensors and switches, electronic HVAC sensors and controls, charge controllers, solid state relays, linear and rotary position sensors, circuit breakers, and semiconductor burn-in test sockets. These products help prevent damage from overheating and fires in a wide variety of applications, including commercial HVAC systems, refrigerators, aircraft, lighting, and other industrial applications, and help optimize performance by using sensors which provide feedback to control systems. The Sensing Solutions business also manufactures direct current ("DC") to alternating current ("AC") power inverters, which enable the operation of electronic equipment when grid power is not available.segments.
Basis of Presentation
The accompanying audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“("U.S. GAAP”GAAP"). The accompanying consolidated financial statements and present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated.
All U.S. dollar ("USD") and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated.
Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowancesallowance for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets), contingencies, the value of certain equity awards and the measurement of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of plant and equipment, measurement of our post-retirement benefit obligations, and the accounting foridentification, valuation, and determination of useful lives of identifiable intangible assets acquired in business combinations. The accounting estimates used in the preparation of the
consolidated financial statements willmay change as new events occur, as more experience is acquired, as additional information is obtained, and/orand as the operating environment changes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash comprises cash on hand. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of change in value, and have original maturities of three months or less.
Revenue Recognition
The following discussion of our revenue recognition accounting policies is based on the accounting principles that were used to prepare the fiscal year 2017 consolidated financial statements included in this Annual Report on Form 10-K. On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements.
We recognize revenue to depict the transfer of promised goods to customers in accordance withan amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605, 606, Revenue Recognition ("from Contracts with Customers. This five step model requires us to identify the contract with the customer, identify the performance obligation(s) in the contract, determine the transaction price, allocate the transaction price to the performance obligation(s), and recognize revenue when (or as) we satisfy the performance obligation(s).
The vast majority of our contracts (as defined in FASB ASC 605"). RevenueTopic 606) are customer purchase orders ("POs" and each, a "PO") that require us to transfer specified quantities of tangible products to our customers. These performance obligations are generally satisfied within a short period of time. Amounts billed to our customers for shipping and handling after control has transferred are recognized as revenue and the related costs that we incur are presented in cost of revenue.
In determining the transaction price, we evaluate whether the consideration promised in the contract includes a variable amount and, if applicable, we include in the transaction price some or all of an amount of variable consideration only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may be explicitly stated in the contract or implied based on our customary practices. Examples of variable consideration present in our contracts include rights of return, in the case of a defective or non-conforming product, and trade discounts, including early payment discounts and retrospective volume discounts. Such variable consideration has not historically been material in relation to our net revenue.
Our contract terms generally require the customer to make payment shortly after (that is, less than one year) the shipment date. In such instances, we do not consider the effects of a significant financing component in determining the transaction price. Lastly, we exclude from product salesour determination of the transaction price value-added tax and other similar taxes.
Our performance obligations are satisfied, and revenue is recognized, when control of the significant risks and rewards of ownership have beenproduct is transferred title to the product and riskcustomer. The transfer of loss transfers to our customer, and collection of sales proceeds is reasonably assured. Based on these criteria, revenue iscontrol generally recognized whenoccurs at the point in time the product is shipped from our warehouse or, less often, at the point in limited instances, whentime it is received by the customer, depending on the specific terms of the arrangement. Product sales are recorded net of trade discounts (including volume and early payment incentives), sales returns, value-added tax, and similar taxes. Amounts billed to our customers for shipping and handling are recorded in revenue. Shipping and handling costs are included in cost of revenue. Sales to customers generally include a right of return for defective or non-conforming product. Sales returns have not historically been significant in relation to our net revenue and have been within our estimates.
Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer PO, and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606. Depending on the product, we generally provide such warranties for a period of twelve to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit. We do not offer separately priced extended warranty or product maintenance contracts.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.
Refer to Note 3, "Revenue Recognition," for additional information related to the net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), requires that a companyWe measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units,securities, and recognize as compensation expense that fair value over the requisite service period.period as required in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. Share-based compensation expense is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where
the related employee costs are presented, however, such costs, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation expense associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. For awards without performance conditions that are subject to graded vesting, companies have the option to recognize compensation expense either on a straight-line or accelerated basis. We have elected to recognize compensation expense for these awards on a straight-line basis. However, awards that are subject to both graded vesting and performance conditions must be expensed on an accelerated basis.
We estimate the fair value of options on the grant date of grant using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in estimating the grant-date fair value of these optionsthis model are as follows: the
The fair value of the underlying ordinary shares, expected term, expected volatility, risk-free interest rate, and expected dividend yield. Significant factors used in determining these assumptions are detailed below.
We useshares. This is determined as the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the date of the grant as the fair value of ordinary shares in the Black-Scholes-Merton option-pricing model.
date.
The expected termterm. This is determined by comparing the termsbased upon our own historical average term of our options granted against those of publicly-traded companies within our industry.exercised and outstanding options.
Expected volatility. We consider our own historical volatility, as well as the historical andour implied volatilities of publicly-traded companies within our industry,volatility, in estimating expected volatility for stock options. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility.
Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in this Annual Report on Form 10-K for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the date of the grant.grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessmentCompensation expense is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation cost is recordedrecognized if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore,forfeitures. Accordingly, we only recognize compensation costexpense for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Share-based compensation expense is generally recognized as a component of Selling, general and administrative (“SG&A”) expense, which is consistent with where the related employee costs are recorded. Refer to further discussion of share-based payments in Note 11,4, "Share-Based Payment Plans.Plans," for additional information related to share-based compensation.
FinancialDebt Instruments
Derivative financial instruments: We maintain derivative financial instruments with major financial institutions of investment grade credit rating and monitor the amount of credit exposure to any one issuer. We believe there are no significant concentrations of risk associated with our derivative financial instruments.
We account for our derivative financial instruments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) and with ASC Topic 815, Derivatives and Hedging (“ASC 815”). In accordance with ASC 815, we record all derivatives on the balance sheet at fair value. The accounting for the change in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative as a hedging instrument for accounting purposes, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In addition, ASC 815 provides that, for derivative instruments that qualify for hedge accounting, changes in the fair value are either (a) offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or (b) recognized in equity until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. We do not use derivative financial instruments for trading or speculative purposes.
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar. We enter into forward contracts for certain foreign currencies, including the Euro, Japanese yen, Mexican peso, Chinese renminbi, Korean won, Malaysian ringgit, and British pound sterling. The fair value of foreign currency forward contracts is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. These analyses utilize observable market-based inputs, including foreign currency exchange rates, and reflect the contractual terms of these instruments, including the period to maturity. Certain of these contracts have not been designated as accounting hedges, and in accordance with ASC 815, we recognize the changes in the fair value of these contracts in the consolidated statements of operations. The specific contractual terms utilized as inputs in determining fair value, and a discussion of the nature of the risks being mitigated by these instruments, are detailed in Note 16, “Derivative Instruments and Hedging Activities,” under the caption Hedges of Foreign Currency Risk.
We enter into forward contracts for certain commodities, including silver, gold, nickel, aluminum, copper, platinum, and palladium used in the manufacturing of our products. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. The fair value of our commodity forward contracts is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each
instrument. These analyses utilize observable market-based inputs, including commodity forward curves, and reflect the contractual terms of these instruments, including the period to maturity. These contracts have not been designated as accounting hedges. In accordance with ASC 815, we recognize changes in the fair values of these contracts in the consolidated statements of operations. The specific contractual terms utilized as inputs in determining fair value, and a discussion of the nature of the risks being mitigated by these instruments, are detailed in Note 16, “Derivative Instruments and Hedging Activities,” under the caption Hedges of Commodity Risk.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
We report cash flows arising from our derivative financial instruments consistent with the classification of cash flows from the underlying hedged items.
Refer to Note 16, "Derivative Instruments and Hedging Activities,14, "Debt," of our Financial Statements for further discussion on derivative instruments.
Trade accounts receivable: Trade accounts receivable are recorded at invoiced amounts and do not bear interest. Trade accounts receivable are reduced by an allowance for losses on receivables, as described elsewhere in this Note. Concentrations of risk with respect to trade accounts receivable are generally limited dueadditional information related to the large number of customers in various industries and their dispersion across several geographic areas. Although we do not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of these individual customers. Our largest customer accounted for approximately 8%terms of our Net revenuedebt instruments.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. In addition, the Senior Secured Credit Facilities provide for the Accordion, under which additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased. Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the "Senior Notes Indentures"). As of December 31, 2019, availability under the Accordion was approximately $1.0 billion.
We believe, based on our current level of operations as reflected in our results of operations for the year ended December 31, 20172019, and taking into consideration the restrictions and covenants discussed below and in Note 14, "Debt," of our Financial Statements, that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay 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 ended December 31, 2019.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of Sensata Technologies B.V. ("STBV") and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit
metrics such as interest coverage and leverage ratios. As of January 31, 2020, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs, but will not reduce availability under the Credit Agreement.
The Credit Agreement and the the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14, "Debt," of our Financial Statements) that limit the ability of STBV and 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 in establishing our share repurchase programs, and are evaluated periodically with respect to future potential funding. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations, should we decide to do so. As of December 31, 2019, 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. 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. The authorized amount of our various share repurchase programs may be modified or terminated by our Board of Directors at any time.
During the year ended December 31, 2019, we repurchased ordinary shares under a $250.0 million share repurchase program authorized by our Board of Directors in October 2018 (the "October 2018 Program") and a $500.0 million share repurchase program authorized by our Board of Directors in July 2019 (the "July 2019 Program"). We repurchased approximately 7.2 million ordinary shares at a weighted-average price of $48.87 per share under these programs. The October 2018 Program was terminated upon commencement of the July 2019 Program.
During the year ended December 31, 2018, we repurchased approximately 7.6 million ordinary shares at a weighted-average price of $52.75 per share under a $400.0 million share repurchase program authorized by our Board of Directors in May 2018.
Contractual Obligations and Commercial Commitments
The table below reflects our contractual obligations as of December 31, 2019. Amounts we pay in future periods may vary from those reflected in the table. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | Less than One Year | | One to Three Years | | Three to Five Years | | More than Five Years |
Debt obligations principal(1) | $ | 3,260.7 |
| | $ | 4.6 |
| | $ | 9.3 |
| | $ | 909.3 |
| | $ | 2,337.6 |
|
Debt obligations interest(2) | 1,040.7 |
| | 164.7 |
| | 328.4 |
| | 304.8 |
| | 242.8 |
|
Finance lease obligations principal(3) | 30.6 |
| | 2.0 |
| | 3.0 |
| | 3.3 |
| | 22.4 |
|
Finance lease obligations interest(3) | 21.7 |
| | 2.6 |
| | 4.8 |
| | 4.3 |
| | 10.1 |
|
Other financing obligations principal(4) | 0.5 |
| | 0.4 |
| | 0.2 |
| | — |
| | — |
|
Other financing obligations interest(4) | 0.1 |
| | 0.1 |
| | 0.0 |
| | — |
| | — |
|
Operating lease obligations(5) | 74.0 |
| | 14.8 |
| | 20.1 |
| | 14.5 |
| | 24.5 |
|
Non-cancelable purchase obligations(6) | 61.5 |
| | 26.6 |
| | 29.4 |
| | 5.2 |
| | 0.3 |
|
Total contractual obligations(7)(8) | $ | 4,489.8 |
| | $ | 215.8 |
| | $ | 395.2 |
| | $ | 1,241.4 |
| | $ | 2,637.7 |
|
| |
(1) | Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2019. |
| |
(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2019. Cash flows associated with the next interest payment to be made on our |
variable rate debt subsequent to December 31, 2019 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2019, plus the applicable spread.
| |
(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our finance lease obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these financing arrangements beyond their current terms. |
| |
(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms. |
| |
(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the USD to local currency exchange rates in effect as of December 31, 2019. |
| |
(8) | This table does not include the contractual obligations associated with our pension and other post-retirement benefit plans. As of December 31, 2019, we had recognized a net benefit liability of $36.5 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional information related to our pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $26.0 million of unrecognized tax benefits as of December 31, 2019, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing and the ultimate resolution of the examination is uncertain. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information related to our unrecognized tax benefits. |
Critical Accounting Policies and Estimates
As discussed in Note 2, "Significant Accounting Policies," of our Financial Statements, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in accordance with U.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. We adopted FASB ASC Topic 606 on January 1, 2018. Periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance, including FASB ASC Topic 605, Revenue Recognition. The adoption of FASB ASC Topic 606 did not have a material effect on our financial position or results of operations, and no cumulative catch-up adjustment was recognized.
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 ("PO") 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 POs. 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 PO, in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material. However, should our judgments and estimates regarding variable consideration change, it could result in a material change to the amount of net revenue recognized in a period.
Goodwill, and Other Intangible Assets, and Long-Lived Assets
Businesses acquired are recordedrecognized at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. In accordance with the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other("ASC 350"), goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could 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.
Goodwill: Historically, we had identified fiveIdentification of reporting units. In connection with the 2017 review of those reporting units, we determined that the portion of the Power Management reporting unit that serves the aerospace end market should be reallocated into a separate reporting unit. As a result, we nowWe have identified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, Industrial Sensing, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated. As businesses are acquired, we assign them to an existing reporting unit or create a new reporting unit. Goodwill is assigned
Assignment of assets, liabilities, and goodwill to reporting units. Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units as of the date of the related acquisition.based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from year to year. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipmentPP&E associated with our corporate offices, and debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit.
Evaluation of goodwill for impairment. We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the two-step goodwill impairment test.
In the first step of the two-step goodwill impairment test,quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination at the date
of assessment, and the fair value of the reporting unit was the purchase price.price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill.
We evaluated the goodwill of each reporting unit for impairment as of October 1, 2019. All reporting units 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 cash flows for each reporting unit for the subsequent five fiscal years (the "Discrete Projection Period"). We estimated the value of the cash flows beyond the fifth fiscal year (the "Terminal Year"), by applying a multiple to the projected Terminal Year net earnings before interest, taxes, depreciation, and amortization. The 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 cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices.
The preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the discount rates, and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Types of events that could result in a goodwill impairment. As noted above, the assumptions used in the quantitative calculation of the fair value of our reporting units, is considered a level 3 fair value measurement.
We used a combinationincluding the long-range forecasts, the selection of the qualitativediscount rates, and quantitative methodsthe estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to assessthese 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.
However, we do not consider any of our reporting units to be at risk of failing Step 1 of the goodwill impairment test.
Evaluation of other intangible assets for impairment as of October 1, 2017.
Indefinite-lived intangible assets: Weassets. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review that requires us toin which we estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value. We
In performing the quantitative impairment review, we estimate the fair value by using the relief-from-royalty method, in which requires us towe make assumptions about future conditions impacting the fair value of theour indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
We evaluated our indefinite-lived intangible assets for impairment as of October 1, 2019 (using the quantitative method) and determined that the estimated fair values of these assets exceeded their carrying values at that date. Should certain assumptions used in the development of the fair values of our indefinite-lived intangible assets change, we may be required to recognize an impairment charge in the future.
Definite-lived intangible assets: Definite-lived intangible assets are amortized over the estimated useful life of the asset, using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are consumed. If that pattern cannot be reliably determined, then we amortize the intangible asset using the straight-line method. Capitalized software is amortized on a straight-line basis over its estimated useful life. Capitalized software licenses are amortized on a straight-line basis over the lesser of the term of the license, or the estimated useful life of the software.
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 thesethat 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 the assets,an asset, the impairment charge is based onmeasured as the excess of the carrying value over the fair value of those assets.that asset. We determine fair value by using the appropriate income approach valuation methodology depending on the nature of the 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 cash flows from long-lived assets to determine whether the carrying values of such assets are recoverable over the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of the end markets we serve. If an asset is determined to be impaired, the impairment is the amount by which its carrying value exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management judgment is required in determining various elements of our provision for 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/(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 positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations in various jurisdictions. Significant judgment is required in considering the relative impact of these items along with the weight that should be given to each category. 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 benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date, and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations take into consideration various actuarial assumptions including future compensation levels 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 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 a U.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 declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. Refer to Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity 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.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore, only recognize compensation 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.
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the divestiture of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Refer to Note 5, "Goodwill15, "Commitments and Other Intangible Assets,Contingencies," of our Financial Statements for additional information related to our off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently issued accounting standards adopted in the current period:
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. We adopted the provisions of FASB ASU No. 2016-02 on January 1, 2019 using the modified retrospective transition method. Refer to Note 2, "Significant Accounting Policies" and Note 21, "Leases," each of our Financial Statements, for additional information related to this adoption. We do not expect adoption of FASB ASU No. 2016-02 to have a material impact on our future results of operations.
No other recently issued accounting standards adopted in the current period had a material impact on our consolidated financial position or results of operations, and we do not believe they are reasonably likely to have a material effect on our future consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
There are no recently issued accounting standards to be adopted in future periods that are expected to have a material impact on our consolidated financial position or results of operations.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in foreign currency exchange rates because we transact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We monitor our exposure to these risks, and may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging, which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major financial institutions of investment grade credit rating.
Interest Rate Risk
As discussed further in Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K, the credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for senior secured credit facilities consisting of a term loan facility (the "Term Loan"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
The Term Loan accrues interest at a variable rate that is currently based on LIBOR, plus an interest rate margin, in accordance with the terms of the Credit Agreement.
Sensitivity Analysis
As of December 31, 2019, we had an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $460.7 million. The applicable interest rate associated with the Term Loan at December 31, 2019 was 3.59%. An increase of 100 basis points in this rate would result in additional interest expense of $4.7 million in fiscal year 2020. An additional 100 basis point increase in this rate would result in incremental interest expense of $4.7 million in fiscal year 2020.
As of December 31, 2018, we had an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $917.8 million. The applicable interest rate associated with the Term Loan at December 31, 2018 was 4.21%. An increase of 100 basis points in this rate would have resulted in additional interest expense of $9.3 million in fiscal year 2019. An additional 100 basis point increase in this rate would have resulted in incremental interest expense of $9.3 million in fiscal year 2019.
Foreign Currency Risk
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows, and for non-trading purposes, we enter into foreign currency exchange rate derivatives that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also enter into foreign currency forward contracts that are not designated for hedge accounting purposes. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the foreign currency forward contracts outstanding as of December 31, 2019.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2019 and 2018 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
|
| | | | | | | | | | | |
| | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (In millions) | Net Asset/(Liability) Balance as of December 31, 2019 | | 10% Strengthening of the Value of the Foreign Currency Relative to the United States ("U.S.") Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | $ | 12.6 |
| | $ | (41.2 | ) | | $ | 41.2 |
|
| Chinese Renminbi | $ | (0.7 | ) | | $ | (10.7 | ) | | $ | 10.7 |
|
| Japanese Yen | $ | 0.0 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Korean Won | $ | 0.3 |
| | $ | (2.1 | ) | | $ | 2.1 |
|
| Malaysian Ringgit | $ | 0.0 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Mexican Peso | $ | 8.5 |
| | $ | 15.5 |
| | $ | (15.5 | ) |
| British Pound Sterling | $ | 0.8 |
| | $ | 6.7 |
| | $ | (6.7 | ) |
|
| | | | | | | | | | | |
| | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (In millions) | Net Asset/(Liability) Balance as of December 31, 2018 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | $ | 14.5 |
| | $ | (45.1 | ) | | $ | 45.1 |
|
| Chinese Renminbi | $ | (0.3 | ) | | $ | (4.1 | ) | | $ | 4.1 |
|
| Korean Won | $ | 0.3 |
| | $ | (2.8 | ) | | $ | 2.8 |
|
| Malaysian Ringgit | $ | 0.1 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Mexican Peso | $ | 0.7 |
| | $ | 14.2 |
| | $ | (14.2 | ) |
| British Pound Sterling | $ | (2.6 | ) | | $ | 6.2 |
| | $ | (6.2 | ) |
Commodity Risk
We are exposed to the potential change in prices associated with certain commodities used in the manufacturing of our products. We offset a portion of this exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These forward contracts are not designated as accounting hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the commodity forward contracts outstanding as of December 31, 2019.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 2019 and 2018 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
|
| | | | | | | | | | | | | | | |
| | Net Asset/(Liability) Balance as of December 31, 2019 | | Average Forward Price Per Unit as of December 31, 2019 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (In millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | $ | 1.2 |
| | $ | 18.15 |
| | $ | 1.6 |
| | $ | (1.6 | ) |
| Gold | $ | 1.1 |
| | $ | 1,539.13 |
| | $ | 1.2 |
| | $ | (1.2 | ) |
| Nickel | $ | 0.0 |
| | $ | 6.41 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | $ | (0.2 | ) | | $ | 0.84 |
| | $ | 0.3 |
| | $ | (0.3 | ) |
| Copper | $ | (0.0 | ) | | $ | 2.81 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Platinum | $ | 0.6 |
| | $ | 986.68 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | $ | 0.4 |
| | $ | 1,873.95 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
|
| | | | | | | | | | | | | | | |
| | Net (Liability)/Asset Balance as of December 31, 2018 | | Average Forward Price Per Unit as of December 31, 2018 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (In millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | $ | (0.8 | ) | | $ | 15.72 |
| | $ | 1.7 |
| | $ | (1.7 | ) |
| Gold | $ | (0.0 | ) | | $ | 1,303.51 |
| | $ | 1.3 |
| | $ | (1.3 | ) |
| Nickel | $ | (0.2 | ) | | $ | 4.93 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | $ | (0.3 | ) | | $ | 0.86 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Copper | $ | (1.3 | ) | | $ | 2.71 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Platinum | $ | (0.9 | ) | | $ | 805.38 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | $ | 0.2 |
| | $ | 1,175.96 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following audited consolidated financial statements of Sensata Technologies Holding plc are included in this Annual Report on Form 10-K:
| |
| 2. | Financial Statement Schedules |
The following schedules are included elsewhere in this Annual Report on Form 10-K:
Schedules other than those listed above have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the audited consolidated financial statements or the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Sensata Technologies Holding plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding plc (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 11, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
| |
| Valuation of goodwill |
| Description of the Matter | As of December 31, 2019, the Company’s goodwill balance was $3.1 billion. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. As discussed in Note 2 of the consolidated financial statements, goodwill is tested for impairment at the reporting unit level. The Company evaluated goodwill for impairment as of October 1, 2019. A quantitative goodwill impairment assessment was completed for all reporting units. |
| |
|
| |
| Auditing management’s goodwill impairment analysis was complex and judgmental due to the estimation required in determining the fair value of the reporting units. In particular, the fair value estimates included significant assumptions such as 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 which are affected by expectations about future market or economic conditions. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over management’s review of the data used in their valuation models and reviewed significant assumptions discussed above used in determining the reporting unit fair values. |
| |
| To test the estimated fair value of the Company’s reporting units, with the assistance of our valuation specialists, our audit procedures included, among others, assessing fair value methodologies and testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, the Company’s historical trends with consideration given to changes in the Company’s business, customer base or product mix and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also evaluated the reconciliation of the estimated aggregate fair value of the reporting units to the Company’s market capitalization. |
| |
| Income taxes – uncertain tax positions |
| Description of the Matter | As discussed in Note 7, at December 31, 2019, the Company had approximately $117.6 million of unrecognized tax benefits associated with uncertain tax positions. Uncertainty in a tax position may arise as tax laws are subject to interpretation. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-than-not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. |
| |
| Auditing the recognition and measurement of tax positions related to uncertain tax positions involved significant auditor judgment and use of tax professionals with specialized skills and knowledge because both the recognition and measurement of the tax positions are complex, highly judgmental and based on interpretations of tax laws and legal rulings. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to record the reserve for uncertain tax positions. For example, we tested controls over management’s evaluation of the technical merits of tax positions and identification of uncertain tax positions and the controls to measure the benefit of those tax positions, including management’s review of the inputs and calculations of unrecognized tax benefits resulting from uncertain tax positions. |
| |
| To test the amounts recorded as uncertain tax positions we involved our tax professionals to evaluate the technical merits of the Company’s tax positions. Our procedures included, among others, inspecting correspondence, assessments and settlements from the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also applied our knowledge and experience with the application of federal, foreign and state income tax laws to evaluate the Company’s accounting for those tax positions. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. We also evaluated the Company’s income tax disclosures included in Note 7 in relation to these matters. |
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We have served as the Company's auditor since 2005.
Boston, Massachusetts
February 11, 2020
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Balance Sheets
(In thousands, except per share amounts)
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 774,119 |
| | $ | 729,833 |
|
| Accounts receivable, net of allowances of $15,129 and $13,762 as of December 31, 2019 and 2018, respectively | 557,874 |
| | 581,769 |
|
| Inventories | 506,678 |
| | 492,319 |
|
| Prepaid expenses and other current assets | 126,981 |
| | 113,234 |
|
| Total current assets | 1,965,652 |
| | 1,917,155 |
|
| Property, plant and equipment, net | 830,998 |
| | 787,178 |
|
| Goodwill | 3,093,598 |
| | 3,081,302 |
|
| Other intangible assets, net | 770,904 |
| | 897,191 |
|
| Deferred income tax assets | 21,150 |
| | 27,971 |
|
| Other assets | 152,217 |
| | 86,890 |
|
| Total assets | $ | 6,834,519 |
| | $ | 6,797,687 |
|
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt, finance lease and other financing obligations | $ | 6,918 |
| | $ | 14,561 |
|
| Accounts payable | 376,968 |
| | 379,824 |
|
| Income taxes payable | 35,234 |
| | 27,429 |
|
| Accrued expenses and other current liabilities | 215,626 |
| | 218,130 |
|
| Total current liabilities | 634,746 |
| | 639,944 |
|
| Deferred income tax liabilities | 251,033 |
| | 225,694 |
|
| Pension and other post-retirement benefit obligations | 36,100 |
| | 33,958 |
|
| Finance lease and other financing obligations, less current portion | 28,810 |
| | 30,618 |
|
| Long-term debt, net | 3,219,885 |
| | 3,219,762 |
|
| Other long-term liabilities | 90,190 |
| | 39,277 |
|
| Total liabilities | 4,260,764 |
| | 4,189,253 |
|
| Commitments and contingencies (Note 15) |
| |
|
| Shareholders’ equity: | | | |
| Ordinary shares, €0.01 nominal value per share, 177,069 shares authorized and 172,561 and 171,719 shares issued as of December 31, 2019 and 2018, respectively | 2,212 |
| | 2,203 |
|
| Treasury shares, at cost, 14,733 and 7,571 shares as of December 31, 2019 and 2018, respectively | (749,421 | ) | | (399,417 | ) |
| Additional paid-in capital | 1,725,091 |
| | 1,691,190 |
|
| Retained earnings | 1,616,357 |
| | 1,340,636 |
|
| Accumulated other comprehensive loss | (20,484 | ) | | (26,178 | ) |
| Total shareholders’ equity | 2,573,755 |
| | 2,608,434 |
|
| Total liabilities and shareholders’ equity | $ | 6,834,519 |
| | $ | 6,797,687 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenue | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
| Operating costs and expenses: | | | | | |
| Cost of revenue | 2,267,433 |
| | 2,266,863 |
| | 2,138,898 |
|
| Research and development | 148,425 |
| | 147,279 |
| | 130,127 |
|
| Selling, general and administrative | 281,442 |
| | 305,558 |
| | 301,896 |
|
| Amortization of intangible assets | 142,886 |
| | 139,326 |
| | 161,050 |
|
| Restructuring and other charges, net | 53,560 |
| | (47,818 | ) | | 18,975 |
|
| Total operating costs and expenses | 2,893,746 |
| | 2,811,208 |
| | 2,750,946 |
|
| Operating income | 556,885 |
| | 710,419 |
| | 555,787 |
|
| Interest expense, net | (158,554 | ) | | (153,679 | ) | | (159,761 | ) |
| Other, net | (7,908 | ) | | (30,365 | ) | | 6,415 |
|
| Income before taxes | 390,423 |
| | 526,375 |
| | 402,441 |
|
| Provision for/(benefit from) income taxes | 107,709 |
| | (72,620 | ) | | (5,916 | ) |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Basic net income per share | $ | 1.76 |
| | $ | 3.55 |
| | $ | 2.39 |
|
| Diluted net income per share | $ | 1.75 |
| | $ | 3.53 |
| | $ | 2.37 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Comprehensive Income
(In thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Other comprehensive income/(loss), net of tax: | | | | | |
| Cash flow hedges | 7,362 |
| | 37,363 |
| | (28,202 | ) |
| Defined benefit and retiree healthcare plans | (1,668 | ) | | (377 | ) | | (895 | ) |
| Other comprehensive income/(loss) | 5,694 |
| | 36,986 |
| | (29,097 | ) |
| Comprehensive income | $ | 288,408 |
| | $ | 635,981 |
| | $ | 379,260 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Cash Flows
(In thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 115,862 |
| | 106,014 |
| | 109,321 |
|
| Amortization of debt issuance costs | 7,804 |
| | 7,317 |
| | 7,241 |
|
| Gain on sale of business | — |
| | (64,423 | ) | | — |
|
| Share-based compensation | 18,757 |
| | 23,825 |
| | 19,819 |
|
| Loss on debt financing | 4,364 |
| | 2,350 |
| | 2,670 |
|
| Amortization of intangible assets | 142,886 |
| | 139,326 |
| | 161,050 |
|
| Deferred income taxes | 27,623 |
| | (144,068 | ) | | (56,757 | ) |
| Unrealized loss on derivative instruments and other | 30,292 |
| | 18,176 |
| | 781 |
|
| Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | |
| Accounts receivable, net | 26,605 |
| | (34,877 | ) | | (56,330 | ) |
| Inventories | (10,924 | ) | | (55,445 | ) | | (57,119 | ) |
| Prepaid expenses and other current assets | 10,073 |
| | (11,891 | ) | | (12,412 | ) |
| Accounts payable and accrued expenses | (34,563 | ) | | 48,371 |
| | 23,841 |
|
| Income taxes payable | 2,308 |
| | (353 | ) | | 7,655 |
|
| Other | (4,239 | ) | | (12,754 | ) | | (471 | ) |
| Net cash provided by operating activities | 619,562 |
| | 620,563 |
| | 557,646 |
|
| Cash flows from investing activities: | | | | | |
| Acquisitions, net of cash received | (32,465 | ) | | (228,307 | ) | | — |
|
| Additions to property, plant and equipment and capitalized software | (161,259 | ) | | (159,787 | ) | | (144,584 | ) |
| Investment in debt and equity securities | (9,950 | ) | | — |
| | — |
|
| Proceeds from sale of business, net of cash sold | — |
| | 149,777 |
| | — |
|
| Other | (5,103 | ) | | 711 |
| | 3,862 |
|
| Net cash used in investing activities | (208,777 | ) | | (237,606 | ) | | (140,722 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 15,150 |
| | 6,093 |
| | 7,450 |
|
| Payment of employee restricted stock tax withholdings | (6,990 | ) | | (3,674 | ) | | (2,910 | ) |
| Proceeds from issuance of debt | 450,000 |
| | — |
| | 927,794 |
|
| Payments on debt | (464,605 | ) | | (15,653 | ) | | (943,554 | ) |
| Payments to repurchase ordinary shares | (350,004 | ) | | (399,417 | ) | | — |
|
| Payments of debt and equity issuance costs | (10,050 | ) | | (9,931 | ) | | (4,043 | ) |
| Other | — |
| | 16,369 |
| | — |
|
| Net cash used in financing activities | (366,499 | ) | | (406,213 | ) | | (15,263 | ) |
| Net change in cash and cash equivalents | 44,286 |
| | (23,256 | ) | | 401,661 |
|
| Cash and cash equivalents, beginning of year | 729,833 |
| | 753,089 |
| | 351,428 |
|
| Cash and cash equivalents, end of year | $ | 774,119 |
| �� | $ | 729,833 |
| | $ | 753,089 |
|
| Supplemental cash flow items: | | | | | |
| Cash paid for interest | $ | 169,543 |
| | $ | 163,478 |
| | $ | 164,370 |
|
| Cash paid for income taxes | $ | 61,031 |
| | $ | 72,924 |
| | $ | 48,482 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Shareholders’
Equity |
| | Number |
| Amount |
| Number |
| Amount |
|
| Balance as of December 31, 2016 | 178,437 |
| | $ | 2,289 |
| | (7,557 | ) | | $ | (306,505 | ) |
| $ | 1,643,449 |
| | $ | 636,841 |
| | $ | (34,067 | ) | | $ | 1,942,007 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (67 | ) | | (2,910 | ) |
| — |
| | — |
| | — |
| | (2,910 | ) |
| Stock options exercised | — |
| | — |
| | 326 |
| | 12,465 |
|
| 99 |
| | (5,114 | ) | | — |
| | 7,450 |
|
| Vesting of restricted securities | — |
| | — |
| | 222 |
| | 8,472 |
|
| — |
| | (8,472 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
|
| Net income | — |
| | — |
| | — |
| | — |
|
| — |
| | 408,357 |
| | — |
| | 408,357 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
|
| — |
| �� | — |
| | (29,097 | ) | | (29,097 | ) |
| Balance as of December 31, 2017 | 178,437 |
| | 2,289 |
| | (7,076 | ) | | (288,478 | ) |
| 1,663,367 |
| | 1,031,612 |
| | (63,164 | ) | | 2,345,626 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (71 | ) | | (3,674 | ) | | — |
| | — |
| | — |
| | (3,674 | ) |
| Stock options exercised | 114 |
| | 1 |
| | 58 |
| | 2,250 |
| | 3,998 |
| | (156 | ) | | — |
| | 6,093 |
|
| Vesting of restricted securities | 257 |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Retirement of ordinary shares due to Merger | (7,018 | ) | | (89 | ) | | 7,018 |
| | 286,228 |
| | — |
| | (286,139 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | — |
| | — |
| | (7,571 | ) | | (399,417 | ) | | — |
| | — |
| | — |
| | (399,417 | ) |
| Other retirements of ordinary shares | (71 | ) | | (1 | ) | | 71 |
| | 3,674 |
| | — |
| | (3,673 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 23,825 |
| | — |
| | — |
| | 23,825 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 598,995 |
| | — |
| | 598,995 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,986 |
| | 36,986 |
|
| Balance as of December 31, 2018 | 171,719 |
| | 2,203 |
| | (7,571 | ) | | (399,417 | ) | | 1,691,190 |
| | 1,340,636 |
| | (26,178 | ) | | 2,608,434 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (149 | ) | | (6,990 | ) | | — |
| | — |
| | — |
| | (6,990 | ) |
| Stock options exercised | 537 |
| | 6 |
| | — |
| | — |
| | 15,144 |
| | — |
| | — |
| | 15,150 |
|
| Vesting of restricted securities | 454 |
| | 5 |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | — |
| | — |
| | (7,162 | ) | | (350,004 | ) | | — |
| | — |
| | — |
| | (350,004 | ) |
| Retirement of ordinary shares | (149 | ) | | (2 | ) | | 149 |
| | 6,990 |
| | — |
| | (6,988 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 18,757 |
| | — |
| | — |
| | 18,757 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 282,714 |
| | — |
| | 282,714 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,694 |
| | 5,694 |
|
| Balance as of December 31, 2019 | 172,561 |
| | $ | 2,212 |
| | (14,733 | ) | | $ | (749,421 | ) | | $ | 1,725,091 |
| | $ | 1,616,357 |
| | $ | (20,484 | ) | | $ | 2,573,755 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Basis of Presentation
Description of Business
The accompanying audited consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc ("Sensata plc"), a public limited company incorporated under the laws of England and Wales, and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us."
Prior to March 28, 2018, our parent company issuer was Sensata Technologies Holding N.V. ("Sensata N.V."), which was incorporated under the laws of the Netherlands. On March 28, 2018, Sensata plc completed a cross-border merger (the "Merger") with Sensata N.V., which changed the location of our incorporation from the Netherlands to England and Wales, but did not change the business being conducted by us or our subsidiaries.
We are a global industrial technology company that develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and end users. Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Sensata plc conducts its operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the United Kingdom (the "U.K."), and the United States (the "U.S."); and manufacturing operations primarily in Bulgaria, China, Malaysia, Mexico, the U.K., and the U.S.
We operate in, and report financial information for, the following 2 segments: Performance Sensing and Sensing Solutions. Refer to Note 20, "Segment Reporting," for further detailsadditional information related to each of our segments.
Basis of Presentation
The accompanying audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated. All U.S. dollar ("USD") and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowance for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets.assets), contingencies, the value of certain equity awards and the measurement of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of plant and equipment, measurement of our post-retirement benefit obligations, and the identification, valuation, and determination of useful lives of identifiable intangible assets acquired in business combinations. The accounting estimates used in the preparation of the
consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. This five step model requires us to identify the contract with the customer, identify the performance obligation(s) in the contract, determine the transaction price, allocate the transaction price to the performance obligation(s), and recognize revenue when (or as) we satisfy the performance obligation(s).
The vast majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders ("POs" and each, a "PO") that require us to transfer specified quantities of tangible products to our customers. These performance obligations are generally satisfied within a short period of time. Amounts billed to our customers for shipping and handling after control has transferred are recognized as revenue and the related costs that we incur are presented in cost of revenue.
In determining the transaction price, we evaluate whether the consideration promised in the contract includes a variable amount and, if applicable, we include in the transaction price some or all of an amount of variable consideration only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may be explicitly stated in the contract or implied based on our customary practices. Examples of variable consideration present in our contracts include rights of return, in the case of a defective or non-conforming product, and trade discounts, including early payment discounts and retrospective volume discounts. Such variable consideration has not historically been material in relation to our net revenue.
Our contract terms generally require the customer to make payment shortly after (that is, less than one year) the shipment date. In such instances, we do not consider the effects of a significant financing component in determining the transaction price. Lastly, we exclude from our determination of the transaction price value-added tax and other similar taxes.
Our performance obligations are satisfied, and revenue is recognized, when control of the product is transferred to the customer. The transfer of control generally occurs at the point in time the product is shipped from our warehouse or, less often, at the point in time it is received by the customer, depending on the specific terms of the arrangement. Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer PO, and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606. Depending on the product, we generally provide such warranties for a period of twelve to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit. We do not offer separately priced extended warranty or product maintenance contracts.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.
Refer to Note 3, "Revenue Recognition," for additional information related to the net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
We 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 as required in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. Share-based compensation expense is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where
the related employee costs are presented, however, such costs, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation expense associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. For awards without performance conditions that are subject to graded vesting, companies have the option to recognize compensation expense either on a straight-line or accelerated basis. We have elected to recognize compensation expense for these awards on a straight-line basis. However, awards that are subject to both graded vesting and performance conditions must be expensed on an accelerated basis.
We estimate the fair value of options on the grant date using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in this model are as follows:
The fair value of the underlying ordinary shares. This is determined as the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the grant date.
The expected term. This is determined based upon our own historical average term of exercised and outstanding options.
Expected volatility. We consider our own historical volatility, as well as our implied volatility, in estimating expected volatility for stock options. Implied volatility provides a forward-looking indication and may offer insight into expected volatility.
Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. Compensation expense is recognized if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures. Accordingly, we only recognize compensation expense for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Refer to Note 4, "Share-Based Payment Plans," for additional information related to share-based compensation.
Debt Instruments
Refer to Note 14, "Debt," of our Financial Statements for additional information related to the terms of our debt instruments.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. In addition, the Senior Secured Credit Facilities provide for the Accordion, under which additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased. Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the "Senior Notes Indentures"). As of December 31, 2019, availability under the Accordion was approximately $1.0 billion.
We believe, based on our current level of operations as reflected in our results of operations for the year ended December 31, 2019, and taking into consideration the restrictions and covenants discussed below and in Note 14, "Debt," of our Financial Statements, that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay 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 ended December 31, 2019.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of Sensata Technologies B.V. ("STBV") and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit
metrics such as interest coverage and leverage ratios. As of January 31, 2020, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs, but will not reduce availability under the Credit Agreement.
The Credit Agreement and the the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14, "Debt," of our Financial Statements) that limit the ability of STBV and 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 in establishing our share repurchase programs, and are evaluated periodically with respect to future potential funding. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations, should we decide to do so. As of December 31, 2019, 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. 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. The authorized amount of our various share repurchase programs may be modified or terminated by our Board of Directors at any time.
During the year ended December 31, 2019, we repurchased ordinary shares under a $250.0 million share repurchase program authorized by our Board of Directors in October 2018 (the "October 2018 Program") and a $500.0 million share repurchase program authorized by our Board of Directors in July 2019 (the "July 2019 Program"). We repurchased approximately 7.2 million ordinary shares at a weighted-average price of $48.87 per share under these programs. The October 2018 Program was terminated upon commencement of the July 2019 Program.
During the year ended December 31, 2018, we repurchased approximately 7.6 million ordinary shares at a weighted-average price of $52.75 per share under a $400.0 million share repurchase program authorized by our Board of Directors in May 2018.
Contractual Obligations and Commercial Commitments
The table below reflects our contractual obligations as of December 31, 2019. Amounts we pay in future periods may vary from those reflected in the table. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | Less than One Year | | One to Three Years | | Three to Five Years | | More than Five Years |
Debt obligations principal(1) | $ | 3,260.7 |
| | $ | 4.6 |
| | $ | 9.3 |
| | $ | 909.3 |
| | $ | 2,337.6 |
|
Debt obligations interest(2) | 1,040.7 |
| | 164.7 |
| | 328.4 |
| | 304.8 |
| | 242.8 |
|
Finance lease obligations principal(3) | 30.6 |
| | 2.0 |
| | 3.0 |
| | 3.3 |
| | 22.4 |
|
Finance lease obligations interest(3) | 21.7 |
| | 2.6 |
| | 4.8 |
| | 4.3 |
| | 10.1 |
|
Other financing obligations principal(4) | 0.5 |
| | 0.4 |
| | 0.2 |
| | — |
| | — |
|
Other financing obligations interest(4) | 0.1 |
| | 0.1 |
| | 0.0 |
| | — |
| | — |
|
Operating lease obligations(5) | 74.0 |
| | 14.8 |
| | 20.1 |
| | 14.5 |
| | 24.5 |
|
Non-cancelable purchase obligations(6) | 61.5 |
| | 26.6 |
| | 29.4 |
| | 5.2 |
| | 0.3 |
|
Total contractual obligations(7)(8) | $ | 4,489.8 |
| | $ | 215.8 |
| | $ | 395.2 |
| | $ | 1,241.4 |
| | $ | 2,637.7 |
|
| |
(1) | Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2019. |
| |
(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2019. Cash flows associated with the next interest payment to be made on our |
variable rate debt subsequent to December 31, 2019 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2019, plus the applicable spread.
| |
(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our finance lease obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these financing arrangements beyond their current terms. |
| |
(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2019. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms. |
| |
(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the USD to local currency exchange rates in effect as of December 31, 2019. |
| |
(8) | This table does not include the contractual obligations associated with our pension and other post-retirement benefit plans. As of December 31, 2019, we had recognized a net benefit liability of $36.5 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional information related to our pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $26.0 million of unrecognized tax benefits as of December 31, 2019, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing and the ultimate resolution of the examination is uncertain. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information related to our unrecognized tax benefits. |
Critical Accounting Policies and Estimates
As discussed in Note 2, "Significant Accounting Policies," of our Financial Statements, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in accordance with U.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. We adopted FASB ASC Topic 606 on January 1, 2018. Periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance, including FASB ASC Topic 605, Revenue Recognition. The adoption of FASB ASC Topic 606 did not have a material effect on our financial position or results of operations, and no cumulative catch-up adjustment was recognized.
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 ("PO") 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 POs. 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 PO, in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material. However, should our judgments and estimates regarding variable consideration change, it could result in a material change to the amount of net revenue recognized in a period.
Goodwill, Intangible Assets, and Long-Lived Assets
Businesses acquired are 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. Assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. In accordance with the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired.
Goodwill
Our judgments regarding the existence of indicators of goodwill impairment are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Identification of reporting units. We have identified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Assignment of assets, liabilities, and goodwill to reporting units. Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from year to year. We view some assets and liabilities, such as cash and cash equivalents, PP&E associated with our corporate offices, and debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit.
Evaluation of goodwill for impairment. We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the first step of the quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination at the date
of assessment, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill.
We evaluated the goodwill of each reporting unit for impairment as of October 1, 2019. All reporting units 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 cash flows for each reporting unit for the subsequent five fiscal years (the "Discrete Projection Period"). We estimated the value of the cash flows beyond the fifth fiscal year (the "Terminal Year"), by applying a multiple to the projected Terminal Year net earnings before interest, taxes, depreciation, and amortization. The 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 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.
However, we do not consider any of our reporting units to be at risk of failing Step 1 of the goodwill impairment test.
Evaluation of other intangible assets for impairment
Indefinite-lived intangible assets. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review in which we estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value.
In performing the quantitative impairment review, we estimate the fair value by using the relief-from-royalty method, in which we make assumptions about future conditions impacting the fair value of our indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax 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 of October 1, 2019 (using the quantitative method) and determined that the estimated fair values of these assets exceeded their carrying values at that date. Should certain assumptions used in the development of the fair values of our indefinite-lived intangible assets change, we may be required to recognize an impairment charge in the future.
Definite-lived intangible assets. Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets to be held and used are impaired. If we determine that such facts or circumstances exist, we estimate the recoverability of these assets by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash flows falls below the carrying value of an asset, the impairment charge is measured as the excess of the carrying value over the fair value of that asset. We determine fair value by using the appropriate income approach valuation methodology depending on the nature of the 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 cash flows from long-lived assets to determine whether the carrying values of such assets are recoverable over the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of the end markets we serve. If an asset is determined to be impaired, the impairment is the amount by which its carrying value exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management judgment is required in determining various elements of our provision for 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/(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 positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations in various jurisdictions. Significant judgment is required in considering the relative impact of these items along with the weight that should be given to each category. 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 benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date, and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations take into consideration various actuarial assumptions including future compensation levels 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 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 a U.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 declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. Refer to Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity 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.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore, only recognize compensation 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.
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the divestiture of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Refer to Note 15, "Commitments and Contingencies," of our Financial Statements for additional information related to our off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently issued accounting standards adopted in the current period:
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. We adopted the provisions of FASB ASU No. 2016-02 on January 1, 2019 using the modified retrospective transition method. Refer to Note 2, "Significant Accounting Policies" and Note 21, "Leases," each of our Financial Statements, for additional information related to this adoption. We do not expect adoption of FASB ASU No. 2016-02 to have a material impact on our future results of operations.
No other recently issued accounting standards adopted in the current period had a material impact on our consolidated financial position or results of operations, and we do not believe they are reasonably likely to have a material effect on our future consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
There are no recently issued accounting standards to be adopted in future periods that are expected to have a material impact on our consolidated financial position or results of operations.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in foreign currency exchange rates because we transact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We monitor our exposure to these risks, and may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging, which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major financial institutions of investment grade credit rating.
Interest Rate Risk
As discussed further in Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K, the credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for senior secured credit facilities consisting of a term loan facility (the "Term Loan"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
The Term Loan accrues interest at a variable rate that is currently based on LIBOR, plus an interest rate margin, in accordance with the terms of the Credit Agreement.
Sensitivity Analysis
As of December 31, 2019, we had an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $460.7 million. The applicable interest rate associated with the Term Loan at December 31, 2019 was 3.59%. An increase of 100 basis points in this rate would result in additional interest expense of $4.7 million in fiscal year 2020. An additional 100 basis point increase in this rate would result in incremental interest expense of $4.7 million in fiscal year 2020.
As of December 31, 2018, we had an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $917.8 million. The applicable interest rate associated with the Term Loan at December 31, 2018 was 4.21%. An increase of 100 basis points in this rate would have resulted in additional interest expense of $9.3 million in fiscal year 2019. An additional 100 basis point increase in this rate would have resulted in incremental interest expense of $9.3 million in fiscal year 2019.
Foreign Currency Risk
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows, and for non-trading purposes, we enter into foreign currency exchange rate derivatives that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also enter into foreign currency forward contracts that are not designated for hedge accounting purposes. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the foreign currency forward contracts outstanding as of December 31, 2019.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2019 and 2018 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
|
| | | | | | | | | | | |
| | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (In millions) | Net Asset/(Liability) Balance as of December 31, 2019 | | 10% Strengthening of the Value of the Foreign Currency Relative to the United States ("U.S.") Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | $ | 12.6 |
| | $ | (41.2 | ) | | $ | 41.2 |
|
| Chinese Renminbi | $ | (0.7 | ) | | $ | (10.7 | ) | | $ | 10.7 |
|
| Japanese Yen | $ | 0.0 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Korean Won | $ | 0.3 |
| | $ | (2.1 | ) | | $ | 2.1 |
|
| Malaysian Ringgit | $ | 0.0 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Mexican Peso | $ | 8.5 |
| | $ | 15.5 |
| | $ | (15.5 | ) |
| British Pound Sterling | $ | 0.8 |
| | $ | 6.7 |
| | $ | (6.7 | ) |
|
| | | | | | | | | | | |
| | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (In millions) | Net Asset/(Liability) Balance as of December 31, 2018 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | $ | 14.5 |
| | $ | (45.1 | ) | | $ | 45.1 |
|
| Chinese Renminbi | $ | (0.3 | ) | | $ | (4.1 | ) | | $ | 4.1 |
|
| Korean Won | $ | 0.3 |
| | $ | (2.8 | ) | | $ | 2.8 |
|
| Malaysian Ringgit | $ | 0.1 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Mexican Peso | $ | 0.7 |
| | $ | 14.2 |
| | $ | (14.2 | ) |
| British Pound Sterling | $ | (2.6 | ) | | $ | 6.2 |
| | $ | (6.2 | ) |
Commodity Risk
We are exposed to the potential change in prices associated with certain commodities used in the manufacturing of our products. We offset a portion of this exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These forward contracts are not designated as accounting hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the commodity forward contracts outstanding as of December 31, 2019.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 2019 and 2018 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
|
| | | | | | | | | | | | | | | |
| | Net Asset/(Liability) Balance as of December 31, 2019 | | Average Forward Price Per Unit as of December 31, 2019 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (In millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | $ | 1.2 |
| | $ | 18.15 |
| | $ | 1.6 |
| | $ | (1.6 | ) |
| Gold | $ | 1.1 |
| | $ | 1,539.13 |
| | $ | 1.2 |
| | $ | (1.2 | ) |
| Nickel | $ | 0.0 |
| | $ | 6.41 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | $ | (0.2 | ) | | $ | 0.84 |
| | $ | 0.3 |
| | $ | (0.3 | ) |
| Copper | $ | (0.0 | ) | | $ | 2.81 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Platinum | $ | 0.6 |
| | $ | 986.68 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | $ | 0.4 |
| | $ | 1,873.95 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
|
| | | | | | | | | | | | | | | |
| | Net (Liability)/Asset Balance as of December 31, 2018 | | Average Forward Price Per Unit as of December 31, 2018 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (In millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | $ | (0.8 | ) | | $ | 15.72 |
| | $ | 1.7 |
| | $ | (1.7 | ) |
| Gold | $ | (0.0 | ) | | $ | 1,303.51 |
| | $ | 1.3 |
| | $ | (1.3 | ) |
| Nickel | $ | (0.2 | ) | | $ | 4.93 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | $ | (0.3 | ) | | $ | 0.86 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Copper | $ | (1.3 | ) | | $ | 2.71 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Platinum | $ | (0.9 | ) | | $ | 805.38 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | $ | 0.2 |
| | $ | 1,175.96 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following audited consolidated financial statements of Sensata Technologies Holding plc are included in this Annual Report on Form 10-K:
| |
| 2. | Financial Statement Schedules |
The following schedules are included elsewhere in this Annual Report on Form 10-K:
Schedules other than those listed above have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the audited consolidated financial statements or the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Sensata Technologies Holding plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding plc (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 11, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
| |
| Valuation of goodwill |
| Description of the Matter | As of December 31, 2019, the Company’s goodwill balance was $3.1 billion. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. As discussed in Note 2 of the consolidated financial statements, goodwill is tested for impairment at the reporting unit level. The Company evaluated goodwill for impairment as of October 1, 2019. A quantitative goodwill impairment assessment was completed for all reporting units. |
| |
|
| |
| Auditing management’s goodwill impairment analysis was complex and judgmental due to the estimation required in determining the fair value of the reporting units. In particular, the fair value estimates included significant assumptions such as 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 which are affected by expectations about future market or economic conditions. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over management’s review of the data used in their valuation models and reviewed significant assumptions discussed above used in determining the reporting unit fair values. |
| |
| To test the estimated fair value of the Company’s reporting units, with the assistance of our valuation specialists, our audit procedures included, among others, assessing fair value methodologies and testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, the Company’s historical trends with consideration given to changes in the Company’s business, customer base or product mix and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also evaluated the reconciliation of the estimated aggregate fair value of the reporting units to the Company’s market capitalization. |
| |
| Income taxes – uncertain tax positions |
| Description of the Matter | As discussed in Note 7, at December 31, 2019, the Company had approximately $117.6 million of unrecognized tax benefits associated with uncertain tax positions. Uncertainty in a tax position may arise as tax laws are subject to interpretation. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-than-not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. |
| |
| Auditing the recognition and measurement of tax positions related to uncertain tax positions involved significant auditor judgment and use of tax professionals with specialized skills and knowledge because both the recognition and measurement of the tax positions are complex, highly judgmental and based on interpretations of tax laws and legal rulings. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to record the reserve for uncertain tax positions. For example, we tested controls over management’s evaluation of the technical merits of tax positions and identification of uncertain tax positions and the controls to measure the benefit of those tax positions, including management’s review of the inputs and calculations of unrecognized tax benefits resulting from uncertain tax positions. |
| |
| To test the amounts recorded as uncertain tax positions we involved our tax professionals to evaluate the technical merits of the Company’s tax positions. Our procedures included, among others, inspecting correspondence, assessments and settlements from the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also applied our knowledge and experience with the application of federal, foreign and state income tax laws to evaluate the Company’s accounting for those tax positions. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. We also evaluated the Company’s income tax disclosures included in Note 7 in relation to these matters. |
| |
We have served as the Company's auditor since 2005.
Boston, Massachusetts
February 11, 2020
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Balance Sheets
(In thousands, except per share amounts)
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 774,119 |
| | $ | 729,833 |
|
| Accounts receivable, net of allowances of $15,129 and $13,762 as of December 31, 2019 and 2018, respectively | 557,874 |
| | 581,769 |
|
| Inventories | 506,678 |
| | 492,319 |
|
| Prepaid expenses and other current assets | 126,981 |
| | 113,234 |
|
| Total current assets | 1,965,652 |
| | 1,917,155 |
|
| Property, plant and equipment, net | 830,998 |
| | 787,178 |
|
| Goodwill | 3,093,598 |
| | 3,081,302 |
|
| Other intangible assets, net | 770,904 |
| | 897,191 |
|
| Deferred income tax assets | 21,150 |
| | 27,971 |
|
| Other assets | 152,217 |
| | 86,890 |
|
| Total assets | $ | 6,834,519 |
| | $ | 6,797,687 |
|
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt, finance lease and other financing obligations | $ | 6,918 |
| | $ | 14,561 |
|
| Accounts payable | 376,968 |
| | 379,824 |
|
| Income taxes payable | 35,234 |
| | 27,429 |
|
| Accrued expenses and other current liabilities | 215,626 |
| | 218,130 |
|
| Total current liabilities | 634,746 |
| | 639,944 |
|
| Deferred income tax liabilities | 251,033 |
| | 225,694 |
|
| Pension and other post-retirement benefit obligations | 36,100 |
| | 33,958 |
|
| Finance lease and other financing obligations, less current portion | 28,810 |
| | 30,618 |
|
| Long-term debt, net | 3,219,885 |
| | 3,219,762 |
|
| Other long-term liabilities | 90,190 |
| | 39,277 |
|
| Total liabilities | 4,260,764 |
| | 4,189,253 |
|
| Commitments and contingencies (Note 15) |
| |
|
| Shareholders’ equity: | | | |
| Ordinary shares, €0.01 nominal value per share, 177,069 shares authorized and 172,561 and 171,719 shares issued as of December 31, 2019 and 2018, respectively | 2,212 |
| | 2,203 |
|
| Treasury shares, at cost, 14,733 and 7,571 shares as of December 31, 2019 and 2018, respectively | (749,421 | ) | | (399,417 | ) |
| Additional paid-in capital | 1,725,091 |
| | 1,691,190 |
|
| Retained earnings | 1,616,357 |
| | 1,340,636 |
|
| Accumulated other comprehensive loss | (20,484 | ) | | (26,178 | ) |
| Total shareholders’ equity | 2,573,755 |
| | 2,608,434 |
|
| Total liabilities and shareholders’ equity | $ | 6,834,519 |
| | $ | 6,797,687 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenue | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
| Operating costs and expenses: | | | | | |
| Cost of revenue | 2,267,433 |
| | 2,266,863 |
| | 2,138,898 |
|
| Research and development | 148,425 |
| | 147,279 |
| | 130,127 |
|
| Selling, general and administrative | 281,442 |
| | 305,558 |
| | 301,896 |
|
| Amortization of intangible assets | 142,886 |
| | 139,326 |
| | 161,050 |
|
| Restructuring and other charges, net | 53,560 |
| | (47,818 | ) | | 18,975 |
|
| Total operating costs and expenses | 2,893,746 |
| | 2,811,208 |
| | 2,750,946 |
|
| Operating income | 556,885 |
| | 710,419 |
| | 555,787 |
|
| Interest expense, net | (158,554 | ) | | (153,679 | ) | | (159,761 | ) |
| Other, net | (7,908 | ) | | (30,365 | ) | | 6,415 |
|
| Income before taxes | 390,423 |
| | 526,375 |
| | 402,441 |
|
| Provision for/(benefit from) income taxes | 107,709 |
| | (72,620 | ) | | (5,916 | ) |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Basic net income per share | $ | 1.76 |
| | $ | 3.55 |
| | $ | 2.39 |
|
| Diluted net income per share | $ | 1.75 |
| | $ | 3.53 |
| | $ | 2.37 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Comprehensive Income
(In thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Other comprehensive income/(loss), net of tax: | | | | | |
| Cash flow hedges | 7,362 |
| | 37,363 |
| | (28,202 | ) |
| Defined benefit and retiree healthcare plans | (1,668 | ) | | (377 | ) | | (895 | ) |
| Other comprehensive income/(loss) | 5,694 |
| | 36,986 |
| | (29,097 | ) |
| Comprehensive income | $ | 288,408 |
| | $ | 635,981 |
| | $ | 379,260 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Cash Flows
(In thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 115,862 |
| | 106,014 |
| | 109,321 |
|
| Amortization of debt issuance costs | 7,804 |
| | 7,317 |
| | 7,241 |
|
| Gain on sale of business | — |
| | (64,423 | ) | | — |
|
| Share-based compensation | 18,757 |
| | 23,825 |
| | 19,819 |
|
| Loss on debt financing | 4,364 |
| | 2,350 |
| | 2,670 |
|
| Amortization of intangible assets | 142,886 |
| | 139,326 |
| | 161,050 |
|
| Deferred income taxes | 27,623 |
| | (144,068 | ) | | (56,757 | ) |
| Unrealized loss on derivative instruments and other | 30,292 |
| | 18,176 |
| | 781 |
|
| Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | |
| Accounts receivable, net | 26,605 |
| | (34,877 | ) | | (56,330 | ) |
| Inventories | (10,924 | ) | | (55,445 | ) | | (57,119 | ) |
| Prepaid expenses and other current assets | 10,073 |
| | (11,891 | ) | | (12,412 | ) |
| Accounts payable and accrued expenses | (34,563 | ) | | 48,371 |
| | 23,841 |
|
| Income taxes payable | 2,308 |
| | (353 | ) | | 7,655 |
|
| Other | (4,239 | ) | | (12,754 | ) | | (471 | ) |
| Net cash provided by operating activities | 619,562 |
| | 620,563 |
| | 557,646 |
|
| Cash flows from investing activities: | | | | | |
| Acquisitions, net of cash received | (32,465 | ) | | (228,307 | ) | | — |
|
| Additions to property, plant and equipment and capitalized software | (161,259 | ) | | (159,787 | ) | | (144,584 | ) |
| Investment in debt and equity securities | (9,950 | ) | | — |
| | — |
|
| Proceeds from sale of business, net of cash sold | — |
| | 149,777 |
| | — |
|
| Other | (5,103 | ) | | 711 |
| | 3,862 |
|
| Net cash used in investing activities | (208,777 | ) | | (237,606 | ) | | (140,722 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 15,150 |
| | 6,093 |
| | 7,450 |
|
| Payment of employee restricted stock tax withholdings | (6,990 | ) | | (3,674 | ) | | (2,910 | ) |
| Proceeds from issuance of debt | 450,000 |
| | — |
| | 927,794 |
|
| Payments on debt | (464,605 | ) | | (15,653 | ) | | (943,554 | ) |
| Payments to repurchase ordinary shares | (350,004 | ) | | (399,417 | ) | | — |
|
| Payments of debt and equity issuance costs | (10,050 | ) | | (9,931 | ) | | (4,043 | ) |
| Other | — |
| | 16,369 |
| | — |
|
| Net cash used in financing activities | (366,499 | ) | | (406,213 | ) | | (15,263 | ) |
| Net change in cash and cash equivalents | 44,286 |
| | (23,256 | ) | | 401,661 |
|
| Cash and cash equivalents, beginning of year | 729,833 |
| | 753,089 |
| | 351,428 |
|
| Cash and cash equivalents, end of year | $ | 774,119 |
| �� | $ | 729,833 |
| | $ | 753,089 |
|
| Supplemental cash flow items: | | | | | |
| Cash paid for interest | $ | 169,543 |
| | $ | 163,478 |
| | $ | 164,370 |
|
| Cash paid for income taxes | $ | 61,031 |
| | $ | 72,924 |
| | $ | 48,482 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Shareholders’
Equity |
| | Number |
| Amount |
| Number |
| Amount |
|
| Balance as of December 31, 2016 | 178,437 |
| | $ | 2,289 |
| | (7,557 | ) | | $ | (306,505 | ) |
| $ | 1,643,449 |
| | $ | 636,841 |
| | $ | (34,067 | ) | | $ | 1,942,007 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (67 | ) | | (2,910 | ) |
| — |
| | — |
| | — |
| | (2,910 | ) |
| Stock options exercised | — |
| | — |
| | 326 |
| | 12,465 |
|
| 99 |
| | (5,114 | ) | | — |
| | 7,450 |
|
| Vesting of restricted securities | — |
| | — |
| | 222 |
| | 8,472 |
|
| — |
| | (8,472 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
|
| Net income | — |
| | — |
| | — |
| | — |
|
| — |
| | 408,357 |
| | — |
| | 408,357 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
|
| — |
| �� | — |
| | (29,097 | ) | | (29,097 | ) |
| Balance as of December 31, 2017 | 178,437 |
| | 2,289 |
| | (7,076 | ) | | (288,478 | ) |
| 1,663,367 |
| | 1,031,612 |
| | (63,164 | ) | | 2,345,626 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (71 | ) | | (3,674 | ) | | — |
| | — |
| | — |
| | (3,674 | ) |
| Stock options exercised | 114 |
| | 1 |
| | 58 |
| | 2,250 |
| | 3,998 |
| | (156 | ) | | — |
| | 6,093 |
|
| Vesting of restricted securities | 257 |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Retirement of ordinary shares due to Merger | (7,018 | ) | | (89 | ) | | 7,018 |
| | 286,228 |
| | — |
| | (286,139 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | — |
| | — |
| | (7,571 | ) | | (399,417 | ) | | — |
| | — |
| | — |
| | (399,417 | ) |
| Other retirements of ordinary shares | (71 | ) | | (1 | ) | | 71 |
| | 3,674 |
| | — |
| | (3,673 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 23,825 |
| | — |
| | — |
| | 23,825 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 598,995 |
| | — |
| | 598,995 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,986 |
| | 36,986 |
|
| Balance as of December 31, 2018 | 171,719 |
| | 2,203 |
| | (7,571 | ) | | (399,417 | ) | | 1,691,190 |
| | 1,340,636 |
| | (26,178 | ) | | 2,608,434 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (149 | ) | | (6,990 | ) | | — |
| | — |
| | — |
| | (6,990 | ) |
| Stock options exercised | 537 |
| | 6 |
| | — |
| | — |
| | 15,144 |
| | — |
| | — |
| | 15,150 |
|
| Vesting of restricted securities | 454 |
| | 5 |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | — |
| | — |
| | (7,162 | ) | | (350,004 | ) | | — |
| | — |
| | — |
| | (350,004 | ) |
| Retirement of ordinary shares | (149 | ) | | (2 | ) | | 149 |
| | 6,990 |
| | — |
| | (6,988 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 18,757 |
| | — |
| | — |
| | 18,757 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 282,714 |
| | — |
| | 282,714 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,694 |
| | 5,694 |
|
| Balance as of December 31, 2019 | 172,561 |
| | $ | 2,212 |
| | (14,733 | ) | | $ | (749,421 | ) | | $ | 1,725,091 |
| | $ | 1,616,357 |
| | $ | (20,484 | ) | | $ | 2,573,755 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Basis of Presentation
Description of Business
The accompanying audited consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc ("Sensata plc"), a public limited company incorporated under the laws of England and Wales, and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us."
Prior to March 28, 2018, our parent company issuer was Sensata Technologies Holding N.V. ("Sensata N.V."), which was incorporated under the laws of the Netherlands. On March 28, 2018, Sensata plc completed a cross-border merger (the "Merger") with Sensata N.V., which changed the location of our incorporation from the Netherlands to England and Wales, but did not change the business being conducted by us or our subsidiaries.
We are a global industrial technology company that develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and end users. Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Sensata plc conducts its operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the United Kingdom (the "U.K."), and the United States (the "U.S."); and manufacturing operations primarily in Bulgaria, China, Malaysia, Mexico, the U.K., and the U.S.
We operate in, and report financial information for, the following 2 segments: Performance Sensing and Sensing Solutions. Refer to Note 20, "Segment Reporting," for additional information related to each of our segments.
Basis of Presentation
The accompanying audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated. All U.S. dollar ("USD") and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowance for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets), contingencies, the value of certain equity awards and the measurement of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of plant and equipment, measurement of our post-retirement benefit obligations, and the identification, valuation, and determination of useful lives of identifiable intangible assets acquired in business combinations. The accounting estimates used in the preparation of the
consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. This five step model requires us to identify the contract with the customer, identify the performance obligation(s) in the contract, determine the transaction price, allocate the transaction price to the performance obligation(s), and recognize revenue when (or as) we satisfy the performance obligation(s).
The vast majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders ("POs" and each, a "PO") that require us to transfer specified quantities of tangible products to our customers. These performance obligations are generally satisfied within a short period of time. Amounts billed to our customers for shipping and handling after control has transferred are recognized as revenue and the related costs that we incur are presented in cost of revenue.
In determining the transaction price, we evaluate whether the consideration promised in the contract includes a variable amount and, if applicable, we include in the transaction price some or all of an amount of variable consideration only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may be explicitly stated in the contract or implied based on our customary practices. Examples of variable consideration present in our contracts include rights of return, in the case of a defective or non-conforming product, and trade discounts, including early payment discounts and retrospective volume discounts. Such variable consideration has not historically been material in relation to our net revenue.
Our contract terms generally require the customer to make payment shortly after (that is, less than one year) the shipment date. In such instances, we do not consider the effects of a significant financing component in determining the transaction price. Lastly, we exclude from our determination of the transaction price value-added tax and other similar taxes.
Our performance obligations are satisfied, and revenue is recognized, when control of the product is transferred to the customer. The transfer of control generally occurs at the point in time the product is shipped from our warehouse or, less often, at the point in time it is received by the customer, depending on the specific terms of the arrangement. Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer PO, and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606. Depending on the product, we generally provide such warranties for a period of twelve to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit. We do not offer separately priced extended warranty or product maintenance contracts.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.
Refer to Note 3, "Revenue Recognition," for additional information related to the net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
We 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 as required in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. Share-based compensation expense is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where
the related employee costs are presented, however, such costs, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation expense associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. For awards without performance conditions that are subject to graded vesting, companies have the option to recognize compensation expense either on a straight-line or accelerated basis. We have elected to recognize compensation expense for these awards on a straight-line basis. However, awards that are subject to both graded vesting and performance conditions must be expensed on an accelerated basis.
We estimate the fair value of options on the grant date using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in this model are as follows:
The fair value of the underlying ordinary shares. This is determined as the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the grant date.
The expected term. This is determined based upon our own historical average term of exercised and outstanding options.
Expected volatility. We consider our own historical volatility, as well as our implied volatility, in estimating expected volatility for stock options. Implied volatility provides a forward-looking indication and may offer insight into expected volatility.
Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. Compensation expense is recognized if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures. Accordingly, we only recognize compensation expense for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Refer to Note 4, "Share-Based Payment Plans," for additional information related to share-based compensation.
Financial Instruments
Our financial instruments include derivative instruments, debt instruments, debt and equity investments, and trade accounts receivable.
Derivative financial instruments: We account for our derivative financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures and FASB ASC Topic 815, Derivatives and Hedging. In accordance with FASB ASC Topic 815, we recognize all derivatives on the balance sheet at fair value. The fair value of our derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. These analyses utilize observable market-based inputs, including foreign currency exchange rates and commodity forward curves, and reflect the contractual terms of these instruments, including the period to maturity.
Derivative instruments that are designated and qualify as hedges of the exposure to changes in the fair value of an asset, liability, or commitment, and that are attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments that are designated and qualify as hedges of the exposure to variability in expected future cash flows are considered cash flow hedges. Derivative instruments may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Currently, our derivative instruments that are designated as accounting hedges are all cash flow hedges. We also hold derivative instruments that are not designated as accounting hedges.
The accounting for changes in the fair value of our cash flow hedges depends on whether we have elected to designate the derivative as a hedging instrument for accounting purposes and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In accordance with FASB ASC Topic 815, both the effective and ineffective portion of
changes in the fair value of derivatives designated and qualifying as cash flow hedges is recognized in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. Changes in the fair value of derivative instruments that are not designated as accounting hedges are recognized immediately in other, net. Refer to Note 16, "Shareholders' Equity," and Note 19, "Derivative Instruments and Hedging Activities," for additional information related to the reclassification of amounts from accumulated other comprehensive loss into earnings.
We present the cash flows arising from our derivative financial instruments in a manner consistent with the presentation of cash flows that relate to the underlying hedged items.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. We do not offset the fair value amounts recognized for derivative instruments against fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral.
We maintain derivative instruments with major financial institutions of investment grade credit rating and monitor the amount of credit exposure to any one issuer. We believe there are no significant concentrations of risk associated with our derivative instruments.
Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to our derivative instruments.
Debt Instruments: A premium or discount on a debt instrument is recordedrecognized on the balance sheet as an adjustment to the carrying amount of the debt liability. In general, amounts paid to creditors are considered a reduction in the proceeds received from the issuance of the debt and are accounted for as a component of the premium or discount on the issuance, not as an issuance cost.
Direct and incremental costs associated with the issuance of debt instruments such as legal fees, printing costs, and underwriters' fees, among others, paid to parties other than creditors, are also reported and presented as a reduction of debt on the consolidated balance sheets.
Debt issuance costs and premiums or discounts are amortized over the term of the respective financing arrangement using the effective interest method. Amortization of these amounts is included as a component of Interestinterest expense, net in the consolidated statements of operations.
In accounting for debt refinancing transactions, we apply the provisions of FASB ASC Subtopic 470-50, Modifications and Extinguishments (“ASC 470-50”). Our evaluation of the accounting under FASB ASC Subtopic 470-50 is done on a creditor by creditor basis in order to determine if the terms of the debt are substantially different and, as a result, whether to apply modification or extinguishment accounting. In the event that an individual holder of existing debt did not invest in new debt, we apply extinguishment accounting. Borrowings associated with individual holders of new debt that are not holders of existing debt are accounted for as new issuances.
Refer to Note 8,14, "Debt," for further details ofadditional information related to our debt instruments and transactions.
Equity Investments: We measure equity investments (other than those accounted for under the equity method, those that result in consolidation of the investee, and certain other investments) either at fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative prescribed in FASB ASC Topic 321, Investments - Equity Securities. Under the measurement alternative, such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
Refer to Note 18, "Fair Value Measures," for additional information related to our measurement of financial instruments.
Trade accounts receivable: Trade accounts receivable are recognized at invoiced amounts and do not bear interest. Trade accounts receivable are reduced by an allowance for losses on receivables, as described elsewhere in this Note 2. Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers in various industries and their dispersion across several geographic areas. Although we do not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of these
individual customers. Our largest customer accounted for approximately 7% of our net revenue for the year ended December 31, 2019.
Allowance for Losses on Receivables
The allowance for losses on receivables is used to present accounts receivable, net at an amount that represents our estimate of the related transaction price recognized as revenue in accordance with FASB ASC Topic 606. The allowance represents an estimate of probable but unconfirmed losses in the receivable portfolio. We estimate the allowance on the basis of specifically identified receivables that are evaluated individually for impairment and a statistical analysis of the remaining receivables determined by reference to past default experience. Customers are generally not required to provide collateral for purchases. The allowance for losses on receivables also includes an allowance for sales returns (variable consideration).
Management judgments are used to determine when to charge off uncollectible trade accounts receivable. We base these judgments on the age of the receivable, credit quality of the customer, current economic conditions, and other factors that may affect a customer’s ability and intent to pay.
Losses on receivables have not historically been significant.
Goodwill and Other Intangible Assets
Businesses acquired are 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 the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Goodwill: We have identified 6 reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Certain assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the related reporting units based on methods that we believe are reasonable and supportable, and we apply that allocation method on a consistent basis from year to year. Other assets and liabilities, such as cash and cash equivalents and property, plant and equipment ("PP&E") associated with our corporate offices, and debt, we view as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired and liabilities assumed to a new or existing reporting unit as of the date of the acquisition.
In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the retained portion of the related reporting unit.
We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the first step of the quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities as if the reporting unit had been acquired in a business combination at the date of assessment, and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill. The fair value measurements of our reporting units are categorized in level 3 of the fair value hierarchy.
Indefinite-lived intangible assets: Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review that requires us to estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value. We estimate the fair value by using the relief-from-royalty method, which requires us to make assumptions about future conditions impacting the value of the indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
Definite-lived intangible assets: 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. Capitalized software and capitalized software licenses are presented on the consolidated balance sheets as intangible assets. Capitalized software licenses are amortized on a straight-line basis over the lesser of the term of the license or the estimated useful life of the software. Capitalized software is amortized on a straight-line basis over its estimated useful life.
Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets are impaired. If we determine that such facts or circumstances exist, we estimate the recoverability of these assets by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash flows is less than the carrying value of an asset, the impairment charge is measured as the excess of the carrying value over the fair value of that asset. We determine fair value by using the appropriate income approach valuation methodology, depending on the nature of the definite-lived intangible asset.
Refer to Note 11, "Goodwill and Other Intangible Assets, Net," for additional information related to our goodwill and other intangible assets.
Income Taxes
We provideestimate our provision for income taxes utilizingin each of the jurisdictions in which we operate. The provision for income taxes includes both our current and deferred tax exposure. Our deferred tax exposure is measured using the asset and liability method. Under this method, under which deferred income taxes are recordedrecognized to reflect the future tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to reverse or settle. If it is determined that it is more likely than not that future tax benefits associated with a deferred tax asset will not be realized, a valuation allowance is provided. The effect on deferred tax assets and liabilities of a change in statutory tax rates is recognized in the consolidated statements of operations as an adjustment to income tax expense in the period that includes the enactment date.
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. If it is determined that it is more likely than not that future tax benefits associated with a deferred tax asset will not be realized, a valuation allowance is provided. As a result, we maintain valuation allowances against the deferred tax assets in jurisdictions that have incurred losses in recent periods and in which it is more likely than not that such deferred tax assets will not be utilized in the foreseeable future.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act") was signed into law. The Tax Reform Act introduced two new U.S. tax base erosion provisions: the global intangible low-taxed income ("GILTI") and the base erosion and anti-abuse tax ("BEAT"). We elected to account for GILTI in the period in which it is incurred rather than adjusting our deferred tax assets for any future impacts of this provision. Similarly, we account for BEAT tax in the year incurred as a period expense only, and have followed the guidance found in the FASB Staff Q&A, Topic 740, No. 4, Accounting for the Base Erosion Anti-Abuse Tax, which states that an entity does not need to evaluate the potential of paying BEAT in future years on the realization of its deferred tax assets and liabilities. We have followed this guidance in our current tax calculation and evaluation of the realizability of our deferred tax assets.
In accordance with FASB ASC Topic 740, Income Taxes ("ASC 740"), penaltieswe 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 unrecognizeduncertain tax benefitspositions 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 unrecognizeduncertain tax benefitspositions within the (Benefitprovision for/(benefit from)/provision for income taxes line of the consolidated statements of operations.
Refer to Note 9,7, "Income Taxes," for further details onadditional information related to our income taxes.
Pension and Other Post-Retirement Benefit PlansBenefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The estimatesfunded status of pension and other post-retirement benefit plans, recognized on our consolidated balance sheets as an asset, current liability, or long-term liability, is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. In general, the measurement date coincides with our fiscal year end, however, certain significant events, such as (1) plan amendments, (2) business combinations, (3) settlements or curtailments, or (4) plan mergers, may trigger the need for an interim measurement of both the plan assets and benefit obligations.
Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date. The value of benefit obligations and related expense of these plans recorded in thetakes into consideration various financial statements are based on certain assumptions. The most significant assumptions, relate toincluding assumed discount rate expected return on plan assets, and the rate of increase in healthcare costs. Othercosts, and demographic assumptions, used include employee demographic factors such asincluding compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. We review these assumptions annually.
Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Actuarial gains and losses are recorded directly to Otherother comprehensive income or loss. If the total net actuarial gain or loss included in Accumulatedaccumulated other comprehensive loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pensionbenefit cost over the average remaining service lives of the employees participating in the pension or post-retirement benefit plan.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality, fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the effects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality, fixed-income investments does not exist, we estimate the discount rate using government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we use the fair value of plan assets and consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans’ funds.
Changes to benefit obligations may also be initiated by a settlement or curtailment. A settlement of a defined benefit obligation is an irrevocable transaction that relieves us (or the plan) of primary responsibility for the defined benefit obligation and eliminates significant risks related to the obligation and the assets used to effect the settlement. The ratesettlement of increaseall or more than a minor portion of healthcare costs directly impacts the estimatepension obligation constitutes an event that requires recognition of all or part of the net actuarial gains or losses deferred in accumulated other comprehensive loss. Our policy is to apply settlement accounting to the extent our year-to date settlements for a given plan exceed the sum of our forecasted full year service cost and interest cost for that particular plan.
A curtailment is an event that significantly reduces the expected years of service of active employees or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future obligationsservice. The curtailment accounting provisions are applied on a plan-by-plan basis. The total gain or loss resulting from a curtailment is the sum of two distinct elements: (1) prior service cost write-off and (2) curtailment gain or loss. Our policy is that a curtailment event
represents one for which we expect a 10% (or greater) reduction in connection with ourfuture years of service or an elimination of the accrual of defined benefits for some or all of the future services of 10% (or greater) of the plan's participants.
Contributions made to pension and other post-retirement medical benefits. Our estimatebenefit plans are presented as cash used in operations within the consolidated statements of healthcarecash flows.
We present the service cost trends is based on historical increases in healthcare costs under similarly designed plans, the levelcomponent of increase in healthcare costs expectednet periodic benefit cost in the future,cost of revenue, research and development ("R&D"), and SG&A expense line items, and we present the design featuresnon–service components of the underlying plan.
We have adopted use of the Retirement Plan ("RP") 2014 mortality tables with the updated Mortality Projection ("MP") 2017 mortality improvement scale as issued by the Society of Actuariesnet periodic benefit cost in 2017 for our U.S. defined benefit plans. The updated MP 2017 mortality improvement scale reflects improvements in longevity as compared to the MP 2016 mortality improvement scale the Society of Actuaries issued in 2016, primarily because it includes actual Social Security mortality data through 2015. The MP projection scale is used to factor in projected mortality improvements over time, based on age and date of birth (i.e., two-dimension generational).other, net.
Refer to Note 10,13, "Pension and Other Post-Retirement Benefits," for furtheradditional information onrelated to our pension and other post-retirement benefit plans.
Allowance for Losses on Receivables
The allowance for losses on receivables is used to provide for potential impairment of receivables. The allowance represents an estimate of probable but unconfirmed losses in the receivable portfolio. We estimate the allowance on the basis of specifically identified receivables that are evaluated individually for impairment and a statistical analysis of the remaining receivables determined by reference to past default experience. Customers are generally not required to provide collateral for purchases. The allowance for losses on receivables also includes an allowance for sales returns.
Management judgments are used to determine when to charge off uncollectible trade accounts receivable. We base these judgments on the age of the receivable, credit quality of the customer, current economic conditions, and other factors that may affect a customer’s ability and intent to pay.
Losses on receivables have not historically been significant.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. Cost forThe cost of raw materials, work-in-process, and finished goods is determined based on a first-in, first-out ("FIFO") basis and includes material, labor, and applicable manufacturing overhead. We conduct quarterly inventory reviews for salability and obsolescence, and inventory considered unlikely to be sold is adjusted to net realizable value.
Refer to Note 4,9, "Inventories," for details ofadditional information related to our inventory balances.
Property, Plant and Equipment ("PP&E") and Other Capitalized Costs
PP&E is stated at cost, and in the case of plant and equipment, is depreciated on a straight-line basis over its estimated economic useful life. The depreciable lives of plant and equipment are as follows:
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| Buildings and improvements | 2 – 40 years |
| Machinery and equipment | 2 – 15 years |
Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated economic useful lives of the improvements. Amortization of leasehold improvements is included in depreciation expense.
Assets held under capitalfinance leases are recordedrecognized at the lower of the present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. AmortizationDepreciation expense associated with capitalfinance leases which is included within depreciation expense, is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease, unless ownership is transferred by the end of the lease or there is a bargain purchase option, in which case the asset is amortized,depreciated, normally on a straight-line basis, over the useful life that would be assigned if the asset were owned.
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major improvements that increase asset values and extend useful lives are capitalized.
Refer to Note 3,10, "Property, Plant and Equipment," for details ofadditional information related to our PP&E balances.
Foreign Currency
We derive a significant portion of our net revenue from markets outside of the U.S. For financial reporting purposes, the functional currency of all of our subsidiaries is the U.S. dollarUSD because of the significant influence of the U.S. dollarUSD on our operations. In certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar.USD. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in U.S. dollarsUSD using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollarUSD are adjusted to the U.S. dollarUSD using the exchange rate at the balance sheet date, with gains or losses recognized in Other,other, net in the consolidated statements of operations.
Other, netCash and Cash Equivalents
Other, net for the years ended December 31, 2017, 2016,Cash comprises cash on hand. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of change in value, and 2015 consistedhave original maturities of the following:three months or less.
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Currency remeasurement gain/(loss) on net monetary assets | $ | 18,041 |
| | $ | (10,621 | ) | | $ | (9,613 | ) |
| (Loss)/gain on foreign currency forward contracts | (15,618 | ) | | (1,850 | ) | | 3,606 |
|
| Gain/(loss) on commodity forward contracts | 9,989 |
| | 7,399 |
| | (18,468 | ) |
| Loss on debt financing | (2,670 | ) | | — |
| | (25,538 | ) |
| Other | 75 |
| | 171 |
| | (316 | ) |
| Total | $ | 9,817 |
| | $ | (4,901 | ) | | $ | (50,329 | ) |
Recently issued accounting standards to be adopted in a futurethe current period:
In May 2014,February 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which modifies how all entities recognize revenue, and
consolidates into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605 and various other revenue accounting standards for specialized transactions and industries. FASB ASU No. 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. FASB ASU No. 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of FASB ASU No. 2014-09 by one year. FASB ASU No. 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We have developed an implementation plan to adopt this new guidance, which included an assessment of the impact of the new guidance on our financial position and results of operations. This implementation plan is substantially complete. We have determined that this standard will not have a material impact on our financial position or results of operations. We adopted FASB ASU No. 2014-09 on January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. FASB ASU No. 2016-02ASC Topic 842, Leases, requires lessees to classify most leases as either finance or operating leases and to initially recognize a lease liability and right-of-use asset. Entities may elect to account for certain short-termFor finance leases, (with a term of 12 months or less) using a method similar to the current operating lease model. The statements of operations will include for finance leases, separate recognition of interest on the lease liability and amortization of the right-of-use asset and forasset. For operating leases, the statements of operations include a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis. At December 31, 2017, we are contractually obligated to make future paymentsWe adopted the provisions of $68.6 million under our operating lease obligations in existence as of that date, primarily related to long-term leases. While we are in the early stages of our implementation process for FASB ASU No. 2016-02 and have not yet determined itson January 1, 2019 using the modified retrospective transition method. Refer to Note 21, "Leases" for additional information related to this adoption.
No other recently issued accounting standards adopted in the current period had a material impact on our consolidated financial position or results of operations, these leases would potentially be requiredoperations.
Recently issued accounting standards to be presented on the balance sheetadopted in accordance with the requirements of FASB ASU No. 2016-02. FASB ASU No. 2016-02 is effective for annual reportinga future period:
There are no recently issued accounting standards to be adopted in future periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. FASB ASU No. 2016-02 must be applied usingthat are expected to have a modified retrospective approach, which requires recognition and measurement of leases at the beginning of the earliest period presented, with certain practical expedients available.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. FASB ASU No. 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. We are still evaluating thematerial impact that this guidance will have on our consolidated financial position andor results of operations, and we have not yet determined whether we will early adopt FASB ASU No. 2017-12.operations.
3. Revenue Recognition
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. The vast majority of our revenue is derived from the sale of tangible products whereby control of the product transfers to the customer at a point in time, we recognize revenue at a point in time, and the underlying contract is a PO that establishes a firm purchase commitment for a short period of time. Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials. We do not offer separately priced extended warranty or product maintenance contracts. Refer to Note 2, "Significant Accounting Policies" for additional information.
We have elected to apply certain practical expedients that allow for more limited disclosures than those that would otherwise be required by FASB ASC Topic 606, including (1) the disclosure of transaction price allocated to the remaining unsatisfied performance obligations at the end of the period and (2) an explanation of when we expect to recognize the related revenue.
We believe that our end markets are the categories that best depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents net revenue disaggregated by segment and end market for the years ended December 31, 2019, 2018, and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing | | Sensing Solutions | | Total |
| | For the year ended December 31, | | For the year ended December 31, | | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | | | | | | | | | | | | | |
| Automotive | $ | 1,986,537 |
| | $ | 2,076,834 |
| | $ | 1,989,152 |
| | $ | 42,446 |
| | $ | 49,961 |
| | $ | 50,463 |
| | $ | 2,028,983 |
| | $ | 2,126,795 |
| | $ | 2,039,615 |
|
HVOR (1) | 559,479 |
| | 550,817 |
| | 471,448 |
| | — |
| | — |
| | — |
| | 559,479 |
| | 550,817 |
| | 471,448 |
|
| Industrial | — |
| | — |
| | — |
| | 351,942 |
| | 336,617 |
| | 312,137 |
| | 351,942 |
| | 336,617 |
| | 312,137 |
|
Appliance and HVAC (2) | — |
| | — |
| | — |
| | 201,745 |
| | 208,482 |
| | 209,958 |
| | 201,745 |
| | 208,482 |
| | 209,958 |
|
| Aerospace | — |
| | — |
| | — |
| | 176,505 |
| | 164,294 |
| | 150,782 |
| | 176,505 |
| | 164,294 |
| | 150,782 |
|
| Other | — |
| | — |
| | — |
| | 131,977 |
| | 134,622 |
| | 122,793 |
| | 131,977 |
| | 134,622 |
| | 122,793 |
|
| Net revenue | $ | 2,546,016 |
| | $ | 2,627,651 |
| | $ | 2,460,600 |
| | $ | 904,615 |
| | $ | 893,976 |
| | $ | 846,133 |
| | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
| |
(1) | Heavy vehicle and off-road |
| |
(2) | Heating, ventilation and air conditioning |
In addition, refer to Note 20, "Segment Reporting," for a presentation of net revenue disaggregated by product category and geographic region.
Contract Assets and Liabilities
Accounts receivable represent our only contract asset. Contract liabilities, whereby we receive payment from customers related to our promise to satisfy performance obligations in the future, are 0t material.
4. Share-Based Payment Plans
We issue share-based compensation awards under the Sensata Technologies Holding plc First Amended and Restated 2010 Equity Incentive Plan (the "2010 Equity Incentive Plan"). The purpose of the 2010 Equity Incentive Plan is to promote long-term growth and profitability by providing our present and future eligible directors, officers, and employees with incentives to contribute to, and participate in, our success. There are 10.0 million ordinary shares authorized for grants of awards under the 2010 Equity Incentive Plan, of which 2.5 million were available as of December 31, 2019.
Refer to Note 2, "Significant Accounting Policies," for additional information related to our to share-based compensation accounting policies.
Share-Based Compensation Awards
We grant option, restricted stock unit ("RSU"), and performance restricted stock unit ("PRSU") awards under the 2010 Equity Incentive Plan. For option and RSU awards vesting is typically subject only to continued employment and the passage of time. For PRSU awards vesting is also subject to continued employment and the passage of time, however the number of awarded units that ultimately vest also depends on the attainment of certain predefined performance criteria. Throughout this Annual Report on Form 10-K, RSU and PRSU awards are often referred to collectively as "restricted securities."
Options
A summary of stock option activity for the years ended December 31, 2019, 2018, and 2017 is presented in the table below (amounts have been calculated based on unrounded shares):
|
| | | | | | | | | | | | |
| | Number of Options (thousands) | | Weighted-Average Exercise Price Per Option | | Weighted-Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value |
| Balance as of December 31, 2016 | 3,546 |
| | $ | 35.67 |
| | 6.3 | | $ | 19,844 |
|
| Granted | 387 |
| | $ | 43.67 |
| | | | |
| Forfeited or expired | (1 | ) | | $ | 32.03 |
| | | | |
| Exercised | (326 | ) | | $ | 22.86 |
| | | | $ | 7,175 |
|
| Balance as of December 31, 2017 | 3,606 |
| | $ | 37.69 |
| | 6.0 | | $ | 50,130 |
|
| Granted | 307 |
| | $ | 51.83 |
| | | | |
| Forfeited or expired | (39 | ) | | $ | 45.59 |
| | | | |
| Exercised | (172 | ) | | $ | 35.31 |
| | | | $ | 3,143 |
|
| Balance as of December 31, 2018 | 3,702 |
| | $ | 38.89 |
| | 5.3 | | $ | 27,846 |
|
| Granted | 382 |
| | $ | 46.92 |
| | | | |
| Forfeited or expired | (83 | ) | | $ | 48.92 |
| | | | |
| Exercised | (537 | ) | | $ | 28.21 |
| | | | $ | 11,690 |
|
| Balance as of December 31, 2019 | 3,464 |
| | $ | 41.19 |
| | 5.0 | | $ | 44,696 |
|
| Options vested and exercisable as of December 31, 2019 | 2,646 |
| | $ | 39.49 |
| | 4.0 | | $ | 38,811 |
|
| Vested and expected to vest as of December 31, 2019 | 3,385 |
| | $ | 41.05 |
| | 4.9 | | $ | 44,145 |
|
A summary of the status of our unvested options as of December 31, 2019, and of the changes during the year then ended, is presented in the table below (amounts have been calculated based on unrounded shares):
|
| | | | | | |
| | Number of Options (thousands) | | Weighted-Average Grant-Date Fair Value |
| Balance as of December 31, 2018 | 1,077 |
| | $ | 13.98 |
|
| Granted during the year | 382 |
| | $ | 13.90 |
|
| Vested during the year | (579 | ) | | $ | 13.41 |
|
| Forfeited during the year | (62 | ) | | $ | 14.39 |
|
| Balance as of December 31, 2019 | 818 |
| | $ | 14.33 |
|
The fair value of stock options that vested during the years ended December 31, 2019, 2018, and 2017 was $7.8 million, $5.5 million, and $5.6 million, respectively.
Option awards granted to employees under the 2010 Equity Incentive Plan generally vest 25% per year over four years from the grant date.
We recognize compensation expense for options on a straight-line basis over the requisite service period, which is generally the same as the vesting period. The options generally expire ten years from the date of grant.
For options granted prior to April 2019, except as otherwise provided in specific option award agreements, if a participant ceases to be employed by us, options not yet vested generally expire and are forfeited at the termination date, and options that are fully vested generally expire 60 days after termination of the participant’s employment. Exclusions to the general policy for terminated employees include termination for cause (in which case the options expire on the participant’s termination date) and termination due to death or disability (in which case any unvested options shall immediately vest and expire six months after the participant’s termination date).
For options granted in or after April 2019, the same terms apply, except that fully vested options expire 90 days after termination of the participant's employment for any reason other than termination for cause (in which case the options expire on the participant's termination date), termination due to due to death or disability (in which case the options expire one year after the participant's termination date), and termination for a qualified retirement (in which case options will continue to vest and expire ten years from the grant date).
The weighted-average grant-date fair value per option granted during the years ended December 31, 2019, 2018, and 2017 was $13.90, $15.70, and $14.50, respectively. The fair value of options was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The weighted-average key assumptions used in estimating the grant-date fair value of options for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Expected dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected volatility | 25.00 | % | | 25.00 | % | | 30.00 | % |
| Risk-free interest rate | 2.35 | % | | 2.62 | % | | 2.08 | % |
| Expected term (years) | 6.0 |
| | 6.0 |
| | 6.0 |
|
| Fair value per share of underlying ordinary shares | $ | 46.92 |
| | $ | 51.83 |
| | $ | 43.67 |
|
Restricted Securities
We grant RSU awards that cliff vest between one year and three years from the grant date, and we grant PRSU awards that cliff vest three years after the grant date. For PRSU awards, the number of units that ultimately vest depends on the extent to which certain performance criteria are met, as described in the table below. For restricted securities granted in or after April 2019, terms include provisions allowing continued or accelerated vesting for a qualified retirement.
A summary of restricted securities granted in the years ended December 31, 2019, 2018, and 2017 is presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Percentage Range of Units That May Vest (1) |
| | | | | | 0.0% to 150.0% | | 0.0% to 172.5% | | 0.0% to 200.0% |
| (Awards in thousands) | RSU Awards Granted | | Weighted-Average
Grant-Date
Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value |
| 2019 | 298 |
| | $ | 47.73 |
| | 76 |
| | $ | 46.92 |
| | 138 |
| | $ | 46.92 |
| | — |
| | $ | — |
|
| 2018 | 218 |
| | $ | 51.05 |
| | 63 |
| | $ | 51.83 |
| | 118 |
| | $ | 51.83 |
| | — |
| | $ | — |
|
| 2017 | 182 |
| | $ | 43.24 |
| | — |
| | $ | — |
| | 183 |
| | $ | 43.67 |
| | 53 |
| | $ | 43.33 |
|
| |
(1) | Represents the percentage range of PRSU award units granted that may vest according to the terms of the awards. The amounts presented within this table do not reflect our current assessment of the probable outcome of vesting based on the achievement or expected achievement of performance conditions. |
Compensation expense for the year ended December 31, 2019 reflects our estimate of the probable outcome of the performance conditions associated with the PRSU awards granted in fiscal years 2019, 2018, and 2017.
A summary of activity related to outstanding restricted securities for fiscal years 2019, 2018, and 2017 is presented in the table below (amounts have been calculated based on unrounded shares):
|
| | | | | | |
| | Restricted Securities (thousands) | | Weighted-Average Grant-Date Fair Value |
| Balance as of December 31, 2016 | 920 |
| | $ | 44.35 |
|
| Granted | 418 |
| | $ | 43.44 |
|
| Forfeited | (35 | ) | | $ | 43.94 |
|
| Vested | (222 | ) | | $ | 42.24 |
|
| Balance as of December 31, 2017 | 1,081 |
| | $ | 44.43 |
|
| Granted | 399 |
| | $ | 51.40 |
|
| Forfeited | (121 | ) | | $ | 48.28 |
|
| Vested | (240 | ) | | $ | 53.01 |
|
| Balance as of December 31, 2018 | 1,119 |
| | $ | 44.66 |
|
Granted (1) | 555 |
| | $ | 46.73 |
|
| Forfeited | (115 | ) | | $ | 47.07 |
|
| Vested | (454 | ) | | $ | 39.62 |
|
| Balance as of December 31, 2019 | 1,105 |
| | $ | 47.51 |
|
| |
(1) | Includes 43 thousand PRSU awards granted due to greater than 100% vesting. |
Aggregate intrinsic value information for restricted securities as of December 31, 2019, 2018, and 2017 is presented below:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Outstanding | $ | 59,526 |
| | $ | 50,161 |
| | $ | 55,271 |
|
| Expected to vest | $ | 34,717 |
| | $ | 44,203 |
| | $ | 42,106 |
|
The weighted-average remaining periods over which the restrictions will lapse as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Outstanding | 1.1 | | 1.2 | | 1.3 |
| Expected to vest | 1.0 | | 1.2 | | 1.4 |
The expected to vest restricted securities are calculated based on the application of a forfeiture rate assumption to all outstanding restricted securities as well as our assessment of the probability of meeting the required performance conditions that pertain to the PRSU awards.
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards, which is recognized within SG&A expense in the consolidated statements of operations, during the identified periods:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Stock options | $ | 6,552 |
| | $ | 5,739 |
| | $ | 6,046 |
|
| Restricted securities | 12,205 |
| | 18,086 |
| | 13,773 |
|
| Share-based compensation expense | $ | 18,757 |
| | $ | 23,825 |
| | $ | 19,819 |
|
In fiscal years 2019 and 2018, we recognized $3.2 million and $3.0 million of income tax benefit associated with share-based compensation expense. We recognized 0 such tax benefit in fiscal year 2017.
The table below presents unrecognized compensation expense at December 31, 2019 for each class of award, and the remaining expected term for this expense to be recognized:
|
| | | | | |
| | Unrecognized Compensation Expense | | Expected Recognition (years) |
| Options | $ | 8,419 |
| | 1.8 |
| Restricted securities | 14,789 |
| | 1.5 |
| Total unrecognized compensation expense | $ | 23,208 |
| | |
5. Restructuring and Other Charges, Net
Restructuring and other charges, net for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Severance costs, net (1) | | $ | 29,240 |
| | $ | 7,566 |
| | $ | 11,125 |
|
Facility and other exit costs (2) | | 808 |
| | 877 |
| | 7,850 |
|
Gain on sale of Valves Business (3)(5) | | — |
| | (64,423 | ) | | — |
|
Other (4)(5) | | 23,512 |
| | 8,162 |
| | — |
|
| Restructuring and other charges, net | | $ | 53,560 |
| | $ | (47,818 | ) | | $ | 18,975 |
|
| |
(1) | Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.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 in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of 2 other manufacturing sites in Europe. |
| |
(3) | In the year ended December 31, 2018, we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business"). |
| |
(4) | In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC, LLC ("GIGAVAC"). Refer to Note 15, "Commitments and Contingencies," for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC. |
| |
(5) | Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
Changes to our severance liability during the years ended December 31, 2019 and 2018 were as follows:
|
| | | | |
| | | Severance |
| Balance as of December 31, 2017 | | $ | 7,583 |
|
| Charges, net of reversals | | 7,566 |
|
| Payments | | (8,341 | ) |
| Foreign currency remeasurement | | (217 | ) |
| Balance as of December 31, 2018 | | 6,591 |
|
| Charges, net of reversals | | 29,240 |
|
| Payments | | (21,095 | ) |
| Foreign currency remeasurement | | 43 |
|
| Balance as of December 31, 2019 | | $ | 14,779 |
|
The severance liability as of December 31, 2019 and 2018 was entirely recorded in accrued expenses and other current liabilities on our consolidated balance sheets. Refer to Note 12, "Accrued Expenses and Other Current Liabilities."
6. Other, Net
Other, net consisted of the following for the years ended December 31, 2019, 2018, and 2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
Currency remeasurement (loss)/gain on net monetary assets(1) | $ | (6,802 | ) | | $ | (18,905 | ) | | $ | 18,041 |
|
Gain/(loss) on foreign currency forward contracts(2) | 2,225 |
| | 2,070 |
| | (15,618 | ) |
Gain/(loss) on commodity forward contracts(2) | 4,888 |
| | (8,481 | ) | | 9,989 |
|
Loss on debt financing(3) | (4,364 | ) | | (2,350 | ) | | (2,670 | ) |
| Net periodic benefit cost, excluding service cost | (3,186 | ) | | (3,585 | ) | | (3,402 | ) |
| Other | (669 | ) | | 886 |
| | 75 |
|
| Other, net | $ | (7,908 | ) | | $ | (30,365 | ) | | $ | 6,415 |
|
| |
(1) | Relates to the remeasurement of non-USD denominated net monetary assets and liabilities into USD. Refer to the Foreign Currency section of Note 2, "Significant Accounting Policies," for additional information. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to gains and losses on our commodity and foreign currency exchange forward contracts. |
| |
(3) | Refer to Note 14, "Debt," for additional information related to our debt financing transactions. |
7. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 28, 2018, the Company reincorporated its headquarters in the U.K. We file income tax returns in the countries in which our subsidiaries are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.S., and the U.K. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
The Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. In fiscal year 2017 we recognized a tax benefit related to the enactment-date effects of the Tax
Reform Act resulting from the adjustment of our deferred tax assets and liabilities, net of the impact from recognizing the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recognizing a tax benefit of $73.7 million, which was principally associated with indefinite-lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Tax Reform Act and refinement of our calculations during the year ended December 31, 2018, we determined that no further adjustment was necessary.
Global intangible low-taxed income
The Tax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| 2019 | $ | 13,183 |
| | $ | 377,240 |
| | $ | 390,423 |
|
| 2018 | $ | 68,027 |
| | $ | 458,348 |
| | $ | 526,375 |
|
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
Provision for/(benefit from) income taxes
Provision for/(benefit from) income taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | | | | | |
| | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| 2019 | | | | | | | |
| Current | $ | 5,643 |
| | $ | 73,947 |
| | $ | 496 |
| | $ | 80,086 |
|
| Deferred | 9,687 |
| | 17,339 |
| | 597 |
| | 27,623 |
|
| Total | $ | 15,330 |
| | $ | 91,286 |
| | $ | 1,093 |
| | $ | 107,709 |
|
| 2018 | | | | | | | |
| Current | $ | 5,700 |
| | $ | 64,666 |
| | $ | 1,082 |
| | $ | 71,448 |
|
| Deferred | (109,663 | ) | | (18,770 | ) | | (15,635 | ) | | (144,068 | ) |
| Total | $ | (103,963 | ) | | $ | 45,896 |
| | $ | (14,553 | ) | | $ | (72,620 | ) |
| 2017 | | | | | | | |
| Current | $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Tax computed at statutory rate of 21% in 2019 and 2018, and 35% in 2017 | $ | 81,989 |
| | $ | 110,539 |
| | $ | 140,854 |
|
| Reserve for tax exposure | 20,079 |
| | 10,775 |
| | 38,013 |
|
| Valuation allowances | 19,640 |
| | (123,426 | ) | | (3,368 | ) |
| Foreign tax rate differential | (19,107 | ) | | (41,200 | ) | | (111,990 | ) |
| Withholding taxes not creditable | 9,509 |
| | 8,734 |
| | 3,896 |
|
| Research and development incentives | (8,410 | ) | | (19,475 | ) | | (5,922 | ) |
| Change in tax laws or rates | 5,121 |
| | (22,264 | ) | | 3,912 |
|
| U.S. state taxes, net of federal benefit | 863 |
| | (11,499 | ) | | 1,087 |
|
| Unrealized foreign currency exchange losses, net | (43 | ) | | 11,346 |
| | 830 |
|
| U.S. Tax Reform Act impact | — |
| | — |
| | (73,668 | ) |
| Other | (1,932 | ) | | 3,850 |
| | 440 |
|
| Provision for/(benefit from) income taxes | $ | 107,709 |
| | $ | (72,620 | ) | | $ | (5,916 | ) |
Valuation allowance impact on tax expense
During the year ended December 31, 2018, we released a substantial portion of our valuation allowance against our deferred tax assets in the U.S. We continue to maintain a valuation allowance against certain of our interest, foreign tax, and state tax credit carryforwards. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Act Impact
As a result of the Tax Reform Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recognized $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory 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.
Our subsidiary in Changzhou, China is currently eligible for a reduced tax rate of 15%, which is effective through 2021. The impact on current tax expense of the tax holidays and exemptions is included in the foreign tax rate differential line in the reconciliation of the statutory tax rate to effective rate. The remeasurement of the deferred tax assets and liabilities is included in the change in tax laws or rates line.
Research and development incentives
Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are deducted if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned. In certain jurisdictions we recognize a deferred tax liability on withholding and other taxes on intercompany payments including dividends.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Net operating loss, interest expense, and other carryforwards | $ | 283,094 |
| | $ | 305,277 |
|
| Prepaid and accrued expenses | 67,143 |
| | 72,093 |
|
| Intangible assets | 20,457 |
| | 27,122 |
|
| Inventories and related reserves | 16,712 |
| | 14,171 |
|
| Property, plant and equipment | 14,749 |
| | 14,571 |
|
| Share-based compensation | 10,288 |
| | 11,332 |
|
| Pension liability and other | 7,158 |
| | 8,741 |
|
| Unrealized exchange loss | 1,959 |
| | 4,255 |
|
| Total deferred tax assets | 421,560 |
| | 457,562 |
|
| Valuation allowance | (146,775 | ) | | (157,043 | ) |
| Net deferred tax asset | 274,785 |
| | 300,519 |
|
| Deferred tax liabilities: | | | |
| Intangible assets and goodwill | (440,009 | ) | | (440,348 | ) |
| Tax on undistributed earnings of subsidiaries | (31,636 | ) | | (35,187 | ) |
| Property, plant and equipment | (13,762 | ) | | (15,795 | ) |
| Operating lease right of use assets | (12,522 | ) | | — |
|
| Unrealized exchange gain | (6,739 | ) | | (6,912 | ) |
| Total deferred tax liabilities | (504,668 | ) | | (498,242 | ) |
| Net deferred tax liability | $ | (229,883 | ) | | $ | (197,723 | ) |
Valuation allowance and net operating loss carryforwards
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we determined that sufficient positive evidence existed as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million were realizable, and therefore, we reduced the valuation allowance accordingly.
One of the provisions of the Tax Reform Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards
may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not reverse unless the related book goodwill or indefinite-lived intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2019 and 2018 decreased $10.3 million and $120.3 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2019 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2019, we have U.S. federal net operating loss carryforwards of $472.0 million and suspended interest expense carryforwards of $511.4 million. Substantially all of our U.S. federal net operating loss carryforwards will expire from 2027 to 2037. Our state net operating loss carryforwards will expire from 2020 to 2037. Our interest carryovers have an unlimited life. We also have non-U.S. net operating loss carryforwards of $221.9 million, which will begin to expire in 2020.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 89,609 |
| | $ | 59,884 |
| | $ | 45,898 |
|
| Increases related to current year tax positions | | 17,378 |
| | 15,676 |
| | 14,585 |
|
| Increases related to prior year tax positions | | 15,356 |
| | 14,609 |
| | 7,968 |
|
| Decreases related to settlements with tax authorities | | (3,515 | ) | | — |
| | (7,211 | ) |
| Decreases related to prior year tax positions | | (1,773 | ) | | (1,144 | ) | | — |
|
| Increases related to business combinations | | 450 |
| | 1,000 |
| | — |
|
| Decreases related to lapse of applicable statute of limitations | | (87 | ) | | — |
| | (1,356 | ) |
| Increases/(decreases) related to foreign currency exchange rate | | 173 |
| | (416 | ) | | — |
|
| Balance at end of year | | $ | 117,591 |
| | $ | 89,609 |
| | $ | 59,884 |
|
We recognize interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table that follows presents the expense/(income) related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 2019, 2018, and 2017, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Statements of Operations | | Balance Sheets |
| | For the year ended December 31, | | As of December 31, |
| (In millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| Interest | $ | 0.9 |
| | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 1.3 |
| | $ | 0.4 |
|
| Penalties | $ | (0.1 | ) | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | 0.3 |
| | $ | 0.4 |
|
At December 31, 2019, we anticipate that the liability for unrecognized tax benefits could decrease by up to $6.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2019 that if recognized, would impact our effective tax rate is $67.8 million.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.K., and the U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2019.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2019, 2018, and 2017, the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Basic weighted-average ordinary shares outstanding | 160,946 |
| | 168,570 |
| | 171,165 |
|
| Dilutive effect of stock options | 600 |
| | 822 |
| | 616 |
|
| Dilutive effect of unvested restricted securities | 422 |
| | 467 |
| | 388 |
|
| Diluted weighted-average ordinary shares outstanding | 161,968 |
| | 169,859 |
| | 172,169 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for additional information related to our equity awards. These potential ordinary shares are as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Anti-dilutive shares excluded | 1,170 |
| | 930 |
| | 1,410 |
|
| Contingently issuable shares excluded | 641 |
| | 687 |
| | 871 |
|
9. Inventories
The components of inventories as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Finished goods | $ | 197,531 |
| | $ | 187,095 |
|
| Work-in-process | 104,007 |
| | 104,405 |
|
| Raw materials | 205,140 |
| | 200,819 |
|
| Inventories | $ | 506,678 |
| | $ | 492,319 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 20172019 and 20162018 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Land | | $ | 17,880 |
| | $ | 22,021 |
|
| Buildings and improvements | | 266,864 |
| | 259,182 |
|
| Machinery and equipment | | 1,367,293 |
| | 1,220,285 |
|
| Total property, plant and equipment | | 1,652,037 |
| | 1,501,488 |
|
| Accumulated depreciation | | (821,039 | ) | | (714,310 | ) |
| Property, plant and equipment, net | | $ | 830,998 |
| | $ | 787,178 |
|
|
| | | | | | | | |
| | | December 31,
2017 | | December 31,
2016 |
| Land | | $ | 23,077 |
| | $ | 23,077 |
|
| Buildings and improvements | | 250,475 |
| | 234,846 |
|
| Machinery and equipment | | 1,132,461 |
| | 1,025,900 |
|
| PP&E, gross | | 1,406,013 |
| | 1,283,823 |
|
| Accumulated depreciation | | (655,964 | ) | | (559,777 | ) |
| Total | | $ | 750,049 |
| | $ | 724,046 |
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under capitalfinance leases, totaled $115.9 million, $106.0 million, and $109.3 million$106.9 million, and $96.1 million for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively.
PP&E, net as of December 31, 20172019 and 20162018 included the following assets under capitalfinance leases:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Assets under finance leases in property, plant and equipment | $ | 49,714 |
| | $ | 49,714 |
|
| Accumulated depreciation | (24,316 | ) | | (22,508 | ) |
| Assets under finance leases in property, plant and equipment, net | $ | 25,398 |
| | $ | 27,206 |
|
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| PP&E recognized under capital leases | $ | 45,249 |
| | $ | 44,637 |
|
| Accumulated amortization | (20,631 | ) | | (18,410 | ) |
| Total | $ | 24,618 |
| | $ | 26,227 |
|
4. Inventories
The components of inventories as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Finished goods | $ | 195,089 |
| | $ | 169,304 |
|
| Work-in-process | 92,678 |
| | 74,810 |
|
| Raw materials | 158,362 |
| | 145,730 |
|
| Total | $ | 446,129 |
| | $ | 389,844 |
|
As of December 31, 2017 and 2016, inventories totaling $11.2 million and $10.3 million, respectively, had been consigned to customers.
5.11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in net goodwill by segment for the yearyears ended December 31, 2016. There were no acquisitions or other changes to goodwill during the year ended2019 and 2018.
|
| | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| Balance as of December 31, 2017 | $ | 2,148,135 |
| | $ | 857,329 |
| | $ | 3,005,464 |
|
| Divestiture of Valves Business | (38,800 | ) | | — |
| | (38,800 | ) |
| Acquisition of GIGAVAC | 46,298 |
| | 68,340 |
| | 114,638 |
|
| Balance as of December 31, 2018 | 2,155,633 |
| | 925,669 |
| | 3,081,302 |
|
| GIGAVAC purchase accounting adjustment | 16,387 |
| | (16,564 | ) | | (177 | ) |
| Other acquisition | — |
| | 12,473 |
| | 12,473 |
|
| Balance as of December 31, 2019 | $ | 2,172,020 |
| | $ | 921,578 |
| | $ | 3,093,598 |
|
At each of December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| | Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Balance as of December 31, 2015 | $ | 2,149,627 |
|
| $ | — |
|
| $ | 2,149,627 |
|
| $ | 888,582 |
|
| $ | (18,466 | ) |
| $ | 870,116 |
|
| $ | 3,038,209 |
|
| $ | (18,466 | ) |
| $ | 3,019,743 |
|
| CST - purchase accounting adjustment | (1,492 | ) | | — |
| | (1,492 | ) | | (12,787 | ) | | — |
| | (12,787 | ) | | (14,279 | ) | | — |
| | (14,279 | ) |
| Balance as of December 31, 2016 and 2017 | $ | 2,148,135 |
| | $ | — |
| | $ | 2,148,135 |
| | $ | 875,795 |
| | $ | (18,466 | ) | | $ | 857,329 |
| | $ | 3,023,930 |
| | $ | (18,466 | ) | | $ | 3,005,464 |
|
Goodwill attributed to acquisitions reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed. The purchase accounting adjustments above generally reflect revisions in fair value estimates of liabilities assumed, and tangible and intangible assets acquired as well as an adjustment to arrive at the final allocation of goodwillhas been assigned to our segments which is based on a methodology that utilizesusing anticipated future earnings of the components of business. Goodwill attributed to the business.
We evaluated our goodwill for impairment as of October 1, 2017 using a combinationdivestiture of the qualitative and quantitative methods. BasedValves Business is based on these analyses, we have determined that, for each of the reporting units subject to the qualitative method, it was more likely than not that their fair values were greater than their carrying values at that date, and for each of the reporting units subject to the quantitative method, that their fair values exceeded their carrying values at that date. We evaluated our other indefinite-lived intangible assets for impairment as of October 1, 2017 using the quantitative method, and we determined that the fair values of these indefinite-lived intangible assets exceeded their carrying values on that date. Should certain assumptions change that were used in the qualitative and quantitative analyses of goodwill, or in the development of therelative fair value of our indefinite-lived intangible assets, we may be required to recognize goodwill or other intangible asset impairments.
The following table outlines the components of definite-lived intangible assets, excluding goodwill, as of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted-
Average
Life (Years) | | December 31, 2017 | | December 31, 2016 |
Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value |
| Completed technologies | 14 | | $ | 727,968 |
| | $ | (418,987 | ) | | $ | (2,430 | ) | | $ | 306,551 |
| | $ | 729,168 |
| | $ | (358,500 | ) | | $ | (2,430 | ) | | $ | 368,238 |
|
| Customer relationships | 11 | | 1,771,198 |
| | (1,287,581 | ) | | (12,144 | ) | | 471,473 |
| | 1,771,198 |
| | (1,196,961 | ) | | (12,144 | ) | | 562,093 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
| | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 22 | | 50,754 |
| | (11,094 | ) | | — |
| | 39,660 |
| | 50,754 |
| | (8,672 | ) | | — |
| | 42,082 |
|
Capitalized software (1) | 7 | | 59,909 |
| | (25,939 | ) | | — |
| | 33,970 |
| | 54,284 |
| | (19,736 | ) | | — |
| | 34,548 |
|
| Total | 12 | | $ | 2,633,229 |
| | $ | (1,767,001 | ) | | $ | (14,574 | ) | | $ | 851,654 |
| | $ | 2,628,804 |
| | $ | (1,607,269 | ) | | $ | (14,574 | ) | | $ | 1,006,961 |
|
| |
(1)
| During the years ended December 31, 2017 and 2016, we wrote-off approximately $1.1 million and $7.2 million, respectively, of fully-amortized capitalized software that was not in use. |
The following table outlines Amortization of intangible assets for the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Acquisition-related definite-lived intangible assets | $ | 153,729 |
| | $ | 194,208 |
| | $ | 179,785 |
|
| Capitalized software | 7,321 |
| | 7,290 |
| | 6,847 |
|
| Total | $ | 161,050 |
| | $ | 201,498 |
| | $ | 186,632 |
|
The table below presents estimated Amortization of intangible assets for the following future periods:
|
| | | |
| 2018 | $ | 137,707 |
|
| 2019 | $ | 128,594 |
|
| 2020 | $ | 112,141 |
|
| 2021 | $ | 95,960 |
|
| 2022 | $ | 81,816 |
|
In additionValves Business to the above, wePerformance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to our acquisition and divestiture transactions.
We own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2019 using quantitative analyses. Refer to Note 2, "Significant Accounting Policies," for additional information related to the methodology used. Based on these analyses, we have determined that as of October 1, 2019 the fair value of each of our reporting units and indefinite-lived intangible assets exceeded their carrying values. 6. Acquisitions
CSTThe following tables outline the components of definite-lived intangible assets as of December 31, 2019 and 2018:
On December 1, 2015, we completed |
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
Weighted-
Average
Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairment | | Net Carrying Value |
| Completed technologies | 14 | | $ | 770,608 |
| | $ | (529,926 | ) | | $ | (2,430 | ) | | $ | 238,252 |
|
| Customer relationships | 11 | | 1,827,998 |
| | (1,430,515 | ) | | (12,144 | ) | | 385,339 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,654 |
| | (16,598 | ) | | — |
| | 50,056 |
|
Capitalized software and other(1) | 7 | | 67,784 |
| | (38,997 | ) | | — |
| | 28,787 |
|
| Total | 12 | | $ | 2,756,444 |
| | $ | (2,039,436 | ) | | $ | (14,574 | ) | | $ | 702,434 |
|
|
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
Weighted-
Average
Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairment | | Net Carrying Value |
| Completed technologies | 14 | | $ | 759,008 |
| | $ | (475,295 | ) | | $ | (2,430 | ) | | $ | 281,283 |
|
| Customer relationships | 11 | | 1,825,698 |
| | (1,352,189 | ) | | (12,144 | ) | | 461,365 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,154 |
| | (13,468 | ) | | — |
| | 52,686 |
|
Capitalized software and other(1) | 7 | | 65,896 |
| | (32,509 | ) | | — |
| | 33,387 |
|
| Total | 12 | | $ | 2,740,156 |
| | $ | (1,896,861 | ) | | $ | (14,574 | ) | | $ | 828,721 |
|
| |
(1) | During the years ended December 31, 2019 and 2018, we wrote-off approximately $0.3 million and $0.2 million, respectively, of fully-amortized capitalized software that was not in use. |
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the definite-lived intangible assets recognized as a result of the acquisition of allGIGAVAC.
The following table outlines amortization of definite-lived intangible assets for the years ended December 31, 2019, 2018, and 2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Acquisition-related definite-lived intangible assets | $ | 136,087 |
| | $ | 132,235 |
| | $ | 153,729 |
|
| Capitalized software | 6,799 |
| | 7,091 |
| | 7,321 |
|
| Amortization of definite-lived intangible assets | $ | 142,886 |
| | $ | 139,326 |
| | $ | 161,050 |
|
The table below presents estimated amortization of definite-lived intangible assets for each of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China (collectively, "CST"), for an aggregate purchase price of $1,000.8 million. The acquisition included the Kavlico, BEI, Crydom, and Newall product lines and brands, and encompassed sales, engineering, and manufacturing sites in the U.S., the U.K., Germany, France, and Mexico. We acquired CST to further extend our sensing content beyond automotive markets and build scale in pressure sensing. Portions of CST are being integrated into each of our segments. The allocation of the purchase price related to this acquisition was finalized in the fourth quarter of 2016.next five years:
|
| | | |
| For the year ended December 31, | |
| 2020 | $ | 127,787 |
|
| 2021 | $ | 111,177 |
|
| 2022 | $ | 97,620 |
|
| 2023 | $ | 83,802 |
|
| 2024 | $ | 68,818 |
|
7.12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 20172019 and 20162018 consisted of the following:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Accrued compensation and benefits | $ | 52,394 |
| | $ | 68,936 |
|
| Accrued interest | 42,803 |
| | 40,550 |
|
| Accrued severance | 14,779 |
| | 6,591 |
|
| Current portion of operating lease liabilities | 11,543 |
| | — |
|
| Current portion of pension and post-retirement benefit obligations | 3,220 |
| | 3,176 |
|
| Foreign currency and commodity forward contracts | 1,925 |
| | 7,710 |
|
| Other accrued expenses and current liabilities | 88,962 |
| | 91,167 |
|
| Accrued expenses and other current liabilities | $ | 215,626 |
| | $ | 218,130 |
|
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Accrued compensation and benefits | $ | 89,816 |
| | $ | 83,008 |
|
| Accrued interest | 36,919 |
| | 36,805 |
|
| Foreign currency and commodity forward contracts | 35,094 |
| | 26,151 |
|
| Accrued severance | 4,184 |
| | 14,268 |
|
| Current portion of pension and post-retirement benefit obligations | 3,342 |
| | 2,750 |
|
| Other accrued expenses and current liabilities | 90,205 |
| | 82,584 |
|
| Total | $ | 259,560 |
| | $ | 245,566 |
|
8.13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2019, we contributed $3.3 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2020.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
We have one defined contribution plan for U.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the defined contribution plan was $5.5 million, $5.7 million, and $5.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2019, we did not and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2019 and 2018 did not include an assumption for a Federal subsidy.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the non-U.S. defined benefit plans during 2020.
Impact on Financial Statements
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 7 |
| | $ | 2,836 |
| | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Expected return on plan assets | (1,694 | ) | | — |
| | (702 | ) | | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) |
| Amortization of net loss | 946 |
| | — |
| | 766 |
| | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,306 | ) | | 9 |
| | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) |
| Loss on settlement | 565 |
| | — |
| | 1,572 |
| | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
|
| Loss on curtailment | — |
| | — |
| | — |
| | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost/(credit) | $ | 1,300 |
| | $ | (1,096 | ) | | $ | 5,825 |
| | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Service cost | — |
| | 7 |
| | 2,836 |
| | — |
| | 50 |
| | 3,122 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
|
| Actuarial loss/(gain) | 1,711 |
| | (92 | ) | | 9,344 |
| | (519 | ) | | (124 | ) | | 2,777 |
|
| Curtailments | — |
| | — |
| | — |
| | — |
| | — |
| | 931 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (3,310 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 161 |
| | — |
| | — |
| | (350 | ) |
| Ending balance | $ | 45,548 |
| | $ | 5,588 |
| | $ | 74,172 |
| | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Actual return on plan assets | 4,484 |
| | — |
| | 4,125 |
| | (811 | ) | | — |
| | (1,308 | ) |
| Employer contributions | 3,326 |
| | 547 |
| | 4,889 |
| | 3,985 |
| | 630 |
| | 5,992 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 228 |
| | — |
| | — |
| | 164 |
|
| Ending balance | $ | 44,870 |
| | $ | — |
| | $ | 43,906 |
| | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
|
| Funded status at end of year | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
| Accumulated benefit obligation at end of year | $ | 45,548 |
| | NA |
| | $ | 65,633 |
| | $ | 45,169 |
| | NA |
| | $ | 59,948 |
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | 2,788 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (952 | ) | | (717 | ) | | (1,551 | ) | | (595 | ) | | (1,116 | ) | | (1,465 | ) |
| Noncurrent liabilities | (2,514 | ) | | (4,871 | ) | | (28,715 | ) | | (4,699 | ) | | (4,901 | ) | | (24,358 | ) |
| Funded status | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service cost/(credit) | $ | — |
| | $ | 306 |
| | $ | (16 | ) | | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) |
| Net loss | $ | 18,780 |
| | $ | 809 |
| | $ | 17,151 |
| | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
|
We expect to amortize a loss of $1.4 million from accumulated other comprehensive loss to net periodic benefit cost during fiscal year 2020.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 3,465 |
| | $ | 74,020 |
| | $ | 45,169 |
| | $ | 65,691 |
|
| Accumulated benefit obligation | $ | 3,465 |
| | $ | 65,633 |
| | $ | 45,169 |
| | $ | 59,948 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 9,053 |
| | $ | 74,020 |
| | $ | 51,186 |
| | $ | 65,691 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net (gain)/loss | $ | (824 | ) | | $ | (71 | ) | | $ | 4,365 |
| | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
|
| Amortization of net loss | (723 | ) | | — |
| | (539 | ) | | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 998 |
| | (6 | ) | | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
|
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Settlement effect | (432 | ) | | — |
| | (1,100 | ) | | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) |
| Curtailment effect | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
|
| Total in other comprehensive (income)/loss | $ | (1,979 | ) | | $ | 927 |
| | $ | 2,720 |
| | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 2019 and 2018 are as follows:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 2.60 | % | | 2.80 | % | | 3.79 | % | | 3.90 | % |
| Non-U.S. assumed discount rate | 1.90 | % | | NA |
| | 2.17 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.87 | % | | NA |
| | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % |
| Non-U.S. assumed discount rate | 5.76 | % | | NA |
| | 5.87 | % | | NA |
| | 3.90 | % | | NA |
|
| U.S. average long-term rate of return on plan assets | 4.53 | % | | NA |
| | 4.57 | % | | NA |
| | 4.50 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 1.77 | % | | NA |
| | 2.26 | % | | NA |
| | 2.29 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.43 | % | | NA |
| | 4.82 | % | | NA |
| | 3.75 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.30 | % | | 6.60 | % | | 6.90 | % |
| Attributed to age 65 or greater | 6.70 | % | | 7.10 | % | | 7.50 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: | | | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2019 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on post-retirement benefit obligations | $ | 314 |
| | $ | (287 | ) |
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2020 | $ | 8,985 |
| | $ | 717 |
| | $ | 3,346 |
|
| 2021 | $ | 7,868 |
| | $ | 653 |
| | $ | 3,299 |
|
| 2022 | $ | 6,116 |
| | $ | 653 |
| | $ | 3,896 |
|
| 2023 | $ | 5,219 |
| | $ | 534 |
| | $ | 3,499 |
|
| 2024 | $ | 3,804 |
| | $ | 516 |
| | $ | 3,456 |
|
| 2025 - 2029 | $ | 12,201 |
| | $ | 1,838 |
| | $ | 21,775 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for additional information related to the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser reviewed market opportunities using historical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2019:
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| | | |
| | Target Allocation | | Actual Allocation as of December 31, 2019 |
| U.S. large cap equity | 7% | | 5% |
| U.S. small / mid cap equity | 2% | | 1% |
| Globally managed volatility fund | 3% | | 2% |
| International (non-U.S.) equity | 4% | | 3% |
Fixed income (U.S. investment grade) (1) | 68% | | 42% |
| High-yield fixed income | 2% | | 1% |
| International (non-U.S.) fixed income | 1% | | 1% |
Money market funds (1) | 13% | | 45% |
| |
(1) | As of December 31, 2019, our holdings in the Money market funds exceed the target allocation as we prepare to make payments resulting from the voluntary retirement incentive program. Refer to Note 5, "Restructuring and Other Charges, Net" for additional information about the voluntary retirement incentive program. |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. large cap equity | $ | 2,221 |
| | $ | 2,960 |
|
| U.S. small / mid cap equity | 637 |
| | 833 |
|
| Global managed volatility fund | 849 |
| | 1,214 |
|
| International (non-U.S.) equity | 1,195 |
| | 1,493 |
|
| Total equity mutual funds | 4,902 |
| | 6,500 |
|
| Fixed income (U.S. investment grade) | 18,830 |
| | 26,884 |
|
| High-yield fixed income | 561 |
| | 792 |
|
| International (non-U.S.) fixed income | 264 |
| | 402 |
|
| Total fixed income mutual funds | 19,655 |
| | 28,078 |
|
| Money market funds | 20,313 |
| | 5,297 |
|
| Total plan assets | $ | 44,870 |
| | $ | 39,875 |
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All fair value measures presented above are categorized in Level 1 of the fair value hierarchy. Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2019 and 2018.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% fixed income securities and 50% equity securities, cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2019:
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| | | |
| Target Allocation | | Actual Allocation as of December 31, 2019 |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 65% |
| Equity securities | 10%-90% | | 35% |
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. equity | $ | 2,413 |
| | $ | 2,212 |
|
| International (non-U.S.) equity | 6,343 |
| | 5,158 |
|
| Total equity securities | 8,756 |
| | 7,370 |
|
| U.S. fixed income | 3,835 |
| | 3,345 |
|
| International (non-U.S.) fixed income | 9,716 |
| | 8,811 |
|
| Total fixed income securities | 13,551 |
| | 12,156 |
|
| Cash and cash equivalents | 9,726 |
| | 10,339 |
|
| Total plan assets | $ | 32,033 |
| | $ | 29,865 |
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All fair value measures presented above are categorized in Level 1 of the fair value hierarchy, with the exception of U.S. fixed income securities of $0.3 million and $0.3 million as of December 31, 2019 and 2018, respectively, which are categorized as Level 2. The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the plan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
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| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Insurance policies | $ | 10,472 |
| | $ | 8,897 |
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All fair value measures presented above are categorized in Level 3 of the fair value hierarchy. The following table presents a rollforward of these assets for the years ended December 31, 2019 and 2018:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2017 | $ | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | 8,897 |
|
| Actual return on plan assets still held at reporting date | 1,821 |
|
| Purchases, sales, settlements, and exchange rate changes | (246 | ) |
| Balance as of December 31, 2019 | $ | 10,472 |
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The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are insurance policies. As of December 31, 2019 and 2018 the fair values of these assets were $1.3 million and $1.1 million, respectively. These fair value measurements are categorized in Level 3 of the fair value hierarchy.
14. Debt
Our long-term debt and capitalfinance lease and other financing obligations as of December 31, 20172019 and 20162018 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | Maturity Date | 2019 | | 2018 |
| Term Loan | September 20, 2026 | $ | 460,725 |
| | $ | 917,794 |
|
| 4.875% Senior Notes | October 15, 2023 | 500,000 |
| | 500,000 |
|
| 5.625% Senior Notes | November 1, 2024 | 400,000 |
| | 400,000 |
|
| 5.0% Senior Notes | October 1, 2025 | 700,000 |
| | 700,000 |
|
| 6.25% Senior Notes | February 15, 2026 | 750,000 |
| | 750,000 |
|
| 4.375% Senior Notes | February 15, 2030 | 450,000 |
| | — |
|
| Less: debt discount | | (11,758 | ) | | (15,169 | ) |
| Less: deferred financing costs | | (24,452 | ) | | (23,159 | ) |
| Less: current portion | | (4,630 | ) | | (9,704 | ) |
| Long-term debt, net | | $ | 3,219,885 |
| | $ | 3,219,762 |
|
| Finance lease and other financing obligations | | $ | 31,098 |
| | $ | 35,475 |
|
| Less: current portion | | (2,288 | ) | | (4,857 | ) |
| Finance lease and other financing obligations, less current portion | | $ | 28,810 |
| | $ | 30,618 |
|
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Term loans | $ | 927,794 |
| | $ | 937,794 |
|
| 4.875% Senior Notes | 500,000 |
| | 500,000 |
|
| 5.625% Senior Notes | 400,000 |
| | 400,000 |
|
| 5.0% Senior Notes | 700,000 |
| | 700,000 |
|
| 6.25% Senior Notes | 750,000 |
| | 750,000 |
|
| Less: discount | (14,424 | ) | | (17,655 | ) |
| Less: deferred financing costs | (27,758 | ) | | (33,656 | ) |
| Less: current portion | (9,802 | ) | | (9,901 | ) |
| Long-term debt, net | $ | 3,225,810 |
| | $ | 3,226,582 |
|
| Capital lease and other financing obligations | $ | 34,657 |
| | $ | 37,111 |
|
| Less: current portion | (5,918 | ) | | (4,742 | ) |
| Capital lease and other financing obligations, less current portion | $ | 28,739 |
| | $ | 32,369 |
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Senior Secured Credit FacilitiesFacility
In May 2011, we entered into a series of financing transactions designed to refinance our then existing indebtedness. These transactions included the execution of aThe credit agreement governing our secured credit facility (as amended, the “Credit Agreement”"Credit Agreement") providingprovides for senior secured credit facilities (the “Senior"Senior Secured Credit Facilities”Facilities"), consisting of a term loan facility (the "Term Loan"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities cancould be issued. Currently outstandingissued under certain circumstances.
On March 27, 2019 certain indirect, wholly-owned subsidiaries of Sensata plc, including Sensata Technologies B.V. ("STBV"), entered into the ninth amendment (the "Ninth Amendment") of the Credit Agreement. Among other changes to the Credit Agreement, the Ninth Amendment (i) extended the maturity date of the Revolving Credit Facility to March 27, 2024; (ii) added pounds sterling as an available currency for revolving credit loans and letters of credit under the Revolving Credit Facility; (iii) lowered the interest rate margins related to the Revolving Credit Facility (depending on our senior secured net leverage ratio); (iv) lowered our letter of credit fees (depending on our senior secured net leverage ratio); (v) reduced our revolving credit commitment fees (depending on our senior secured net leverage ratio); and (vi) modified the senior secured net leverage ratio financial covenant to increase the Revolving Credit Facility utilization threshold above which such financial covenant is tested from 10% to 20% and eliminated the requirement that such ratio be tested (regardless of utilization) for purposes of satisfying the conditions to any borrowing or other utilization under the Revolving Credit Facility.
On June 13, 2019, our subsidiaries that were at the time borrowers under the Credit Agreement entered into an amendment to the Credit Agreement with the administrative agent to correct certain technical and immaterial errors in the Credit Agreement.
On September 20, 2019 certain of our subsidiaries, including STBV and its indirect, wholly-owned subsidiary, Sensata Technologies Inc. ("STI"), entered into the tenth amendment of the Credit Agreement (the "Tenth Amendment"). Under the terms of the Tenth Amendment, among other changes to the Credit Agreement, (i) the final maturity date of the Term Loan was extended to September 20, 2026; (ii) STI became the sole borrower under the Credit Agreement and assumed substantially all of the obligations of STBV and Sensata Technologies Finance Company, LLC ("STFC") thereunder; (iii) STBV became a guarantor of STI’s obligations under the Credit Agreement, and STFC ceased to be a guarantor with respect to the Credit Agreement; (iv) certain subsidiaries of STBV that previously guaranteed STBV’s and/or STFC’s obligations under the Credit Agreement (the “Released Guarantors”) were released from their guarantees under the Credit Agreement, subject to the satisfaction of certain tests (the “Guarantees Release”); (v) the permission to incur incremental additional indebtedness under the Credit Agreement was increased; and (vi) certain of the operational and restrictive covenants and other terms and conditions of the Senior Secured Credit Facilities to which STBV and its restricted subsidiaries are a term loan facility (the "Term Loan") provided under the eighth amendment (the "Eighth Amendment")subject were modified to provide us with increased flexibility and permissions thereunder (including permission, subject to no default or event of the Credit Agreement, a $420.0default, to make restricted payments (including dividends) in an amount equal to $50.0 million revolving credit facility (the “Revolving Credit Facility”), and $1.0 billion incremental facilities underannually, which additional term loans may be issued or the capacity of the Revolving Credit Facility maycan be increased (the “Accordion”)to an unlimited amount subject to compliance with a specified senior secured net leverage ratio). The terms of the Eighth Amendment are described in more detail below.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries in the U.S., the Netherlands, Mexico, Japan, Belgium, Bulgaria, Malaysia, Bermuda, Luxembourg, France, Ireland, and the U.K. (collectively, the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists ofsecured by substantially all present and future property and assets of STBV Sensata Technologies Finance Company, LLC, and the Guarantors.its guarantor subsidiaries.
The Credit Agreement stipulates certain events and conditionsprovides that, may require usif our senior secured net leverage ratio exceeds a specified level, we are required to use a portion of our excess cash flow, as defined by the terms ofin the Credit Agreement, generated by operating, investing, or financing activities to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments
of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2017.2019.
On November 7, 2017, we entered into the Eighth Amendment, which resulted in a “Repricing Transaction” per the terms of the Credit Agreement. As a result, the Term Loan replaced the term loan provided under the Sixth Amendment. Pursuant to the Eighth Amendment, changes from the previously issued term loan included the following: (i) the applicable interest rate margins were reduced to 0.75% for Base Rate loans and 1.75% for Eurodollar Rate loans, the Base Rate floor was reduced to 1.00%, and the Eurodollar Rate floor was reduced to 0.00%; (ii) a prepayment premium of 1.0% was added with respect to any repricing event that occurs with respect to the Term Loan prior to the date that is six months after the effective date of the Eighth Amendment; (iii) the senior secured net leverage ratio threshold that triggers the excess cash flow mandatory prepayment requirement was increased; (iv) the Accordion was re-set to $1.0 billion as of the effective date of the Eighth Amendment; (v) various baskets, permissions and other provisions under certain of the affirmative and negative covenants were increased or otherwise amended for our benefit; and (vi) certain other changes were made to the Credit Agreement that are not considered material. The Term Loan retains all other provisions of the Sixth Amendment, including original principal amount and maturity, amongst others.
The terms presented herein reflect the current terms as a result of all Credit Agreement amendments.
Term Loan
The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the Term Loan upon completion of the Tenth Amendment, with the balance due at maturity.
In accordance with the terms of the Credit Agreement, the Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), with each withrepresenting a different determination of interest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity. The applicableinterest rate margins for the Term Loan are fixed at, and as of December 31, 20172019 were, 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, (a decrease from 1.25% and 2.25%, respectively, pursuant to the Sixth Amendment) subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively (a decrease from 1.75% and 0.75%, respectively, pursuant to the Sixth Amendment).
respectively. As of December 31, 2017,2019, we maintained the Term Loan as a Eurodollar Rate loan, which accrued interest at a rate of 3.21%3.59%.
Revolving Credit Facility
At our option,In accordance with the terms of the Credit Agreement, borrowings under the Revolving Credit Facility may, at our option, be maintained from time to time as a Base Rate loan or aloans, Eurodollar Rate loanloans, or EURIBOR loans (each as defined in the Credit Agreement), with each withrepresenting a different determination of interest rates. Interest ratesThe interest rate margins and letter of credit fees onunder the Revolving Credit Facility are as follows (each depending on the achievement of certainour senior secured net leverage ratios)ratio): (i) the indexinterest rate spreadmargin for Eurodollar Rate loans is 1.75% orranges from 1.00% to 1.50%; (ii) the indexinterest rate spreadmargin for Base Rate loans is 0.75% orranges from 0.00% to 0.50%; and (iii) the letter of credit fees are 1.625% orrange from 0.875% to 1.375%.
We are required to pay to our revolving credit lenders, on a quarterly basis, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee is subjectranges from 0.125% to a pricing grid based0.25%, depending on our senior secured net leverage ratio. The spreads on the commitment fee currently range from 0.25% to 0.375%.ratios.
As of December 31, 2017,2019, there was $415.3$416.1 million of availabilityavailable under the Revolving Credit Facility, (netnet of $4.7$3.9 million of obligations in respect of outstanding letters of credit).credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2017,2019, no amounts had been drawn against these outstanding letters of credit.
Availability under the Revolving loansCredit Facility may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general corporate purposes.
Senior Notes
At December 31, 2017, we hadWe have various tranches of senior notes outstanding, including the 4.875% Senior Notes, the 5.625% Senior Notes, the 5.0% Senior Notes, and the 6.25% Senior Notes (each as defined below, and collectively, the “Senior Notes”).
At any time, we may redeem the Senior Notes (with the exceptionoutstanding. These consisted of the 6.25% Senior Notes, the redemption terms of which are discussed$500.0 million in more detail below), in whole or in part, at a redemption price equal to 100% of theaggregate principal amount of 4.875% senior notes due 2023 issued by STBV (the "4.875% Senior Notes"), $400.0 million in aggregate principal amount of 5.625% senior notes due 2024 issued by STBV (the "5.625% Senior Notes"), $700.0 million in aggregate principal amount of 5.0% senior notes due 2025 issued by STBV (the "5.0% Senior Notes"), $750.0 million in aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes") issued by our subsidiary Sensata Technologies UK Financing Co. plc ("STUK"), and $450.0 million in aggregate principal amount of 4.375% senior notes due 2030 issued by STI (the "4.375% Senior Notes" and together with the other senior notes referenced above, the "Senior Notes").
4.375% Senior Notes redeemed, plus accrued
On September 20, 2019, concurrently with the entry into the Tenth Amendment, we completed the issuance and unpaid interest, if any,sale of the 4.375% Senior Notes. The proceeds of the issuance of the 4.375% Senior Notes were used to partially repay the date of redemption, plus the Applicable Premium (also known as the "make-whole premium") set forth in the indentures under which theTerm Loan. The 4.375% Senior Notes were issued (the “Senior
Notes Indentures”). Upon the occurrenceunder an indenture dated as of certain change in control events, we will be required to make an offer to purchase theSeptember 20, 2019 among STI, as issuer, The Bank of New York Mellon, as trustee, and our guarantor subsidiaries named therein. The 4.375% Senior Notes then outstandingwere offered at a purchase price equal to 101%par, and interest is payable semi-annually on February 15 and August 15 of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. In addition, if certain changes in the law of any relevant taxing jurisdiction become effective that would impose withholding taxes or other deductionseach year, commencing on the payments of the Senior Notes or the guarantees, we may redeem the Senior Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption.February 15, 2020.
The Senior Notes Indentures provide for events of default (subject in certain cases to customary grace and cure periods) that include, among others, nonpayment of principal or interest when due, breach of covenants or other agreements in the Senior Notes Indentures, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and when the guarantees of significant subsidiaries cease to be in full force and effect. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes may declare the principal of, and accrued but unpaid interest on, all of the Senior Notes to be due and payable immediately. All provisions regarding remedies in an event of default are subject to the Senior Notes Indentures.
4.875% Senior Notes
In April 2013 we completed the issuance and sale of $500.0 million aggregate principal amount ofthe 4.875% senior notes due 2023 (the "4.875% Senior Notes"),Notes, which were issued under an indenture dated as of April 17, 2013 (the "4.875% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors.guarantors named therein. The 4.875% Senior Notes were offered at par. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
Our obligations under the 4.875% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 4.875% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 4.875% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
5.625% Senior Notes
In October 2014 we completed the issuance and sale of $400.0 million aggregate principal amount ofthe 5.625% senior notes due 2024 (the "5.625% Senior Notes"),Notes, which were issued under an indenture dated as of October 14, 2014, (the "5.625% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors.guarantors named therein. The 5.625% Senior Notes were offered at par. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
Our obligations under the 5.625% 5.0% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 5.625% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 5.625% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
5.0%Senior Notes
In March 2015 we completed the issuance and sale of $700.0 million aggregate principal amount ofthe 5.0% senior notes due 2025 (the "5.0% Senior Notes"),Notes, which were issued under an indenture dated as of March 26, 2015, (the "5.0% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors.guarantors named therein. The 5.0% Senior Notes were offered at par. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
Our obligations under the 5.0% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 5.0% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 5.0% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of $750.0 million aggregate principal amount ofthe 6.25% senior notes due 2026 (the "6.25% Senior Notes"),Notes, which were issued by Sensata Technologies UK Financing Co. plc ("STUK") under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes Indenture" and, together with the indentures under which the other Senior Notes were issued, the "Senior Notes Indentures"), among STUK, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors.guarantors named therein. The 6.25% Senior Notes were offered at par. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Redemption
WeExcept as described below with respect to the 4.375% Senior Notes and the 6.25% Senior Notes, at any time, and from time to time, we may optionally redeem the 6.25% Senior Notes, in whole or in part, at any time prior to February 15, 2021, at a redemption price equal to 100% of the principal amount of the 6.25% Senior Notesnotes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption, plus the Applicable Premium (also known as the “make-whole” premium)a "make-whole premium" set forth in the relevant Senior Notes Indenture. The "make-whole" premium will not be payable with respect to any such redemption of the 4.375% Senior Notes on or after November 15, 2029. The "make-whole" premium will not be payable with respect to any such redemption of the 6.25% Senior Notes Indenture. Thereafter,on or after February 15, 2021; on or after such date, we may optionally redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus accrued and unpaid interest if any, to the date of redemption):redemption, if any) during the applicable period:
|
| | |
| Period beginning February 15, | Price |
|
| 2021 | 103.125 | % |
| 2022 | 102.083 | % |
| 2023 | 101.042 | % |
| 2024 and thereafter | 100.000 | % |
|
| |
| |
| Period beginning February 15, | Price |
| 2021 | 103.125% |
| 2022 | 102.083% |
| 2023 | 101.042% |
| 2024 and thereafter | 100.000% |
In addition, at any time prior to November 15, 2018, we may redeem up to 40%Upon the occurrence of certain specific kinds of changes in control, the issuers of the aggregateSenior Notes will be required to offer to repurchase the notes at 101% of their principal amount, of the 6.25% Senior Notes with the net cash proceeds from certain equity offerings at the redemption price of 106.25% plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, providedrepurchase.
If changes in certain tax laws or treaties, or any change in the official application, administration, or interpretation thereof, of any relevant taxing jurisdiction become effective that at least 60%would impose withholding taxes or other deductions on the payments of any of the aggregateSenior Notes or the guarantees thereof, we may, at our option, redeem the relevant Senior Notes in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, premium, if any, and all additional amounts (as described in the relevant Senior Notes Indenture), if any, then due and which will become due on the date of redemption.
Guarantees
The obligations of the 6.25% Senior Notes remains outstanding immediately after each such redemption.
Our obligations underissuers of the 6.25% Senior Notes are guaranteed by STBV and certainall of STBV’s existing and future wholly-ownedits subsidiaries (other than STUK)(excluding the company that is the issuer of the relevant Senior Notes) that guarantee ourthe obligations of STI under Credit Agreement (after giving effect to the Senior Secured Credit Facilities.Guarantees Release pursuant to the Tenth Amendment). The 6.25%Released Guarantors are not guarantors of the 4.375% Senior Notes, and upon consummation of the relatedTenth Amendment, the guarantees areof the senior unsecured obligationsReleased Guarantors with respect to the other Senior Notes were released.
Events of STUKDefault
The Senior Notes Indentures provide for events of default that include, among others, nonpayment of principal or interest when due, breach of covenants or other provisions in the relevant Senior Notes Indenture, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and the Guarantors, respectively. The 6.25%cessation of the full force and effect of the guarantees of significant subsidiaries. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes issued under the relevant Senior Notes Indenture may declare the principal of, and accrued but unpaid interest on, all of the guarantees rank equallyrelevant Senior Notes to be due and payable immediately. All provisions regarding remedies in rightan event of paymentdefault are subject to all existing and future senior unsecured indebtedness of STUK, STBV, or the Guarantors.relevant Senior Notes Indenture.
Restrictions and Covenants
As of December 31, 2017,2019, STBV and all of theits subsidiaries of STBV were subject to certain restrictive covenants.covenants under the Credit Agreement and the Senior Notes Indentures. Under certain circumstances, STBV will beis permitted to designate a subsidiary as "unrestricted,""unrestricted" for purposes of the Credit Agreement, in which case the restrictive covenants thereunder will not apply to that subsidiary.subsidiary; the Senior Notes Indentures do not contain such a permission. STBV has not designated any subsidiaries as unrestricted. The net assets of STBV subject to these restrictions totaled $2,555.0 million at December 31, 2019.
UnderCredit Agreement
The Credit Agreement contains non-financial restrictive covenants (subject to important exceptions and qualifications set forth in the Revolving Credit Facility,Agreement) that limit our ability to, among other things:
incur indebtedness or liens, prepay subordinated debt, or amend the terms of our subordinated debt;
make loans and investments (including acquisitions) or sell assets;
change our business or accounting policies, merge, consolidate, dissolve or liquidate, or amend the terms of our organizational documents;
enter into affiliate transactions;
pay dividends and make other restricted payments; or
enter into certain burdensome contractual obligations.
In addition, under the Credit Agreement, STBV and its subsidiaries are required to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 10%20% of the commitments under the Revolving Credit Facility. In addition, STBV and its subsidiaries are required to satisfy this covenant, on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings.
Senior Notes Indentures
The Credit Agreement also contains non-financialSenior Notes Indentures contain restrictive covenants that limit our ability to incur subsequent indebtedness, incur liens, prepay subordinated debt, make loans and investments (including acquisitions), merge, consolidate, dissolve or liquidate, sell assets, enter into affiliate transactions, change our business, change our accounting policies, make capital expenditures, amend the terms of our subordinated debt and our organizational documents, pay dividends and make other restricted payments, and enter into certain burdensome contractual obligations. These covenants are subject(subject to important exceptions and qualifications set forth in the Credit Agreement.
The Senior Notes Indentures contain restrictive covenantsIndentures) that limit the ability of STBV and its subsidiaries to, among other things:
incur additional debtliens;
incur or issue preferred stock; create liens; create restrictions on STBV's subsidiaries' ability to make payments to STBV; pay dividendsguarantee indebtedness without guaranteeing the Senior Notes;
engage in sale and make other distributions in respect of STBV's and its subsidiaries' capital stock; redeemleaseback transactions; or repurchase STBV's capital stock, our capital stock, or the capital stock of any other direct or indirect parent company of STBV or prepay subordinated indebtedness; make certain investments or certain other restricted payments; guarantee indebtedness; designate unrestricted subsidiaries; sell certain kinds of assets; enter into certain types of transactions with affiliates; and
effect mergers or consolidations. These covenants are subject to important exceptionsconsolidations, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of the assets of STBV and qualifications set forth in the Senior Notes Indentures. its subsidiaries.
Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by Standard & Poor's Rating Services or Moody's Investors Service, Inc. and provided no default has occurred and is continuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer ratedassigned an investment grade rating by either rating agency andor an event of default has occurred and is continuing at such time. As of December 31, 2017,2019, none of the Senior Notes were not ratedassigned an investment grade rating by either rating agency.
The Guarantors under the Credit Agreement and the Senior Notes Indentures
Restrictions on Payment of Dividends
STBV's subsidiaries are generally not restricted in their ability to pay dividends or otherwise distribute funds to STBV, except for restrictions imposed under applicable corporate law.
STBV, however, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us,Sensata plc, under the Credit Agreement and the Senior Notes Indentures.Agreement. Specifically, the Credit Agreement prohibits STBV from paying dividends or making any distributions to its parent companies except for limited purposes including,that include, but are not limited to: (i) to, the following:
customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurred in the ordinary course of business, provided that such amounts, in the aggregate, do not to exceed $20.0 million in any fiscal year, plus reasonableyear;
dividends and customary indemnification claims made by our directors or officers attributable to the ownership of STBV and its subsidiaries; (ii) franchise taxes, certain advisory fees, and customary compensation of officers and employees of such parent companies to the extent such compensation is attributable to the ownership or operations of STBV and its subsidiaries; (iii) repurchase, retirement, or other acquisition of equity interest of the parent from certain present, future, and former employees, directors, managers, consultants of the parent companies, STBV, or its subsidiariesdistributions in an aggregate amount not to exceed $20.0$200.0 million in any fiscal year, plus certain amounts, including the amountretained portion of excess cash proceeds from certain equity issuances to such persons, the amount of equity interests subject to a certain deferred compensation plan, and the amount of certain key-man life insurance proceeds; (iv) so longflow, but only insofar as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis, dividends and other distributions inbasis;
so long as no default or an aggregate amount not to exceed $100.0 million, plus certain amounts, including the retained portionevent of excess cash flow; (v)default exists, dividends and other distributions in an aggregate amount not to exceed $50.0 million in any calendar year (subject(with the unused portion in any year being carried over to increase uponsucceeding years) plus unlimited additional amounts but only insofar as the achievement of certain ratios);senior secured net leverage ratio is less than 2.5:1.0 calculated on a pro forma basis; and (vi) so long as no default or event of default exists,
other dividends and other distributions in an aggregate amount not to exceed $150.0 million.million, so long as no default or event of default exists.
The Senior Notes Indentures generally provide thatallow STBV canto pay dividends and make other distributions to its parent companies uponcompanies.
Compliance with Financial and Non-Financial Covenants
We were in compliance with all of the achievementfinancial and non–financial covenants and default provisions associated with our indebtedness as of certain conditions and in an amount as determined in accordance with the Senior Notes Indentures.
The net assets of STBV subject to these restrictions totaled $2,258.6 million at December 31, 2017.2019 and for the fiscal year then ended.
Accounting for Debt Financing TransactionsDefined Benefit Pension Plans
Refer to Note 2, "Significant Accounting Policies,"The benefits under the heading Debt Instruments for discussionqualified defined benefit pension plan are determined using a formula based upon years of our accounting policies regarding debt financing transactions.service and the highest five consecutive years of compensation.
DuringTI closed the years ended December 31, 2017qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and 2015, we recorded losses of $2.7 million and $25.5 million, respectively,thereafter participating in Other, net relatedan enhanced defined contribution plan.
We intend to our debt financing transactions of which $0.6 million and $19.2 million, respectively, related to transaction costs. The remaining losses recorded to Other, net primarily relatecontribute amounts to the write-offqualified defined benefit pension plan in order to meet the minimum funding requirements of unamortized deferred financing costsfederal laws and debt discounts.
regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2017, $0.22019, we contributed $3.3 million was accountedto the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2020.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
We have one defined contribution plan for as debt issuance costsU.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the Eighth Amendmentdefined contribution plan was $5.5 million, $5.7 million, and were recorded on$5.9 million for the balance sheet asyears ended December 31, 2019, 2018, and 2017, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an adjustment to the carrying amountemployee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the debt liability.
Duringcost is borne by the participants in the plan. For the year ended December 31, 2015, $12.52019, we did not and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2019 and 2018 did not include an assumption for a Federal subsidy.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the non-U.S. defined benefit plans during 2020.
Impact on Financial Statements
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 7 |
| | $ | 2,836 |
| | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Expected return on plan assets | (1,694 | ) | | — |
| | (702 | ) | | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) |
| Amortization of net loss | 946 |
| | — |
| | 766 |
| | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,306 | ) | | 9 |
| | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) |
| Loss on settlement | 565 |
| | — |
| | 1,572 |
| | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
|
| Loss on curtailment | — |
| | — |
| | — |
| | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost/(credit) | $ | 1,300 |
| | $ | (1,096 | ) | | $ | 5,825 |
| | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Service cost | — |
| | 7 |
| | 2,836 |
| | — |
| | 50 |
| | 3,122 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
|
| Actuarial loss/(gain) | 1,711 |
| | (92 | ) | | 9,344 |
| | (519 | ) | | (124 | ) | | 2,777 |
|
| Curtailments | — |
| | — |
| | — |
| | — |
| | — |
| | 931 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (3,310 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 161 |
| | — |
| | — |
| | (350 | ) |
| Ending balance | $ | 45,548 |
| | $ | 5,588 |
| | $ | 74,172 |
| | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Actual return on plan assets | 4,484 |
| | — |
| | 4,125 |
| | (811 | ) | | — |
| | (1,308 | ) |
| Employer contributions | 3,326 |
| | 547 |
| | 4,889 |
| | 3,985 |
| | 630 |
| | 5,992 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 228 |
| | — |
| | — |
| | 164 |
|
| Ending balance | $ | 44,870 |
| | $ | — |
| | $ | 43,906 |
| | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
|
| Funded status at end of year | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
| Accumulated benefit obligation at end of year | $ | 45,548 |
| | NA |
| | $ | 65,633 |
| | $ | 45,169 |
| | NA |
| | $ | 59,948 |
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | 2,788 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (952 | ) | | (717 | ) | | (1,551 | ) | | (595 | ) | | (1,116 | ) | | (1,465 | ) |
| Noncurrent liabilities | (2,514 | ) | | (4,871 | ) | | (28,715 | ) | | (4,699 | ) | | (4,901 | ) | | (24,358 | ) |
| Funded status | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service cost/(credit) | $ | — |
| | $ | 306 |
| | $ | (16 | ) | | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) |
| Net loss | $ | 18,780 |
| | $ | 809 |
| | $ | 17,151 |
| | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
|
We expect to amortize a loss of $1.4 million was accountedfrom accumulated other comprehensive loss to net periodic benefit cost during fiscal year 2020.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as debt issuance costsfollows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 3,465 |
| | $ | 74,020 |
| | $ | 45,169 |
| | $ | 65,691 |
|
| Accumulated benefit obligation | $ | 3,465 |
| | $ | 65,633 |
| | $ | 45,169 |
| | $ | 59,948 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 9,053 |
| | $ | 74,020 |
| | $ | 51,186 |
| | $ | 65,691 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net (gain)/loss | $ | (824 | ) | | $ | (71 | ) | | $ | 4,365 |
| | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
|
| Amortization of net loss | (723 | ) | | — |
| | (539 | ) | | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 998 |
| | (6 | ) | | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
|
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Settlement effect | (432 | ) | | — |
| | (1,100 | ) | | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) |
| Curtailment effect | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
|
| Total in other comprehensive (income)/loss | $ | (1,979 | ) | | $ | 927 |
| | $ | 2,720 |
| | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 2019 and 2018 are as follows:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 2.60 | % | | 2.80 | % | | 3.79 | % | | 3.90 | % |
| Non-U.S. assumed discount rate | 1.90 | % | | NA |
| | 2.17 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.87 | % | | NA |
| | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % |
| Non-U.S. assumed discount rate | 5.76 | % | | NA |
| | 5.87 | % | | NA |
| | 3.90 | % | | NA |
|
| U.S. average long-term rate of return on plan assets | 4.53 | % | | NA |
| | 4.57 | % | | NA |
| | 4.50 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 1.77 | % | | NA |
| | 2.26 | % | | NA |
| | 2.29 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.43 | % | | NA |
| | 4.82 | % | | NA |
| | 3.75 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.30 | % | | 6.60 | % | | 6.90 | % |
| Attributed to age 65 or greater | 6.70 | % | | 7.10 | % | | 7.50 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: | | | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2019 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on post-retirement benefit obligations | $ | 314 |
| | $ | (287 | ) |
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2020 | $ | 8,985 |
| | $ | 717 |
| | $ | 3,346 |
|
| 2021 | $ | 7,868 |
| | $ | 653 |
| | $ | 3,299 |
|
| 2022 | $ | 6,116 |
| | $ | 653 |
| | $ | 3,896 |
|
| 2023 | $ | 5,219 |
| | $ | 534 |
| | $ | 3,499 |
|
| 2024 | $ | 3,804 |
| | $ | 516 |
| | $ | 3,456 |
|
| 2025 - 2029 | $ | 12,201 |
| | $ | 1,838 |
| | $ | 21,775 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for additional information related to the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser reviewed market opportunities using historical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2019:
|
| | | |
| | Target Allocation | | Actual Allocation as of December 31, 2019 |
| U.S. large cap equity | 7% | | 5% |
| U.S. small / mid cap equity | 2% | | 1% |
| Globally managed volatility fund | 3% | | 2% |
| International (non-U.S.) equity | 4% | | 3% |
Fixed income (U.S. investment grade) (1) | 68% | | 42% |
| High-yield fixed income | 2% | | 1% |
| International (non-U.S.) fixed income | 1% | | 1% |
Money market funds (1) | 13% | | 45% |
| |
(1) | As of December 31, 2019, our holdings in the Money market funds exceed the target allocation as we prepare to make payments resulting from the voluntary retirement incentive program. Refer to Note 5, "Restructuring and Other Charges, Net" for additional information about the voluntary retirement incentive program. |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. large cap equity | $ | 2,221 |
| | $ | 2,960 |
|
| U.S. small / mid cap equity | 637 |
| | 833 |
|
| Global managed volatility fund | 849 |
| | 1,214 |
|
| International (non-U.S.) equity | 1,195 |
| | 1,493 |
|
| Total equity mutual funds | 4,902 |
| | 6,500 |
|
| Fixed income (U.S. investment grade) | 18,830 |
| | 26,884 |
|
| High-yield fixed income | 561 |
| | 792 |
|
| International (non-U.S.) fixed income | 264 |
| | 402 |
|
| Total fixed income mutual funds | 19,655 |
| | 28,078 |
|
| Money market funds | 20,313 |
| | 5,297 |
|
| Total plan assets | $ | 44,870 |
| | $ | 39,875 |
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy. Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2019 and 2018.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% fixed income securities and 50% equity securities, cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2019:
|
| | | |
| Target Allocation | | Actual Allocation as of December 31, 2019 |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 65% |
| Equity securities | 10%-90% | | 35% |
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. equity | $ | 2,413 |
| | $ | 2,212 |
|
| International (non-U.S.) equity | 6,343 |
| | 5,158 |
|
| Total equity securities | 8,756 |
| | 7,370 |
|
| U.S. fixed income | 3,835 |
| | 3,345 |
|
| International (non-U.S.) fixed income | 9,716 |
| | 8,811 |
|
| Total fixed income securities | 13,551 |
| | 12,156 |
|
| Cash and cash equivalents | 9,726 |
| | 10,339 |
|
| Total plan assets | $ | 32,033 |
| | $ | 29,865 |
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy, with the exception of U.S. fixed income securities of $0.3 million and $0.3 million as of December 31, 2019 and 2018, respectively, which are categorized as Level 2. The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the plan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Insurance policies | $ | 10,472 |
| | $ | 8,897 |
|
All fair value measures presented above are categorized in Level 3 of the fair value hierarchy. The following table presents a rollforward of these assets for the years ended December 31, 2019 and 2018:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2017 | $ | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | 8,897 |
|
| Actual return on plan assets still held at reporting date | 1,821 |
|
| Purchases, sales, settlements, and exchange rate changes | (246 | ) |
| Balance as of December 31, 2019 | $ | 10,472 |
|
The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are insurance policies. As of December 31, 2019 and 2018 the fair values of these assets were $1.3 million and $1.1 million, respectively. These fair value measurements are categorized in Level 3 of the fair value hierarchy.
14. Debt
Our long-term debt and finance lease and other financing obligations as of December 31, 2019 and 2018 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | Maturity Date | 2019 | | 2018 |
| Term Loan | September 20, 2026 | $ | 460,725 |
| | $ | 917,794 |
|
| 4.875% Senior Notes | October 15, 2023 | 500,000 |
| | 500,000 |
|
| 5.625% Senior Notes | November 1, 2024 | 400,000 |
| | 400,000 |
|
| 5.0% Senior Notes | October 1, 2025 | 700,000 |
| | 700,000 |
|
| 6.25% Senior Notes | February 15, 2026 | 750,000 |
| | 750,000 |
|
| 4.375% Senior Notes | February 15, 2030 | 450,000 |
| | — |
|
| Less: debt discount | | (11,758 | ) | | (15,169 | ) |
| Less: deferred financing costs | | (24,452 | ) | | (23,159 | ) |
| Less: current portion | | (4,630 | ) | | (9,704 | ) |
| Long-term debt, net | | $ | 3,219,885 |
| | $ | 3,219,762 |
|
| Finance lease and other financing obligations | | $ | 31,098 |
| | $ | 35,475 |
|
| Less: current portion | | (2,288 | ) | | (4,857 | ) |
| Finance lease and other financing obligations, less current portion | | $ | 28,810 |
| | $ | 30,618 |
|
Secured Credit Facility
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"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
On March 27, 2019 certain indirect, wholly-owned subsidiaries of Sensata plc, including Sensata Technologies B.V. ("STBV"), entered into the ninth amendment (the "Ninth Amendment") of the Credit Agreement. Among other changes to the Credit Agreement, the Ninth Amendment (i) extended the maturity date of the Revolving Credit Facility to March 27, 2024; (ii) added pounds sterling as an available currency for revolving credit loans and letters of credit under the Revolving Credit Facility; (iii) lowered the interest rate margins related to the Revolving Credit Facility (depending on our senior secured net leverage ratio); (iv) lowered our letter of credit fees (depending on our senior secured net leverage ratio); (v) reduced our revolving credit commitment fees (depending on our senior secured net leverage ratio); and (vi) modified the senior secured net leverage ratio financial covenant to increase the Revolving Credit Facility utilization threshold above which such financial covenant is tested from 10% to 20% and eliminated the requirement that such ratio be tested (regardless of utilization) for purposes of satisfying the conditions to any borrowing or other utilization under the Revolving Credit Facility.
On June 13, 2019, our subsidiaries that were at the time borrowers under the Credit Agreement entered into an amendment to the Credit Agreement with the administrative agent to correct certain technical and immaterial errors in the Credit Agreement.
On September 20, 2019 certain of our subsidiaries, including STBV and its indirect, wholly-owned subsidiary, Sensata Technologies Inc. ("STI"), entered into the tenth amendment of the Credit Agreement (the "Tenth Amendment"). Under the terms of the Tenth Amendment, among other changes to the Credit Agreement, (i) the final maturity date of the Term Loan was extended to September 20, 2026; (ii) STI became the sole borrower under the Credit Agreement and assumed substantially all of the obligations of STBV and Sensata Technologies Finance Company, LLC ("STFC") thereunder; (iii) STBV became a guarantor of STI’s obligations under the Credit Agreement, and STFC ceased to be a guarantor with respect to the Credit Agreement; (iv) certain subsidiaries of STBV that previously guaranteed STBV’s and/or STFC’s obligations under the Credit Agreement (the “Released Guarantors”) were released from their guarantees under the Credit Agreement, subject to the satisfaction of certain tests (the “Guarantees Release”); (v) the permission to incur incremental additional indebtedness under the Credit Agreement was increased; and (vi) certain of the operational and restrictive covenants and other terms and conditions of the Senior Secured Credit Facilities to which STBV and its restricted subsidiaries are subject were modified to provide us with increased flexibility and permissions thereunder (including permission, subject to no default or event of default, to make restricted payments (including dividends) in an amount equal to $50.0 million annually, which can be increased to an unlimited amount subject to compliance with a specified senior secured net leverage ratio).
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries and secured by substantially all present and future property and assets of STBV and its guarantor subsidiaries.
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 the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2019.
Term Loan
The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the Term Loan upon completion of the Tenth Amendment, with the balance due at maturity.
In accordance with the terms of the Credit Agreement, the Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The interest rate margins for the Term Loan are fixed at, and as of December 31, 2019 were, 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2019, we maintained the Term Loan as a Eurodollar Rate loan, which accrued interest at 3.59%.
Revolving Credit Facility
In accordance with the terms of the Credit Agreement, borrowings under the Revolving Credit Facility may, at our option, be maintained from time to time as Base Rate loans, Eurodollar Rate loans, or EURIBOR loans (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The interest rate margins and letter of credit fees under the Revolving Credit Facility are as follows (each depending on our senior secured net leverage ratio): (i) the interest rate margin for Eurodollar Rate loans ranges from 1.00% to 1.50%; (ii) the interest rate margin for Base Rate loans ranges from 0.00% to 0.50%; and (iii) the letter of credit fees range from 0.875% to 1.375%.
We are required to pay to our revolving credit lenders, on a quarterly basis, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.125% to 0.25%, depending on our senior secured net leverage ratios.
As of December 31, 2019, 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 of December 31, 2019, no amounts had been drawn against these outstanding letters of credit.
Availability under the Revolving Credit Facility may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general corporate purposes.
Senior Notes
We have various tranches of senior notes outstanding. These consisted of $500.0 million in aggregate principal amount of 4.875% senior notes due 2023 issued by STBV (the "4.875% Senior Notes"), $400.0 million in aggregate principal amount of 5.625% senior notes due 2024 issued by STBV (the "5.625% Senior Notes"), $700.0 million in aggregate principal amount of 5.0% senior notes due 2025 issued by STBV (the "5.0% Senior Notes"), $750.0 million in aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes") issued by our subsidiary Sensata Technologies UK Financing Co. plc ("STUK"), and $450.0 million in aggregate principal amount of 4.375% senior notes due 2030 issued by STI (the "4.375% Senior Notes" and together with the other senior notes referenced above, the "Senior Notes").
4.375% Senior Notes
On September 20, 2019, concurrently with the entry into the Tenth Amendment, we completed the issuance and sale of the 4.375% Senior Notes. The proceeds of the issuance of the 4.375% Senior Notes were used to partially repay the Term Loan. The 4.375% Senior Notes were issued under an indenture dated as of September 20, 2019 among STI, as issuer, The Bank of New York Mellon, as trustee, and our guarantor subsidiaries named therein. The 4.375% Senior Notes were offered at par, and interest is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2020.
4.875% Senior Notes
In April 2013 we completed the issuance and sale of the 4.875% Senior Notes, which were issued under an indenture dated as of April 17, 2013 among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 4.875% Senior Notes were offered at par. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014 we completed the issuance and sale of the 5.625% Senior Notes, which were issued under an indenture dated as of October 14, 2014, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 5.625% Senior Notes were offered at par. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015 we completed the issuance and sale of the 5.0% Senior Notes, which were issued under an indenture dated as of March 26, 2015, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 5.0% Senior Notes were offered at par. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were issued under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes Indenture" and, together with the indentures under which the other Senior Notes were recordedissued, the "Senior Notes Indentures"), among STUK, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 6.25% Senior Notes were offered at par. Interest on the balance sheet6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Redemption
Except as an adjustmentdescribed below with respect to the carrying amount of the debt liability. In addition, $8.8 million was recorded in Interest expense, net, which relates to fees associated with bridge financing that was not utilized.
During the year ended December 31, 2016 we did not enter into any debt financing transactions.
Leases
We occupy leased facilities with initial terms ranging up to 20 years. The lease agreements frequently include options to renew for additional periods or to purchase the leased assets and generally require that we pay taxes, insurance, and maintenance costs. Depending on the specific terms of the leases, our obligations are in two forms: capital leases and operating leases. Rent expense for the years ended December 31, 2017, 2016, and 2015 was $19.7 million, $18.1 million, and $14.1 million, respectively.
We have capital leases for facilities in Baoying, China and Attleboro, Massachusetts. As of December 31, 2017 and 2016, the combined capital lease obligations outstanding for these facilities were $26.2 million and $27.8 million, respectively.
Other Financing Obligations
In 2013, we entered into an agreement with one of our suppliers, Measurement Specialties, Inc., under which we acquired the rights to certain intellectual property in exchange for quarterly royalty payments through the fourth quarter of 2019. As
of December 31, 2017 and 2016, we had recognized a liability related to this agreement of $3.5 million and $5.2 million, respectively.
Debt Maturities
The final maturity of the Term Loan is October 14, 2021. The Term Loan must be repaid in full on or prior to this date. The 4.875% Senior Notes, the 5.625% Senior Notes, the 5.0%4.375% Senior Notes and the 6.25% Senior Notes, matureat any time, and from time to time, we may optionally redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption, plus a "make-whole premium" set forth in the relevant Senior Notes Indenture. The "make-whole" premium will not be payable with respect to any such redemption of the 4.375% Senior Notes on Octoberor after November 15, 2023, November 1, 2024, October 1, 2025, and2029. The "make-whole" premium will not be payable with respect to any such redemption of the 6.25% Senior Notes on or after February 15, 2026, respectively. 2021; on or after such date, we may optionally redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus accrued and unpaid interest to the date of redemption, if any) during the applicable period:
|
| | |
| Period beginning February 15, | Price |
|
| 2021 | 103.125 | % |
| 2022 | 102.083 | % |
| 2023 | 101.042 | % |
| 2024 and thereafter | 100.000 | % |
Upon the occurrence of certain specific kinds of changes in control, the issuers of the Senior Notes will be required to offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
If changes in certain tax laws or treaties, or any change in the official application, administration, or interpretation thereof, of any relevant taxing jurisdiction become effective that would impose withholding taxes or other deductions on the payments of any of the Senior Notes or the guarantees thereof, we may, at our option, redeem the relevant Senior Notes in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, premium, if any, and all additional amounts (as described in the relevant Senior Notes Indenture), if any, then due and which will become due on the date of redemption.
Guarantees
The final maturityobligations of the issuers of the Senior Notes are guaranteed by STBV and all of its subsidiaries (excluding the company that is the issuer of the relevant Senior Notes) that guarantee the obligations of STI under Credit Agreement (after giving effect to the Guarantees Release pursuant to the Tenth Amendment). The Released Guarantors are not guarantors of the 4.375% Senior Notes, and upon consummation of the Tenth Amendment, the guarantees of the Released Guarantors with respect to the other Senior Notes were released.
Events of Default
The Senior Notes Indentures provide for events of default that include, among others, nonpayment of principal or interest when due, breach of covenants or other provisions in the relevant Senior Notes Indenture, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and the cessation of the full force and effect of the guarantees of significant subsidiaries. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes issued under the relevant Senior Notes Indenture may declare the principal of, and accrued but unpaid interest on, all of the relevant Senior Notes to be due and payable immediately. All provisions regarding remedies in an event of default are subject to the relevant Senior Notes Indenture.
Restrictions and Covenants
As of December 31, 2019, STBV and all of its subsidiaries were subject to certain restrictive covenants under the Credit Agreement and the Senior Notes Indentures. Under certain circumstances, STBV is permitted to designate a subsidiary as "unrestricted" for purposes of the Credit Agreement, in which case the restrictive covenants thereunder will not apply to that subsidiary; the Senior Notes Indentures do not contain such a permission. STBV has not designated any subsidiaries as unrestricted. The net assets of STBV subject to these restrictions totaled $2,555.0 million at December 31, 2019.
Credit Agreement
The Credit Agreement contains non-financial restrictive covenants (subject to important exceptions and qualifications set forth in the Credit Agreement) that limit our ability to, among other things:
incur indebtedness or liens, prepay subordinated debt, or amend the terms of our subordinated debt;
make loans and investments (including acquisitions) or sell assets;
change our business or accounting policies, merge, consolidate, dissolve or liquidate, or amend the terms of our organizational documents;
enter into affiliate transactions;
pay dividends and make other restricted payments; or
enter into certain burdensome contractual obligations.
In addition, under the Credit Agreement, STBV and its subsidiaries are required to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 20% of the commitments under the Revolving Credit FacilityFacility.
Senior Notes Indentures
The Senior Notes Indentures contain restrictive covenants (subject to important exceptions and qualifications set forth in the Senior Notes Indentures) that limit the ability of STBV and its subsidiaries to, among other things:
incur liens;
incur or guarantee indebtedness without guaranteeing the Senior Notes;
engage in sale and leaseback transactions; or
effect mergers or consolidations, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of the assets of STBV and its subsidiaries.
Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by Standard & Poor's Rating Services or Moody's Investors Service, Inc. and provided no default has occurred and is March 26, 2020. Loans made pursuantcontinuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer assigned an investment grade rating by either rating agency or an event of default has occurred and is continuing at such time. As of December 31, 2019, none of the Senior Notes were assigned an investment grade rating by either rating agency.
Restrictions on Payment of Dividends
STBV's subsidiaries are generally not restricted in their ability to pay dividends or otherwise distribute funds to STBV, except for restrictions imposed under applicable corporate law.
STBV, however, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to Sensata plc, under the Credit Agreement. Specifically, the Credit Agreement prohibits STBV from paying dividends or making distributions to its parent companies except for purposes that include, but are not limited to, the Revolving Credit Facility must be repaidfollowing:
customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurred in fullthe ordinary course of business, provided that such amounts, in the aggregate, do not exceed $20.0 million in any fiscal year;
dividends and other distributions in an aggregate amount not to exceed $200.0 million plus certain amounts, including the retained portion of excess cash flow, but only insofar as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis;
so long as no default or prioran event of default exists, dividends and other distributions in an aggregate amount not to such dateexceed $50.0 million in any calendar year (with the unused portion in any year being carried over to succeeding years) plus unlimited additional amounts but only insofar as the senior secured net leverage ratio is less than 2.5:1.0 calculated on a pro forma basis; and are pre-payable at our option at par. All letters
other dividends and other distributions in an aggregate amount not to exceed $150.0 million, so long as no default or event of credit issued thereunder will terminate at the final maturity of the Revolving Credit Facility unless cash collateralized prior to such time.default exists.
The following table presents the remaining mandatory principal repayments of long-term debt, excluding capital lease payments,Senior Notes Indentures generally allow STBV to pay dividends and make other financing obligations, and discretionary repurchases of debt, in each of the years ended December 31, 2018 through 2022 and thereafter.
|
| | | | |
| For the year ended December 31, | | Aggregate Maturities |
| 2018 | | $ | 9,802 |
|
| 2019 | | 9,901 |
|
| 2020 | | 9,901 |
|
| 2021 | | 898,190 |
|
| 2022 | | — |
|
| Thereafter | | 2,350,000 |
|
| Total long-term debt principal payments | | $ | 3,277,794 |
|
Compliance with Financial and Non-Financial Covenants
As of, and for the year ended, December 31, 2017, weWe were in compliance with all of the financial and non–financial covenants and default provisions associated with our indebtedness.
9. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. Several of our Dutch resident subsidiaries are taxable entities in the Netherlands and file tax returns under Dutch fiscal unity (i.e., consolidation). Prior to April 30, 2008, we filed one consolidated tax return in the U.S. On April 30, 2008, our U.S. subsidiaries executed a separation and distribution agreement that divided our U.S. businesses, resulting in two separate U.S. consolidated federal income tax returns. On January 1, 2016, our U.S. subsidiaries resumed filing one consolidated tax return. Our remaining subsidiaries will file income tax returns in the countries in which they are incorporated and/or operate, including the Netherlands, Japan, China, Germany, Belgium, Bulgaria, South Korea, Malaysia, the U.K., France, and Mexico. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017 President Donald Trump signed into U.S. law the Tax Cuts and Jobs Act of 2017 (“Tax Reform”). ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.
Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
Amounts recorded where we consider accounting to be complete for the year ended December 31, 2017 principally relate to the reduction in the U.S. corporate income tax rate to 21 percent, which resulted in the recording of an income tax benefit of $73.7 million to remeasure deferred taxes liabilities associated with indefinite-lived intangible assets that are deemed to reverse at the new 21 percent tax rate. Absent this deferred tax liability, we are in a net deferred tax asset position that is offset by a full valuation allowance.
The Tax Reform includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries. We have performed an earnings and profits analysis, and as a result of foreign tax credits available to fully offset the anticipated transition tax, there will be no income tax effect in the current period. Therefore, the preliminary accounting for this matter is generally complete.
However, several provisions, including the repatriation provisions, of the Tax Reform have significant impact on our U.S. tax attributes, generally consisting of credits, loss carry-forwards, and deferred interest deductions. Our tax attributes are generally subject to a full valuation allowance in the U.S. and thus, any adjustments to the attributes will not impact the tax provision. Although we have made a reasonable estimate of the gross amounts of the attributes disclosed, a final determination of the Tax Reform’s impact on the attributes and related valuation allowance requirements remain incomplete pending a full analysis of the provisions and their interpretations.
Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income, a limitation of net operating losses generated after fiscal 2018 to 80 percent of taxable income, an incremental tax (base erosion anti-abuse tax or “BEAT”) on excessive amounts paid to foreign related parties, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or “GILTI”). We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2017, 2016, and 2015 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| For the year ended December 31, | | | | | |
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
| 2016 | $ | (43,842 | ) | | $ | 365,287 |
| | $ | 321,445 |
|
| 2015 | $ | (60,707 | ) | | $ | 266,336 |
| | $ | 205,629 |
|
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for the years ended December 31, 2017, 2016, and 2015 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | | | | | |
| | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| For the year ended December 31, | | | | | | | |
| 2017 | | | | | | | |
| Current | $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
| 2016 | | | | | | | |
| Current | $ | 464 |
| | $ | 49,977 |
| | $ | 226 |
| | $ | 50,667 |
|
| Deferred | 10,036 |
| | 2,010 |
| | (3,702 | ) | | 8,344 |
|
| Total | $ | 10,500 |
| | $ | 51,987 |
| | $ | (3,476 | ) | | $ | 59,011 |
|
| 2015: | | | | | | | |
| Current | $ | (8,187 | ) | | $ | 45,326 |
| | $ | (197 | ) | | $ | 36,942 |
|
| Deferred | (168,855 | ) | | (361 | ) | | (9,793 | ) | | (179,009 | ) |
| Total | $ | (177,042 | ) | | $ | 44,965 |
| | $ | (9,990 | ) | | $ | (142,067 | ) |
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2017, 2016, and 2015 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Tax computed at statutory rate of 35% | $ | 140,854 |
| | $ | 112,506 |
| | $ | 71,970 |
|
| Foreign tax rate differential | (111,990 | ) | | (86,339 | ) | | (66,367 | ) |
| U.S. Tax Reform Impact | (73,668 | ) | | — |
| | — |
|
| Reserve for tax exposure | 38,013 |
| | 11,227 |
| | (2,949 | ) |
| Release of valuation allowances | (12,209 | ) | | (1,925 | ) | | (180,001 | ) |
| Losses not tax benefited | 8,841 |
| | 32,490 |
| | 56,778 |
|
| Patent box | (5,922 | ) | | (10,961 | ) | | (3,714 | ) |
| Change in tax law or rates | 3,912 |
| | 2,542 |
| | (10,290 | ) |
| Withholding taxes not creditable | 3,896 |
| | 6,014 |
| | 4,346 |
|
| Unrealized foreign exchange (gains)/losses, net | 830 |
| | 3,829 |
| | (12,120 | ) |
| Other | 1,527 |
| | (10,372 | ) | | 280 |
|
| (Benefit from)/provision for income taxes | $ | (5,916 | ) | | $ | 59,011 |
| | $ | (142,067 | ) |
U.S. Tax Reform Impact
As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35 percent to 21 percent, effective on January 1, 2018. We are required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. We recorded $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21 percent rate. Absent this deferred tax liability, the U.S. operation is in a net deferred tax asset position, offset by a full valuation allowance. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including China, the U.K., the Netherlands, South Korea, Malaysia, Bermuda, and Bulgaria, that have statutory tax rates lower than the historical U.S. statutory rate, resulting in an effective rate benefit. This
benefit can change from year to year based upon the jurisdictional mix of earnings. For the years ended December 31, 2017, 2016, and 2015, this benefit was $112.0 million, $86.3 million, and $66.4 million, respectively.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. From 2016 through 2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of 15%. The impact of the tax holidays and exemptions on our effective rate is included in the foreign tax rate differential line in the reconciliation of the statutory rate to effective rate.
Patent box
Certain income of our U.K. subsidiaries is eligible for lower tax rates under the “patent box” regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. For the years ended December 31, 2017, 2016, and 2015, this benefit was $5.9 million, $11.0 million, and $3.7 million, respectively.
Release of valuation allowances
During the years ended December 31, 2017, 2016, and 2015, we released a portion of our valuation allowance and recognized a deferred tax benefit of $12.2 million, $1.9 million, and $180.0 million, respectively. The deferred tax benefits in fiscal years 2016 and 2015 arose primarily in connection with the 2015 acquisition of CST and the 2014 acquisitions of Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities were established and related primarily to the step-up of intangible assets for book purposes.
Losses not tax benefited
Losses incurred in certain jurisdictions, predominantly the U.S., are not currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in foreseeable future. For the years ended December 31, 2017, 2016, and 2015, this resulted in a deferred tax expense of $8.8 million, $32.5 million, and $56.8 million, respectively.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are expensed if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with the remittance of presently unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned.
In certain jurisdictions we record withholding and other taxes on intercompany payments including dividends. During the years ended December 31, 2017, 2016, and 2015, this amount totaled $3.9 million, $6.0 million, and $4.3 million.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Deferred tax assets: | | | |
| Inventories and related reserves | $ | 17,287 |
| | $ | 17,616 |
|
| Accrued expenses | 25,920 |
| | 32,703 |
|
| Property, plant and equipment | 13,396 |
| | 11,297 |
|
| Intangible assets | 22,050 |
| | 32,282 |
|
| Unrealized Exchange Loss | 12,265 |
| | — |
|
| Net operating loss, interest expense, and other carryforwards | 349,244 |
| | 446,946 |
|
| Pension liability and other | 8,880 |
| | 10,545 |
|
| Share-based compensation | 12,195 |
| | 15,341 |
|
| Other | 7,028 |
| | 3,398 |
|
| Total deferred tax assets | 468,265 |
| | 570,128 |
|
| Valuation allowance | (277,315 | ) | | (299,746 | ) |
| Net deferred tax asset | 190,950 |
| | 270,382 |
|
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (23,222 | ) | | (25,195 | ) |
| Intangible assets and goodwill | (428,028 | ) | | (556,089 | ) |
| Unrealized exchange gain | (6,031 | ) | | (11,547 | ) |
| Tax on undistributed earnings of subsidiaries | (38,894 | ) | | (48,493 | ) |
| Other | — |
| | (991 | ) |
| Total deferred tax liabilities | (496,175 | ) | | (642,315 | ) |
| Net deferred tax liability | $ | (305,225 | ) | | $ | (371,933 | ) |
Valuation allowance and net operating loss carryforwards
Since our inception, we have incurred tax losses in the U.S., resulting in allowable tax net operating loss carryforwards. In measuring the related deferred tax assets, we considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Judgment is required in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the “more likely than not” criteria established in ASC 740 to determine whether the future benefit from the deferred tax assets should be recognized. As a result, we have established a full valuation allowance on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not reverse unless the related book goodwill or intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2017 and 2016 (decreased)/increased $(22.4) million and $2.8 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assetsindebtedness as of December 31, 2017 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2017, we have U.S. federal net operating loss carryforwards of $724.9 million2019 and interest expense carryforwards of $472.0 million. U.S. federal net operating loss carryforwards will expire from 2026 to 2037, state net operating loss carryforwards will expire from 2018 to 2037, and the interest carryovers have an unlimited life. It is more likely
than not that these net operating losses will not be utilized in the foreseeable future. We also have non-U.S. net operating loss carryforwards of $262.6 million, which will begin to expire in 2018.
We believe a change of ownership within the meaning of Section 382 of the Internal Revenue Code occurred in the fourth quarter of 2012. As a result, our U.S. federal net operating loss utilization will be limited to an amount equal to the market capitalization of our U.S. subsidiaries at the time of the ownership change multiplied by the federal long-term tax exempt rate. A change of ownership under Section 382 of the Internal Revenue Code is defined as a cumulative change of fifty percentage points or more in the ownership positions of certain stockholders owning five percent or more of our common stock over a three year rolling period. We do not believe the resulting limitation will prohibit the utilization of our U.S. federal net operating loss.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | |
| Balance at December 31, 2014 | $ | 22,774 |
|
| Increases related to prior year tax positions | 5,467 |
|
| Increases related to current year tax positions | 18,382 |
|
| Decreases related to settlements with tax authorities | (8,566 | ) |
| Balance at December 31, 2015 | 38,057 |
|
| Increases related to prior year tax positions | 6,390 |
|
| Increases related to current year tax positions | 8,462 |
|
| Decreases related to lapse of applicable statute of limitations | (256 | ) |
| Decreases related to settlements with tax authorities | (6,755 | ) |
| Balance at December 31, 2016 | 45,898 |
|
| Increases related to prior year tax positions | 7,968 |
|
| Increases related to current year tax positions | 14,585 |
|
| Decreases related to lapse of applicable statute of limitations | (1,356 | ) |
| Decreases related to settlements with tax authorities | (7,211 | ) |
| Balance at December 31, 2017 | $ | 59,884 |
|
During the year ended December 31, 2015, we established a reserve of $16.0 million in connection with a capital restructuring transaction executed during the year.
We record interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table that follows presents the (income)/expense related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 2017, 2016, and 2015, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Statements of Operations | | Balance Sheets |
| | | For the year ended December 31, | | As of December 31, |
| (in millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| Interest | | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.7 |
| | $ | 1.0 |
|
| Penalties | | $ | (0.1 | ) | | $ | 0.1 |
| | $ | (0.3 | ) | | $ | 0.5 |
| | $ | 1.1 |
|
The liability for unrecognized tax benefits generally relates to the allocation of taxable income to the various jurisdictions where we are subject to tax. At December 31, 2017, we anticipate that the liability for unrecognized tax benefits could decrease by up to $0.2 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2017 and 2016 that will impact our effective tax rate are $5.4 million and $12.0 million, respectively.
Our major tax jurisdictions include the Netherlands, the U.S., Japan, Germany, Mexico, China, South Korea, Belgium, Bulgaria, France, Malaysia, and the U.K. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2017.fiscal year then ended.
Indemnifications
We have various indemnification provisions in place with Texas Instruments Incorporated ("TI"), Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement by TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive, Airpax, Schrader, and CST, respectively.
10. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2019, we contributed $3.3 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan during 2018.in fiscal year 2020.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
Prior to August 1, 2012, we offered two defined contribution plans. Both defined contribution plans offered an employer matching savings option that allowed employees to make pre-tax contributions to various investment choices.
Employees who elected not to remain in the qualified defined benefit pension plan, and new employees hired after November 1997, could participate in an enhancedWe have one defined contribution plan where employer matching contributions were provided for up to 4% of the employee’s annual eligible earnings. In addition, this plan provided for an additional fixed employer contribution of 2% of the employee’s annual eligible earnings forU.S. employees, who elected not to remain in the qualified defined benefit pension plan and employees hired between November 1997 and December 31, 2003. Effective in 2012, we discontinued the additional fixed employer contribution of 2%.
Employees who remained in the qualified defined benefit pension plan were permitted to participate in a defined contribution plan, where 50% employer matching contributions were provided for up to 2% of the employee’s annual eligible earnings. Effective in 2012, we increased the employer matching contribution to 100% for up to 4% of the employee's annual eligible earnings.
In 2012, we merged the two defined contribution plans into one plan. The combined planwhich provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. Our matching of employees’ contributions under our defined contribution plan is discretionary and is based on our assessment of our financial performance.
The aggregate expense related to the defined contribution plans for U.S. employeesplan was $5.5 million, $5.7 million, and $5.9 million$5.8 million, and $4.7 million for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2017,2019, we did not and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 20172019 and 20162018 did not include an assumption for a Federal subsidy.
In the fourth quarter of 2013, we amended the retiree healthcare benefit plan to eliminate supplemental medical coverage offered to Medicare eligible retirees, effective January 1, 2014. As a result of the amendment, we recognized a gain of $7.2 million that was recorded in Other comprehensive (loss)/income in the fourth quarter of 2013, which is being amortized as a component of net periodic benefit cost over a period of approximately 5 years from the date of recognition, which represents the remaining average service period to the full eligibility dates of the active plan participants.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute approximately $2.3 million to the non-U.S. defined benefit plans during 2018.2020.
Impact on Financial Statements
The following table outlines thecomponents of net periodic benefit cost of thecost/(credit) associated with our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2017, 2016,2019, 2018, and 2015:2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 7 |
| | $ | 2,836 |
| | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Expected return on plan assets | (1,694 | ) | | — |
| | (702 | ) | | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) |
| Amortization of net loss | 946 |
| | — |
| | 766 |
| | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,306 | ) | | 9 |
| | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) |
| Loss on settlement | 565 |
| | — |
| | 1,572 |
| | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
|
| Loss on curtailment | — |
| | — |
| | — |
| | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost/(credit) | $ | 1,300 |
| | $ | (1,096 | ) | | $ | 5,825 |
| | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 74 |
| | $ | 2,582 |
| | $ | — |
| | $ | 83 |
| | $ | 2,716 |
| | $ | — |
| | $ | 102 |
| | $ | 2,811 |
|
| Interest cost | 1,604 |
| | 325 |
| | 1,053 |
| | 1,461 |
| | 364 |
| | 1,179 |
| | 1,564 |
| | 272 |
| | 1,075 |
|
| Expected return on plan assets | (2,151 | ) | | — |
| | (905 | ) | | (2,684 | ) | | — |
| | (952 | ) | | (2,666 | ) | | — |
| | (892 | ) |
| Amortization of net loss | 1,149 |
| | 54 |
| | 287 |
| | 707 |
| | 143 |
| | 488 |
| | 473 |
| | 361 |
| | 19 |
|
| Amortization of net prior service credit | — |
| | (1,335 | ) | | (4 | ) | | — |
| | (1,335 | ) | | (20 | ) | | — |
| | (1,335 | ) | | (37 | ) |
| Loss on settlement | 3,225 |
| | — |
| | 100 |
| | 1,293 |
| | — |
| | 34 |
| | 391 |
| | — |
| | 479 |
|
| (Gain)/loss on curtailment | — |
| | — |
| | — |
| | — |
| | — |
| | (486 | ) | | — |
| | — |
| | 1,901 |
|
| Net periodic benefit cost/(credit) | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
| | $ | 777 |
| | $ | (745 | ) | | $ | 2,959 |
| | $ | (238 | ) | | $ | (600 | ) | | $ | 5,356 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Service cost | — |
| | 7 |
| | 2,836 |
| | — |
| | 50 |
| | 3,122 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
|
| Actuarial loss/(gain) | 1,711 |
| | (92 | ) | | 9,344 |
| | (519 | ) | | (124 | ) | | 2,777 |
|
| Curtailments | — |
| | — |
| | — |
| | — |
| | — |
| | 931 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (3,310 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 161 |
| | — |
| | — |
| | (350 | ) |
| Ending balance | $ | 45,548 |
| | $ | 5,588 |
| | $ | 74,172 |
| | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Actual return on plan assets | 4,484 |
| | — |
| | 4,125 |
| | (811 | ) | | — |
| | (1,308 | ) |
| Employer contributions | 3,326 |
| | 547 |
| | 4,889 |
| | 3,985 |
| | 630 |
| | 5,992 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 228 |
| | — |
| | — |
| | 164 |
|
| Ending balance | $ | 44,870 |
| | $ | — |
| | $ | 43,906 |
| | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
|
| Funded status at end of year | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
| Accumulated benefit obligation at end of year | $ | 45,548 |
| | NA |
| | $ | 65,633 |
| | $ | 45,169 |
| | NA |
| | $ | 59,948 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in Benefit Obligation | | | | | | | | | | | |
| Beginning balance | $ | 57,679 |
| | $ | 10,296 |
| | $ | 59,056 |
| | $ | 57,626 |
| | $ | 11,108 |
| | $ | 56,102 |
|
| Service cost | — |
| | 74 |
| | 2,582 |
| | — |
| | 83 |
| | 2,716 |
|
| Interest cost | 1,604 |
| | 325 |
| | 1,053 |
| | 1,461 |
| | 364 |
| | 1,179 |
|
| Plan participants’ contributions | — |
| | 519 |
| | 120 |
| | — |
| | 405 |
| | 139 |
|
| Plan amendment | — |
| | — |
| | (6 | ) | | — |
| | — |
| | (73 | ) |
| Actuarial loss/(gain) | 2,936 |
| | (197 | ) | | 2,692 |
| | 4,946 |
| | (984 | ) | | 5,127 |
|
| Curtailments | — |
| | — |
| | — |
| | — |
| | — |
| | (2,169 | ) |
| Benefits paid | (13,604 | ) | | (1,325 | ) | | (2,572 | ) | | (6,354 | ) | | (962 | ) | | (3,186 | ) |
Acquisitions (1) | — |
| | — |
| | — |
| | — |
| | 282 |
| | 253 |
|
| Foreign currency exchange rate changes | — |
| | — |
| | 4,488 |
| | — |
| | — |
| | (1,032 | ) |
| Ending balance | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
| | $ | 57,679 |
| | $ | 10,296 |
| | $ | 59,056 |
|
| Change in Plan Assets | | | | | | | | | | | |
| Beginning balance | $ | 52,042 |
| | $ | — |
| | $ | 37,361 |
| | $ | 55,867 |
| | $ | — |
| | $ | 33,961 |
|
| Actual return on plan assets | 2,319 |
| | — |
| | 1,241 |
| | 2,262 |
| | — |
| | 2,469 |
|
| Employer contributions | 344 |
| | 1,325 |
| | 2,586 |
| | 267 |
| | 962 |
| | 3,552 |
|
| Plan participants’ contributions | — |
| | — |
| | 120 |
| | — |
| | — |
| | 139 |
|
| Benefits paid | (13,604 | ) | | (1,325 | ) | | (2,572 | ) | | (6,354 | ) | | (962 | ) | | (3,186 | ) |
| Foreign currency exchange rate changes | — |
| | — |
| | 2,486 |
| | — |
| | — |
| | 426 |
|
| Ending balance | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
| | $ | 52,042 |
| | $ | — |
| | $ | 37,361 |
|
| Funded status at end of year | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) | | $ | (5,637 | ) | | $ | (10,296 | ) | | $ | (21,695 | ) |
| Accumulated benefit obligation at end of year | $ | 48,615 |
| | NA |
| | $ | 60,588 |
| | $ | 57,679 |
| | NA |
| | $ | 53,995 |
|
(1) Relates to unfunded defined benefit plans assumed as part of the acquisition of CST.
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | 2,788 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (952 | ) | | (717 | ) | | (1,551 | ) | | (595 | ) | | (1,116 | ) | | (1,465 | ) |
| Noncurrent liabilities | (2,514 | ) | | (4,871 | ) | | (28,715 | ) | | (4,699 | ) | | (4,901 | ) | | (24,358 | ) |
| Funded status | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (638 | ) | | (1,210 | ) | | (1,494 | ) | | (651 | ) | | (1,226 | ) | | (873 | ) |
| Noncurrent liabilities | (6,876 | ) | | (8,482 | ) | | (24,697 | ) | | (4,986 | ) | | (9,070 | ) | | (20,822 | ) |
| | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) | | $ | (5,637 | ) | | $ | (10,296 | ) | | $ | (21,695 | ) |
Balances recognized within Accumulatedaccumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2017, 2016,2019, 2018, and 20152017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service cost/(credit) | $ | — |
| | $ | 306 |
| | $ | (16 | ) | | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) |
| Net loss | $ | 18,780 |
| | $ | 809 |
| | $ | 17,151 |
| | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service credit | $ | — |
| | $ | 823 |
| | $ | (220 | ) | | $ | — |
| | $ | (512 | ) | | $ | (218 | ) | | $ | — |
| | $ | (1,847 | ) | | $ | (538 | ) |
| Net loss | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
| | $ | 22,490 |
| | $ | 1,260 |
| | $ | 11,070 |
| | $ | 19,122 |
| | $ | 2,387 |
| | $ | 10,719 |
|
We expect to amortize a loss of $0.3$1.4 million from Accumulatedaccumulated other comprehensive loss to net periodic benefit cost during 2018.fiscal year 2020.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 20172019 and 20162018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 3,465 |
| | $ | 74,020 |
| | $ | 45,169 |
| | $ | 65,691 |
|
| Accumulated benefit obligation | $ | 3,465 |
| | $ | 65,633 |
| | $ | 45,169 |
| | $ | 59,948 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 48,615 |
| | $ | 31,680 |
| | $ | 57,679 |
| | $ | 25,367 |
|
| Accumulated benefit obligation | $ | 48,615 |
| | $ | 26,609 |
| | $ | 57,679 |
| | $ | 22,285 |
|
| Plan assets | $ | 41,101 |
| | $ | 5,759 |
| | $ | 52,042 |
| | $ | 4,876 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 20172019 and 20162018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 9,053 |
| | $ | 74,020 |
| | $ | 51,186 |
| | $ | 65,691 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 58,307 |
| | $ | 63,153 |
| | $ | 67,975 |
| | $ | 54,849 |
|
| Plan assets | $ | 41,101 |
| | $ | 36,990 |
| | $ | 52,042 |
| | $ | 33,606 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in Otherother comprehensive lossincome/(loss) for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net (gain)/loss | $ | (824 | ) | | $ | (71 | ) | | $ | 4,365 |
| | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
|
| Amortization of net loss | (723 | ) | | — |
| | (539 | ) | | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 998 |
| | (6 | ) | | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
|
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Settlement effect | (432 | ) | | — |
| | (1,100 | ) | | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) |
| Curtailment effect | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
|
| Total in other comprehensive (income)/loss | $ | (1,979 | ) | | $ | 927 |
| | $ | 2,720 |
| | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net loss/(gain) | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
| | $ | 5,368 |
| | $ | (984 | ) | | $ | 2,505 |
| | $ | 2,792 |
| | $ | (949 | ) | | $ | (1,233 | ) |
| Amortization of net (loss)/gain | (1,149 | ) | | (54 | ) | | (130 | ) | | (707 | ) | | (143 | ) | | (436 | ) | | (473 | ) | | (361 | ) | | 70 |
|
| Amortization of net prior service credit | — |
| | 1,335 |
| | 3 |
| | — |
| | 1,335 |
| | 15 |
| | — |
| | 1,335 |
| | 32 |
|
| Plan amendment | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (73 | ) | | — |
| | — |
| | 24 |
|
| Settlement effect | (3,225 | ) | | — |
| | (69 | ) | | (1,293 | ) | | — |
| | (67 | ) | | (391 | ) | | — |
| | (330 | ) |
| Curtailment effect | — |
| | — |
| | — |
| | — |
| | — |
| | (1,272 | ) | | — |
| | — |
| | — |
|
| Total recognized in other comprehensive loss/(income) | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
| | $ | 3,368 |
| | $ | 208 |
| | $ | 672 |
| | $ | 1,928 |
| | $ | 25 |
| | $ | (1,437 | ) |
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 20172019 and 20162018 are as follows:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 2.60 | % | | 2.80 | % | | 3.79 | % | | 3.90 | % |
| Non-U.S. assumed discount rate | 1.90 | % | | NA |
| | 2.17 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.87 | % | | NA |
| | 2.66 | % | | NA |
|
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | | December 31, 2016 | |
| | Defined Benefit | | Retiree Healthcare | | | Defined Benefit | | Retiree Healthcare | |
| U.S. assumed discount rate | 3.00 | % | | 3.10 | % | | | 3.20 | % | | 3.30 | % | |
| Non-U.S. assumed discount rate | 2.07 | % | | NA |
| | | 1.75 | % | | NA |
| |
| Non-U.S. average long-term pay progression | 2.66 | % | | NA |
| | | 2.46 | % | | NA |
| |
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % |
| Non-U.S. assumed discount rate | 5.76 | % | | NA |
| | 5.87 | % | | NA |
| | 3.90 | % | | NA |
|
| U.S. average long-term rate of return on plan assets | 4.53 | % | | NA |
| | 4.57 | % | | NA |
| | 4.50 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 1.77 | % | | NA |
| | 2.26 | % | | NA |
| | 2.29 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.43 | % | | NA |
| | 4.82 | % | | NA |
| | 3.75 | % | | NA |
|
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.20 | % | | 3.30 | % | | 3.10 | % | | 3.50 | % | | 2.90 | % | | 2.90 | % |
| Non-U.S. assumed discount rate | 3.90 | % | | NA |
| | 3.83 | % | | NA |
| | 4.19 | % | | NA |
|
U.S. average long-term rate of return on plan assets | 4.50 | % | | NA |
| | 5.00 | % | | NA |
| | 5.00 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 2.29 | % | | NA |
| | 2.60 | % | | NA |
| | 2.51 | % | | NA |
|
| Non-U.S. average long-term pay progression | 3.75 | % | | NA |
| | 3.78 | % | | NA |
| | 4.34 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2017, 2016,2019, 2018, and 20152017 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.30 | % | | 6.60 | % | | 6.90 | % |
| Attributed to age 65 or greater | 6.70 | % | | 7.10 | % | | 7.50 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: | | | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
|
| | | | | | | | |
| | Retiree Healthcare |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.90 | % | | 7.10 | % | | 7.30 | % |
| Attributed to age 65 or greater | 7.50 | % | | 7.80 | % | | 6.80 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: |
| | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2029 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2029 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 20172019 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on post-retirement benefit obligations | $ | 314 |
| | $ | (287 | ) |
|
| | | | | | | |
| | 1 percentage point increase | | 1 percentage point decrease |
| Effect on total service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on post-retirement benefit obligations | $ | 261 |
| | $ | (227 | ) |
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2020 | $ | 8,985 |
| | $ | 717 |
| | $ | 3,346 |
|
| 2021 | $ | 7,868 |
| | $ | 653 |
| | $ | 3,299 |
|
| 2022 | $ | 6,116 |
| | $ | 653 |
| | $ | 3,896 |
|
| 2023 | $ | 5,219 |
| | $ | 534 |
| | $ | 3,499 |
|
| 2024 | $ | 3,804 |
| | $ | 516 |
| | $ | 3,456 |
|
| 2025 - 2029 | $ | 12,201 |
| | $ | 1,838 |
| | $ | 21,775 |
|
|
| | | | | | | | | | | |
| Expected Benefit Payments | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| | | | | | |
| 2018 | $ | 6,211 |
| | $ | 1,210 |
| | $ | 2,848 |
|
| 2019 | 5,851 |
| | 1,257 |
| | 2,905 |
|
| 2020 | 5,341 |
| | 1,219 |
| | 3,178 |
|
| 2021 | 4,956 |
| | 1,112 |
| | 3,258 |
|
| 2022 | 4,001 |
| | 1,022 |
| | 3,937 |
|
| 2023 - 2027 | 12,185 |
| | 3,273 |
| | 20,474 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for additional information related to the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser collaboratively reviewed market opportunities using historic and statisticalhistorical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored. Currently, we believe that there are no significant concentrations of risk associated with the plan assets.
The following table presents information about the plan’s target and actual asset allocation, as well as the actual allocation, as of December 31, 2017:2019:
|
| | | |
| | Target Allocation | | Actual Allocation as of December 31, 2019 |
| U.S. large cap equity | 7% | | 5% |
| U.S. small / mid cap equity | 2% | | 1% |
| Globally managed volatility fund | 3% | | 2% |
| International (non-U.S.) equity | 4% | | 3% |
Fixed income (U.S. investment grade) (1) | 68% | | 42% |
| High-yield fixed income | 2% | | 1% |
| International (non-U.S.) fixed income | 1% | | 1% |
Money market funds (1) | 13% | | 45% |
|
| | | | | |
| Asset Class | Target Allocation | | Actual Allocation as of December 31, 2017 |
| U.S. large cap equity | 8 | % | | 8 | % |
| U.S. small / mid cap equity | 2 | % | | 2 | % |
Globally managed volatility fund
| 3 | % | | 3 | % |
| International (non-U.S.) equity | 4 | % | | 4 | % |
| Fixed income (U.S. investment and non-investment grade) | 68 | % | | 67 | % |
| High-yield fixed income | 2 | % | | 2 | % |
| International (non-U.S.) fixed income | 1 | % | | 1 | % |
Money market funds
| 12 | % | | 12 | % |
| |
(1) | As of December 31, 2019, our holdings in the Money market funds exceed the target allocation as we prepare to make payments resulting from the voluntary retirement incentive program. Refer to Note 5, "Restructuring and Other Charges, Net" for additional information about the voluntary retirement incentive program. |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 20172019 and 2016, aggregated by the level2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. large cap equity | $ | 2,221 |
| | $ | 2,960 |
|
| U.S. small / mid cap equity | 637 |
| | 833 |
|
| Global managed volatility fund | 849 |
| | 1,214 |
|
| International (non-U.S.) equity | 1,195 |
| | 1,493 |
|
| Total equity mutual funds | 4,902 |
| | 6,500 |
|
| Fixed income (U.S. investment grade) | 18,830 |
| | 26,884 |
|
| High-yield fixed income | 561 |
| | 792 |
|
| International (non-U.S.) fixed income | 264 |
| | 402 |
|
| Total fixed income mutual funds | 19,655 |
| | 28,078 |
|
| Money market funds | 20,313 |
| | 5,297 |
|
| Total plan assets | $ | 44,870 |
| | $ | 39,875 |
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy within which those measurements fall:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Asset Class | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| U.S. large cap equity | $ | 3,288 |
| | $ | — |
| | $ | — |
| | $ | 3,288 |
| | $ | 3,786 |
| | $ | — |
| | $ | — |
| | $ | 3,786 |
|
| U.S. small / mid cap equity | 942 |
| | — |
| | — |
| | 942 |
| | 2,109 |
| | — |
| | — |
| | 2,109 |
|
| Global managed volatility fund | 1,288 |
| | — |
| | — |
| | 1,288 |
| | — |
| | — |
| | — |
| | — |
|
| International (non-U.S.) equity | 1,788 |
| | — |
| | — |
| | 1,788 |
| | 2,867 |
| | — |
| | — |
| | 2,867 |
|
| Total equity mutual funds | 7,306 |
| | — |
| | — |
| | 7,306 |
| | 8,762 |
| | — |
| | — |
| | 8,762 |
|
| Fixed income (U.S. investment grade) | 27,507 |
| | — |
| | — |
| | 27,507 |
| | 42,053 |
| | — |
| | — |
| | 42,053 |
|
| High-yield fixed income | 821 |
| | — |
| | — |
| | 821 |
| | 788 |
| | — |
| | — |
| | 788 |
|
| International (non-U.S.) fixed income | 398 |
| | — |
| | — |
| | 398 |
| | 439 |
| | — |
| | — |
| | 439 |
|
| Total fixed income mutual funds | 28,726 |
| | — |
| | — |
| | 28,726 |
| | 43,280 |
| | — |
| | — |
| | 43,280 |
|
Money market funds
| 5,069 |
| | — |
| | — |
| | 5,069 |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 41,101 |
| | $ | — |
| | $ | — |
| | $ | 41,101 |
| | $ | 52,042 |
| | $ | — |
| | $ | — |
| | $ | 52,042 |
|
hierarchy. Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, and cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investmentinvestments in individual securities, derivatives, long-duration fixed income andsecurities, cash, and cash equivalents isare permitted, the plan did not hold these types of investments as of December 31, 2017 or 2016.2019 and 2018.
Prohibited investments include direct investmentinvestments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% equityfixed income securities and 50% fixed incomeequity securities, and cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2017:2019:
|
| | | | |
Asset Class | Target Allocation | | Actual Allocation as of December 31, 20172019 |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 65% |
| Equity securities | 10%-90% | | 29 | % |
Fixed income securities and cash and cash equivalents | 10%-90% | | 71 | %35% |
The following table presents information about the plan assets measured at fair value as of December 31, 20172019 and 2016, aggregated by the level2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. equity | $ | 2,413 |
| | $ | 2,212 |
|
| International (non-U.S.) equity | 6,343 |
| | 5,158 |
|
| Total equity securities | 8,756 |
| | 7,370 |
|
| U.S. fixed income | 3,835 |
| | 3,345 |
|
| International (non-U.S.) fixed income | 9,716 |
| | 8,811 |
|
| Total fixed income securities | 13,551 |
| | 12,156 |
|
| Cash and cash equivalents | 9,726 |
| | 10,339 |
|
| Total plan assets | $ | 32,033 |
| | $ | 29,865 |
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy, withinwith the exception of U.S. fixed income securities of $0.3 million and $0.3 million as of December 31, 2019 and 2018, respectively, which those measurements fall:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Asset Class | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| U.S. equity | $ | 2,461 |
| | $ | — |
| | $ | — |
| | $ | 2,461 |
| | $ | 2,791 |
| | $ | — |
| | $ | — |
| | $ | 2,791 |
|
| International (non-U.S.) equity | 6,567 |
| | — |
| | — |
| | 6,567 |
| | 5,581 |
| | — |
| | — |
| | 5,581 |
|
| Total equity securities | 9,028 |
| | — |
| | — |
| | 9,028 |
| | 8,372 |
| | — |
| | — |
| | 8,372 |
|
| U.S. fixed income | 2,968 |
| | 268 |
| | — |
| | 3,236 |
| | 2,894 |
| | 249 |
| | — |
| | 3,143 |
|
| International (non-U.S.) fixed income | 11,046 |
| | — |
| | — |
| | 11,046 |
| | 11,288 |
| | — |
| | — |
| | 11,288 |
|
| Total fixed income securities | 14,014 |
| | 268 |
| | — |
| | 14,282 |
| | 14,182 |
| | 249 |
| | — |
| | 14,431 |
|
| Cash and cash equivalents | 7,921 |
| | — |
| | — |
| | 7,921 |
| | 5,927 |
| | — |
| | — |
| | 5,927 |
|
| Total | $ | 30,963 |
| | $ | 268 |
| | $ | — |
| | $ | 31,231 |
| | $ | 28,481 |
| | $ | 249 |
| | $ | — |
| | $ | 28,730 |
|
are categorized as Level 2. The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, and cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plansplan are composed of insurance policies. The contributions (or premiums) we paymake to the plan are used to purchase insurance policies that provide for specific benefit payments to our plan participants. The benefit formula is determined independently by us. OnUpon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, thesethis defined benefit plans areplan is not considered a multi-employer plans.plan.
The following table presents information about the plans’plan assets measured at fair value as of December 31, 20172019 and 2016, aggregated by the level2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Insurance policies | $ | 10,472 |
| | $ | 8,897 |
|
All fair value measures presented above are categorized in Level 3 of the fair value hierarchy within which those measurements fall:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Asset Class | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Insurance policies | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
| | $ | — |
| | $ | — |
| | $ | 8,014 |
| | $ | 8,014 |
|
| Total | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
| | $ | — |
| | $ | — |
| | $ | 8,014 |
| | $ | 8,014 |
|
hierarchy. The following table presents a rollforward of the Level 3these assets in our Netherlands' pension plans for the years ended December 31, 20172019 and 2016:2018:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2017 | $ | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | 8,897 |
|
| Actual return on plan assets still held at reporting date | 1,821 |
|
| Purchases, sales, settlements, and exchange rate changes | (246 | ) |
| Balance as of December 31, 2019 | $ | 10,472 |
|
|
| | | |
| | Significant unobservable inputs (Level 3) |
| Balance at December 31, 2015 | $ | 5,757 |
|
| Actual return on plan assets still held at reporting date | 2,064 |
|
| Purchases, sales, settlements, and exchange rate changes | 193 |
|
| Balance at December 31, 2016 | 8,014 |
|
| Actual return on plan assets still held at reporting date | (597 | ) |
| Purchases, sales, settlements, and exchange rate changes | 1,642 |
|
| Balance at December 31, 2017 | $ | 9,059 |
|
The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate asthat is usedapplied to value the related defined benefit plan liabilities.liability.
Belgium Plan AssetsShare-Based Compensation Expense
The assetstable below presents non-cash compensation expense related to our equity awards, which is recognized within SG&A expense in the consolidated statements of operations, during the Belgium definedidentified periods:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Stock options | $ | 6,552 |
| | $ | 5,739 |
| | $ | 6,046 |
|
| Restricted securities | 12,205 |
| | 18,086 |
| | 13,773 |
|
| Share-based compensation expense | $ | 18,757 |
| | $ | 23,825 |
| | $ | 19,819 |
|
In fiscal years 2019 and 2018, we recognized $3.2 million and $3.0 million of income tax benefit plan are composed of insurance policies. As of associated with share-based compensation expense. We recognized 0 such tax benefit in fiscal year 2017.
The table below presents unrecognized compensation expense at December 31, 20172019 for each class of award, and 2016the fair value of these plan assets was $0.9 million and $0.8 million, respectively, which are consideredremaining expected term for this expense to be Level 3 financial instruments.recognized:
|
| | | | | |
| | Unrecognized Compensation Expense | | Expected Recognition (years) |
| Options | $ | 8,419 |
| | 1.8 |
| Restricted securities | 14,789 |
| | 1.5 |
| Total unrecognized compensation expense | $ | 23,208 |
| | |
11. Share-Based Payment Plans5. Restructuring and Other Charges, Net
In connection with the completion of our initial public offering ("IPO"), we adopted the Sensata Technologies Holding N.V. 2010 Equity Incentive Plan (the “2010 Equity Incentive Plan”). The purpose of the 2010 Equity Incentive Plan is to promote long-term growthRestructuring and profitability by providing our present and future eligible directors, officers, and employees with incentives to contribute to, and participate in, our success. There are 10.0 million ordinary shares authorized under the 2010 Equity Incentive Plan, of which 3.8 million were available as of December 31, 2017.
Share-Based Compensation Awards
We grant share-based compensation awards under the 2010 Equity Incentive Plan for which vesting is subject only to continued employment and the passage of time (options and restricted stock units ("RSUs")), as well as those for which vesting also depends on the attainment of certain performance criteria (performance options and performance-based restricted stock units ("PRSUs")). RSUs and PRSUs are generally referred to in this Annual Report on Form 10-K as "restricted securities."
Options
A summary of stock option activityother charges, net for the years ended December 31, 2019, 2018, and 2017 2016, and 2015 is presented in the table below (amounts have been calculated based on unrounded shares):were as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Severance costs, net (1) | | $ | 29,240 |
| | $ | 7,566 |
| | $ | 11,125 |
|
Facility and other exit costs (2) | | 808 |
| | 877 |
| | 7,850 |
|
Gain on sale of Valves Business (3)(5) | | — |
| | (64,423 | ) | | — |
|
Other (4)(5) | | 23,512 |
| | 8,162 |
| | — |
|
| Restructuring and other charges, net | | $ | 53,560 |
| | $ | (47,818 | ) | | $ | 18,975 |
|
|
| | | | | | | | | | | | |
| | Stock Options | | Weighted-Average Exercise Price Per Option | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
| Balance at December 31, 2014 | 4,089 |
| | $ | 27.53 |
| | 6.3 | | $ | 101,705 |
|
| Granted | 353 |
| | $ | 56.60 |
| | | | |
| Forfeited and expired | (65 | ) | | $ | 43.93 |
| | | | |
| Exercised | (1,016 | ) | | $ | 18.85 |
| | | | $ | 34,835 |
|
| Balance at December 31, 2015 | 3,361 |
| | $ | 32.89 |
| | 6.2 | | $ | 47,967 |
|
Granted (1) | 654 |
| | $ | 37.89 |
| | | | |
| Forfeited and expired | (111 | ) | | $ | 43.95 |
| | | | |
| Exercised | (358 | ) | | $ | 11.05 |
| | | | $ | 9,501 |
|
| Balance at December 31, 2016 | 3,546 |
| | $ | 35.67 |
| | 6.3 | | $ | 19,844 |
|
| Granted | 387 |
| | $ | 43.67 |
| | | | |
| Forfeited and expired | (1 | ) | | $ | 32.03 |
| | | | |
| Exercised | (326 | ) | | $ | 22.86 |
| | | | $ | 7,175 |
|
| Balance at December 31, 2017 | 3,606 |
| | $ | 37.69 |
| | 6.0 | | $ | 50,130 |
|
| Options vested and exercisable as of December 31, 2017 | 2,422 |
| | $ | 35.47 |
| | 4.8 | | $ | 38,872 |
|
Vested and expected to vest as of December 31, 2017 (2) | 3,426 |
| | $ | 37.43 |
| | 5.8 | | $ | 48,476 |
|
__________________
| |
(1) | Includes 257 performance-based options.Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.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 in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). |
| |
(2) | ConsistsFacility and other exit costs for the year ended December 31, 2017 included $3.2 million of vested optionscosts related to the closure of our facility in Minden, Germany and unvested options$3.1 million of costs associated with the consolidation of 2 other manufacturing sites in Europe. |
| |
(3) | In the year ended December 31, 2018, we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business"). |
| |
(4) | In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that are expectedwe entered into in connection with the acquisition of GIGAVAC, LLC ("GIGAVAC"). Refer to vest. The expectedNote 15, "Commitments and Contingencies," for additional information related to vest options are determined by applying the forfeiture rate assumption, adjustedsupply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC. |
| |
(5) | Refer to Note 17, "Acquisitions and Divestitures," for cumulative actual forfeitures,additional information related to total unvested options.the acquisition of GIGAVAC and the divestiture of the Valves Business. |
A summary of the status of
Changes to our unvested options as of December 31, 2017, and of the changes during the year then ended, is presented in the table below (amounts have been calculated based on unrounded shares):
|
| | | | | | |
| | Stock Options | | Weighted-Average Grant-Date Fair Value |
| Unvested as of December 31, 2016 | 1,223 |
| | $ | 13.28 |
|
| Granted during the year | 387 |
| | $ | 14.50 |
|
| Vested during the year | (425 | ) | | $ | 13.16 |
|
| Forfeited or expired during the year | (1 | ) | | $ | 10.09 |
|
| Unvested as of December 31, 2017 | 1,184 |
| | $ | 13.72 |
|
The fair value of stock options that vested during the years ended December 31, 2017, 2016, and 2015 was $5.6 million, $7.1 million, and $7.5 million, respectively.
Non-performance-based options granted to employees under the 2010 Equity Incentive Plan generally vest 25% per year over four years from the date of grant. Performance-based options granted to employees under the 2010 Equity Incentive Plan vest after three years, depending on the extent to which certain performance criteria are met. Options granted to directors under the 2010 Equity Incentive Plan vest after one year.
We recognize compensation expense for options on a straight-line basis over the requisite service period, which is generally the same as the vesting period. The options expire ten years from the date of grant. Except as otherwise provided in specific option award agreements, if a participant ceases to be employed by us, options not yet vested expire and are forfeited at
the termination date, and options that are fully vested expire 60 days after termination of the participant’s employment for any reason other than termination for cause (in which case the options expire on the participant’s termination date) or due to death or disability (in which case the options expire 6 months after the participant’s termination date).
The weighted-average grant-date fair value per option grantedseverance liability during the years ended December 31, 2017, 20162019 and 2018 were as follows:
|
| | | | |
| | | Severance |
| Balance as of December 31, 2017 | | $ | 7,583 |
|
| Charges, net of reversals | | 7,566 |
|
| Payments | | (8,341 | ) |
| Foreign currency remeasurement | | (217 | ) |
| Balance as of December 31, 2018 | | 6,591 |
|
| Charges, net of reversals | | 29,240 |
|
| Payments | | (21,095 | ) |
| Foreign currency remeasurement | | 43 |
|
| Balance as of December 31, 2019 | | $ | 14,779 |
|
The severance liability as of December 31, 2019 and 2018 was entirely recorded in accrued expenses and other current liabilities on our consolidated balance sheets. Refer to Note 12, "Accrued Expenses and Other Current Liabilities."
6. Other, Net
Other, net consisted of the following for the years ended December 31, 2019, 2018, and 2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
Currency remeasurement (loss)/gain on net monetary assets(1) | $ | (6,802 | ) | | $ | (18,905 | ) | | $ | 18,041 |
|
Gain/(loss) on foreign currency forward contracts(2) | 2,225 |
| | 2,070 |
| | (15,618 | ) |
Gain/(loss) on commodity forward contracts(2) | 4,888 |
| | (8,481 | ) | | 9,989 |
|
Loss on debt financing(3) | (4,364 | ) | | (2,350 | ) | | (2,670 | ) |
| Net periodic benefit cost, excluding service cost | (3,186 | ) | | (3,585 | ) | | (3,402 | ) |
| Other | (669 | ) | | 886 |
| | 75 |
|
| Other, net | $ | (7,908 | ) | | $ | (30,365 | ) | | $ | 6,415 |
|
| |
(1) | Relates to the remeasurement of non-USD denominated net monetary assets and liabilities into USD. Refer to the Foreign Currency section of Note 2, "Significant Accounting Policies," for additional information. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to gains and losses on our commodity and foreign currency exchange forward contracts. |
| |
(3) | Refer to Note 14, "Debt," for additional information related to our debt financing transactions. |
7. Income Taxes
Effective April 27, 2006 (inception), and 2015 was $14.50, $12.08concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 28, 2018, the Company reincorporated its headquarters in the U.K. We file income tax returns in the countries in which our subsidiaries are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.S., and $17.94, respectively.the U.K. The fair value2006 Acquisition purchase accounting and the related debt and equity capitalization of options was estimated on the datevarious subsidiaries of grant using the Black-Scholes-Merton option-pricing model. Seeconsolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Refer to Note 2, "Significant Accounting Policies," for furtherdetailed discussion of howthe accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
The Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. In fiscal year 2017 we estimaterecognized a tax benefit related to the fair valueenactment-date effects of options. the Tax
Reform Act resulting from the adjustment of our deferred tax assets and liabilities, net of the impact from recognizing the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recognizing a tax benefit of $73.7 million, which was principally associated with indefinite-lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Tax Reform Act and refinement of our calculations during the year ended December 31, 2018, we determined that no further adjustment was necessary.
Global intangible low-taxed income
The weighted-average key assumptions usedTax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in estimatingfuture years or to provide for the grant-date fair value of options aretax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| 2019 | $ | 13,183 |
| | $ | 377,240 |
| | $ | 390,423 |
|
| 2018 | $ | 68,027 |
| | $ | 458,348 |
| | $ | 526,375 |
|
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Expected dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected volatility | 30.00 | % | | 30.00 | % | | 30.00 | % |
| Risk-free interest rate | 2.08 | % | | 1.48 | % | | 1.52 | % |
| Expected term (years) | 6.0 |
| | 6.0 |
| | 5.9 |
|
| Fair value per share of underlying ordinary shares | $ | 43.67 |
| | $ | 37.89 |
| | $ | 56.60 |
|
Provision for/(benefit from) income taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | | | | | |
| | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| 2019 | | | | | | | |
| Current | $ | 5,643 |
| | $ | 73,947 |
| | $ | 496 |
| | $ | 80,086 |
|
| Deferred | 9,687 |
| | 17,339 |
| | 597 |
| | 27,623 |
|
| Total | $ | 15,330 |
| | $ | 91,286 |
| | $ | 1,093 |
| | $ | 107,709 |
|
| 2018 | | | | | | | |
| Current | $ | 5,700 |
| | $ | 64,666 |
| | $ | 1,082 |
| | $ | 71,448 |
|
| Deferred | (109,663 | ) | | (18,770 | ) | | (15,635 | ) | | (144,068 | ) |
| Total | $ | (103,963 | ) | | $ | 45,896 |
| | $ | (14,553 | ) | | $ | (72,620 | ) |
| 2017 | | | | | | | |
| Current | $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Tax computed at statutory rate of 21% in 2019 and 2018, and 35% in 2017 | $ | 81,989 |
| | $ | 110,539 |
| | $ | 140,854 |
|
| Reserve for tax exposure | 20,079 |
| | 10,775 |
| | 38,013 |
|
| Valuation allowances | 19,640 |
| | (123,426 | ) | | (3,368 | ) |
| Foreign tax rate differential | (19,107 | ) | | (41,200 | ) | | (111,990 | ) |
| Withholding taxes not creditable | 9,509 |
| | 8,734 |
| | 3,896 |
|
| Research and development incentives | (8,410 | ) | | (19,475 | ) | | (5,922 | ) |
| Change in tax laws or rates | 5,121 |
| | (22,264 | ) | | 3,912 |
|
| U.S. state taxes, net of federal benefit | 863 |
| | (11,499 | ) | | 1,087 |
|
| Unrealized foreign currency exchange losses, net | (43 | ) | | 11,346 |
| | 830 |
|
| U.S. Tax Reform Act impact | — |
| | — |
| | (73,668 | ) |
| Other | (1,932 | ) | | 3,850 |
| | 440 |
|
| Provision for/(benefit from) income taxes | $ | 107,709 |
| | $ | (72,620 | ) | | $ | (5,916 | ) |
Valuation allowance impact on tax expense
During the year ended December 31, 2018, we released a substantial portion of our valuation allowance against our deferred tax assets in the U.S. We continue to maintain a valuation allowance against certain of our interest, foreign tax, and state tax credit carryforwards. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Act Impact
As a result of the Tax Reform Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recognized $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We did not grant optionsoperate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory 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.
Our subsidiary in Changzhou, China is currently eligible for a reduced tax rate of 15%, which is effective through 2021. The impact on current tax expense of the tax holidays and exemptions is included in the foreign tax rate differential line in the reconciliation of the statutory tax rate to effective rate. The remeasurement of the deferred tax assets and liabilities is included in the change in tax laws or rates line.
Research and development incentives
Certain income of our directors in 2017 or 2016. We granted 72 options to our directorsU.K. subsidiaries is eligible for lower tax rates under the 2010 Equity Incentive Plan"patent box" regime, resulting in 2015. These options vested after onecertain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are deducted if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were not subjectearned. In certain jurisdictions we recognize a deferred tax liability on withholding and other taxes on intercompany payments including dividends.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Net operating loss, interest expense, and other carryforwards | $ | 283,094 |
| | $ | 305,277 |
|
| Prepaid and accrued expenses | 67,143 |
| | 72,093 |
|
| Intangible assets | 20,457 |
| | 27,122 |
|
| Inventories and related reserves | 16,712 |
| | 14,171 |
|
| Property, plant and equipment | 14,749 |
| | 14,571 |
|
| Share-based compensation | 10,288 |
| | 11,332 |
|
| Pension liability and other | 7,158 |
| | 8,741 |
|
| Unrealized exchange loss | 1,959 |
| | 4,255 |
|
| Total deferred tax assets | 421,560 |
| | 457,562 |
|
| Valuation allowance | (146,775 | ) | | (157,043 | ) |
| Net deferred tax asset | 274,785 |
| | 300,519 |
|
| Deferred tax liabilities: | | | |
| Intangible assets and goodwill | (440,009 | ) | | (440,348 | ) |
| Tax on undistributed earnings of subsidiaries | (31,636 | ) | | (35,187 | ) |
| Property, plant and equipment | (13,762 | ) | | (15,795 | ) |
| Operating lease right of use assets | (12,522 | ) | | — |
|
| Unrealized exchange gain | (6,739 | ) | | (6,912 | ) |
| Total deferred tax liabilities | (504,668 | ) | | (498,242 | ) |
| Net deferred tax liability | $ | (229,883 | ) | | $ | (197,723 | ) |
Valuation allowance and net operating loss carryforwards
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to performance conditions. The weighted-average grant date fair value per option was $17.05.
Restricted Securities
We grant RSUsdetermine whether, based on the weight of that cliff vest over various lengthsevidence, a valuation allowance is needed for all or some portion of time ranging from onethe deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to four years, as well as those that vest 25% per year over four years. We grant PRSUs that generally cliff vest three years after the grant date. The numbereach category of PRSUs that ultimately vest will depend onevidence is commensurate with the extent to which certain performanceit 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 are met, as definedestablished in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we determined that sufficient positive evidence existed as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million were realizable, and therefore, we reduced the valuation allowance accordingly.
One of the provisions of the Tax Reform Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards
may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not reverse unless the related book goodwill or indefinite-lived intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2019 and 2018 decreased $10.3 million and $120.3 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2019 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2019, we have U.S. federal net operating loss carryforwards of $472.0 million and suspended interest expense carryforwards of $511.4 million. Substantially all of our U.S. federal net operating loss carryforwards will expire from 2027 to 2037. Our state net operating loss carryforwards will expire from 2020 to 2037. Our interest carryovers have an unlimited life. We also have non-U.S. net operating loss carryforwards of $221.9 million, which will begin to expire in 2020.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 89,609 |
| | $ | 59,884 |
| | $ | 45,898 |
|
| Increases related to current year tax positions | | 17,378 |
| | 15,676 |
| | 14,585 |
|
| Increases related to prior year tax positions | | 15,356 |
| | 14,609 |
| | 7,968 |
|
| Decreases related to settlements with tax authorities | | (3,515 | ) | | — |
| | (7,211 | ) |
| Decreases related to prior year tax positions | | (1,773 | ) | | (1,144 | ) | | — |
|
| Increases related to business combinations | | 450 |
| | 1,000 |
| | — |
|
| Decreases related to lapse of applicable statute of limitations | | (87 | ) | | — |
| | (1,356 | ) |
| Increases/(decreases) related to foreign currency exchange rate | | 173 |
| | (416 | ) | | — |
|
| Balance at end of year | | $ | 117,591 |
| | $ | 89,609 |
| | $ | 59,884 |
|
We recognize interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table below. Seethat follows presents the expense/(income) related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 2019, 2018, and 2017, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Statements of Operations | | Balance Sheets |
| | For the year ended December 31, | | As of December 31, |
| (In millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| Interest | $ | 0.9 |
| | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 1.3 |
| | $ | 0.4 |
|
| Penalties | $ | (0.1 | ) | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | 0.3 |
| | $ | 0.4 |
|
At December 31, 2019, we anticipate that the liability for unrecognized tax benefits could decrease by up to $6.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2019 that if recognized, would impact our effective tax rate is $67.8 million.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.K., and the U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2019.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2019, 2018, and 2017, the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Basic weighted-average ordinary shares outstanding | 160,946 |
| | 168,570 |
| | 171,165 |
|
| Dilutive effect of stock options | 600 |
| | 822 |
| | 616 |
|
| Dilutive effect of unvested restricted securities | 422 |
| | 467 |
| | 388 |
|
| Diluted weighted-average ordinary shares outstanding | 161,968 |
| | 169,859 |
| | 172,169 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for additional information related to our equity awards. These potential ordinary shares are as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Anti-dilutive shares excluded | 1,170 |
| | 930 |
| | 1,410 |
|
| Contingently issuable shares excluded | 641 |
| | 687 |
| | 871 |
|
9. Inventories
The components of inventories as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Finished goods | $ | 197,531 |
| | $ | 187,095 |
|
| Work-in-process | 104,007 |
| | 104,405 |
|
| Raw materials | 205,140 |
| | 200,819 |
|
| Inventories | $ | 506,678 |
| | $ | 492,319 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of howour accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 2019 and 2018 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Land | | $ | 17,880 |
| | $ | 22,021 |
|
| Buildings and improvements | | 266,864 |
| | 259,182 |
|
| Machinery and equipment | | 1,367,293 |
| | 1,220,285 |
|
| Total property, plant and equipment | | 1,652,037 |
| | 1,501,488 |
|
| Accumulated depreciation | | (821,039 | ) | | (714,310 | ) |
| Property, plant and equipment, net | | $ | 830,998 |
| | $ | 787,178 |
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under finance leases, totaled $115.9 million, $106.0 million, and $109.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
PP&E, net as of December 31, 2019 and 2018 included the following assets under finance leases:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Assets under finance leases in property, plant and equipment | $ | 49,714 |
| | $ | 49,714 |
|
| Accumulated depreciation | (24,316 | ) | | (22,508 | ) |
| Assets under finance leases in property, plant and equipment, net | $ | 25,398 |
| | $ | 27,206 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to PP&E, net.
11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in net goodwill by segment for the years ended December 31, 2019 and 2018.
|
| | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| Balance as of December 31, 2017 | $ | 2,148,135 |
| | $ | 857,329 |
| | $ | 3,005,464 |
|
| Divestiture of Valves Business | (38,800 | ) | | — |
| | (38,800 | ) |
| Acquisition of GIGAVAC | 46,298 |
| | 68,340 |
| | 114,638 |
|
| Balance as of December 31, 2018 | 2,155,633 |
| | 925,669 |
| | 3,081,302 |
|
| GIGAVAC purchase accounting adjustment | 16,387 |
| | (16,564 | ) | | (177 | ) |
| Other acquisition | — |
| | 12,473 |
| | 12,473 |
|
| Balance as of December 31, 2019 | $ | 2,172,020 |
| | $ | 921,578 |
| | $ | 3,093,598 |
|
At each of December 31, 2019, 2018, and 2017, accumulated goodwill impairment was $0.0 million related to Performance Sensing and $18.5 million related to Sensing Solutions.
Goodwill attributed to acquisitions reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed, and has been assigned to our segments based on a methodology using anticipated future earnings of the components of business. Goodwill attributed to the divestiture of the Valves Business is based on the relative fair value of the Valves Business to the Performance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to our acquisition and divestiture transactions.
We own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we estimatehave no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2019 using quantitative analyses. Refer to Note 2, "Significant Accounting Policies," for additional information related to the methodology used. Based on these analyses, we have determined that as of October 1, 2019 the fair value of restricted securities.each of our reporting units and indefinite-lived intangible assets exceeded their carrying values.
A summary
The following tables outline the components of restricted securities granted in the past three years is presented below:definite-lived intangible assets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
Weighted-
Average
Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairment | | Net Carrying Value |
| Completed technologies | 14 | | $ | 770,608 |
| | $ | (529,926 | ) | | $ | (2,430 | ) | | $ | 238,252 |
|
| Customer relationships | 11 | | 1,827,998 |
| | (1,430,515 | ) | | (12,144 | ) | | 385,339 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,654 |
| | (16,598 | ) | | — |
| | 50,056 |
|
Capitalized software and other(1) | 7 | | 67,784 |
| | (38,997 | ) | | — |
| | 28,787 |
|
| Total | 12 | | $ | 2,756,444 |
| | $ | (2,039,436 | ) | | $ | (14,574 | ) | | $ | 702,434 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Percentage Range of PRSUs Awarded That May Vest (1) |
| | | | | | | 0.0% to 172.5% | | 0.0% to 200.0% |
| Year ended December 31, | | RSUs Granted | | Weighted-Average
Grant-Date
Fair Value | | PRSUs Granted | | Weighted-Average Grant-Date Fair Value | | PRSUs Granted | | Weighted-Average Grant-Date Fair Value |
| 2017 | | 182 |
| | $ | 43.24 |
| | 183 |
| | $ | 43.67 |
| | 53 |
| | $ | 43.33 |
|
| 2016 | | 319 |
| | $ | 38.33 |
| | 180 |
| | $ | 38.96 |
| | — |
| | $ | — |
|
| 2015 | | 150 |
| | $ | 56.42 |
| | 128 |
| | $ | 56.94 |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
Weighted-
Average
Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairment | | Net Carrying Value |
| Completed technologies | 14 | | $ | 759,008 |
| | $ | (475,295 | ) | | $ | (2,430 | ) | | $ | 281,283 |
|
| Customer relationships | 11 | | 1,825,698 |
| | (1,352,189 | ) | | (12,144 | ) | | 461,365 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,154 |
| | (13,468 | ) | | — |
| | 52,686 |
|
Capitalized software and other(1) | 7 | | 65,896 |
| | (32,509 | ) | | — |
| | 33,387 |
|
| Total | 12 | | $ | 2,740,156 |
| | $ | (1,896,861 | ) | | $ | (14,574 | ) | | $ | 828,721 |
|
| |
(1) | During the years ended December 31, 2019 and 2018, we wrote-off approximately $0.3 million and $0.2 million, respectively, of fully-amortized capitalized software that was not in use. |
(1) Represents the percentage range of PRSUs that may vest accordingRefer to Note 17, "Acquisitions and Divestitures," for additional information related to the termsdefinite-lived intangible assets recognized as a result of the awards,acquisition of GIGAVAC.
The following table outlines amortization of definite-lived intangible assets for the years ended December 31, 2019, 2018, and does not reflect our current assessment2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Acquisition-related definite-lived intangible assets | $ | 136,087 |
| | $ | 132,235 |
| | $ | 153,729 |
|
| Capitalized software | 6,799 |
| | 7,091 |
| | 7,321 |
|
| Amortization of definite-lived intangible assets | $ | 142,886 |
| | $ | 139,326 |
| | $ | 161,050 |
|
The table below presents estimated amortization of definite-lived intangible assets for each of the probable outcomenext five years:
|
| | | |
| For the year ended December 31, | |
| 2020 | $ | 127,787 |
|
| 2021 | $ | 111,177 |
|
| 2022 | $ | 97,620 |
|
| 2023 | $ | 83,802 |
|
| 2024 | $ | 68,818 |
|
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of vestingDecember 31, 2019 and 2018 consisted of the following:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Accrued compensation and benefits | $ | 52,394 |
| | $ | 68,936 |
|
| Accrued interest | 42,803 |
| | 40,550 |
|
| Accrued severance | 14,779 |
| | 6,591 |
|
| Current portion of operating lease liabilities | 11,543 |
| | — |
|
| Current portion of pension and post-retirement benefit obligations | 3,220 |
| | 3,176 |
|
| Foreign currency and commodity forward contracts | 1,925 |
| | 7,710 |
|
| Other accrued expenses and current liabilities | 88,962 |
| | 91,167 |
|
| Accrued expenses and other current liabilities | $ | 215,626 |
| | $ | 218,130 |
|
13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2019, we contributed $3.3 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2020.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
We have one defined contribution plan for U.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the defined contribution plan was $5.5 million, $5.7 million, and $5.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2019, we did not and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2019 and 2018 did not include an assumption for a Federal subsidy.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the achievement or expected achievementnon-U.S. defined benefit plans during 2020.
Impact on Financial Statements
The components of performance conditions.net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2019, 2018, and 2017 were as follows:
Compensation |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 7 |
| | $ | 2,836 |
| | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Expected return on plan assets | (1,694 | ) | | — |
| | (702 | ) | | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) |
| Amortization of net loss | 946 |
| | — |
| | 766 |
| | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,306 | ) | | 9 |
| | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) |
| Loss on settlement | 565 |
| | — |
| | 1,572 |
| | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
|
| Loss on curtailment | — |
| | — |
| | — |
| | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost/(credit) | $ | 1,300 |
| | $ | (1,096 | ) | | $ | 5,825 |
| | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Service cost | — |
| | 7 |
| | 2,836 |
| | — |
| | 50 |
| | 3,122 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
|
| Actuarial loss/(gain) | 1,711 |
| | (92 | ) | | 9,344 |
| | (519 | ) | | (124 | ) | | 2,777 |
|
| Curtailments | — |
| | — |
| | — |
| | — |
| | — |
| | 931 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (3,310 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 161 |
| | — |
| | — |
| | (350 | ) |
| Ending balance | $ | 45,548 |
| | $ | 5,588 |
| | $ | 74,172 |
| | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Actual return on plan assets | 4,484 |
| | — |
| | 4,125 |
| | (811 | ) | | — |
| | (1,308 | ) |
| Employer contributions | 3,326 |
| | 547 |
| | 4,889 |
| | 3,985 |
| | 630 |
| | 5,992 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 228 |
| | — |
| | — |
| | 164 |
|
| Ending balance | $ | 44,870 |
| | $ | — |
| | $ | 43,906 |
| | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
|
| Funded status at end of year | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
| Accumulated benefit obligation at end of year | $ | 45,548 |
| | NA |
| | $ | 65,633 |
| | $ | 45,169 |
| | NA |
| | $ | 59,948 |
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | 2,788 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (952 | ) | | (717 | ) | | (1,551 | ) | | (595 | ) | | (1,116 | ) | | (1,465 | ) |
| Noncurrent liabilities | (2,514 | ) | | (4,871 | ) | | (28,715 | ) | | (4,699 | ) | | (4,901 | ) | | (24,358 | ) |
| Funded status | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service cost/(credit) | $ | — |
| | $ | 306 |
| | $ | (16 | ) | | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) |
| Net loss | $ | 18,780 |
| | $ | 809 |
| | $ | 17,151 |
| | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
|
We expect to amortize a loss of $1.4 million from accumulated other comprehensive loss to net periodic benefit cost during fiscal year 2020.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 3,465 |
| | $ | 74,020 |
| | $ | 45,169 |
| | $ | 65,691 |
|
| Accumulated benefit obligation | $ | 3,465 |
| | $ | 65,633 |
| | $ | 45,169 |
| | $ | 59,948 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 9,053 |
| | $ | 74,020 |
| | $ | 51,186 |
| | $ | 65,691 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net (gain)/loss | $ | (824 | ) | | $ | (71 | ) | | $ | 4,365 |
| | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
|
| Amortization of net loss | (723 | ) | | — |
| | (539 | ) | | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 998 |
| | (6 | ) | | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
|
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Settlement effect | (432 | ) | | — |
| | (1,100 | ) | | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) |
| Curtailment effect | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
|
| Total in other comprehensive (income)/loss | $ | (1,979 | ) | | $ | 927 |
| | $ | 2,720 |
| | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 2019 and 2018 are as follows:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 2.60 | % | | 2.80 | % | | 3.79 | % | | 3.90 | % |
| Non-U.S. assumed discount rate | 1.90 | % | | NA |
| | 2.17 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.87 | % | | NA |
| | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % |
| Non-U.S. assumed discount rate | 5.76 | % | | NA |
| | 5.87 | % | | NA |
| | 3.90 | % | | NA |
|
| U.S. average long-term rate of return on plan assets | 4.53 | % | | NA |
| | 4.57 | % | | NA |
| | 4.50 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 1.77 | % | | NA |
| | 2.26 | % | | NA |
| | 2.29 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.43 | % | | NA |
| | 4.82 | % | | NA |
| | 3.75 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.30 | % | | 6.60 | % | | 6.90 | % |
| Attributed to age 65 or greater | 6.70 | % | | 7.10 | % | | 7.50 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: | | | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2017 reflects our estimate2019 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on post-retirement benefit obligations | $ | 314 |
| | $ | (287 | ) |
The table below outlines the benefits expected to be paid to participants in each of the probable outcomefollowing years, taking into consideration expected future service, as appropriate. The majority of the performance conditions associatedpayments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2020 | $ | 8,985 |
| | $ | 717 |
| | $ | 3,346 |
|
| 2021 | $ | 7,868 |
| | $ | 653 |
| | $ | 3,299 |
|
| 2022 | $ | 6,116 |
| | $ | 653 |
| | $ | 3,896 |
|
| 2023 | $ | 5,219 |
| | $ | 534 |
| | $ | 3,499 |
|
| 2024 | $ | 3,804 |
| | $ | 516 |
| | $ | 3,456 |
|
| 2025 - 2029 | $ | 12,201 |
| | $ | 1,838 |
| | $ | 21,775 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for additional information related to the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the PRSUs granted in 2017U.S. defined benefit plan is 83% fixed income and 2016.17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser reviewed market opportunities using historical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2019:
|
| | | |
| | Target Allocation | | Actual Allocation as of December 31, 2019 |
| U.S. large cap equity | 7% | | 5% |
| U.S. small / mid cap equity | 2% | | 1% |
| Globally managed volatility fund | 3% | | 2% |
| International (non-U.S.) equity | 4% | | 3% |
Fixed income (U.S. investment grade) (1) | 68% | | 42% |
| High-yield fixed income | 2% | | 1% |
| International (non-U.S.) fixed income | 1% | | 1% |
Money market funds (1) | 13% | | 45% |
| |
(1) | As of December 31, 2019, our holdings in the Money market funds exceed the target allocation as we prepare to make payments resulting from the voluntary retirement incentive program. Refer to Note 5, "Restructuring and Other Charges, Net" for additional information about the voluntary retirement incentive program. |
The portfolio is monitored for automatic rebalancing on a monthly basis.
A summary of activity related to outstanding restricted securities for 2017, 2016, and 2015 is presented inThe following table presents information about the table below (amounts have been calculated based on unrounded shares):
|
| | | | | | |
| | Restricted Securities | | Weighted-Average Grant-Date Fair Value |
| Balance at December 31, 2014 | 656 |
| | $ | 36.06 |
|
| Granted | 278 |
| | $ | 56.66 |
|
| Forfeited | (165 | ) | | $ | 38.55 |
|
| Vested | (115 | ) | | $ | 26.72 |
|
| Balance at December 31, 2015 | 654 |
| | $ | 45.87 |
|
| Granted | 499 |
| | $ | 38.56 |
|
| Forfeited | (48 | ) | | $ | 47.01 |
|
| Vested | (185 | ) | | $ | 33.41 |
|
| Balance at December 31, 2016 | 920 |
| | $ | 44.35 |
|
| Granted | 418 |
| | $ | 43.44 |
|
| Forfeited | (35 | ) | | $ | 43.94 |
|
| Vested | (222 | ) | | $ | 42.24 |
|
| Balance at December 31, 2017 | 1,081 |
| | $ | 44.43 |
|
Aggregate intrinsicplan assets measured at fair value information for restricted securities as of December 31, 2017, 2016,2019 and 2015 is2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. large cap equity | $ | 2,221 |
| | $ | 2,960 |
|
| U.S. small / mid cap equity | 637 |
| | 833 |
|
| Global managed volatility fund | 849 |
| | 1,214 |
|
| International (non-U.S.) equity | 1,195 |
| | 1,493 |
|
| Total equity mutual funds | 4,902 |
| | 6,500 |
|
| Fixed income (U.S. investment grade) | 18,830 |
| | 26,884 |
|
| High-yield fixed income | 561 |
| | 792 |
|
| International (non-U.S.) fixed income | 264 |
| | 402 |
|
| Total fixed income mutual funds | 19,655 |
| | 28,078 |
|
| Money market funds | 20,313 |
| | 5,297 |
|
| Total plan assets | $ | 44,870 |
| | $ | 39,875 |
|
All fair value measures presented below:
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Outstanding | $ | 55,271 |
| | $ | 35,845 |
| | $ | 30,115 |
|
| Expected to vest | $ | 42,106 |
| | $ | 26,937 |
| | $ | 22,704 |
|
The weighted-average remaining periods over whichabove are categorized in Level 1 of the restrictions will lapse, expressedfair value hierarchy. Investments in years, as of December 31, 2017, 2016, and 2015mutual funds are as follows:
|
| | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Outstanding | 1.3 | | 1.5 | | 1.4 |
| Expected to vest | 1.4 | | 1.5 | | 1.4 |
The expected to vest restricted securities are calculated based on the applicationpublicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2019 and 2018.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% fixed income securities and 50% equity securities, cash, and cash equivalents, with allowance for a forfeiture rate assumption to all outstanding restricted securities40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as our assessmentthe actual allocation, as of December 31, 2019:
|
| | | |
| Target Allocation | | Actual Allocation as of December 31, 2019 |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 65% |
| Equity securities | 10%-90% | | 35% |
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. equity | $ | 2,413 |
| | $ | 2,212 |
|
| International (non-U.S.) equity | 6,343 |
| | 5,158 |
|
| Total equity securities | 8,756 |
| | 7,370 |
|
| U.S. fixed income | 3,835 |
| | 3,345 |
|
| International (non-U.S.) fixed income | 9,716 |
| | 8,811 |
|
| Total fixed income securities | 13,551 |
| | 12,156 |
|
| Cash and cash equivalents | 9,726 |
| | 10,339 |
|
| Total plan assets | $ | 32,033 |
| | $ | 29,865 |
|
All fair value measures presented above are categorized in Level 1 of the probabilityfair value hierarchy, with the exception of meetingU.S. fixed income securities of $0.3 million and $0.3 million as of December 31, 2019 and 2018, respectively, which are categorized as Level 2. The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the required performance conditionslast business day of the year.
Permitted asset classes include equity securities that pertainare traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the PRSUs.
On April 25, 2016, our Boardplan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of Directors approved retroactive amendments to our RSUs and PRSUs to allow for accelerated vesting upon termination without cause within 24 months after a change in control, as defined inan individual plan participant, the 2010 Equity Incentive Plan. These changes were made in orderinsurance contracts purchased are converted to provide consistency across our equity awards,specific benefits for the participant. The contributions paid by us are commingled with contributions paid to better align management and shareholder interests,the insurance provider by other employers for investment purposes and to incorporate equity compensation best practices. There was no change toreduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the termsplan assets measured at fair value as of our option awards, as Section 4.3(b)December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Insurance policies | $ | 10,472 |
| | $ | 8,897 |
|
All fair value measures presented above are categorized in Level 3 of the 2010 Equity Incentive Plan specifically providesfair value hierarchy. The following table presents a rollforward of these assets for accelerated vestingthe years ended December 31, 2019 and 2018:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2017 | $ | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | 8,897 |
|
| Actual return on plan assets still held at reporting date | 1,821 |
|
| Purchases, sales, settlements, and exchange rate changes | (246 | ) |
| Balance as of December 31, 2019 | $ | 10,472 |
|
The fair values of options upon terminationthe insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without cause within 24 months after a change in control.actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards:
|
| | | | | | | | | | | |
| | For the year ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Options | $ | 6,046 |
| | $ | 7,094 |
| | $ | 7,176 |
|
| Restricted securities | 13,773 |
| | 10,331 |
| | 8,150 |
|
| Total share-based compensation expense | $ | 19,819 |
| | $ | 17,425 |
| | $ | 15,326 |
|
This compensation expenseawards, which is recordedrecognized within SG&A expense in the consolidated statements of operations, during the identified periods. We did not recognize aperiods:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Stock options | $ | 6,552 |
| | $ | 5,739 |
| | $ | 6,046 |
|
| Restricted securities | 12,205 |
| | 18,086 |
| | 13,773 |
|
| Share-based compensation expense | $ | 18,757 |
| | $ | 23,825 |
| | $ | 19,819 |
|
In fiscal years 2019 and 2018, we recognized $3.2 million and $3.0 million of income tax benefit associated with these expenses.share-based compensation expense. We recognized 0 such tax benefit in fiscal year 2017.
The table below presents unrecognized compensation expense at December 31, 20172019 for each class of award, and the remaining expected term for this expense to be recognized:
|
| | | | | |
| | Unrecognized Compensation Expense | | Expected Recognition (years) |
| Options | $ | 8,419 |
| | 1.8 |
| Restricted securities | 14,789 |
| | 1.5 |
| Total unrecognized compensation expense | $ | 23,208 |
| | |
|
| | | | | |
| | Unrecognized compensation expense | | Expected recognition (years) |
| Options | $ | 9,924 |
| | 2.1 |
| Restricted securities | 19,755 |
| | 1.6 |
| Total unrecognized compensation expense | $ | 29,679 |
| | |
12. Shareholders’ Equity5. Restructuring and Other Charges, Net
Our authorized share capital consists of 400.0 million ordinary shares with a nominal value of €0.01 per share, of which 178.4 million ordinary shares were issuedRestructuring and 171.4 million were outstanding as of other charges, net for the years ended December 31, 2017. Issued2019, 2018, and outstanding shares exclude 1.1 million outstanding restricted securities and 3.6 million outstanding stock options. See Note 11, "Share-Based Payment Plans," for awards available for grant2017 were as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Severance costs, net (1) | | $ | 29,240 |
| | $ | 7,566 |
| | $ | 11,125 |
|
Facility and other exit costs (2) | | 808 |
| | 877 |
| | 7,850 |
|
Gain on sale of Valves Business (3)(5) | | — |
| | (64,423 | ) | | — |
|
Other (4)(5) | | 23,512 |
| | 8,162 |
| | — |
|
| Restructuring and other charges, net | | $ | 53,560 |
| | $ | (47,818 | ) | | $ | 18,975 |
|
| |
(1) | Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.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 in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of 2 other manufacturing sites in Europe. |
| |
(3) | In the year ended December 31, 2018, we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business"). |
| |
(4) | In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC, LLC ("GIGAVAC"). Refer to Note 15, "Commitments and Contingencies," for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC. |
| |
(5) | Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business. |
Changes to our outstanding equity plan.
Treasury Shares
We have a $250.0 million share repurchase program in place. Under this program, we may repurchase ordinary shares from time to time, at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions. The share repurchase program may be modified or terminated by our Board of Directors at any time. We did not repurchase any ordinary shares under this programseverance liability during the years ended December 31, 2017, 2016, or 2015. At December 31, 2017, $250.0 million remained available for share repurchase under this program.
Ordinary shares repurchased by us are recorded at cost as treasury shares2019 and result in a reduction of shareholders' equity. We reissue treasury shares as part of our share-based compensation programs. When shares are reissued, we determine the cost using the first-in, first-out method. During the years ended December 31, 2017, 2016, and 2015, we reissued 0.5 million, 0.5 million, and 1.1 million treasury shares, respectively. During the years ended December 31, 2017 and 2016, in connection with our treasury share reissuances, we recognized reductions in Retained earnings of $13.6 million, and $16.8 million, respectively.
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss2018 were as follows:
|
| | | | |
| | | Severance |
| Balance as of December 31, 2017 | | $ | 7,583 |
|
| Charges, net of reversals | | 7,566 |
|
| Payments | | (8,341 | ) |
| Foreign currency remeasurement | | (217 | ) |
| Balance as of December 31, 2018 | | 6,591 |
|
| Charges, net of reversals | | 29,240 |
|
| Payments | | (21,095 | ) |
| Foreign currency remeasurement | | 43 |
|
| Balance as of December 31, 2019 | | $ | 14,779 |
|
|
| | | | | | | | | | | |
| | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2014 | $ | 17,578 |
| | $ | (29,326 | ) | | $ | (11,748 | ) |
| Pre-tax current period change | (18,301 | ) | | 359 |
| | (17,942 | ) |
| Income tax benefit/(expense) | 4,575 |
| | (875 | ) | | 3,700 |
|
| Balance at December 31, 2015 | 3,852 |
| | (29,842 | ) | | (25,990 | ) |
| Pre-tax current period change | (5,106 | ) | | (4,934 | ) | | (10,040 | ) |
| Income tax benefit | 1,277 |
| | 686 |
| | 1,963 |
|
| Balance at December 31, 2016 | 23 |
| | (34,090 | ) | | (34,067 | ) |
| Pre-tax current period change | (37,603 | ) | | (1,445 | ) | | (39,048 | ) |
| Income tax benefit | 9,401 |
| | 550 |
| | 9,951 |
|
| Balance at December 31, 2017 | $ | (28,179 | ) | | $ | (34,985 | ) | | $ | (63,164 | ) |
The detailsseverance liability as of December 31, 2019 and 2018 was entirely recorded in accrued expenses and other current liabilities on our consolidated balance sheets. Refer to Note 12, "Accrued Expenses and Other Current Liabilities."
6. Other, Net
Other, net consisted of the components of Other comprehensive loss, net of tax,following for the years ended December 31, 2017, 2016,2019, 2018, and 2015 are as follows:2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total |
| Other comprehensive (loss)/income before reclassifications | | $ | (39,387 | ) | | $ | (4,184 | ) | | $ | (43,571 | ) | | $ | (6,356 | ) | | $ | (6,816 | ) | | $ | (13,172 | ) | | $ | 19,464 |
| | $ | (634 | ) | | $ | 18,830 |
|
| Amounts reclassified from Accumulated other comprehensive loss | | 11,185 |
| | 3,289 |
| | 14,474 |
| | 2,527 |
| | 2,568 |
| | 5,095 |
| | (33,190 | ) | | 118 |
| | (33,072 | ) |
| Net current period other comprehensive loss | | $ | (28,202 | ) | | $ | (895 | ) | | $ | (29,097 | ) | | $ | (3,829 | ) | | $ | (4,248 | ) | | $ | (8,077 | ) | | $ | (13,726 | ) | | $ | (516 | ) | | $ | (14,242 | ) |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
Currency remeasurement (loss)/gain on net monetary assets(1) | $ | (6,802 | ) | | $ | (18,905 | ) | | $ | 18,041 |
|
Gain/(loss) on foreign currency forward contracts(2) | 2,225 |
| | 2,070 |
| | (15,618 | ) |
Gain/(loss) on commodity forward contracts(2) | 4,888 |
| | (8,481 | ) | | 9,989 |
|
Loss on debt financing(3) | (4,364 | ) | | (2,350 | ) | | (2,670 | ) |
| Net periodic benefit cost, excluding service cost | (3,186 | ) | | (3,585 | ) | | (3,402 | ) |
| Other | (669 | ) | | 886 |
| | 75 |
|
| Other, net | $ | (7,908 | ) | | $ | (30,365 | ) | | $ | 6,415 |
|
The details of the amounts reclassified from Accumulated other comprehensive loss for the years ended December 31, 2017, 2016, and 2015 are as follows:
|
| | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Amount of Loss/(Gain) Reclassified from Accumulated Other Comprehensive Loss | | |
| Component | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | Affected Line in Consolidated Statements of Operations |
| Derivative instruments designated and qualifying as cash flow hedges | | | | | | | | |
| Foreign currency forward contracts | | $ | 916 |
| | $ | (17,720 | ) | | $ | (54,537 | ) | | Net revenue (1) |
| Foreign currency forward contracts | | 13,997 |
| | 21,089 |
| | 10,284 |
| | Cost of revenue (1) |
| Total, before taxes | | 14,913 |
| | 3,369 |
| | (44,253 | ) | | Income before taxes |
| Income tax effect | | (3,728 | ) | | (842 | ) | | 11,063 |
| | (Benefit from)/provision for income taxes |
| Total, net of taxes | | $ | 11,185 |
| | $ | 2,527 |
| | $ | (33,190 | ) | | Net income |
| | | | | | | | | |
| Defined benefit and retiree healthcare plans | | $ | 3,476 |
| | $ | 2,975 |
| | $ | 351 |
| | Various (2) |
| Income tax effect | | (187 | ) | | (407 | ) | | (233 | ) | | (Benefit from)/provision for income taxes |
| Total, net of taxes | | $ | 3,289 |
| | $ | 2,568 |
| | $ | 118 |
| | Net income |
| |
(1) | SeeRelates to the remeasurement of non-USD denominated net monetary assets and liabilities into USD. Refer to the Foreign Currency section of Note 16,2, "Significant Accounting Policies," for additional information. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional detailsinformation related to gains and losses on amounts to be reclassified in the future from Accumulated other comprehensive loss.our commodity and foreign currency exchange forward contracts. |
| |
(2)(3)
| Amounts relatedRefer to defined benefit and retiree healthcare plans reclassified from Accumulated other comprehensive loss affect the Cost of revenue, Research and development, Restructuring and special charges, and SG&A line items in the consolidated statements of operations. The amounts reclassified are included in the computation of net periodic benefit cost. See Note 10, "Pension and Other Post-Retirement Benefits,14, "Debt," for additional details of net periodic benefit cost.information related to our debt financing transactions. |
13. Related Party Transactions7. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 28, 2018, the Company reincorporated its headquarters in the U.K. We file income tax returns in the countries in which our subsidiaries are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.S., and the U.K. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Cross License AgreementRefer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
The Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. In fiscal year 2017 we recognized a tax benefit related to the enactment-date effects of the Tax
Reform Act resulting from the adjustment of our deferred tax assets and liabilities, net of the impact from recognizing the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recognizing a tax benefit of $73.7 million, which was principally associated with indefinite-lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Tax Reform Act and refinement of our calculations during the year ended December 31, 2018, we determined that no further adjustment was necessary.
Global intangible low-taxed income
The Tax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| 2019 | $ | 13,183 |
| | $ | 377,240 |
| | $ | 390,423 |
|
| 2018 | $ | 68,027 |
| | $ | 458,348 |
| | $ | 526,375 |
|
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
Provision for/(benefit from) income taxes
Provision for/(benefit from) income taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | | | | | |
| | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| 2019 | | | | | | | |
| Current | $ | 5,643 |
| | $ | 73,947 |
| | $ | 496 |
| | $ | 80,086 |
|
| Deferred | 9,687 |
| | 17,339 |
| | 597 |
| | 27,623 |
|
| Total | $ | 15,330 |
| | $ | 91,286 |
| | $ | 1,093 |
| | $ | 107,709 |
|
| 2018 | | | | | | | |
| Current | $ | 5,700 |
| | $ | 64,666 |
| | $ | 1,082 |
| | $ | 71,448 |
|
| Deferred | (109,663 | ) | | (18,770 | ) | | (15,635 | ) | | (144,068 | ) |
| Total | $ | (103,963 | ) | | $ | 45,896 |
| | $ | (14,553 | ) | | $ | (72,620 | ) |
| 2017 | | | | | | | |
| Current | $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Tax computed at statutory rate of 21% in 2019 and 2018, and 35% in 2017 | $ | 81,989 |
| | $ | 110,539 |
| | $ | 140,854 |
|
| Reserve for tax exposure | 20,079 |
| | 10,775 |
| | 38,013 |
|
| Valuation allowances | 19,640 |
| | (123,426 | ) | | (3,368 | ) |
| Foreign tax rate differential | (19,107 | ) | | (41,200 | ) | | (111,990 | ) |
| Withholding taxes not creditable | 9,509 |
| | 8,734 |
| | 3,896 |
|
| Research and development incentives | (8,410 | ) | | (19,475 | ) | | (5,922 | ) |
| Change in tax laws or rates | 5,121 |
| | (22,264 | ) | | 3,912 |
|
| U.S. state taxes, net of federal benefit | 863 |
| | (11,499 | ) | | 1,087 |
|
| Unrealized foreign currency exchange losses, net | (43 | ) | | 11,346 |
| | 830 |
|
| U.S. Tax Reform Act impact | — |
| | — |
| | (73,668 | ) |
| Other | (1,932 | ) | | 3,850 |
| | 440 |
|
| Provision for/(benefit from) income taxes | $ | 107,709 |
| | $ | (72,620 | ) | | $ | (5,916 | ) |
Valuation allowance impact on tax expense
During the year ended December 31, 2018, we released a substantial portion of our valuation allowance against our deferred tax assets in the U.S. We continue to maintain a valuation allowance against certain of our interest, foreign tax, and state tax credit carryforwards. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Act Impact
As a result of the Tax Reform Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recognized $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory 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.
Our subsidiary in Changzhou, China is currently eligible for a reduced tax rate of 15%, which is effective through 2021. The impact on current tax expense of the tax holidays and exemptions is included in the foreign tax rate differential line in the reconciliation of the statutory tax rate to effective rate. The remeasurement of the deferred tax assets and liabilities is included in the change in tax laws or rates line.
Research and development incentives
Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are deducted if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned. In certain jurisdictions we recognize a deferred tax liability on withholding and other taxes on intercompany payments including dividends.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Net operating loss, interest expense, and other carryforwards | $ | 283,094 |
| | $ | 305,277 |
|
| Prepaid and accrued expenses | 67,143 |
| | 72,093 |
|
| Intangible assets | 20,457 |
| | 27,122 |
|
| Inventories and related reserves | 16,712 |
| | 14,171 |
|
| Property, plant and equipment | 14,749 |
| | 14,571 |
|
| Share-based compensation | 10,288 |
| | 11,332 |
|
| Pension liability and other | 7,158 |
| | 8,741 |
|
| Unrealized exchange loss | 1,959 |
| | 4,255 |
|
| Total deferred tax assets | 421,560 |
| | 457,562 |
|
| Valuation allowance | (146,775 | ) | | (157,043 | ) |
| Net deferred tax asset | 274,785 |
| | 300,519 |
|
| Deferred tax liabilities: | | | |
| Intangible assets and goodwill | (440,009 | ) | | (440,348 | ) |
| Tax on undistributed earnings of subsidiaries | (31,636 | ) | | (35,187 | ) |
| Property, plant and equipment | (13,762 | ) | | (15,795 | ) |
| Operating lease right of use assets | (12,522 | ) | | — |
|
| Unrealized exchange gain | (6,739 | ) | | (6,912 | ) |
| Total deferred tax liabilities | (504,668 | ) | | (498,242 | ) |
| Net deferred tax liability | $ | (229,883 | ) | | $ | (197,723 | ) |
Valuation allowance and net operating loss carryforwards
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we determined that sufficient positive evidence existed as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million were realizable, and therefore, we reduced the valuation allowance accordingly.
One of the provisions of the Tax Reform Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards
may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not reverse unless the related book goodwill or indefinite-lived intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2019 and 2018 decreased $10.3 million and $120.3 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2019 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2019, we have U.S. federal net operating loss carryforwards of $472.0 million and suspended interest expense carryforwards of $511.4 million. Substantially all of our U.S. federal net operating loss carryforwards will expire from 2027 to 2037. Our state net operating loss carryforwards will expire from 2020 to 2037. Our interest carryovers have an unlimited life. We also have non-U.S. net operating loss carryforwards of $221.9 million, which will begin to expire in 2020.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 89,609 |
| | $ | 59,884 |
| | $ | 45,898 |
|
| Increases related to current year tax positions | | 17,378 |
| | 15,676 |
| | 14,585 |
|
| Increases related to prior year tax positions | | 15,356 |
| | 14,609 |
| | 7,968 |
|
| Decreases related to settlements with tax authorities | | (3,515 | ) | | — |
| | (7,211 | ) |
| Decreases related to prior year tax positions | | (1,773 | ) | | (1,144 | ) | | — |
|
| Increases related to business combinations | | 450 |
| | 1,000 |
| | — |
|
| Decreases related to lapse of applicable statute of limitations | | (87 | ) | | — |
| | (1,356 | ) |
| Increases/(decreases) related to foreign currency exchange rate | | 173 |
| | (416 | ) | | — |
|
| Balance at end of year | | $ | 117,591 |
| | $ | 89,609 |
| | $ | 59,884 |
|
We recognize interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table that follows presents the expense/(income) related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 2019, 2018, and 2017, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Statements of Operations | | Balance Sheets |
| | For the year ended December 31, | | As of December 31, |
| (In millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| Interest | $ | 0.9 |
| | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 1.3 |
| | $ | 0.4 |
|
| Penalties | $ | (0.1 | ) | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | 0.3 |
| | $ | 0.4 |
|
At December 31, 2019, we anticipate that the liability for unrecognized tax benefits could decrease by up to $6.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2019 that if recognized, would impact our effective tax rate is $67.8 million.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.K., and the U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2019.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2019, 2018, and 2017, the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Basic weighted-average ordinary shares outstanding | 160,946 |
| | 168,570 |
| | 171,165 |
|
| Dilutive effect of stock options | 600 |
| | 822 |
| | 616 |
|
| Dilutive effect of unvested restricted securities | 422 |
| | 467 |
| | 388 |
|
| Diluted weighted-average ordinary shares outstanding | 161,968 |
| | 169,859 |
| | 172,169 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for additional information related to our equity awards. These potential ordinary shares are as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Anti-dilutive shares excluded | 1,170 |
| | 930 |
| | 1,410 |
|
| Contingently issuable shares excluded | 641 |
| | 687 |
| | 871 |
|
9. Inventories
The components of inventories as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Finished goods | $ | 197,531 |
| | $ | 187,095 |
|
| Work-in-process | 104,007 |
| | 104,405 |
|
| Raw materials | 205,140 |
| | 200,819 |
|
| Inventories | $ | 506,678 |
| | $ | 492,319 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 2019 and 2018 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Land | | $ | 17,880 |
| | $ | 22,021 |
|
| Buildings and improvements | | 266,864 |
| | 259,182 |
|
| Machinery and equipment | | 1,367,293 |
| | 1,220,285 |
|
| Total property, plant and equipment | | 1,652,037 |
| | 1,501,488 |
|
| Accumulated depreciation | | (821,039 | ) | | (714,310 | ) |
| Property, plant and equipment, net | | $ | 830,998 |
| | $ | 787,178 |
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under finance leases, totaled $115.9 million, $106.0 million, and $109.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
PP&E, net as of December 31, 2019 and 2018 included the following assets under finance leases:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Assets under finance leases in property, plant and equipment | $ | 49,714 |
| | $ | 49,714 |
|
| Accumulated depreciation | (24,316 | ) | | (22,508 | ) |
| Assets under finance leases in property, plant and equipment, net | $ | 25,398 |
| | $ | 27,206 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to PP&E, net.
11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in net goodwill by segment for the years ended December 31, 2019 and 2018.
|
| | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| Balance as of December 31, 2017 | $ | 2,148,135 |
| | $ | 857,329 |
| | $ | 3,005,464 |
|
| Divestiture of Valves Business | (38,800 | ) | | — |
| | (38,800 | ) |
| Acquisition of GIGAVAC | 46,298 |
| | 68,340 |
| | 114,638 |
|
| Balance as of December 31, 2018 | 2,155,633 |
| | 925,669 |
| | 3,081,302 |
|
| GIGAVAC purchase accounting adjustment | 16,387 |
| | (16,564 | ) | | (177 | ) |
| Other acquisition | — |
| | 12,473 |
| | 12,473 |
|
| Balance as of December 31, 2019 | $ | 2,172,020 |
| | $ | 921,578 |
| | $ | 3,093,598 |
|
At each of December 31, 2019, 2018, and 2017, accumulated goodwill impairment was $0.0 million related to Performance Sensing and $18.5 million related to Sensing Solutions.
Goodwill attributed to acquisitions reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed, and has been assigned to our segments based on a methodology using anticipated future earnings of the components of business. Goodwill attributed to the divestiture of the Valves Business is based on the relative fair value of the Valves Business to the Performance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to our acquisition and divestiture transactions.
We own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2019 using quantitative analyses. Refer to Note 2, "Significant Accounting Policies," for additional information related to the methodology used. Based on these analyses, we have determined that as of October 1, 2019 the fair value of each of our reporting units and indefinite-lived intangible assets exceeded their carrying values.
The following tables outline the components of definite-lived intangible assets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
Weighted-
Average
Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairment | | Net Carrying Value |
| Completed technologies | 14 | | $ | 770,608 |
| | $ | (529,926 | ) | | $ | (2,430 | ) | | $ | 238,252 |
|
| Customer relationships | 11 | | 1,827,998 |
| | (1,430,515 | ) | | (12,144 | ) | | 385,339 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,654 |
| | (16,598 | ) | | — |
| | 50,056 |
|
Capitalized software and other(1) | 7 | | 67,784 |
| | (38,997 | ) | | — |
| | 28,787 |
|
| Total | 12 | | $ | 2,756,444 |
| | $ | (2,039,436 | ) | | $ | (14,574 | ) | | $ | 702,434 |
|
|
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
Weighted-
Average
Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairment | | Net Carrying Value |
| Completed technologies | 14 | | $ | 759,008 |
| | $ | (475,295 | ) | | $ | (2,430 | ) | | $ | 281,283 |
|
| Customer relationships | 11 | | 1,825,698 |
| | (1,352,189 | ) | | (12,144 | ) | | 461,365 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,154 |
| | (13,468 | ) | | — |
| | 52,686 |
|
Capitalized software and other(1) | 7 | | 65,896 |
| | (32,509 | ) | | — |
| | 33,387 |
|
| Total | 12 | | $ | 2,740,156 |
| | $ | (1,896,861 | ) | | $ | (14,574 | ) | | $ | 828,721 |
|
| |
(1) | During the years ended December 31, 2019 and 2018, we wrote-off approximately $0.3 million and $0.2 million, respectively, of fully-amortized capitalized software that was not in use. |
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the definite-lived intangible assets recognized as a result of the acquisition of GIGAVAC.
The following table outlines amortization of definite-lived intangible assets for the years ended December 31, 2019, 2018, and 2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Acquisition-related definite-lived intangible assets | $ | 136,087 |
| | $ | 132,235 |
| | $ | 153,729 |
|
| Capitalized software | 6,799 |
| | 7,091 |
| | 7,321 |
|
| Amortization of definite-lived intangible assets | $ | 142,886 |
| | $ | 139,326 |
| | $ | 161,050 |
|
The table below presents estimated amortization of definite-lived intangible assets for each of the next five years:
|
| | | |
| For the year ended December 31, | |
| 2020 | $ | 127,787 |
|
| 2021 | $ | 111,177 |
|
| 2022 | $ | 97,620 |
|
| 2023 | $ | 83,802 |
|
| 2024 | $ | 68,818 |
|
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 2019 and 2018 consisted of the following:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Accrued compensation and benefits | $ | 52,394 |
| | $ | 68,936 |
|
| Accrued interest | 42,803 |
| | 40,550 |
|
| Accrued severance | 14,779 |
| | 6,591 |
|
| Current portion of operating lease liabilities | 11,543 |
| | — |
|
| Current portion of pension and post-retirement benefit obligations | 3,220 |
| | 3,176 |
|
| Foreign currency and commodity forward contracts | 1,925 |
| | 7,710 |
|
| Other accrued expenses and current liabilities | 88,962 |
| | 91,167 |
|
| Accrued expenses and other current liabilities | $ | 215,626 |
| | $ | 218,130 |
|
13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2019, we contributed $3.3 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2020.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
We have one defined contribution plan for U.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the defined contribution plan was $5.5 million, $5.7 million, and $5.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2019, we did not and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2019 and 2018 did not include an assumption for a Federal subsidy.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the non-U.S. defined benefit plans during 2020.
Impact on Financial Statements
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 7 |
| | $ | 2,836 |
| | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Expected return on plan assets | (1,694 | ) | | — |
| | (702 | ) | | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) |
| Amortization of net loss | 946 |
| | — |
| | 766 |
| | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,306 | ) | | 9 |
| | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) |
| Loss on settlement | 565 |
| | — |
| | 1,572 |
| | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
|
| Loss on curtailment | — |
| | — |
| | — |
| | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost/(credit) | $ | 1,300 |
| | $ | (1,096 | ) | | $ | 5,825 |
| | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Service cost | — |
| | 7 |
| | 2,836 |
| | — |
| | 50 |
| | 3,122 |
|
| Interest cost | 1,483 |
| | 203 |
| | 1,344 |
| | 1,473 |
| | 272 |
| | 1,310 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
|
| Actuarial loss/(gain) | 1,711 |
| | (92 | ) | | 9,344 |
| | (519 | ) | | (124 | ) | | 2,777 |
|
| Curtailments | — |
| | — |
| | — |
| | — |
| | — |
| | 931 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (3,310 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 161 |
| | — |
| | — |
| | (350 | ) |
| Ending balance | $ | 45,548 |
| | $ | 5,588 |
| | $ | 74,172 |
| | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Actual return on plan assets | 4,484 |
| | — |
| | 4,125 |
| | (811 | ) | | — |
| | (1,308 | ) |
| Employer contributions | 3,326 |
| | 547 |
| | 4,889 |
| | 3,985 |
| | 630 |
| | 5,992 |
|
| Plan participants’ contributions | — |
| | 474 |
| | 31 |
| | — |
| | 475 |
| | 60 |
|
| Benefits paid | (2,815 | ) | | (1,021 | ) | | (5,235 | ) | | (4,400 | ) | | (1,105 | ) | | (6,262 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 228 |
| | — |
| | — |
| | 164 |
|
| Ending balance | $ | 44,870 |
| | $ | — |
| | $ | 43,906 |
| | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
|
| Funded status at end of year | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
| Accumulated benefit obligation at end of year | $ | 45,548 |
| | NA |
| | $ | 65,633 |
| | $ | 45,169 |
| | NA |
| | $ | 59,948 |
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | 2,788 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (952 | ) | | (717 | ) | | (1,551 | ) | | (595 | ) | | (1,116 | ) | | (1,465 | ) |
| Noncurrent liabilities | (2,514 | ) | | (4,871 | ) | | (28,715 | ) | | (4,699 | ) | | (4,901 | ) | | (24,358 | ) |
| Funded status | $ | (678 | ) | | $ | (5,588 | ) | | $ | (30,266 | ) | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) |
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service cost/(credit) | $ | — |
| | $ | 306 |
| | $ | (16 | ) | | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) |
| Net loss | $ | 18,780 |
| | $ | 809 |
| | $ | 17,151 |
| | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
|
We expect to amortize a loss of $1.4 million from accumulated other comprehensive loss to net periodic benefit cost during fiscal year 2020.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 3,465 |
| | $ | 74,020 |
| | $ | 45,169 |
| | $ | 65,691 |
|
| Accumulated benefit obligation | $ | 3,465 |
| | $ | 65,633 |
| | $ | 45,169 |
| | $ | 59,948 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 9,053 |
| | $ | 74,020 |
| | $ | 51,186 |
| | $ | 65,691 |
|
| Plan assets | $ | — |
| | $ | 43,754 |
| | $ | 39,875 |
| | $ | 39,868 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net (gain)/loss | $ | (824 | ) | | $ | (71 | ) | | $ | 4,365 |
| | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
|
| Amortization of net loss | (723 | ) | | — |
| | (539 | ) | | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 998 |
| | (6 | ) | | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
|
| Divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
|
| Plan amendment | — |
| | — |
| | — |
| | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Settlement effect | (432 | ) | | — |
| | (1,100 | ) | | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) |
| Curtailment effect | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
|
| Total in other comprehensive (income)/loss | $ | (1,979 | ) | | $ | 927 |
| | $ | 2,720 |
| | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 2019 and 2018 are as follows:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 2.60 | % | | 2.80 | % | | 3.79 | % | | 3.90 | % |
| Non-U.S. assumed discount rate | 1.90 | % | | NA |
| | 2.17 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.87 | % | | NA |
| | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % |
| Non-U.S. assumed discount rate | 5.76 | % | | NA |
| | 5.87 | % | | NA |
| | 3.90 | % | | NA |
|
| U.S. average long-term rate of return on plan assets | 4.53 | % | | NA |
| | 4.57 | % | | NA |
| | 4.50 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 1.77 | % | | NA |
| | 2.26 | % | | NA |
| | 2.29 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.43 | % | | NA |
| | 4.82 | % | | NA |
| | 3.75 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.30 | % | | 6.60 | % | | 6.90 | % |
| Attributed to age 65 or greater | 6.70 | % | | 7.10 | % | | 7.50 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: | | | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2019 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on post-retirement benefit obligations | $ | 314 |
| | $ | (287 | ) |
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2020 | $ | 8,985 |
| | $ | 717 |
| | $ | 3,346 |
|
| 2021 | $ | 7,868 |
| | $ | 653 |
| | $ | 3,299 |
|
| 2022 | $ | 6,116 |
| | $ | 653 |
| | $ | 3,896 |
|
| 2023 | $ | 5,219 |
| | $ | 534 |
| | $ | 3,499 |
|
| 2024 | $ | 3,804 |
| | $ | 516 |
| | $ | 3,456 |
|
| 2025 - 2029 | $ | 12,201 |
| | $ | 1,838 |
| | $ | 21,775 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for additional information related to the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser reviewed market opportunities using historical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2019:
|
| | | |
| | Target Allocation | | Actual Allocation as of December 31, 2019 |
| U.S. large cap equity | 7% | | 5% |
| U.S. small / mid cap equity | 2% | | 1% |
| Globally managed volatility fund | 3% | | 2% |
| International (non-U.S.) equity | 4% | | 3% |
Fixed income (U.S. investment grade) (1) | 68% | | 42% |
| High-yield fixed income | 2% | | 1% |
| International (non-U.S.) fixed income | 1% | | 1% |
Money market funds (1) | 13% | | 45% |
| |
(1) | As of December 31, 2019, our holdings in the Money market funds exceed the target allocation as we prepare to make payments resulting from the voluntary retirement incentive program. Refer to Note 5, "Restructuring and Other Charges, Net" for additional information about the voluntary retirement incentive program. |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. large cap equity | $ | 2,221 |
| | $ | 2,960 |
|
| U.S. small / mid cap equity | 637 |
| | 833 |
|
| Global managed volatility fund | 849 |
| | 1,214 |
|
| International (non-U.S.) equity | 1,195 |
| | 1,493 |
|
| Total equity mutual funds | 4,902 |
| | 6,500 |
|
| Fixed income (U.S. investment grade) | 18,830 |
| | 26,884 |
|
| High-yield fixed income | 561 |
| | 792 |
|
| International (non-U.S.) fixed income | 264 |
| | 402 |
|
| Total fixed income mutual funds | 19,655 |
| | 28,078 |
|
| Money market funds | 20,313 |
| | 5,297 |
|
| Total plan assets | $ | 44,870 |
| | $ | 39,875 |
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy. Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2019 and 2018.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% fixed income securities and 50% equity securities, cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2019:
|
| | | |
| Target Allocation | | Actual Allocation as of December 31, 2019 |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 65% |
| Equity securities | 10%-90% | | 35% |
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| U.S. equity | $ | 2,413 |
| | $ | 2,212 |
|
| International (non-U.S.) equity | 6,343 |
| | 5,158 |
|
| Total equity securities | 8,756 |
| | 7,370 |
|
| U.S. fixed income | 3,835 |
| | 3,345 |
|
| International (non-U.S.) fixed income | 9,716 |
| | 8,811 |
|
| Total fixed income securities | 13,551 |
| | 12,156 |
|
| Cash and cash equivalents | 9,726 |
| | 10,339 |
|
| Total plan assets | $ | 32,033 |
| | $ | 29,865 |
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy, with the exception of U.S. fixed income securities of $0.3 million and $0.3 million as of December 31, 2019 and 2018, respectively, which are categorized as Level 2. The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the plan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Insurance policies | $ | 10,472 |
| | $ | 8,897 |
|
All fair value measures presented above are categorized in Level 3 of the fair value hierarchy. The following table presents a rollforward of these assets for the years ended December 31, 2019 and 2018:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2017 | $ | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | 8,897 |
|
| Actual return on plan assets still held at reporting date | 1,821 |
|
| Purchases, sales, settlements, and exchange rate changes | (246 | ) |
| Balance as of December 31, 2019 | $ | 10,472 |
|
The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are insurance policies. As of December 31, 2019 and 2018 the fair values of these assets were $1.3 million and $1.1 million, respectively. These fair value measurements are categorized in Level 3 of the fair value hierarchy.
14. Debt
Our long-term debt and finance lease and other financing obligations as of December 31, 2019 and 2018 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | Maturity Date | 2019 | | 2018 |
| Term Loan | September 20, 2026 | $ | 460,725 |
| | $ | 917,794 |
|
| 4.875% Senior Notes | October 15, 2023 | 500,000 |
| | 500,000 |
|
| 5.625% Senior Notes | November 1, 2024 | 400,000 |
| | 400,000 |
|
| 5.0% Senior Notes | October 1, 2025 | 700,000 |
| | 700,000 |
|
| 6.25% Senior Notes | February 15, 2026 | 750,000 |
| | 750,000 |
|
| 4.375% Senior Notes | February 15, 2030 | 450,000 |
| | — |
|
| Less: debt discount | | (11,758 | ) | | (15,169 | ) |
| Less: deferred financing costs | | (24,452 | ) | | (23,159 | ) |
| Less: current portion | | (4,630 | ) | | (9,704 | ) |
| Long-term debt, net | | $ | 3,219,885 |
| | $ | 3,219,762 |
|
| Finance lease and other financing obligations | | $ | 31,098 |
| | $ | 35,475 |
|
| Less: current portion | | (2,288 | ) | | (4,857 | ) |
| Finance lease and other financing obligations, less current portion | | $ | 28,810 |
| | $ | 30,618 |
|
Secured Credit Facility
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"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
On March 27, 2019 certain indirect, wholly-owned subsidiaries of Sensata plc, including Sensata Technologies B.V. ("STBV"), entered into a perpetual, royalty-free cross license agreementthe ninth amendment (the "Ninth Amendment") of the Credit Agreement. Among other changes to the Credit Agreement, the Ninth Amendment (i) extended the maturity date of the Revolving Credit Facility to March 27, 2024; (ii) added pounds sterling as an available currency for revolving credit loans and letters of credit under the Revolving Credit Facility; (iii) lowered the interest rate margins related to the Revolving Credit Facility (depending on our senior secured net leverage ratio); (iv) lowered our letter of credit fees (depending on our senior secured net leverage ratio); (v) reduced our revolving credit commitment fees (depending on our senior secured net leverage ratio); and (vi) modified the senior secured net leverage ratio financial covenant to increase the Revolving Credit Facility utilization threshold above which such financial covenant is tested from 10% to 20% and eliminated the requirement that such ratio be tested (regardless of utilization) for purposes of satisfying the conditions to any borrowing or other utilization under the Revolving Credit Facility.
On June 13, 2019, our subsidiaries that were at the time borrowers under the Credit Agreement entered into an amendment to the Credit Agreement with TIthe administrative agent to correct certain technical and immaterial errors in the Credit Agreement.
On September 20, 2019 certain of our subsidiaries, including STBV and its indirect, wholly-owned subsidiary, Sensata Technologies Inc. ("STI"), entered into the tenth amendment of the Credit Agreement (the “Cross License Agreement”"Tenth Amendment"). Under the Cross Licenseterms of the Tenth Amendment, among other changes to the Credit Agreement, (i) the final maturity date of the Term Loan was extended to September 20, 2026; (ii) STI became the sole borrower under the Credit Agreement and assumed substantially all of the obligations of STBV and Sensata Technologies Finance Company, LLC ("STFC") thereunder; (iii) STBV became a guarantor of STI’s obligations under the Credit Agreement, and STFC ceased to be a guarantor with respect to the Credit Agreement; (iv) certain subsidiaries of STBV that previously guaranteed STBV’s and/or STFC’s obligations under the Credit Agreement (the “Released Guarantors”) were released from their guarantees under the Credit Agreement, subject to the satisfaction of certain tests (the “Guarantees Release”); (v) the permission to incur incremental additional indebtedness under the Credit Agreement was increased; and (vi) certain of the operational and restrictive covenants and other terms and conditions of the Senior Secured Credit Facilities to which STBV and its restricted subsidiaries are subject were modified to provide us with increased flexibility and permissions thereunder (including permission, subject to no default or event of default, to make restricted payments (including dividends) in an amount equal to $50.0 million annually, which can be increased to an unlimited amount subject to compliance with a specified senior secured net leverage ratio).
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries and secured by substantially all present and future property and assets of STBV and its guarantor subsidiaries.
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 the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2019.
Term Loan
The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the Term Loan upon completion of the Tenth Amendment, with the balance due at maturity.
In accordance with the terms of the Credit Agreement, the parties grantedTerm Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The interest rate margins for the Term Loan are fixed at, and as of December 31, 2019 were, 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2019, we maintained the Term Loan as a Eurodollar Rate loan, which accrued interest at 3.59%.
Revolving Credit Facility
In accordance with the terms of the Credit Agreement, borrowings under the Revolving Credit Facility may, at our option, be maintained from time to time as Base Rate loans, Eurodollar Rate loans, or EURIBOR loans (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The interest rate margins and letter of credit fees under the Revolving Credit Facility are as follows (each depending on our senior secured net leverage ratio): (i) the interest rate margin for Eurodollar Rate loans ranges from 1.00% to 1.50%; (ii) the interest rate margin for Base Rate loans ranges from 0.00% to 0.50%; and (iii) the letter of credit fees range from 0.875% to 1.375%.
We are required to pay to our revolving credit lenders, on a quarterly basis, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.125% to 0.25%, depending on our senior secured net leverage ratios.
As of December 31, 2019, 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 of December 31, 2019, no amounts had been drawn against these outstanding letters of credit.
Availability under the Revolving Credit Facility may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general corporate purposes.
Senior Notes
We have various tranches of senior notes outstanding. These consisted of $500.0 million in aggregate principal amount of 4.875% senior notes due 2023 issued by STBV (the "4.875% Senior Notes"), $400.0 million in aggregate principal amount of 5.625% senior notes due 2024 issued by STBV (the "5.625% Senior Notes"), $700.0 million in aggregate principal amount of 5.0% senior notes due 2025 issued by STBV (the "5.0% Senior Notes"), $750.0 million in aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes") issued by our subsidiary Sensata Technologies UK Financing Co. plc ("STUK"), and $450.0 million in aggregate principal amount of 4.375% senior notes due 2030 issued by STI (the "4.375% Senior Notes" and together with the other senior notes referenced above, the "Senior Notes").
4.375% Senior Notes
On September 20, 2019, concurrently with the entry into the Tenth Amendment, we completed the issuance and sale of the 4.375% Senior Notes. The proceeds of the issuance of the 4.375% Senior Notes were used to partially repay the Term Loan. The 4.375% Senior Notes were issued under an indenture dated as of September 20, 2019 among STI, as issuer, The Bank of New York Mellon, as trustee, and our guarantor subsidiaries named therein. The 4.375% Senior Notes were offered at par, and interest is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2020.
4.875% Senior Notes
In April 2013 we completed the issuance and sale of the 4.875% Senior Notes, which were issued under an indenture dated as of April 17, 2013 among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 4.875% Senior Notes were offered at par. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014 we completed the issuance and sale of the 5.625% Senior Notes, which were issued under an indenture dated as of October 14, 2014, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 5.625% Senior Notes were offered at par. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015 we completed the issuance and sale of the 5.0% Senior Notes, which were issued under an indenture dated as of March 26, 2015, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 5.0% Senior Notes were offered at par. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were issued under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes Indenture" and, together with the indentures under which the other Senior Notes were issued, the "Senior Notes Indentures"), among STUK, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 6.25% Senior Notes were offered at par. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Redemption
Except as described below with respect to the 4.375% Senior Notes and the 6.25% Senior Notes, at any time, and from time to time, we may optionally redeem the Senior Notes, in whole or in part, at a licenseprice equal to use100% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption, plus a "make-whole premium" set forth in the relevant Senior Notes Indenture. The "make-whole" premium will not be payable with respect to any such redemption of the 4.375% Senior Notes on or after November 15, 2029. The "make-whole" premium will not be payable with respect to any such redemption of the 6.25% Senior Notes on or after February 15, 2021; on or after such date, we may optionally redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus accrued and unpaid interest to the date of redemption, if any) during the applicable period:
|
| | |
| Period beginning February 15, | Price |
|
| 2021 | 103.125 | % |
| 2022 | 102.083 | % |
| 2023 | 101.042 | % |
| 2024 and thereafter | 100.000 | % |
Upon the occurrence of certain technology usedspecific kinds of changes in control, the issuers of the Senior Notes will be required to offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
If changes in certain tax laws or treaties, or any change in the official application, administration, or interpretation thereof, of any relevant taxing jurisdiction become effective that would impose withholding taxes or other deductions on the payments of any of the Senior Notes or the guarantees thereof, we may, at our option, redeem the relevant Senior Notes in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, premium, if any, and all additional amounts (as described in the relevant Senior Notes Indenture), if any, then due and which will become due on the date of redemption.
Guarantees
The obligations of the issuers of the Senior Notes are guaranteed by STBV and all of its subsidiaries (excluding the company that is the issuer of the relevant Senior Notes) that guarantee the obligations of STI under Credit Agreement (after giving effect to the Guarantees Release pursuant to the Tenth Amendment). The Released Guarantors are not guarantors of the 4.375% Senior Notes, and upon consummation of the Tenth Amendment, the guarantees of the Released Guarantors with respect to the other Senior Notes were released.
Events of Default
The Senior Notes Indentures provide for events of default that include, among others, nonpayment of principal or interest when due, breach of covenants or other provisions in the relevant Senior Notes Indenture, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and the cessation of the full force and effect of the guarantees of significant subsidiaries. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes issued under the relevant Senior Notes Indenture may declare the principal of, and accrued but unpaid interest on, all of the relevant Senior Notes to be due and payable immediately. All provisions regarding remedies in an event of default are subject to the relevant Senior Notes Indenture.
Restrictions and Covenants
As of December 31, 2019, STBV and all of its subsidiaries were subject to certain restrictive covenants under the Credit Agreement and the Senior Notes Indentures. Under certain circumstances, STBV is permitted to designate a subsidiary as "unrestricted" for purposes of the Credit Agreement, in which case the restrictive covenants thereunder will not apply to that subsidiary; the Senior Notes Indentures do not contain such a permission. STBV has not designated any subsidiaries as unrestricted. The net assets of STBV subject to these restrictions totaled $2,555.0 million at December 31, 2019.
Credit Agreement
The Credit Agreement contains non-financial restrictive covenants (subject to important exceptions and qualifications set forth in the Credit Agreement) that limit our ability to, among other things:
incur indebtedness or liens, prepay subordinated debt, or amend the terms of our subordinated debt;
make loans and investments (including acquisitions) or sell assets;
change our business or accounting policies, merge, consolidate, dissolve or liquidate, or amend the terms of our organizational documents;
enter into affiliate transactions;
pay dividends and make other restricted payments; or
enter into certain burdensome contractual obligations.
In addition, under the Credit Agreement, STBV and its subsidiaries are required to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 20% of the commitments under the Revolving Credit Facility.
Senior Notes Indentures
The Senior Notes Indentures contain restrictive covenants (subject to important exceptions and qualifications set forth in the Senior Notes Indentures) that limit the ability of STBV and its subsidiaries to, among other things:
incur liens;
incur or guarantee indebtedness without guaranteeing the Senior Notes;
engage in sale and leaseback transactions; or
effect mergers or consolidations, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of the assets of STBV and its subsidiaries.
Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by Standard & Poor's Rating Services or Moody's Investors Service, Inc. and provided no default has occurred and is continuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer assigned an investment grade rating by either rating agency or an event of default has occurred and is continuing at such time. As of December 31, 2019, none of the Senior Notes were assigned an investment grade rating by either rating agency.
Restrictions on Payment of Dividends
STBV's subsidiaries are generally not restricted in their ability to pay dividends or otherwise distribute funds to STBV, except for restrictions imposed under applicable corporate law.
STBV, however, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to Sensata plc, under the Credit Agreement. Specifically, the Credit Agreement prohibits STBV from paying dividends or making distributions to its parent companies except for purposes that include, but are not limited to, the following:
customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurred in the ordinary course of business, provided that such amounts, in the aggregate, do not exceed $20.0 million in any fiscal year;
dividends and other distributions in an aggregate amount not to exceed $200.0 million plus certain amounts, including the retained portion of excess cash flow, but only insofar as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis;
so long as no default or an event of default exists, dividends and other distributions in an aggregate amount not to exceed $50.0 million in any calendar year (with the unused portion in any year being carried over to succeeding years) plus unlimited additional amounts but only insofar as the senior secured net leverage ratio is less than 2.5:1.0 calculated on a pro forma basis; and
other dividends and other distributions in an aggregate amount not to exceed $150.0 million, so long as no default or event of default exists.
The Senior Notes Indentures generally allow STBV to pay dividends and make other distributions to its parent companies.
Compliance with Financial and Non-Financial Covenants
We were in compliance with all of the financial and non–financial covenants and default provisions associated with our indebtedness as of December 31, 2019 and for the fiscal year then ended.
Accounting for Debt Financing Transactions
During the year ended December 31, 2019, in connection with the entry into the Ninth Amendment, we incurred $2.4 million of creditor fees and related third-party costs, which were recorded as an adjustment to the carrying amount of long-term debt.
During the year ended December 31, 2019, in connection with of the issuance of the 4.375% Senior Notes, the entry into the Tenth Amendment, and the subsequent partial repayment of the Term Loan, we recognized a loss of $4.4 million, presented in the other, party’s business.net line of our consolidated statement of operations, as well as $5.0 million of deferred financing costs, which are presented as a reduction of long-term debt on our consolidated balance sheets.
During the year ended December 31, 2018, in connection with the Merger, we paid $5.8 million of creditor fees and related third-party costs in order to obtain consents to the transaction from our existing lenders. As a result, and based on application of the provisions in FASB ASC Subtopic 470-50, we recognized a $3.5 million adjustment to the carrying value of long-term debt, net and a $2.4 million loss in other, net.
During the year ended December 31, 2017, we recognized a $0.2 million adjustment to the carrying value of long-term debt, net and a $2.7 million loss in other, net, based on application of the provisions in FASB ASC Subtopic 470-50.
Refer to Note 2, "Significant Accounting Policies," for additional information related to our accounting policies regarding debt financing transactions.
Finance Lease and Other Financing Obligations
Refer to Note 21, "Leases," for additional information related to our finance leases.
Debt Maturities
The aggregate principal amount of each tranche of our Senior Notes is due in full at its maturity date. The Term Loan must be repaid in full on or prior to its final maturity date. Loans made pursuant to the Revolving Credit Facility must be repaid in full at its maturity date and can be repaid prior to then at par. All letters of credit issued thereunder will terminate at the final maturity of the Revolving Credit Facility unless cash collateralized prior to such time.
14. Commitments and Contingencies
Future minimumThe following table presents the remaining mandatory principal repayments of long-term debt, excluding finance lease payments, for capital leases, other financing obligations, and non-cancelable operating leasesdiscretionary repurchases of debt, in effect aseach of the years ended December 31, 2017 are as follows:2020 through 2024 and thereafter.
|
| | | |
| For the year ended December 31, | Aggregate Maturities |
| 2020 | $ | 4,630 |
|
| 2021 | 4,630 |
|
| 2022 | 4,630 |
|
| 2023 | 504,630 |
|
| 2024 | 404,630 |
|
| Thereafter | 2,337,575 |
|
| Total long-term debt principal payments | $ | 3,260,725 |
|
|
| | | | | | | | | | | | | | | |
| | Future Minimum Payments |
| | Capital Leases | | Other Financing Obligations | | Operating Leases | | Total |
| For the year ending December 31, | | | | | | | |
| 2018 | $ | 5,472 |
| | $ | 3,125 |
| | $ | 12,871 |
| | $ | 21,468 |
|
| 2019 | 5,393 |
| | 2,498 |
| | 9,255 |
| | 17,146 |
|
| 2020 | 5,429 |
| | 459 |
| | 6,534 |
| | 12,422 |
|
| 2021 | 4,931 |
| | 178 |
| | 5,165 |
| | 10,274 |
|
| 2022 | 4,561 |
| | — |
| | 4,189 |
| | 8,750 |
|
| 2023 and thereafter | 15,267 |
| | — |
| | 30,595 |
| | 45,862 |
|
| Net minimum rentals | 41,053 |
| | 6,260 |
| | 68,609 |
| | 115,922 |
|
| Less: interest portion | (11,798 | ) | | (858 | ) | | — |
| | (12,656 | ) |
| Present value of future minimum rentals | $ | 29,255 |
| | $ | 5,402 |
| | $ | 68,609 |
| | $ | 103,266 |
|
15. Commitments and Contingencies
Non-cancelable purchase agreements exist with various suppliers, primarily for services such as information technology support. The terms of these agreements are fixed and determinable. As of December 31, 2017,2019, we had the following purchase commitments:
|
| | | |
| For the year ending December 31, | |
| 2020 | $ | 26,588 |
|
| 2021 | 19,726 |
|
| 2022 | 9,721 |
|
| 2023 | 5,060 |
|
| 2024 | 132 |
|
| 2025 and thereafter | 272 |
|
| Total purchase commitments | $ | 61,499 |
|
|
| | | |
| | Purchase Commitments |
| For the year ending December 31, | |
| 2018 | $ | 17,310 |
|
| 2019 | 11,200 |
|
| 2020 | 8,153 |
|
| 2021 | 6,467 |
|
| 2022 | 1,682 |
|
| 2023 and thereafter | 70 |
|
| Total | $ | 44,882 |
|
Collaborative Arrangements
On March 4, 2016, we entered into a strategic partnership agreement (the "SPA") with Quanergy Systems, Inc. ("Quanergy") to jointly develop, manufacture, and sell solid state Light Detection and Ranging ("LiDAR") sensors. Under the terms of the SPA, we will be exclusive partners with Quanergy for component level solid state LiDAR sensors in the transportation market.
We are accounting for the SPA under the provisions of ASC Topic 808, Collaborative Arrangements, under which the accounting for certain transactions is determined using principal versus agent considerations. Using the guidance in ASC Subtopic 605-45, Principal Agent Considerations, we have determined that we are the principal with respect to the SPA.
During the year ended December 31, 2017, there were no material amounts recorded to earnings related to the SPA.
Off-Balance Sheet CommitmentsArrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the saledivestiture of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases,
indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Indemnifications Provided As Part of Contracts and Agreements
We are party to the following types of agreements pursuant to which we may be obligated to indemnify a third party with respect to certain matters.
Officers and Directors: Our articles of association provide for indemnification of directors and officers by us to the fullest extent permitted by applicable law, as it now exists or may hereinafter be amended (but, in the case of an amendment, only to the extent such amendment permits broader indemnification rights than permitted prior thereto), against any and all liabilities, including all expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, provided he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful or outside of his or her mandate. The articles do not provide a limit to the maximum future payments, if any, under the indemnification. No indemnification is provided for in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for gross negligence or willful misconduct in the performance of his or her duty on our behalf.
In addition, we have a liability insurance policy that insures directors and officers against the cost of defense, settlement, or payment of claims and judgments under some circumstances. Certain indemnification payments may not be covered under our directors’ and officers’ insurance coverage.
Initial Purchasers of Senior Notes: Pursuant to the terms of the purchase agreements entered into in connection with our private placement senior note offerings, we are obligated to indemnify the initial purchasers of the Senior Notes against certain liabilities caused by any untrue statement or alleged untrue statement of a material fact in various documents relied upon by such initial purchasers, or to contribute to payments the initial purchasers may be required to make in respect thereof. The purchase agreements do not provide a limit to the maximum future payments, if any, under these indemnifications.
Intellectual Property and Product Liability Indemnification: We routinely sell products with a limited intellectual property and product liability indemnification included in the terms of sale. Historically, we have had only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities resulting from these indemnifications cannot reasonably be estimated or accrued.
Product Warranty Liabilities
Our standard terms of saleRefer to Revenue Recognition in Note 2, "Significant Accounting Policies," for additional information related to the warranties we provide our customers with a warranty against faulty workmanship and the use of defective materials, which, depending on the product, generally exists for a period of twelve to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. We do not offer separately priced extended warranty or product maintenance contracts. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.customers.
In the event a warranty claim based on defective materials exists, we may be able to recover some of the cost of the claim from the vendor from whom the materials were purchased. Our ability to recover some of the costs will depend on the terms and conditions to which we agreed when the materials were purchased. When a warranty claim is made, the only collateral available to us is the return of the inventory from the customer making the warranty claim. Historically, when customers make a warranty claim, we either replace the product or provide the customer with a credit. We generally do not rework the returned product.
Our policy is to accrue for warranty claims when a loss is both probable and estimable. This is accomplished by accruing for estimated returns and estimated costs to replace the product at the time the related revenue is recognized. Liabilities for warranty claims have historically not been material. In some instances, customers may make claims for costs they incurred or other damages related to a claim. Any potentially material liabilities associated with these claims are discussed in this Note under the heading Legal Proceedings and Claims.
Environmental Remediation Liabilities
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines, civil or criminal sanctions, or third-party property damage or personal injury claims, in the event of violations or liabilities under these laws and regulations, or non-compliance with the environmental permits required at our facilities. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations.
Legal Proceedings and Claims
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, and/or cash flows.
We account for litigation and claims losses in accordance with FASB ASC Topic 450, Contingencies(“ASC 450”). Under FASB ASC Topic 450, loss contingency provisions are recordedrecognized for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined each accounting period as
additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the minimum amount, which could be an immaterial amount, is recorded.recognized. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resulting in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.
Pending Litigation and Claims:
We are regularly involveda defendant in a numberlawsuit, Wasica Finance Gmbh et al v. Schrader International Inc. et al, Case No. 13-1353-CPS, U.S.D.C., Delaware, in which the claimant alleges infringement of claimstheir patent (US 5,602,524) in connection with our tire pressure monitoring system ("TPMS") products. The patent in question has expired, and litigation mattersas a result, the claimant is seeking damages for past alleged infringement with interest and costs. Should the claimant prevail, these amounts could be material. We have denied liability and have been defending the litigation. Trial is currently expected in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death.February 2020. We believe that a loss related to this matter is probable, but do not believe such loss will be material.
We were a defendant in a lawsuit, Metal Seal Precision, Ltd. v. Sensata Technologies Inc., Case No. 2017-0518-BCSI, MA Superior Court (Suffolk County), in which the ultimate resolutionclaimant, a supplier of certain metal parts used in the manufacture of our products, alleged breach of contract, breach of covenant of good faith and fair dealing, and anticipatory repudiation. The dispute arose out of an agreement under which Metal Seal alleged that we did not meet certain purchase requirements, resulting in damages and lost profits. On November 26, 2019, the parties agreed to settle this lawsuit and terminate the underlying supply agreement through an asset purchase agreement (the “MS Purchase Agreement”), whereby Sensata would purchase certain equipment and assets from Metal Seal for $28.0 million (the “Purchase Price”). The parties executed and closed the MS Purchase Agreement on December 13, 2019, and the lawsuit was formally dismissed by the Superior Court on December 24, 2019. We intend to use the assets and equipment purchased in this transaction to expand our internal production of certain parts previously supplied by Metal Seal. As a result of the current litigation matters pending against us will not be material to our financial statements.termination of the underlying supply agreement and execution of the MS Purchase Agreement, we recorded $10.2 million of the Purchase Price as a capital expense for the acquired assets, with the remaining $17.8 million, representing the amount by which the Purchase Price exceeded the fair value of the purchased equipment and assets, recorded in restructuring and other charges, net.
15.16. Shareholders’ Equity
Treasury Shares
Ordinary shares repurchased by us are recognized, measured at cost, and presented as treasury shares on our consolidated balance sheets, resulting in a reduction of shareholders' equity.
In connection with the Merger, all then outstanding treasury shares were canceled in accordance with U.K. law. Accordingly, we (1) derecognized the total purchase price of these treasury shares, (2) recognized a reduction to ordinary shares at an amount equal to the total par value of such shares, and (3) recognized a reduction to retained earnings at an amount equal to the excess of the total repurchase price over the total par value of the then outstanding treasury shares, or $286.1 million.
From time to time, our Board of Directors has authorized various share repurchase programs. 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. The authorized amount of our various share repurchase programs may be modified or terminated by our Board of Directors at any time.
During the year ended December 31, 2018, we repurchased ordinary shares under a $400.0 million share repurchase program authorized by our Board of Directors in May 2018. During the year ended December 31, 2019, we repurchased ordinary shares under a $250.0 million share repurchase program authorized by our Board of Directors in October 2018 (the "October 2018 Program") and a $500.0 million share repurchase program authorized by our Board of Directors in July 2019 (the "July 2019 Program"). The October 2018 Program was terminated upon commencement of the July 2019 Program.
As a result of certain aspects of U.K. law, we discontinued the practice of reissuing treasury shares as part of our share-based compensation programs upon completion of the Merger. The number of treasury shares reissued prior to completion of the Merger was not material.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
|
| | | | | | | | | | | |
| | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2016 | $ | 23 |
| | $ | (34,090 | ) | | $ | (34,067 | ) |
| Pre-tax current period change | (37,603 | ) | | (1,445 | ) | | (39,048 | ) |
| Tax effect | 9,401 |
| | 550 |
| | 9,951 |
|
| Balance as of December 31, 2017 | (28,179 | ) | | (34,985 | ) | | (63,164 | ) |
| Pre-tax current period change | 49,817 |
| | (1,183 | ) | | 48,634 |
|
| Tax effect | (12,454 | ) | | 806 |
| | (11,648 | ) |
| Balance as of December 31, 2018 | 9,184 |
| | (35,362 | ) | | (26,178 | ) |
| Pre-tax current period change | 9,816 |
| | (2,198 | ) | | 7,618 |
|
| Tax effect | (2,454 | ) | | 530 |
| | (1,924 | ) |
| Balance as of December 31, 2019 | 16,546 |
| | (37,030 | ) | | (20,484 | ) |
The details of the components of other comprehensive income/(loss), net of tax, for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total |
| Other comprehensive income/(loss) before reclassifications | | $ | 28,795 |
| | $ | (3,470 | ) | | $ | 25,325 |
| | $ | 26,859 |
| | $ | (2,120 | ) | | $ | 24,739 |
| | $ | (39,387 | ) | | $ | (4,184 | ) | | $ | (43,571 | ) |
| Amounts reclassified from accumulated other comprehensive loss | | (21,433 | ) | | 1,802 |
| | (19,631 | ) | | 10,504 |
| | 1,743 |
| | 12,247 |
| | 11,185 |
| | 3,289 |
| | 14,474 |
|
| Other comprehensive income/(loss) | | $ | 7,362 |
| | $ | (1,668 | ) | | $ | 5,694 |
| | $ | 37,363 |
| | $ | (377 | ) | | $ | 36,986 |
| | $ | (28,202 | ) | | $ | (895 | ) | | $ | (29,097 | ) |
The details of the (gain)/loss reclassified from accumulated other comprehensive loss for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
| | | | | | | | | | | | | | |
| | | Amount of (Gain)/Loss Reclassified from Accumulated Other Comprehensive Loss | | |
| | | For the year ended December 31, | | Affected Line in Consolidated Statements of Operations |
| | | 2019 | | 2018 | | 2017 | |
| Derivative instruments designated and qualifying as cash flow hedges: | | | | | | | | |
| Foreign currency forward contracts | | $ | (26,180 | ) | | $ | 18,072 |
| | $ | 916 |
| | Net revenue (1) |
| Foreign currency forward contracts | | (2,397 | ) | | (5,442 | ) | | 13,997 |
| | Cost of revenue (1) |
| Foreign currency forward contracts | | — |
| | 1,376 |
| | — |
| | Other, net (1) |
| Total, before taxes | | (28,577 | ) | | 14,006 |
| | 14,913 |
| | Income before taxes |
| Income tax effect | | 7,144 |
| | (3,502 | ) | | (3,728 | ) | | Provision for/(benefit from) income taxes |
| Total, net of taxes | | $ | (21,433 | ) | | $ | 10,504 |
| | $ | 11,185 |
| | Net income |
| | | | | | | | | |
| Defined benefit and retiree healthcare plans | | $ | 2,552 |
| | $ | 1,993 |
| | $ | 3,476 |
| | Other, net (2) |
| Defined benefit and retiree healthcare plans | | — |
| | 228 |
| | — |
| | Restructuring and other charges, net (3) |
| Total, before taxes | | 2,552 |
| | 2,221 |
| | 3,476 |
| | Income before taxes |
| Income tax effect | | (750 | ) | | (478 | ) | | (187 | ) | | Provision for/(benefit from) income taxes |
| Total, net of taxes | | $ | 1,802 |
| | $ | 1,743 |
| | $ | 3,289 |
| | Net income |
| |
(1) | Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to amounts to be reclassified from accumulated other comprehensive loss in future periods. |
| |
(2) | Refer to Note 13, "Pension and Other Post-Retirement Benefits," for additional information related to net periodic benefit cost. |
| |
(3) | Amount represents an equity component of the Valves Business, which was sold in fiscal year 2018. Refer to Note 5, "Restructuring and Other Charges, Net," and Note 17, "Acquisitions and Divestitures," for additional information related to the divestiture of the Valves Business. |
17. Acquisitions and Divestitures
Other acquisition
On September 13, 2019 we completed 1 acquisition for approximately $30.8 million, net of cash acquired and subject to customary post-closing adjustments. This business is being integrated into our Sensing Solutions segment. The majority of the purchase price allocation, which is preliminary as of December 31, 2019, was to completed technologies, customer relationships, and goodwill. We are in the process of completing our assessment of the fair values of assets acquired and liabilities assumed.
GIGAVAC merger
On September 24, 2018, we entered into an agreement and plan of merger with GIGAVAC, whereby GIGAVAC would merge with one of our wholly-owned subsidiaries, thereby becoming a wholly-owned subsidiary of Sensata. On October 31, 2018, we completed the acquisition of GIGAVAC for cash consideration of approximately $231.1 million, net of cash received. In connection with the acquisition, an additional $12.0 million related to compensation arrangements entered into with certain GIGAVAC employees and shareholders will be paid on or before the second anniversary of the transaction.
Based in Carpinteria, California, GIGAVAC has more than 270 employees and is a leading producer of high voltage contactors and fuses that are mission-critical components for electric vehicles and equipment. It provides solutions that enable electrification in demanding environments within the automotive, battery storage, industrial, and HVOR end markets. We acquired GIGAVAC to increase our content and capabilities for electrification, including products such as cars, delivery trucks, buses, material handling equipment, and charging stations. Portions of GIGAVAC are being integrated into each of our operating segments.
The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed:
|
| | | |
| Net working capital, excluding cash | $ | 17,132 |
|
| Property, plant and equipment | 4,384 |
|
| Goodwill | 114,461 |
|
| Other intangible assets | 122,742 |
|
| Other assets | 63 |
|
| Deferred income tax liabilities | (27,072 | ) |
| Other long-term liabilities | (602 | ) |
| Fair value of net assets acquired, excluding cash and cash equivalents | 231,108 |
|
| Cash and cash equivalents | 359 |
|
| Fair value of net assets acquired | $ | 231,467 |
|
The allocation of purchase price related to this merger was finalized in the fourth quarter of 2019 and was based on management’s judgments after evaluating several factors, including valuation assessments of tangible and intangible assets. The goodwill of $114.5 million represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. The amount of goodwill recognized that is expected to be deductible for tax purposes is not material.
In connection with the allocation of purchase price to the assets acquired and liabilities assumed, we identified certain definite-lived intangible assets. The following table presents the acquired definite-lived intangible assets, their estimated fair values, and weighted average lives:
|
| | | | | |
| | Acquisition Date Fair Value | | Weighted-Average Lives (years) |
| Acquired definite-lived intangible assets: | | | |
| Customer relationships | $ | 74,500 |
| | 10 |
| Completed technologies | 31,040 |
| | 13 |
| Tradenames | 15,400 |
| | 15 |
| Other | 1,802 |
| | 6 |
| Total definite-lived intangible assets acquired | $ | 122,742 |
| | 12 |
The definite-lived intangible assets were valued using the income approach. We used the relief-from-royalty method to value completed technologies and tradenames, and we used the multi-period excess earnings method to value customer relationships. These valuation methods incorporate assumptions including expected discounted future cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies or the future earnings related to existing customer relationships.
Valves Business Divestiture
In August 2018 we completed the divestiture of the Valves Business to Pacific Industrial Co. Ltd. (together with its affiliates, "Pacific"). Contemporaneous with the closing of the sale, Sensata and Pacific entered into a long-term supply agreement, which imposes an obligation on us to purchase minimum quantities of product from Pacific over a period of nearly five years.
In exchange for selling the Valves Business and entering into the long-term supply agreement, we received cash consideration from Pacific of approximately $165.5 million, net of $11.8 million of cash and cash equivalents sold. We recognized a (pre-tax) gain on sale of $64.4 million, which is presented in restructuring and other charges, net. In addition, we recognized $5.9 million of costs to sell the Valves Business, which are also presented in restructuring and other charges, net. Refer to Note 5, "Restructuring and Other Charges, Net," for additional information.
We determined that the terms of the long-term supply agreement entered into concurrent with the divestiture of the Valves Business were not at market. Accordingly, we recognized a liability of $16.4 million, measured at fair value, which represented the fair value of the off-market component of the supply agreement.
The Valves Business, which we acquired in fiscal year 2014 as part of our acquisition of Schrader, manufactured mechanical valves for pressure applications in tires and fluid controls and assembled tire hardware aftermarket products with
manufacturing locations in the U.S. and Europe. The sale did not include our TPMS business and the Global TPMS Aftermarket business.
The Valves Business was included in our Performance Sensing segment (and reporting unit). We allocated goodwill to the Valves Business based on its fair value relative to the fair value of the retained Performance Sensing reporting unit.
18. Fair Value Measures
Our assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC Topic 820. The levels of the fair value hierarchy are described below:
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date.
Level 2 inputs utilize inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, allowing for situations where there is little, if any, market activity for the asset or liability.
Measured on a Recurring Basis
The following table presents information about certainfair values of our assets and liabilities measured at fair value on a recurring basis as of as of December 31, 20172019 and 2016, aggregated by2018 are as shown in the levelbelow table. All fair value measures presented are categorized in Level 2 of the fair value hierarchy within which those measurements fell:hierarchy.
|
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Assets measured at fair value: | | | |
| Foreign currency forward contracts | $ | 23,561 |
| | 17,871 |
|
| Commodity forward contracts | 3,623 |
| | 831 |
|
| Total assets measured at fair value | $ | 27,184 |
| | 18,702 |
|
| Liabilities measured at fair value: | | | |
| Foreign currency forward contracts | $ | 1,959 |
| | 5,165 |
|
| Commodity forward contracts | 462 |
| | 4,137 |
|
| Total liabilities measured at fair value | $ | 2,421 |
| | 9,302 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| Assets | | | | | | | | | | | | | |
| Foreign currency forward contracts | $ | — |
| | $ | 3,955 |
| | $ | — |
| | | $ | — |
| | $ | 32,757 |
| | $ | — |
| |
| Commodity forward contracts |
|
| | 6,458 |
| | — |
| | | — |
| | 2,639 |
| | — |
| |
| Total | $ | — |
| | $ | 10,413 |
| | $ | — |
| | | $ | — |
| | $ | 35,396 |
| | $ | — |
| |
| Liabilities | | | | | | | | | | | | | |
| Foreign currency forward contracts | $ | — |
| | $ | 40,969 |
| | $ | — |
| | | $ | — |
| | $ | 27,201 |
| | $ | — |
| |
| Commodity forward contracts | — |
| | 1,104 |
| | — |
| | | — |
| | 3,790 |
| | — |
| |
| Total | $ | — |
| | $ | 42,073 |
| | $ | — |
| | | $ | — |
| | $ | 30,991 |
| | $ | — |
| |
SeeRefer to Note 2, "Significant Accounting Policies," underfor additional information related to the caption Financial Instruments, for discussion of how wemethods used to estimate the fair value of our financial instruments. Seeinstruments, and refer Note 16,19, "Derivative Instruments and Hedging Activities," for specific contractual terms utilized asadditional information related to the inputs in determiningused to determine these fair value measurements and a discussion of the nature of the risks being mitigated bythat these instruments.derivative instruments are intended to mitigate.
Although we have determined that the majority of the inputs used to value our derivativesderivative instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own non-performance risk and the respective counterparties' non-performance risk in the fair value measurement. However, asAs of December 31, 20172019 and 2016,2018, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivatives in their entirety are classified in Level 2 in the fair value hierarchy.
Measured on a Nonrecurring Basis
We evaluate the recoverability ofevaluated our goodwill and other indefinite-lived intangible assets in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that goodwill or other intangible assets may be impaired. Asfor impairment as of October 1, 2017, we evaluated our goodwill for impairment using a combination of the qualitative and quantitative methods.2019. Refer to Note 2, "Significant Accounting Policies,"11, "Goodwill and Other Intangible Assets, Net" for further discussion of this process.additional information. Based on these analyses, we determined that for each of the reporting units subject to the qualitative method, it was more likely than not that their fair valuesno impairments were greater than their carrying values at that date, and for each of the reporting units subject to the quantitative method, that their fair values exceeded their carrying values at that date.
required. As of October 1, 2017, we evaluated our other indefinite-lived intangible assets for impairment (using the quantitative method) and determined that the fair values of those assets exceeded their carrying values on that date. The fair values of our other indefinite-lived intangible assets are considered Level 3 fair value measurements.
As of December 31, 2017,2019, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of goodwill or other indefinite-lived intangible assets.
A long-lived asset, which includes PP&E, is considered held for sale when it meets certain criteria described in ASC Topic 360, Property, Plant, and Equipment. A long-lived asset classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment of the asset's carrying amount to its fair value less cost to sell in the period the held for sale criteria are met. In the period that a long-lived asset is considered
held for sale it is presented within Prepaid expenses and other current assets on our balance sheet where it remains until it is either sold or no longer meets the held for sale criteria. For comparative purposes, the prior year carrying amount of a long-lived asset considered held for sale is presented within Other assets on our balance sheet.
In the first quarter of 2017, we determined that one of our facilities met the held for sale criteria and recorded it at its fair value less costs to sell of $1.7 million (which approximated its net carrying value at that time). In the third quarter of 2017, we sold the asset for an immaterial gain.
The fair value of assets held for sale is considered to be a Level 3 fair value measurement and is determined based on the use of appraisals, input from market participants, our experience selling similar assets, internally developed cash flow models, or a combination thereof.
Financial Instruments Not Recorded at Fair Value
The following table presents the carrying values and fair values of financial instruments not recorded at fair value in the consolidated balance sheets as of December 31, 20172019 and 2016:2018. All fair value measures presented are categorized within Level 2 of the fair value hierarchy.
| | | | December 31, 2017 | | December 31, 2016 | As of December 31, |
| | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value | 2019 | | 2018 |
| | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
| Liabilities | | | | | | | | | | | | | | | | |
| Term loans | $ | 927,794 |
| | $ | — |
| | $ | 930,114 |
| | $ | — |
| | $ | 937,794 |
| | $ | — |
| | $ | 942,483 |
| | $ | — |
| |
| Term Loan | | $ | 460,725 |
| | $ | 464,181 |
| | $ | 917,794 |
| | $ | 904,027 |
|
| 4.875% Senior Notes | $ | 500,000 |
| | $ | — |
| | $ | 521,875 |
| | $ | — |
| | $ | 500,000 |
| | $ | — |
| | $ | 514,375 |
| | $ | — |
| $ | 500,000 |
| | $ | 532,500 |
| | $ | 500,000 |
| | $ | 491,875 |
|
| 5.625% Senior Notes | $ | 400,000 |
| | $ | — |
| | $ | 439,000 |
| | $ | — |
| | $ | 400,000 |
| | $ | — |
| | $ | 417,752 |
| | $ | — |
| $ | 400,000 |
| | $ | 444,000 |
| | $ | 400,000 |
| | $ | 400,500 |
|
| 5.0% Senior Notes | $ | 700,000 |
| | $ | — |
| | $ | 741,125 |
| | $ | — |
| | $ | 700,000 |
| | $ | — |
| | $ | 686,000 |
| | $ | — |
| $ | 700,000 |
| | $ | 759,500 |
| | $ | 700,000 |
| | $ | 660,625 |
|
| 6.25% Senior Notes | $ | 750,000 |
| | $ | — |
| | $ | 813,750 |
| | $ | — |
| | $ | 750,000 |
| | $ | — |
| | $ | 786,098 |
| | $ | — |
| $ | 750,000 |
| | $ | 808,125 |
| | $ | 750,000 |
| | $ | 751,875 |
|
| 4.375% Senior Notes | | $ | 450,000 |
| | $ | 457,875 |
| | $ | — |
| | $ | — |
|
| |
(1) | Excluding any related debt discounts and deferred financing costs. |
(1)The carrying value excludes discounts and deferred financing costs.
The fair values ofIn addition to the term loans and the Senior Notes are determined using observable prices in markets where these instruments are generallyabove, we hold certain equity investments that do not traded on a daily basis.
Cash and cash equivalents, accounts receivable, and accounts payable are carried at their cost, which approximates fair value because of their short-term nature.
In March 2016, we acquired Series B Preferred Stock of Quanergy for $50.0 million. In accordance with the guidance in ASC Topic 323, Investments - Equity Method and Joint Ventures, we have accounted for this investment as a cost method investment under ASC Subtopic 325-20, Cost Method Investments, as the Series B Preferred Stock is not "in substance" common stock and does not have a readily determinable fair value. We did not estimatevalues for which we use the fair valuemeasurement alternative prescribed in FASB ASC Topic 321. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of this cost method investment as of December 31, 2017 as therethe same issuer. There were no indicatorsimpairments or changes resulting from observable transactions for any of impairment,these investments, and because we determined it was not practicableno adjustments have been made to estimate its fair value duetheir carrying values.
Refer to the restricted marketabilitytable below for a detail of the investment.carrying values of these investments, each of which are included in other assets.
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Quanergy Systems, Inc | $ | 50,000 |
| | $ | 50,000 |
|
Lithium Balance (1) | 3,700 |
| | — |
|
| Total | $ | 53,700 |
| | $ | 50,000 |
|
| |
(1) | Our investment in Lithium Balance A/S ("Lithium Balance") was purchased in July 2019. |
16.19. Derivative Instruments and Hedging Activities
In accordance with ASC 815 we recognizeWe utilize derivative instruments on our balance sheet, and we measure them at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate the derivative as being in a hedging relationship, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivative instruments that are designated, and qualify as hedges of the exposure to changes in the fair value of an asset, liability, commitment, and that are attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments that are designated and qualify as hedges of the exposure to variability in expected future cash flows are considered cash flow hedges. Derivative instruments may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. We currently only utilize cash flow hedges.
flows. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on thethese hedging instrumentinstruments with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge.transactions. We may enter into other derivative contracts that are intended to economically hedge certain risks, even though we elect not to apply hedge accounting under FASB ASC Topic 815. Changes in the fair value of derivativesDerivative financial instruments not designated in hedging relationshipsas hedges are recorded directly in the consolidated
statements of operations. Specific information about the valuations of derivatives is described inused to manage our exposure to certain risks, not for trading or speculative purposes. Refer to Note 2, "Significant Accounting Policies," for additional information related to the valuation techniques and classification of derivatives in the fair value hierarchy is described in Note 15, “Fair Value Measures.”
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. Refer to Note 12, "Shareholders' Equity," and elsewhere in this Note, for more details on the reclassification of amounts from Accumulated other comprehensive loss into earnings. The ineffective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recognized directly in earnings.
We do not offset the fair value amounts recognized foraccounting policies regarding derivative instruments against fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. As of December 31, 2017 and 2016, we had posted no cash collateral.hedging activities.
Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar.USD. We useenter into forward contracts for certain of these foreign currency forward agreementscurrencies to manage this exposure. We currently have outstanding foreign currency forward contracts that qualify as cash flow hedges intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also have outstanding foreign currency forward contracts that are intended to preserve the economic value of foreign currency denominated monetary assets and liabilities; these instrumentsliabilities, which are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815. Foreign currency forward contracts not designated as hedges are not speculative and are used to manage our exposure to foreign exchange movements.
For each of the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, amounts excluded from the ineffective portionassessment of the changes in the fair valueeffectiveness of our foreign currency forward agreements that are designated as cash flow hedges waswere not material and no amounts were excluded from the assessment of effectiveness.material. As of December 31, 2017,2019, we estimate that $29.9$20.1 million inof net lossesgains will be reclassified from Accumulatedaccumulated other comprehensive loss to earnings during the twelve monthsmonth period ending December 31, 2018.2020.
As of December 31, 2017,2019, we had the following outstanding foreign currency forward contracts:
|
| | | | | | | | | | |
Notional
(in millions) | | Effective DateDate(s) | | Maturity DateDate(s) | | Index (Exchange Rates) | | Weighted- Average Strike Rate | | Cash Flow Hedge Designation(1) |
61.022.0 EUR | | December 27, 20172019 | | January 31, 20182020 | | Euro ("EUR") to U.S. Dollar Exchange Rate | | 1.19 USD | | Non-designated1.12 USD | | Not designated |
443.0340.3 EUR | | Various from March 2016 to December 2017 | | Various from January 2018 to December 2019 | | EuroVarious from January 2020 to U.S. Dollar Exchange RateNovember 2021 | | 1.15EUR to USD | | Designated1.17 USD | | Cash flow hedge |
640.0425.0 CNY | | December 26, 201723, 2019 | | January 31, 20182020 | | U.S. DollarUSD to Chinese Renminbi Exchange Rate("CNY") | | 6.577.04 CNY | | Non-designatedNot designated |
960.0326.0 CNY | | Various from October to December 201713, 2019 | | Various from January to December 20182020 | | U.S. DollarUSD to Chinese Renminbi Exchange Rate | | 6.72 CNY | | Designated7.07 CNY | | Cash flow hedge |
200.0594.0 JPY | | December 27, 201723, 2019 | | January 31, 20182020 | | U.S. DollarUSD to Japanese Yen Exchange Rate("JPY") | | 112.83109.07 JPY | | Non-designatedNot designated |
40,954.524,046.6 KRW | | Various from March 2016February 2018 to December 20172019 | | Various from January 20182020 to November 2021 | | USD to Korean Won ("KRW") | | 1,135.19 KRW | | Cash flow hedge |
| 22.0 MYR | | December 23, 2019 | | U.S. Dollar to Korean Won Exchange RateJanuary 31, 2020 | | 1,130.61 KRWUSD to Malaysian Ringgit ("MYR") | | Designated4.12 MYR | | Not designated |
19.5 MYR150.0 MXN | | December 27, 2019 | | January 31, 2020 | | USD to Mexican Peso ("MXN") | | 19.00 MXN | | Not designated |
| 2,871.0 MXN | | Various from MarchFebruary 2018 to November 2016December 2019 | | Various from January 2020 to October 2018November 2021 | | U.S. DollarUSD to Malaysian Ringgit Exchange Rate | | 4.21 MYR | | Designated |
215.0 MXN | | December 27, 2017 | | January 31, 2018 | | U.S. Dollar to Mexican Peso Exchange Rate | | 19.8320.81 MXN | | Non-designatedCash flow hedge |
2,541.0 MXN | | Various from March 2016 to December 2017
| | Various from January 2018 to November 2019 | | U.S. Dollar to Mexican Peso Exchange Rate | | 20.25 MXN | | Designated |
35.550.8 GBP | | Various from March 20162018 to December 20172019 | | Various from January 20182020 to November 20192021 | | British Pound Sterling ("GBP") to U.S. Dollar Exchange RateUSD | | 1.31 USD | | DesignatedCash flow hedge |
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods.
| |
(1) | Derivative financial instruments not designated as hedges are used to manage our exposure to currency exchange rate risk. They are intended to preserve the economic value, and they are not used for trading or speculative purposes. |
Hedges of Commodity Risk
Our objective in usingWe enter into commodity forward contracts isin order to offset a portion oflimit our exposure to the potential changevariability in prices associated with certain commodities usedraw material costs that is caused by movements in the manufacturingprice of our products, including silver, gold, nickel, aluminum, copper, platinum, and palladium.underlying metals. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. These instruments are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815. Commodity forward contracts not designated as hedges are not speculative and are used to manage our exposure to commodity price movements.
WeAs of December 31, 2019, we had the following outstanding commodity forward contracts, none of which were designated as derivatives in qualifying hedging relationships, as of December 31, 2017:contracts:
|
| | | | | | | | |
| Commodity | | Notional | | Remaining Contracted Periods | | Weighted-Average Strike Price Per Unit |
| Silver | | 855,297 troy oz. | | January 2020-November 2021 | | $ | 16.68 |
|
| Gold | | 7,851 troy oz. | | January 2020-November 2021 | | $ | 1,402.78 |
|
| Nickel | | 225,599 pounds | | January 2020-November 2021 | | $ | 6.25 |
|
| Aluminum | | 3,054,791 pounds | | January 2020-November 2021 | | $ | 0.89 |
|
| Copper | | 2,336,790 pounds | | January 2020-November 2021 | | $ | 2.81 |
|
| Platinum | | 7,340 troy oz. | | January 2020-November 2021 | | $ | 905.29 |
|
| Palladium | | 892 troy oz. | | January 2020-November 2021 | | $ | 1,441.81 |
|
|
| | | | | | |
Commodity | | Notional | | Remaining Contracted Periods | | Weighted-
Average
Strike Price Per Unit
|
Silver | | 1,117,049 troy oz. | | January 2018 - November 2019 | | $17.75 |
Gold | | 12,200 troy oz. | | January 2018 - November 2019 | | $1,288.85 |
Nickel | | 275,490 pounds | | January 2018 - November 2019 | | $4.84 |
Aluminum | | 5,592,797 pounds | | January 2018 - November 2019 | | $0.88 |
Copper | | 7,413,661 pounds | | January 2018 - November 2019 | | $2.71 |
Platinum | | 8,029 troy oz. | | January 2018 - November 2019 | | $987.12 |
Palladium | | 1,935 troy oz. | | January 2018 - November 2019 | | $819.85 |
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods.
Financial Instrument Presentation
The following table presents the fair values of our derivative financial instruments and their classification in the consolidated balance sheets as of December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Asset Derivatives | | Liability Derivatives |
| | | Balance Sheet Location | | As of December 31, | | Balance Sheet Location | | As of December 31, |
| | | | 2019 | | 2018 | | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | | | | | | | |
| Foreign currency forward contracts | | Prepaid expenses and other current assets | | $ | 20,957 |
| | $ | 14,608 |
| | Accrued expenses and other current liabilities | | $ | 1,055 |
| | $ | 3,615 |
|
| Foreign currency forward contracts | | Other assets | | 2,530 |
| | 3,168 |
| | Other long-term liabilities | | 428 |
| | 1,134 |
|
| Total | | | | $ | 23,487 |
| | $ | 17,776 |
| | | | $ | 1,483 |
| | $ | 4,749 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Commodity forward contracts | | Prepaid expenses and other current assets | | $ | 3,069 |
| | $ | 524 |
| | Accrued expenses and other current liabilities | | $ | 394 |
| | $ | 3,679 |
|
| Commodity forward contracts | | Other assets | | 554 |
| | 307 |
| | Other long-term liabilities | | 68 |
| | 458 |
|
| Foreign currency forward contracts | | Prepaid expenses and other current assets | | 74 |
| | 95 |
| | Accrued expenses and other current liabilities | | 476 |
| | 416 |
|
| Total | | | | $ | 3,697 |
| | $ | 926 |
| | | | $ | 938 |
| | $ | 4,553 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | | | | | |
| | | | Fair Value | | | | Fair Value |
| | Balance Sheet Location | | December 31, 2017 | | December 31, 2016 | | Balance Sheet Location | | December 31, 2017 | | December 31, 2016 |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $ | 3,576 |
| | $ | 24,796 |
| | Accrued expenses and other current liabilities | | $ | 32,806 |
| | $ | 20,990 |
|
| Foreign currency forward contracts | Other assets | | 373 |
| | 5,693 |
| | Other long-term liabilities | | 6,881 |
| | 3,814 |
|
| Total | | | $ | 3,949 |
| | $ | 30,489 |
| | | | $ | 39,687 |
| | $ | 24,804 |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Commodity forward contracts | Prepaid expenses and other current assets | | $ | 5,403 |
| | $ | 2,097 |
| | Accrued expenses and other current liabilities | | $ | 1,006 |
| | $ | 2,764 |
|
| Commodity forward contracts | Other assets | | 1,055 |
| | 542 |
| | Other long-term liabilities | | 98 |
| | 1,026 |
|
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 6 |
| | 2,268 |
| | Accrued expenses and other current liabilities | | 1,282 |
| | 2,397 |
|
| Total | | | $ | 6,464 |
| | $ | 4,907 |
| | | | $ | 2,386 |
| | $ | 6,187 |
|
These fair value measurements are all categorized within Level 2 of the fair value hierarchy. Refer to Note 15,18, "Fair Value Measures," for moreadditional information onrelated to the categorization of these measurements.fair value measurements within the fair value hierarchy.
The following tables present the effect of our derivative financial instruments on the consolidated statements of operations and the consolidated statements of comprehensive income for the years ended December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | |
| Derivatives designated as hedging instruments | | Amount of Deferred Gain Recognized in Other Comprehensive Income | | Location of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | | Amount of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income |
| | For the year ended December 31, | | | For the year ended December 31, |
| | 2019 | | 2018 | | | 2019 | | 2018 |
| Foreign currency forward contracts | | $ | 23,881 |
| | $ | 30,752 |
| | Net revenue | | $ | 26,180 |
| | $ | (18,072 | ) |
| Foreign currency forward contracts | | $ | 14,512 |
| | $ | 5,059 |
| | Cost of revenue | | $ | 2,397 |
| | $ | 5,442 |
|
| Foreign currency forward contracts | | $ | — |
| | $ | — |
| | Other, net | | $ | — |
| | $ | (1,376 | ) |
|
| | | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments | | Amount of Deferred (Loss)/Gain Recognized in Other Comprehensive Loss | | Location of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income | | Amount of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income |
| | | 2017 | | 2016 | | | | 2017 | | 2016 |
| Foreign currency forward contracts | | $ | (68,071 | ) | | $ | 24,044 |
| | Net revenue | | $ | (916 | ) | | $ | 17,720 |
|
| Foreign currency forward contracts | | $ | 15,555 |
| | $ | (32,519 | ) | | Cost of revenue | | $ | (13,997 | ) | | $ | (21,089 | ) |
|
| | | | | | | | | | |
| Derivatives not designated as hedging instruments | | Amount of Gain/(Loss) Recognized in Net Income | | Location of Gain/(Loss) |
| | For the year ended December 31, | |
| | 2019 | | 2018 | |
| Commodity forward contracts | | $ | 4,888 |
| | $ | (8,481 | ) | | Other, net |
| Foreign currency forward contracts | | $ | 2,225 |
| | $ | 3,446 |
| | Other, net |
|
| | | | | | | | | | |
Derivatives not designated as hedging instruments | | Amount of Gain/(Loss) on Derivatives Recognized in Net Income | | Location of Gain/(Loss) on Derivatives
Recognized in Net Income |
| | | 2017 | | 2016 | | |
| Commodity forward contracts | | $ | 9,989 |
| | $ | 7,399 |
| | Other, net |
| Foreign currency forward contracts | | $ | (15,618 | ) | | $ | (1,850 | ) | | Other, net |
Credit risk related contingent features
We have agreements with certain of our derivative counterparties that contain a provision whereby if we default on our indebtedness and where repayment of the indebtedness has been accelerated by the lender, then we could also be declared in default on our derivative obligations.
As of December 31, 2017,2019, the termination value of outstanding derivatives in a liability position, excluding any adjustment for non-performance risk, was $42.4$2.4 million. As of December 31, 2017,2019, we have not0t posted any cash collateral related to these agreements. If we breach any of the default provisions on any of our indebtedness as described above, we could be required to settle our obligations under the derivative agreements at their termination values.
17. Restructuring20. Segment Reporting
We operate in, and Special Charges
Restructuring and special charges for fiscal years 2017, 2016, and 2015 were $19.0 million, $4.1 million, and $21.9 million, respectively.
Restructuring and special charges recognized during the year ended December 31, 2017 consisted primarily of severance charges of $11.1 million and facility exist costs of $7.9 million, each of which related primarily to the closing of our facility in Minden, Germany that was part of the acquisition of CST and the closing of our manufacturing facility in Bydgoszcz, Poland. Charges related to the closing of our facility in Minden, Germanyreport financial information for, the year ended December 31, 2017 consisted of severance charges of $8.4 million and facility exit costs of $3.2 million. Charges related to the closing of our facility in Bydgoszcz, Poland for the year ended December 31, 2017 consisted of severance charges of $0.8 million and facility exit costs of $2.3 million.
Restructuring and special charges recognized during the year ended December 31, 2016 primarily included facility exit costs related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico and severance charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of 2016.
Restructuring and special charges recognized during the year ended December 31, 2015 included $7.6 million of severance charges incurred in order to integrate acquired businesses with ours, $4.0 million of severance charges incurred in the second quarter of 2015 related to the announced closing of our Schrader Brazil manufacturing facility, with the remainder primarily associated with the termination of a limited number of employees in various locations throughout the world.
The following table outlines the changes to the restructuring liability during the years ended December 31, 2017 and 2016: |
| | | | |
| | | Severance |
| Balance at December 31, 2015 | | $ | 24,574 |
|
| Charges, net of reversals | | 813 |
|
| Payments | | (7,252 | ) |
| Impact of changes in foreign currency exchange rates | | (785 | ) |
| Balance at December 31, 2016 | | 17,350 |
|
| Charges, net of reversals | | 11,125 |
|
| Payments | | (22,511 | ) |
| Impact of changes in foreign currency exchange rates | | 1,619 |
|
| Balance at December 31, 2017 | | $ | 7,583 |
|
The following table outlines the current and long-term components of our restructuring liabilities recognized in the consolidated balance sheets as of December 31, 2017 and 2016.
|
| | | | | | | | |
| | | December 31,
2017 | | December 31,
2016 |
| Accrued expenses and other current liabilities | | $ | 4,184 |
| | $ | 14,268 |
|
| Other long-term liabilities | | 3,399 |
| | 3,082 |
|
| Total | | $ | 7,583 |
| | $ | 17,350 |
|
Exit and Disposal Activities
In the second quarter of 2015, we closed our Schrader Brazil manufacturing facility. During the year ended December 31, 2015, in connection with this closing, and in addition to the $4.0 million of severance charges recorded in the Restructuring and special charges line of the consolidated statements of operations as discussed above, we incurred approximately $5.0 million of charges, primarily recorded in Cost of revenue, related to the write-down of certain assets, including PP&E and Inventory. These charges are not included in the restructuring and special charges table above.
18. Segment Reporting
We organize our business into two2 reportable segments,segments: Performance Sensing and Sensing Solutions, each of which is also an operating segment. Our operating segments are businesses that we manage as components of an enterprise, for which separate financial information is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance.
An operating segment’s performance is primarily evaluated based on segment profit,operating income, which excludes amortization of intangible assets, restructuring and specialother charges, net, and certain corporate costs/credits not associated with the operations of the segment, including share-based compensation expense and a portion of depreciation expense associated with assets recorded in connection with acquisitions. In addition, an operating segment’s performance excludes results from discontinued operations, if any. Corporate and other costs excluded from an operating segment’s performance are separately stated below and also include costs that are related to functional areas such as finance, information technology, legal, and human resources. We believe that segment profit,operating income, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, and not as a substitute for, or superior to, profit from operationsoperating income or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of each of our two reportable segments are materially consistent with those described in Note 2, "Significant Accounting Policies."
The Performance Sensing segment is a manufacturerprimarily serves the automotive and HVOR industries through development and manufacture of pressure sensors, speedhigh-voltage contactors, and position sensors, temperature sensors,other products used in mission-critical systems and pressure switches usedapplications such as those in subsystems of automobiles, on-road trucks, and off-road equipment (e.g., powertrain, air conditioning, tire pressure monitoring, thermal management, air conditioning, and ride stabilization) and HVOR. Theseregenerative braking). Our products helpare used in subsystems that, among other things, improve operating performance for example, by making an automobile’s heating and air conditioning systems work more efficiently, thereby improving gas mileage. These products are also used in systems thatefficiency as well as address environmental or safety concerns, for example, by reducing vehicle emissions or improvingconcerns.
Sensing Solutions primarily serves the stabilityindustrial and aerospace industries through development and manufacture of a broad portfolio of application-specific sensor and control products used in the aerospace market and a diverse range of industrial markets, including the small appliance, HVAC, semiconductor, material handling, factory automation, and water management markets. Some of the vehicle.
The Sensing Solutionsproducts the segment is a manufacturer of various control products, which are used in industrial, aerospace, military, commercial, medical device,sells include pressure, temperature, and residential markets, andposition sensors, products, which are used in aerospace and industrial
applications such as HVAC systems and military and commercial aircraft. These products include motor and compressor protectors, motor starters, temperature sensors and switches/thermostats, pressure sensors and switches, electronic HVAC sensors and controls, charge controllers, solid state relays, linearbimetal electromechanical controls, thermal and rotary position sensors,magnetic-hydraulic circuit breakers, and semiconductor burn-in test sockets. These products help prevent damage from overheating and fires in a wide variety of applications, including commercial HVAC systems, refrigerators, aircraft, lighting, and other industrial applications and help optimize performance by using sensors which provide feedback to control systems. The Sensing Solutions segment also manufactures DC to AC power inverters, which enable the operation of electronic equipment when grid power is not available.and charge controllers.
The following table presents Netnet revenue and Segment profitsegment operating income for the reportablereported segments and other operating results not allocated to the reportablereported segments for the years ended December 31, 2017, 2016,2019, 2018, and 2015:2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | |
| Performance Sensing | $ | 2,546,016 |
| | $ | 2,627,651 |
| | $ | 2,460,600 |
|
| Sensing Solutions | 904,615 |
| | 893,976 |
| | 846,133 |
|
| Total net revenue | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
| Segment operating income (as defined above): | | | | | |
| Performance Sensing | $ | 648,744 |
| | $ | 712,682 |
| | $ | 664,186 |
|
| Sensing Solutions | 291,261 |
| | 293,009 |
| | 277,450 |
|
| Total segment operating income | 940,005 |
| | 1,005,691 |
| | 941,636 |
|
| Corporate and other | (186,674 | ) | | (203,764 | ) | | (205,824 | ) |
| Amortization of intangible assets | (142,886 | ) | | (139,326 | ) | | (161,050 | ) |
| Restructuring and other charges, net | (53,560 | ) | | 47,818 |
| | (18,975 | ) |
| Operating income | 556,885 |
| | 710,419 |
| | 555,787 |
|
| Interest expense, net | (158,554 | ) | | (153,679 | ) | | (159,761 | ) |
| Other, net | (7,908 | ) | | (30,365 | ) | | 6,415 |
|
| Income before taxes | $ | 390,423 |
| | $ | 526,375 |
| | $ | 402,441 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net revenue: | | | | | |
| Performance Sensing | $ | 2,460,600 |
| | $ | 2,385,380 |
| | $ | 2,346,226 |
|
| Sensing Solutions | 846,133 |
| | 816,908 |
| | 628,735 |
|
| Total net revenue | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
|
| Segment profit (as defined above): | | | | | |
| Performance Sensing | $ | 664,186 |
| | $ | 615,526 |
| | $ | 598,524 |
|
| Sensing Solutions | 277,450 |
| | 261,914 |
| | 199,744 |
|
| Total segment profit | 941,636 |
| | 877,440 |
| | 798,268 |
|
| Corporate and other | (209,226 | ) | | (179,665 | ) | | (196,133 | ) |
| Amortization of intangible assets | (161,050 | ) | | (201,498 | ) | | (186,632 | ) |
| Restructuring and special charges | (18,975 | ) | | (4,113 | ) | | (21,919 | ) |
| Profit from operations | 552,385 |
| | 492,164 |
| | 393,584 |
|
| Interest expense, net | (159,761 | ) | | (165,818 | ) | | (137,626 | ) |
| Other, net | 9,817 |
| | (4,901 | ) | | (50,329 | ) |
| Income before taxes | $ | 402,441 |
| | $ | 321,445 |
| | $ | 205,629 |
|
No customer exceeded 10% of our Netnet revenue in any of the periods presented.
The following table presents Netnet revenue by product category for the years ended December 31, 2017, 2016,2019, 2018, and 2015:2017:
|
| | | | | | | | | | | | | | | |
| | Performance Sensing | | Sensing Solutions | | For the year ended December 31, |
| | | | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | | | | | |
| Sensors | X | | X | | $ | 2,712,926 |
| | $ | 2,755,280 |
| | $ | 2,542,863 |
|
| Controls | | | X | | 481,720 |
| | 508,745 |
| | 497,853 |
|
| Other | X | | X | | 255,985 |
| | 257,602 |
| | 266,017 |
|
| Net revenue | | | | | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
|
| | | | | | | | | | | | | | | |
| | Performance Sensing | | Sensing Solutions | | For the year ended December 31, |
| | | | 2017 | | 2016 | | 2015 |
| Net revenue: | | | | | | | | | |
Pressure sensors (1) | X | | X | | $ | 1,818,382 |
| | $ | 1,736,160 |
| | $ | 1,669,393 |
|
| Speed and position sensors | X | | X | | 425,371 |
| | 420,111 |
| | 328,102 |
|
| Bimetal electromechanical controls | | | X | | 333,907 |
| | 321,202 |
| | 318,721 |
|
| Temperature sensors | X | | X | | 193,322 |
| | 191,463 |
| | 191,369 |
|
| Power conversion and control | | | X | | 127,348 |
| | 120,357 |
| | 58,180 |
|
| Thermal and magnetic-hydraulic circuit breakers | | | X | | 107,097 |
| | 109,719 |
| | 110,980 |
|
| Pressure switches | X | | X | | 96,086 |
| | 88,905 |
| | 86,994 |
|
| Interconnection | | | X | | 59,725 |
| | 57,518 |
| | 61,738 |
|
| Other | X | | X | | 145,495 |
| | 156,853 |
| | 149,484 |
|
| | | | | | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
|
(1) Certain products, totaling $28.5 million, that were categorized as pressure sensors in 2016 have been recast to other.
The following table presents depreciation and amortization expense for our reportable segments for the years ended December 31, 2017, 20162019, 2018, and 2015:2017:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Total depreciation and amortization | | | | | | |
| Depreciation and amortization: | | | | | | |
| Performance Sensing | $ | 68,910 |
| | $ | 68,837 |
| | $ | 62,754 |
| $ | 85,511 |
| | $ | 72,067 |
| | $ | 68,910 |
|
| Sensing Solutions | 17,179 |
| | 14,095 |
| | 10,643 |
| 16,678 |
| | 16,798 |
| | 17,179 |
|
Corporate and other(1) | 184,282 |
| | 225,469 |
| | 209,286 |
| 156,559 |
| | 156,475 |
| | 184,282 |
|
| Total | $ | 270,371 |
| | $ | 308,401 |
| | $ | 282,683 |
| |
| Total depreciation and amortization | | $ | 258,748 |
| | $ | 245,340 |
| | $ | 270,371 |
|
__________________
| |
(1) | Included within Corporate and other is depreciation and amortization expense associated with the fair value step-up recognized in prior acquisitions and accelerated depreciation recordedrecognized in connection with restructuring actions. We do not allocate the additional depreciation and amortization expense associated with the step-up in the fair value of the PP&E and intangible assets associated with these acquisitions or accelerated depreciation related to restructuring actions to our segments. This treatment is consistent with the financial information reviewed by our chief operating decision maker. |
The following table presents total assets for our reportable segments as of December 31, 20172019 and 2016:2018:
| | | | December 31,
2017 | | December 31,
2016 | As of December 31, |
| Total assets | | | | |
| | | 2019 | | 2018 |
| Assets: | | | | |
| Performance Sensing | $ | 1,396,565 |
| | $ | 1,295,381 |
| $ | 1,515,396 |
| | $ | 1,490,310 |
|
| Sensing Solutions | 424,237 |
| | 396,224 |
| 479,455 |
| | 468,131 |
|
Corporate and other(1) | 4,820,723 |
| | 4,549,371 |
| 4,839,668 |
| | 4,839,246 |
|
| Total | $ | 6,641,525 |
| | $ | 6,240,976 |
| |
| Total assets | | $ | 6,834,519 |
| | $ | 6,797,687 |
|
__________________
| |
(1) | IncludedThe following is included within Corporatecorporate and other as of December 31, 20172019 and 2016 is $3,005.5 million2018: goodwill of Goodwill, as well as $920.1$3,093.6 million and $1,075.4$3,081.3 million, respectively, of Otherrespectively; other intangible assets, net $753.1of $770.9 million and $351.4$897.2 million, respectively, ofrespectively; cash and cash equivalents and $36.1of $774.1 million and $21.1$729.8 million, respectively,respectively; and PP&E, net of PP&E, net.$41.2 million and $36.5 million, respectively. This treatment is consistent with the financial information reviewed by our chief operating decision maker. |
The following table presents capital expendituresadditions to PP&E and capitalized software for our reportable segments for the years ended December 31, 2017, 2016,2019, 2018, and 2015:2017:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Additions to property, plant and equipment and capitalized software: | | | | | |
| Performance Sensing | $ | 125,412 |
| | $ | 130,234 |
| | $ | 106,520 |
|
| Sensing Solutions | 19,520 |
| | 12,492 |
| | 13,980 |
|
| Corporate and other | 16,327 |
| | 17,061 |
| | 24,084 |
|
| Total additions to property, plant and equipment and capitalized software | $ | 161,259 |
| | $ | 159,787 |
| | $ | 144,584 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Total capital expenditures | | | | | |
| Performance Sensing | $ | 106,520 |
| | $ | 99,299 |
| | $ | 125,376 |
|
| Sensing Solutions | 13,980 |
| | 11,947 |
| | 16,899 |
|
| Corporate and other | 24,084 |
| | 18,971 |
| | 34,921 |
|
| Total | $ | 144,584 |
| | $ | 130,217 |
| | $ | 177,196 |
|
Geographic Area Information
The following tables present Netnet revenue by geographic area and by significant country for the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017. In these tables, Netnet revenue is aggregated based on an internal methodology that considers bothaccording to the location of our subsidiaries and the primary location of each subsidiary's customers.subsidiaries.
| | | | Net Revenue | For the year ended December 31, |
| | For the year ended December 31, | 2019 | | 2018 | | 2017 |
| | 2017 | | 2016 | | 2015 | |
| Net revenue: | | | | | | |
| Americas | $ | 1,367,113 |
| | $ | 1,367,860 |
| | $ | 1,217,626 |
| $ | 1,460,101 |
| | $ | 1,480,567 |
| | $ | 1,367,113 |
|
| Asia | 903,118 |
| | 810,094 |
| | 764,298 |
| |
| Europe | 1,036,502 |
| | 1,024,334 |
| | 993,037 |
| 969,470 |
| | 1,028,534 |
| | 1,036,502 |
|
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
| |
| Asia and rest of world | | 1,021,060 |
| | 1,012,526 |
| | 903,118 |
|
| Net revenue | | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | |
| United States | $ | 1,333,532 |
| | $ | 1,360,590 |
| | $ | 1,276,304 |
|
| Netherlands | 576,804 |
| | 585,036 |
| | 571,735 |
|
| China | 575,211 |
| | 560,938 |
| | 478,713 |
|
| Korea | 188,226 |
| | 188,114 |
| | 184,101 |
|
| United Kingdom | 151,674 |
| | 163,963 |
| | 174,376 |
|
| All other | 625,184 |
| | 662,986 |
| | 621,504 |
|
| Net revenue | $ | 3,450,631 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
|
|
| | | | | | | | | | | |
| | Net Revenue |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 1,276,304 |
| | $ | 1,322,206 |
| | $ | 1,084,757 |
|
| The Netherlands | 571,735 |
| | 550,937 |
| | 553,192 |
|
| China | 478,713 |
| | 412,460 |
| | 346,890 |
|
| Korea | 184,101 |
| | 182,464 |
| | 198,440 |
|
| Japan | 164,735 |
| | 152,234 |
| | 153,114 |
|
| All other | 631,145 |
| | 581,987 |
| | 638,568 |
|
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
|
The following tables present PP&E, net, by geographic area and by significant country as of December 31, 20172019 and 2016.2018. In these tables, PP&E, net is aggregated based on the location of our subsidiaries.
| | | | PP&E, net | As of December 31, |
| | December 31,
2017 | | December 31,
2016 | 2019 | | 2018 |
| Property, plant and equipment, net: | | | | |
| Americas | $ | 296,863 |
| | $ | 269,697 |
| $ | 289,300 |
| | $ | 292,625 |
|
| Asia | 266,524 |
| | 262,045 |
| |
| Europe | 186,662 |
| | 192,304 |
| 192,772 |
| | 185,011 |
|
| Total | $ | 750,049 |
| | $ | 724,046 |
| |
| Asia and rest of world | | 348,926 |
| | 309,542 |
|
| Property, plant and equipment, net | | $ | 830,998 |
| | $ | 787,178 |
|
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Property, plant and equipment, net: | | | |
| United States | $ | 97,226 |
| | $ | 83,664 |
|
| China | 266,161 |
| | 239,315 |
|
| Mexico | 191,861 |
| | 204,552 |
|
| Bulgaria | 138,644 |
| | 119,477 |
|
| United Kingdom | 40,003 |
| | 51,404 |
|
| Malaysia | 78,310 |
| | 65,688 |
|
| All other | 18,793 |
| | 23,078 |
|
| Property, plant and equipment, net | $ | 830,998 |
| | $ | 787,178 |
|
|
| | | | | | | |
| | PP&E, net |
| | December 31,
2017 | | December 31,
2016 |
| United States | $ | 95,603 |
| | $ | 109,600 |
|
| China | 211,566 |
| | 208,821 |
|
| Mexico | 196,813 |
| | 155,607 |
|
| Bulgaria | 97,562 |
| | 81,719 |
|
| United Kingdom | 63,310 |
| | 75,495 |
|
| Malaysia | 50,783 |
| | 48,477 |
|
| The Netherlands | 4,969 |
| | 4,142 |
|
| All Other | 29,443 |
| | 40,185 |
|
| | $ | 750,049 |
| | $ | 724,046 |
|
21. Leases
We occupy leased facilities with initial terms ranging up to 20 years. The lease agreements frequently include options to renew for additional periods or to purchase the leased assets and generally require that we pay taxes, insurance, and maintenance costs. We also lease certain vehicles and equipment. Depending on the specific terms of the leases, our obligations are in two forms: finance leases and operating leases.
19. Net Income per ShareAs discussed in Note 2, "Significant Accounting Policies," we adopted FASB ASC Topic 842 on January 1, 2019, using the modified retrospective transition method. We have elected to apply the package of practical expedients and the land easement practical expedient. We have not elected to apply the hindsight practical expedient.
BasicAs a result of this adoption, we classify most leases as either finance or operating leases and diluted net income per sharerecognize a related lease liability and right-of-use asset on our consolidated balance sheets. Our accounting for finance leases remains unchanged after the adoption of FASB ASC Topic 842. We have elected to account for leases with a term of one year or less (short-term leases) using a method similar to the operating lease model under FASB ASC Topic 840, Leases (i.e. they are calculated by dividing Net income bynot recorded on the numberconsolidated balance sheets).
We elected to apply the transition provisions of basic and diluted weighted-average ordinary shares outstanding duringthis guidance, including its disclosure requirements, at its date of adoption instead of at the period. Forbeginning of the years ended earliest comparative period presented. Accordingly, we have not restated our consolidated balance sheet as of December 31, 2017, 2016,2018. There was no cumulative effect of adoption on our retained earnings or any other components of equity. The below adjustments were made to our consolidated balance sheet on January 1, 2019 to reflect the new guidance:
|
| | | | | | | | | | | |
| | December 31, 2018 | | Adjustment | | January 1, 2019 |
| Prepaid expenses and other current assets | $ | 113,234 |
| | $ | (253 | ) | | $ | 112,981 |
|
| Other intangible assets, net | $ | 897,191 |
| | $ | (1,510 | ) | | $ | 895,681 |
|
| Other assets | $ | 86,890 |
| | $ | 58,496 |
| | $ | 145,386 |
|
| Accrued expenses and other current liabilities | $ | 218,130 |
| | $ | 12,119 |
| | $ | 230,249 |
|
| Other long-term liabilities | $ | 39,277 |
| | $ | 44,614 |
| | $ | 83,891 |
|
The table below presents the amounts recognized and 2015,location of recognition in our consolidated balance sheet as of December 31, 2019 related to our operating and finance leases:
|
| | | |
| | December 31, 2019 |
| Operating lease right-of-use assets: | |
| Other assets | $ | 55,333 |
|
| Total operating lease right-of-use assets | $ | 55,333 |
|
| Operating lease liabilities: | |
| Accrued expenses and other current liabilities | $ | 11,543 |
|
| Other long-term liabilities | 45,457 |
|
| Total operating lease liabilities | $ | 57,000 |
|
| Finance lease right-of-use assets: | |
| Property, plant and equipment, at cost | $ | 49,714 |
|
| Accumulated depreciation | (24,316 | ) |
| Property, plant and equipment, net | $ | 25,398 |
|
| Finance lease liabilities: | |
| Current portion of long-term debt, finance lease and other financing obligations | $ | 1,974 |
|
| Finance lease and other financing obligations, less current portion | 28,669 |
|
| Total finance lease liabilities | $ | 30,643 |
|
We have material finance leases for facilities in Baoying, China and Attleboro, Massachusetts. As of December 31, 2019 and 2018, the weighted-average ordinary sharescombined finance lease obligation outstanding for basicthese facilities was $29.4 million and diluted net income per share were as follows:$30.4 million, respectively.
The table below presents the lease liabilities arising from obtaining right-of-use assets in the year ended December 31, 2019:
|
| | | |
| | For the year ended |
| | December 31, 2019 |
| Operating leases | $ | 5,423 |
|
| Finance leases | $ | — |
|
|
| | | | | | | | |
| | For the year ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Basic weighted-average ordinary shares outstanding | 171,165 |
| | 170,709 |
| | 169,977 |
|
| Dilutive effect of stock options | 616 |
| | 489 |
| | 1,265 |
|
| Dilutive effect of unvested restricted securities | 388 |
| | 262 |
| | 271 |
|
| Diluted weighted-average ordinary shares outstanding | 172,169 |
| | 171,460 |
| | 171,513 |
|
Net income and net income per share are presented inFor finance leases, the consolidated statements of operations.operations include separate recognition of interest on the lease liability and amortization of the right-of-use asset. For operating leases, the consolidated statements of operations include a single lease
Certain potential ordinary shares were excluded
cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis. The table below presents our total lease cost for the year ended December 31, 2019 (short-term lease cost was not material for the year ended December 31, 2019):
|
| | | |
| | For the year ended |
| | December 31, 2019 |
| Operating lease cost | $ | 16,124 |
|
| | |
| Finance lease cost: | |
| Amortization of right-of-use assets | $ | 1,808 |
|
| Interest on lease liabilities | 2,695 |
|
| Total finance lease cost | $ | 4,503 |
|
Rent expense for the years ended December 31, 2018 and 2017 (prior to the adoption of FASB ASC Topic 842) was $21.0 million and $19.7 million, respectively.
Cash flows from our calculationoperating activities include (1) interest on finance lease liabilities and (2) payments arising from operating leases. Cash flows from financing activities include repayments of diluted weighted-average ordinary shares outstanding because they would have had an anti-dilutive effect on net income per share, or because theythe principal portion of finance lease liabilities. The table below presents the cash paid related to share-based awards that were contingently issuable,our operating and finance leases for which the contingency had not been satisfied. Refer to Note 11, "Share-Based Payment Plans," for further discussionyear ended December 31, 2019:
|
| | | |
| | For the year ended |
| | December 31, 2019 |
| Operating cash flows from operating leases | $ | 15,911 |
|
| Operating cash flows from finance leases | $ | 2,731 |
|
| Financing cash flows from finance leases | $ | 1,933 |
|
The table below presents the weighted-average remaining lease term of our share-based payment plans.operating and finance leases (in years):
|
| |
| December 31, 2019 |
| Operating leases | 8.1 |
| Finance leases | 12.6 |
|
| | | | | | | | |
| | For the year ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Anti-dilutive shares excluded | 1,410 |
| | 1,401 |
| | 747 |
|
| Contingently issuable shares excluded | 871 |
| | 606 |
| | 409 |
|
|
| | |
| December 31, 2019 |
| Operating leases | 5.6 | % |
| Finance leases | 8.6 | % |
The table below presents a maturity analysis of the obligations related to our operating lease liabilities and finance lease liabilities in effect as of December 31, 2019:
|
| | | | | | | |
| | Operating Leases | | Finance Leases |
| Year ending December 31, | | | |
| 2020 | $ | 14,818 |
| | $ | 4,528 |
|
| 2021 | 11,199 |
| | 4,050 |
|
| 2022 | 8,946 |
| | 3,700 |
|
| 2023 | 7,470 |
| | 3,759 |
|
| 2024 | 7,055 |
| | 3,819 |
|
| Thereafter | 24,467 |
| | 32,464 |
|
| Total undiscounted cash flows related to lease liabilities | 73,955 |
| | 52,320 |
|
| Less imputed interest | (16,955 | ) | | (21,677 | ) |
| Total lease liabilities | $ | 57,000 |
| | $ | 30,643 |
|
20.22. Unaudited Quarterly Data
A summary of the unaudited quarterly results of operations for the years ended December 31, 20172019 and 20162018 is as follows:
|
| | | | | | | | | | | | | | | |
| | December 31,
2017 | | September 30,
2017 | | June 30,
2017 | | March 31,
2017 |
| For the year ended December 31, 2017 | | | | | | | |
| Net revenue | $ | 840,534 |
| | $ | 819,054 |
| | $ | 839,874 |
| | $ | 807,271 |
|
| Gross profit | $ | 300,416 |
| | $ | 291,622 |
| | $ | 298,842 |
| | $ | 274,545 |
|
| Net income | $ | 169,129 |
| | $ | 88,035 |
| | $ | 79,457 |
| | $ | 71,736 |
|
Basic net income per share (1) | $ | 0.99 |
| | $ | 0.51 |
| | $ | 0.46 |
| | $ | 0.42 |
|
| Diluted net income per share | $ | 0.98 |
| | $ | 0.51 |
| | $ | 0.46 |
| | $ | 0.42 |
|
(1) The sum of basic net income per share for the four quarters does not equal the full year basic net income per share due to rounding. |
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 |
| Net revenue | $ | 846,691 |
| | $ | 849,715 |
| | $ | 883,726 |
| | $ | 870,499 |
|
| Gross profit | $ | 290,209 |
| | $ | 294,805 |
| | $ | 308,491 |
| | $ | 289,693 |
|
| Net income | $ | 53,538 |
| | $ | 70,675 |
| | $ | 73,436 |
| | $ | 85,065 |
|
Basic net income per share (1) | $ | 0.34 |
| | $ | 0.44 |
| | $ | 0.45 |
| | $ | 0.52 |
|
| Diluted net income per share | $ | 0.34 |
| | $ | 0.44 |
| | $ | 0.45 |
| | $ | 0.52 |
|
|
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| Net revenue | $ | 847,922 |
| | $ | 873,552 |
| | $ | 913,860 |
| | $ | 886,293 |
|
| Gross profit | $ | 304,359 |
| | $ | 315,218 |
| | $ | 331,351 |
| | $ | 303,836 |
|
| Net income | $ | 254,099 |
| | $ | 149,118 |
| | $ | 105,288 |
| | $ | 90,490 |
|
Basic net income per share (1) | $ | 1.55 |
| | $ | 0.89 |
| | $ | 0.61 |
| | $ | 0.53 |
|
Diluted net income per share (1) | $ | 1.54 |
| | $ | 0.88 |
| | $ | 0.61 |
| | $ | 0.52 |
|
| |
(1) | The sum of net income per share for the four quarters does not equal the full year net income per share due to rounding. |
Acquisitions and Divestitures
|
| | | | | | | | | | | | | | | |
| | December 31,
2016 | | September 30,
2016 | | June 30,
2016 | | March 31,
2016 |
| For the year ended December 31, 2016 | | | | | | | |
| Net revenue | $ | 788,396 |
| | $ | 789,798 |
| | $ | 827,545 |
| | $ | 796,549 |
|
| Gross profit | $ | 278,898 |
| | $ | 280,854 |
| | $ | 290,104 |
| | $ | 268,171 |
|
| Net income | $ | 66,527 |
| | $ | 69,785 |
| | $ | 65,510 |
| | $ | 60,612 |
|
| Basic net income per share | $ | 0.39 |
| | $ | 0.41 |
| | $ | 0.38 |
| | $ | 0.36 |
|
| Diluted net income per share | $ | 0.39 |
| | $ | 0.41 |
| | $ | 0.38 |
| | $ | 0.35 |
|
In October 2018 we completed the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to this merger. Net revenue of GIGAVAC included in our consolidated statement of operations in the fourth quarter of 2018 was $12.6 million. In the fourth quarter of 2018, we recorded related transaction costs of $2.5 million, which are included in SG&A expense in the consolidated statements of operations.
Income taxes
In the fourth quarter of 2017,2018, we recorded an income tax benefit of $73.7$122.1 million related to remeasurethe realization of U.S. deferred tax liabilities associated with indefinite-lived intangible assets that are deemed to reverse aspreviously offset by a result of changes in applicable U.S. tax law set forth in the 2017 Tax Cuts and Jobs Act.
valuation allowance. Refer to Note 9,7, "Income Taxes," for further discussion of taxadditional information related matters.to our accounting for income taxes.
Commodity forward contracts
Gains and losses related to our commodity forward contracts, which are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815, are recorded in Other,other, net in the consolidated statements of operations. During the first, second, third, and fourth quarters of 2017, we recognized gains/(losses) of $5.4 million, $(2.0) million, $3.0 million, and $3.6 million, respectively, related to these contracts. During the first, second, third, and fourth quarters of 2016, we recognized gains/(losses) of $5.3 million, $5.4 million, $1.3 million, and $(4.7) million, respectively.
Refer to Note 16,19, "Derivative Instruments and Hedging Activities," for further discussion ofadditional information related to our commodity forward contracts, and Note 2, "Significant Accounting Policies,6, "Other, Net," for a detail of Other,other, net for the years ended December 31, 20172019 and 2016.2018. The below table presents gains/(losses) recognized related to these contracts in the periods presented:
|
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, | | September 30, | | June 30, | | March 31, |
| 2019 | $ | 2,081 |
| | $ | 1,786 |
| | $ | (102 | ) | | $ | 1,123 |
|
| 2018 | $ | 373 |
| | $ | (4,233 | ) | | $ | (1,426 | ) | | $ | (3,195 | ) |
Restructuring and Specialother charges
The below table presents charges/(gains) recorded to restructuring and other charges, net in the periods presented:
|
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, | | September 30, | | June 30, | | March 31, |
| 2019 | $ | 25,520 |
| | $ | 6,421 |
| | $ | 16,310 |
| | $ | 5,309 |
|
| 2018 | $ | 870 |
| | $ | (52,698 | ) | | $ | 244 |
| | $ | 3,766 |
|
In fiscal year 2019, restructuring and other charges net includes a loss related to the first, second, third, and fourth quarterstermination of 2017, we recorded Restructuring and special charges of $11.1 million, $6.4 million, $1.3 million, and $0.2 million, respectively. These charges consisted primarily of severance charges recordeda supply agreement in connection with the closing of our facilityMetal Seal litigation in Minden, Germany that was part of the acquisition of CST and the closing of our manufacturing facility in Bydgoszcz, Poland.
In the first, second, third, and fourth quarters of 2016, we recorded Restructuring and special charges of $0.9 million, $1.5 million, $0.8 million, and $0.9 million, respectively. These charges consisted primarily of facility exit costsquarter, termination benefits provided under a one-time benefit arrangement related to the shutdown and relocation of manufacturing lines from our facilityan operating site in Germany in the Dominican Republic tothird quarter, and a manufacturing facilitycharge provided under a voluntary retirement incentive program in Mexicothe second quarter.
In fiscal year 2018, restructuring and severanceother charges, recordednet includes the gain on sale of the Valves Business, net of transaction costs, in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world.third quarter.
Refer to Note 17,5, "Restructuring and SpecialOther Charges, Net," for further discussion of our restructuring charges.
Charges related to the proposed cross-border merger
In the second, third, and fourth quarters of 2017, we incurred $1.0 million, $3.5 million, and $2.1 million, respectively, in chargesadditional information related to our proposed cross border merger. Refer for Note 1, “Business Description and Basis of Presentation,” for further discussion of our proposed cross-border merger.
21. Subsequent Event
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V. are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being the surviving entity (the “Merger”).
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.restructuring charges.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Balance Sheets
(In thousands)
| | | | | | | As of December 31, |
| | December 31, 2017 | | December 31, 2016 | 2019 | | 2018 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 2,150 |
| | $ | 1,719 |
| $ | 238 |
| | $ | 1,089 |
|
| Intercompany receivables from subsidiaries | 94,094 |
| | 84,396 |
| |
| Intercompany notes receivable from subsidiaries | | 43,673 |
| | — |
|
| Prepaid expenses and other current assets | 643 |
| | 683 |
| 1,246 |
| | 528 |
|
| Total current assets | 96,887 |
| | 86,798 |
| 45,157 |
| | 1,617 |
|
| Deferred income tax assets | | 570 |
| | — |
|
| Investment in subsidiaries | 2,258,559 |
| | 1,857,502 |
| 2,554,954 |
| | 2,932,218 |
|
| Total assets | $ | 2,355,446 |
| | $ | 1,944,300 |
| $ | 2,600,681 |
| | $ | 2,933,835 |
|
| Liabilities and shareholders’ equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 608 |
| | $ | 63 |
| $ | 572 |
| | $ | 58 |
|
| Intercompany payables to subsidiaries | 7,465 |
| | 175 |
| |
| Intercompany accounts payable to subsidiaries | | 1,909 |
| | 12,552 |
|
| Intercompany notes payable to subsidiaries | | 23,216 |
| | 311,009 |
|
| Accrued expenses and other current liabilities | 1,219 |
| | 1,580 |
| 1,229 |
| | 1,782 |
|
| Total current liabilities | 9,292 |
| | 1,818 |
| 26,926 |
| | 325,401 |
|
| Pension obligations | 528 |
| | 475 |
| |
| Total liabilities | 9,820 |
| | 2,293 |
| 26,926 |
| | 325,401 |
|
| Total shareholders’ equity | 2,345,626 |
| | 1,942,007 |
| 2,573,755 |
| | 2,608,434 |
|
| Total liabilities and shareholders’ equity | $ | 2,355,446 |
| | $ | 1,944,300 |
| $ | 2,600,681 |
| | $ | 2,933,835 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Statements of Operations
(In thousands)
| | | | For the year ended | For the year ended December 31, |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | 2019 | | 2018 | | 2017 |
| Net revenue | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| Operating costs and expenses: | | | | | | | | | | |
| Selling, general and administrative | 6,894 |
| | 104 |
| | 618 |
| 8,860 |
| | 10,153 |
| | 6,894 |
|
| Total operating expenses | 6,894 |
| | 104 |
| | 618 |
| |
| Total operating costs and expenses | | 8,860 |
| | 10,153 |
| | 6,894 |
|
| Loss from operations | (6,894 | ) | | (104 | ) | | (618 | ) | (8,860 | ) | | (10,153 | ) | | (6,894 | ) |
| Interest income, net | 8 |
| | 72 |
| | — |
| |
| Intercompany dividend income | | 700,000 |
| | — |
| | — |
|
| Intercompany interest (expense)/income, net | | (23,294 | ) | | (4,709 | ) | | 8 |
|
| Other, net | (169 | ) | | 107 |
| | 60 |
| (21 | ) | | 474 |
| | (169 | ) |
| (Loss)/gain before income taxes and equity in net income of subsidiaries | (7,055 | ) | | 75 |
| | (558 | ) | |
| Equity in net income of subsidiaries | 415,412 |
| | 262,359 |
| | 348,254 |
| |
| Provision for income taxes | — |
| | — |
| | — |
| |
| Income/(loss) before income taxes and equity in net income of subsidiaries | | 667,825 |
| | (14,388 | ) | | (7,055 | ) |
| Equity in net (loss)/income of subsidiaries | | (401,715 | ) | | 613,383 |
| | 415,412 |
|
| Benefit from income taxes | | 16,604 |
| | — |
| | — |
|
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Statements of Comprehensive Income
(In thousands)
| | | | For the year ended | For the year ended December 31, |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | 2019 | | 2018 | | 2017 |
| Net income | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| $ | 282,714 |
| | $ | 598,995 |
| | $ | 408,357 |
|
| Other comprehensive loss, net of tax: | | | | | | |
| Other comprehensive income/(loss), net of tax: | | | | | | |
| Defined benefit plan | 77 |
| | 515 |
| | (22 | ) | — |
| | 535 |
| | 77 |
|
| Subsidiaries' other comprehensive loss | (29,174 | ) | | (8,592 | ) | | (14,220 | ) | |
| Other comprehensive loss | (29,097 | ) | | (8,077 | ) | | (14,242 | ) | |
| Subsidiaries' other comprehensive income/(loss) | | 5,694 |
| | 36,451 |
| | (29,174 | ) |
| Other comprehensive income/(loss) | | 5,694 |
| | 36,986 |
| | (29,097 | ) |
| Comprehensive income | $ | 379,260 |
| | $ | 254,357 |
| | $ | 333,454 |
| $ | 288,408 |
| | $ | 635,981 |
| | $ | 379,260 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Statements of Cash Flows
(In thousands)
| | | | For the year ended | For the year ended December 31, |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | 2019 | | 2018 | | 2017 |
| Net cash used in operating activities | $ | (9,186 | ) | | $ | (4,756 | ) | | $ | (25,576 | ) | $ | (14,989 | ) | | $ | (14,253 | ) | | $ | (9,109 | ) |
| Cash flows from investing activities: | | | | | | | | | | |
| Return of capital from subsidiaries | 5,077 |
| | 6,000 |
| | 6,100 |
| — |
| | — |
| | 5,000 |
|
| Dividends received from subsidiary | | 700,000 |
| | — |
| | — |
|
| Net cash provided by investing activities | 5,077 |
| | 6,000 |
| | 6,100 |
| 700,000 |
| | — |
| | 5,000 |
|
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 7,450 |
| | 3,944 |
| | 19,411 |
| 15,150 |
| | 6,093 |
| | 7,450 |
|
| (Payments on)/proceeds from intercompany borrowings | | (344,018 | ) | | 410,190 |
| | — |
|
| Payments to repurchase ordinary shares | (2,910 | ) | | (4,752 | ) | | (50 | ) | (350,004 | ) | | (399,417 | ) | | — |
|
| Net cash provided by/(used in) financing activities | 4,540 |
| | (808 | ) | | 19,361 |
| |
| Payments of employee restricted stock tax withholdings | | (6,990 | ) | | (3,674 | ) | | (2,910 | ) |
| Net cash (used in)/provided by financing activities | | (685,862 | ) | | 13,192 |
| | 4,540 |
|
| Net change in cash and cash equivalents | 431 |
| | 436 |
| | (115 | ) | (851 | ) | | (1,061 | ) | | 431 |
|
| Cash and cash equivalents, beginning of year | 1,719 |
| | 1,283 |
| | 1,398 |
| 1,089 |
| | 2,150 |
| | 1,719 |
|
| Cash and cash equivalents, end of year | $ | 2,150 |
| | $ | 1,719 |
| | $ | 1,283 |
| $ | 238 |
| | $ | 1,089 |
| | $ | 2,150 |
|
The accompanying notes are an integral part of these condensed financial statements.
1. Basis of Presentation and Description of Business
Sensata Technologies Holding N.V.plc (Parent Company)—Schedule I—Condensed Financial Information of Sensata Technologies Holding N.V. (“plc ("Sensata N.V.”plc"), included in this Annual Report on Form 10-K (this "Report"), provides all parent company information that is required to be presented in accordance with the U.S.United States (the "U.S.") Securities and Exchange Commission (“SEC”("SEC") rules and regulations for financial statement schedules. The accompanying condensed financial statements have been prepared in accordance with the reduced disclosure requirements permitted by the SEC. Sensata N.V.plc and subsidiaries' audited consolidated financial statements are included elsewhere in this Annual ReportReport.
On September 28, 2017, the Board of Directors of Sensata Technologies Holding N.V. ("Sensata N.V.") unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on Form 10-K.February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the surviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and the Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata N.V.plc conducts limited separate operations and acts primarily as a holding company. Sensata N.V.plc has no direct outstanding debt obligations. However, Sensata Technologies B.V,B.V., an indirect, wholly-owned subsidiary of Sensata N.V.,plc, is limited in its ability to pay dividends or otherwise make other distributions to its immediate parent company and, ultimately, to Sensata N.V.,plc, under its senior secured credit facilities and the indentures governing its senior notes. For a discussion of the debt obligations of the subsidiaries of Sensata N.V., seeplc, refer to Note 8,14, "Debt," of theSensata plc and subsidiaries' audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V. are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being the surviving entity (the “Merger”"Consolidated Financial Statements").
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
All U.S. dollar amounts presented except per share amounts are stated in thousands, unless otherwise indicated.
2. Commitments and Contingencies
For a discussion of the commitments and contingencies of the subsidiaries of Sensata N.V., seeplc, refer to Note 14,15, "Commitments and Contingencies," of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Consolidated Financial Statements.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
| | | | | | | | | | | | | | | |
| | Balance at the Beginning of the Period | | Additions | | Deductions | | Balance at the End of the Period |
Charged, Net of Reversals, to Expenses/Against Revenue | |
| For the year ended December 31, 2019 | | | | | | | |
| Accounts receivable allowances | $ | 13,762 |
| | $ | 3,005 |
| | $ | (1,638 | ) | | $ | 15,129 |
|
| For the year ended December 31, 2018 | | | | | | | |
| Accounts receivable allowances | $ | 12,947 |
| | $ | 2,194 |
| | $ | (1,379 | ) | | $ | 13,762 |
|
| For the year ended December 31, 2017 | | | | | | | |
| Accounts receivable allowances | $ | 11,811 |
| | $ | 2,205 |
| | $ | (1,069 | ) | | $ | 12,947 |
|
|
| | | | | | | | | | | | | | | |
| | Balance at the beginning of the period | | Additions | | Deductions | | Balance at the end of the period |
Charged, net of reversals, to expenses/against revenue | |
| For the year ended December 31, 2017 | | | | | | | |
| Accounts receivable allowances | $ | 11,811 |
| | $ | 2,205 |
| | $ | (1,069 | ) | | $ | 12,947 |
|
| For the year ended December 31, 2016 | | | | | | | |
| Accounts receivable allowances | $ | 9,535 |
| | $ | 3,072 |
| | $ | (796 | ) | | $ | 11,811 |
|
| For the year ended December 31, 2015 | | | | | | | |
| Accounts receivable allowances | $ | 10,364 |
| | $ | 2,424 |
| | $ | (3,253 | ) | | $ | 9,535 |
|
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
The required certifications of our Chief Executive Officer and Chief Financial Officer are included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, management's report on internal control over financial reporting, and changes in internal control over financial reporting referred to in these certifications. These certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.
Evaluation of Disclosure Controls and Procedures
With the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017.2019. The term “disclosure"disclosure controls and procedures,”" as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC'sU.S. Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2017,2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter of the year ended December 31, 20172019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of Sensata Technologies Holding plc (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management, Board of Directors, and shareholders regarding the preparation and fair presentation of the Company’s published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
There are inherent limitations to the effectiveness of any system of internal control over financial reporting. Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation in accordance with accounting principles generally accepted in the United States of America. Our internal controls over financial reporting are subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2019. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in May 2013.
Based on the results of this assessment, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of December 31, 2017,2019, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K.
Hengelo, The NetherlandsSwindon, United Kingdom
February 1, 201811, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Sensata Technologies Holding N.V.plc
Opinion on Internal Control over Financial Reporting
We have audited Sensata Technologies Holding N.V.’splc’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Sensata Technologies Holding N.V.plc (the Company) maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Sensata Technologies Holding N.V.the Company as of December 31, 20172019 and 2016, and2018, the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’shareholders' equity for each of the three years in the period ended December 31, 2017 of2019, and the Companyrelated notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”), and our report dated February 1, 201811, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| | | |
/s/ ERNSTErnst & YOUNGYoung LLP | | | |
Boston, Massachusetts
February 1, 2018
11, 2020
| |
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this Item 10 is incorporated herein by reference from the Company's Definitive Proxy Statement of Sensata Technologies Holding plc (the "Company"), to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2017.2019.
| |
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated herein by reference from the Company's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2017.2019.
| |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item 12 is incorporated herein by reference from the Company's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2017.2019.
| |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 is incorporated herein by reference from the Company's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2017.2019.
| |
| ITEM 14. | PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES |
The information required by this Item 14 is incorporated herein by reference from the Company's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2017.2019.
PART IV
| |
| ITEM 15. | EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES |
(a)
| |
| 1. | Financial Statements — See “Financial Statements”"Financial Statements" under Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. |
| |
| 2. | Financial Statement Schedules — See “Financial"Financial Statement Schedules”Schedules" under Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. |
EXHIBIT INDEX
|
| | |
| 2.1 | | |
| | |
| 2.2 | | |
| | | |
| 3.1 | | |
| | | |
| 4.1 | | |
| | | |
| 4.2 | | |
| | | |
| 4.3 | | |
| | | |
| 4.4 | | |
| | | |
| 4.5 | | |
| | | |
| 4.6 | | |
| | | |
| 4.7 | | |
| | | |
| 4.8 | | |
| | | |
| 4.9 | | |
| | | |
| 4.10 | | |
| | | |
| 4.13 | | |
| | |
| 4.14 | | |
| | |
| 4.15 | | |
| | |
| 10.1 | | |
| | | |
| 10.2 | | |
| | |
10.3 | | |
| | |
10.4 | | |
| | | |
10.510.3 | | |
| | | |
10.610.4 | | Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., Morgan Stanley Senior Funding, Inc., as administrative agent, the initial l/c issuer and initial swing line lender named therein, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652). |
| | | |
10.710.5 | | Domestic Guaranty, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc., Sensata Technologies Massachusetts, Inc. and each of the Additional Guarantors from time to time made a party thereto in favor of the Secured Parties (as defined therein) (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652). |
| | | |
10.810.6 | | |
| | | |
10.910.7 | | Foreign Guaranty, dated as of May 12, 2011, made by each of Sensata Technologies Holding Company US B.V., Sensata Technologies Holland, B.V., Sensata Technologies Holding Company Mexico, B.V., Sensata Technologies de México, S. de R.L. de C.V., Sensata Technologies Japan Limited, Sensata Technologies Malaysia Sdn. Bhd. and each of the Additional Guarantors from time to time made a party thereto in favor of the Secured Parties (as defined therein) (incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652). |
| | | |
10.1010.8 | | Patent Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.5 of the Registrant's Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652). |
| | | |
10.1110.9 | | Trademark Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652). |
| | | |
10.12 |
| | |
| 10.10 | | |
| | | |
10.1310.11 | | Domestic Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.8 of the Registrant's Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652). |
| | | |
10.1410.12 | | |
| | | |
10.1510.13 | | |
| | | |
|
| | |
10.1610.14 | | Amendment No. 1 to Credit Agreement dated as of December 6, 2012, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc., and Barclays Bank PLC (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on December 10, 2012)2012, Commission File No. 001-34652). |
| | | |
10.1710.15 | | |
| | |
10.18 | | |
| | |
10.19 | | |
| | | |
10.2010.16 | | |
| | | |
10.2110.17 | | |
| | | |
10.2210.18 | | |
| | |
10.23 | | |
| | |
10.24 | | Amendment No. 2 to Credit Agreement dated as of December 11, 2013, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, and Morgan Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on December 11, 2013). |
| | | |
10.2510.19 | | |
| | | |
10.2610.20 | | |
| | |
10.27 | | |
| | |
10.28 | | |
| | |
10.29 | | Amendment No. 3 to Credit Agreement dated as of October 14, 2014, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Barclays Bank PLC and the other lenders party thereto, and Morgan Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on October 17, 2014). |
| | | |
10.3010.21 | | Amendment No. 4 to Credit Agreement, dated as of November 4, 2014, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on November 10, 2014). |
| | | |
|
| | |
10.3110.22 | | Amendment No. 5 to Credit Agreement, dated as of March 26, 2015, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on April 1, 2015). |
| | | |
10.32 |
| | |
| 10.23 | | Amendment No. 6 to Credit Agreement dated as of May 11, 2015, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., Morgan Stanley Senior Funding, Inc. and Barclays Bank PLC as joint lead arrangers and bookrunners, Morgan Stanley Senior Funding, Inc. as administrative agent on behalf of the lenders party to the Credit Agreement, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on May 14, 2015). |
| | | |
10.3310.24 | | |
| | |
10.34 | | Amendment No. 7 to Credit Agreement, dated as of September 29, 2015, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on October 2, 2015). |
| | | |
10.3510.25 | | |
| | | |
10.3610.26 | | |
| | | |
10.3710.27 | | |
| | | |
10.3810.28 | | Amendment No. 8 to Credit Agreement, dated as of November 7, 2017, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on November 14, 2017) |
| | |
| 10.29 | | |
| | |
| 10.30 | | |
| | |
| 10.31 | | Amendment No. 9 to Credit Agreement, dated as of March 27, 2019, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on April 2, 2019, Commission File Number 001-34652). |
| | |
| 10.32 | | |
| | |
| 10.33 | | |
| | |
| 10.34 | | |
| | |
| 10.35 | | Amendment No. 10 to Credit Agreement and Amendment No. 1 to Domestic Guaranty and Foreign Guaranty, dated as of September 20, 2019, by and among Sensata Technologies Inc., Sensata Technologies Intermediate Holding B.V., Sensata Technologies B.V., the other guarantors party thereto, Morgan Stanley Senior Funding, Inc., and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on September 26, 2019). |
| | | |
| 21.1 | | |
| | | |
| 23.1 | | |
| | | |
| 31.1 | | |
| | | |
|
| | |
| 31.2 | | |
| | | |
| 32.1 | | |
| | | |
101101.INS | | The following materials from Sensata's Annual Report on Form 10-K forInline XBRL Instance Document - the year ended December 31, 2017, formattedinstance document does not appear in the Interactive Data File because its XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations fortags are embedded within the years ended December 31, 2017, 2016,Inline XBRL document. |
| | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. * |
| | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * |
| | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. * |
| | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. * |
| | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * |
| | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and 2015, (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015, (iii) Consolidated Balance Sheets at December 31, 2017 and 2016, (iv) Consolidated Statements of Changescontained in Shareholders’ Equity for the years ended December 31, 2017, 2016, and 2015, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015, (vi) the Notes to Consolidated Financial Statements, (vii) Schedule I — Condensed Financial Information of the Registrant and (viii) Schedule II — Valuation and Qualifying Accounts.Exhibit 101) |
____________________
† Indicates management contract or compensatory plan, contract or arrangement.
‡ There have been non-material modifications to this contract since inception
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | | SENSATA TECHNOLOGIES HOLDING N.V.PLC |
| | | |
| | | | /s/ MARTHA SULLIVAN |
| | By: | | Martha Sullivan |
| | Its: | President and | Chief Executive Officer |
| | | |
| Date: | | February 11, 2020 |
Date: February 1, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| SIGNATURE | | TITLE | | DATE |
| | | | | |
/S/s/ MARTHA SULLIVAN | | President, Chief Executive Officer and Director (Principal | | February 11, 2020 |
| Martha Sullivan | | (Principal Executive Officer) | | February 1, 2018 |
Martha Sullivan | | | | |
| /s/ PAUL VASINGTON | | Executive Vice President and Chief Financial Officer | | February 11, 2020 |
| Paul Vasington | | (Principal Financial Officer and Principal Accounting Officer) | | |
| | | | |
| /s/ ANDREW TEICH | | Chairman of the Board of Directors | | February 11, 2020 |
| Andrew Teich | | | | |
| | | | | |
/S/ PAUL VASINGTON s/ JOHN ABSMEIER | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Director | | February 1, 201811, 2020 |
Paul VasingtonJohn Absmeier | | | | |
| | | | | |
/S/s/ PAUL EDGERLEY | | Chairman of the Board of DirectorsDirector | | February 1, 201811, 2020 |
| Paul Edgerley | | | | |
| | | | | |
/S/ BEDA BOLZENIUS s/ JAMES HEPPELMANN | | Director | | February 1, 2018 |
Beda Bolzenius | | | | |
| | | | |
/S/ JAMES HEPPELMANN
| | Director | | February 1, 201811, 2020 |
| James Heppelmann | | | | |
| | | | | |
/S/s/ CHARLES PEFFER | | Director | | February 1, 201811, 2020 |
| Charles Peffer | | | | |
| | | | | |
/S/ KIRK POND s/ CONSTANCE SKIDMORE | | Director | | February 1, 2018 |
Kirk Pond | | | | |
| | | | |
/S/ CONSTANCE SKIDMORE
| | Director | | February 1, 201811, 2020 |
| Constance Skidmore | | | | |
| | | | | |
/S/ ANDREW TEICH s/ THOMAS WROE | | Director | | February 1, 2018 |
Andrew Teich | | | | |
| | | | |
/S/ THOMAS WROE
| | Director | | February 1, 201811, 2020 |
| Thomas Wroe | | | | |
| | | | | |
/S/s/ STEPHEN ZIDE | | Director | | February 1, 201811, 2020 |
| Stephen Zide | | | | |
| | | | | |
/S/s/ MARTHA SULLIVAN | | Authorized Representative in the United States | | February 1, 201811, 2020 |
| Martha Sullivan | | | | |
