SENSATA TECHNOLOGIES HOLDING PLC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________________
FORM 10-Q
_________________________________________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 001-34652
_________________________________________________________________________________
(Exact name of registrant as specified in its charter)
_________________________________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||
Indicate by 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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 15, 2022, 156,917,754 ordinary shares were outstanding.
TABLE OF CONTENTS
| PART I | |||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
2
PART I—FINANCIAL INFORMATION
Item 1.Financial Statements.
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(unaudited)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
Other intangible assets, net of accumulated amortization of $ | |||||||||||
| Deferred income tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt, finance lease and other financing obligations | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Income taxes payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Pension and other post-retirement benefit obligations | |||||||||||
| Finance lease and other financing obligations, less current portion | |||||||||||
| Long-term debt, net | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Shareholders’ equity: | |||||||||||
Ordinary shares, € | |||||||||||
Treasury shares, at cost, | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Net revenue | $ | $ | |||||||||
| Operating costs and expenses: | |||||||||||
| Cost of revenue | |||||||||||
| Research and development | |||||||||||
| Selling, general and administrative | |||||||||||
| Amortization of intangible assets | |||||||||||
| Restructuring and other charges, net | |||||||||||
| Total operating costs and expenses | |||||||||||
| Operating income | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Income before taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Basic net income per share | $ | $ | |||||||||
| Diluted net income per share | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income: | |||||||||||
| Cash flow hedges | |||||||||||
| Defined benefit and retiree healthcare plans | |||||||||||
| Other comprehensive income | |||||||||||
| Comprehensive income | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Share-based compensation | |||||||||||
| Loss on debt financing | |||||||||||
| Amortization of intangible assets | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Acquisition-related compensation payments | ( | ||||||||||
| Mark-to-market loss on equity investments, net | |||||||||||
| Unrealized (gain)/loss on derivative instruments and other | ( | ||||||||||
| Changes in operating assets and liabilities, net of the effects of acquisitions: | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Income taxes payable | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash received | ( | ( | |||||||||
| Additions to property, plant and equipment and capitalized software | ( | ( | |||||||||
| Investment in debt and equity securities | ( | ( | |||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from exercise of stock options and issuance of ordinary shares | |||||||||||
| Payment of employee restricted stock tax withholdings | ( | ( | |||||||||
| Proceeds from borrowings on debt | |||||||||||
| Payments on debt | ( | ( | |||||||||
| Payments to repurchase ordinary shares | ( | ||||||||||
| Payments of debt financing costs | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of year | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Changes in Shareholders' Equity
(In thousands)
(unaudited)
| Ordinary Shares | Treasury Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Surrender of shares for tax withholding | — | — | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted securities | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Retirement of ordinary shares | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Ordinary Shares | Treasury Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Surrender of shares for tax withholding | — | — | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted securities | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Retirement of ordinary shares | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc, a public limited company incorporated under the laws of England and Wales, and its consolidated subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," or "us."
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q. Accordingly, these interim financial statements do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements. The accompanying financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the interim period results. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 10, 2022 (the "2021 Annual Report").
All U.S. dollar ("USD") and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated.
2. New Accounting Standards
3. Revenue Recognition
The following table presents net revenue disaggregated by segment and end market for the three months ended March 31, 2022 and 2021:
| For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Performance Sensing | Sensing Solutions | Total | Performance Sensing | Sensing Solutions | Total | |||||||||||||||||||||||||||||||||
| Automotive | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
HVOR (1) | ||||||||||||||||||||||||||||||||||||||
| Industrial | ||||||||||||||||||||||||||||||||||||||
Appliance and HVAC (2) | ||||||||||||||||||||||||||||||||||||||
| Aerospace | ||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
________________________
(1) Heavy vehicle and off-road
(2) Heating, ventilation and air conditioning
4. Share-Based Payment Plans
The following table presents the components of non-cash compensation expense related to our equity awards for the three months ended March 31, 2022 and 2021:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Stock options | $ | $ | |||||||||
| Restricted securities | |||||||||||
| Share-based compensation expense | $ | $ | |||||||||
8
5. Restructuring and Other Charges, Net
The following table presents the components of restructuring and other charges, net for the three months ended March 31, 2022 and 2021:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
Q2 2020 Global Restructure Program charges | $ | $ | |||||||||
| Other restructuring and other charges, net | |||||||||||
| Severance costs, net | |||||||||||
| Facility and other exit costs | |||||||||||
Other (1) | |||||||||||
| Restructuring and other charges, net | $ | $ | |||||||||
________________________
(1) Primarily includes expenses related to acquisition-related incentive compensation, partially offset by a gain resulting from reduction of the liability for contingent consideration for Spear Power Systems ("Spear"). Refer to Note 16: Acquisitions for additional information.
The following table presents a rollforward of the severance portion of our restructuring obligations for the three months ended March 31, 2022.
| Q2 2020 Global Restructure Program | Other | Total | |||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ||||||||||||||
| Charges, net of reversals | |||||||||||||||||
| Payments | ( | ( | ( | ||||||||||||||
| Foreign currency remeasurement | ( | ||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ||||||||||||||
The severance liability as of March 31, 2022 was entirely recorded in accrued expenses and other current liabilities on our condensed consolidated balance sheet.
6. Other, Net
The following table presents the components of other, net for the three months ended March 31, 2022 and 2021:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Currency remeasurement loss on net monetary assets | $ | ( | $ | ( | |||||||
| Loss on foreign currency forward contracts | ( | ( | |||||||||
| Gain/(loss) on commodity forward contracts | ( | ||||||||||
| Loss on debt financing | ( | ||||||||||
| Mark-to-market loss on investments, net | ( | ||||||||||
| Net periodic benefit cost, excluding service cost | ( | ( | |||||||||
| Other | ( | ||||||||||
| Other, net | $ | ( | $ | ( | |||||||
7. Income Taxes
The following table presents the provision for income taxes for the three months ended March 31, 2022 and 2021:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Provision for income taxes | $ | $ | |||||||||
9
The decrease in total tax for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was predominantly related to the overall decrease in income before taxes, driven in part by the mark-to-market loss on our investment in Quanergy as discussed in Note 14: Fair Value Measures.
The provision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in tax jurisdictions with limited or no net operating loss carryforwards and withholding taxes related to management fees, royalties, and the repatriation of foreign earnings; and (2) deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to (a) book versus tax basis in intangible assets, (b) changes in net operating loss carryforwards, (c) changes in tax rates, and (d) changes in our assessment of the realizability of our deferred tax assets.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the three months ended March 31, 2022 and 2021 the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Basic weighted-average ordinary shares outstanding | |||||||||||
| Dilutive effect of stock options | |||||||||||
| Dilutive effect of unvested restricted securities | |||||||||||
| Diluted weighted-average ordinary shares outstanding | |||||||||||
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. These potential ordinary shares were as follows:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Anti-dilutive shares excluded | |||||||||||
| Contingently issuable shares excluded | |||||||||||
9. Inventories
The following table presents the components of inventories as of March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Inventories | $ | $ | |||||||||
10
10. Pension and Other Post-Retirement Benefits
The following table presents the components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the three months ended March 31, 2022 and 2021:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||||||||||||||
| Defined Benefit | Retiree Healthcare | Defined Benefit | Total | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Amortization of net loss | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service (credit)/cost | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Loss on settlement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net periodic benefit cost/(credit) | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Components of net periodic benefit cost/(credit) other than service cost are presented in other, net in the condensed consolidated statements of operations. Refer to Note 6: Other, Net.
11. Debt
The following table presents the components of long-term debt, finance lease and other financing obligations as of March 31, 2022 and December 31, 2021:
| Maturity Date | March 31, 2022 | December 31, 2021 | ||||||||||||||||||
| Term Loan | September 20, 2026 | $ | $ | |||||||||||||||||
| October 15, 2023 | ||||||||||||||||||||
| November 1, 2024 | ||||||||||||||||||||
| October 1, 2025 | ||||||||||||||||||||
| February 15, 2030 | ||||||||||||||||||||
| February 15, 2031 | ||||||||||||||||||||
| April 15, 2029 | ||||||||||||||||||||
| Less: debt discount, net of premium | ( | ( | ||||||||||||||||||
| Less: deferred financing costs | ( | ( | ||||||||||||||||||
| Less: current portion | ( | ( | ||||||||||||||||||
| Long-term debt, net | $ | $ | ||||||||||||||||||
| Finance lease and other financing obligations | $ | $ | ||||||||||||||||||
| Less: current portion | ( | ( | ||||||||||||||||||
| Finance lease and other financing obligations, less current portion | $ | $ | ||||||||||||||||||
As of March 31, 2022, we had $416.1 million available under our $420.0 million revolving credit facility (the "Revolving Credit Facility"), net of $3.9 million of obligations in respect of outstanding letters of credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of March 31, 2022, no amounts had been drawn against these outstanding letters of credit.
In the three months ended March 31, 2021, in connection with the redemption of $750.0 million aggregate principal amount of 6.25 % senior notes due 2026 (the "6.25% Senior Notes"), we recognized a loss of $30.1 million, which included $23.4 million in premiums paid, with the remaining loss representing write-off of debt discounts and deferred financing costs.
Accrued Interest
Accrued interest associated with our outstanding debt is included as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets. As of March 31, 2022 and December 31, 2021, accrued interest totaled $63.1 million and $45.1 million, respectively.
11
12. Commitments and Contingencies
13. Shareholders' Equity
Treasury Shares
From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by the Board at any time. On January 20, 2022, we announced that our Board of Directors had authorized a new $500.0 million ordinary share repurchase program (the “January 2022 Program”), which replaced the previous $500.0 million program approved in July 2019, which had availability of $254.5 million as of December 31, 2021. As of March 31, 2022, $449.5 million remained available for repurchase under the January 2022 Program.
Accumulated Other Comprehensive Loss
The following table presents the components of accumulated other comprehensive loss for the three months ended March 31, 2022:
| Cash Flow Hedges | Defined Benefit and Retiree Healthcare Plans | Accumulated Other Comprehensive Loss | ||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income before reclassifications, net of tax | ||||||||||||||||||||
| Reclassifications from accumulated other comprehensive loss, net of tax | ( | ( | ||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | ( | $ | ( | |||||||||||||||
The following table presents the amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021:
| For the three months ended March 31, | Affected Line in Condensed Consolidated Statements of Operations | |||||||||||||||||||
| Component | 2022 | 2021 | ||||||||||||||||||
| Derivative instruments designated and qualifying as cash flow hedges: | ||||||||||||||||||||
| Foreign currency forward contracts | $ | ( | $ | Net revenue (1) | ||||||||||||||||
| Foreign currency forward contracts | ( | ( | Cost of revenue (1) | |||||||||||||||||
| Total, before taxes | ( | Income before taxes | ||||||||||||||||||
| Income tax effect | ( | Provision for income taxes | ||||||||||||||||||
| Total, net of taxes | $ | ( | $ | Net income | ||||||||||||||||
| Defined benefit and retiree healthcare plans | $ | $ | Other, net (2) | |||||||||||||||||
| Income tax effect | ( | ( | Provision for income taxes | |||||||||||||||||
| Total, net of taxes | $ | $ | Net income | |||||||||||||||||
__________________________
(1) Refer to Note 15: Derivative Instruments and Hedging Activities for additional information on amounts to be reclassified from accumulated other comprehensive loss in future periods.
(2) Refer to Note 10: Pension and Other Post-Retirement Benefits for additional information on net periodic benefit cost/(credit).
12
14. Fair Value Measures
Measured on a Recurring Basis
The fair values of our assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 are shown in the below table. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Foreign currency forward contracts | $ | $ | |||||||||
| Commodity forward contracts | |||||||||||
| Total | $ | $ | |||||||||
| Liabilities | |||||||||||
| Foreign currency forward contracts | $ | $ | |||||||||
| Commodity forward contracts | |||||||||||
| Total | $ | $ | |||||||||
Refer to Note 15: Derivative Instruments and Hedging Activities for additional information related to our forward contracts.
Quanergy
As of December 31, 2021, we held a $50.0 million investment in Quanergy Systems, Inc. ("Quanergy") Series B Preferred Stock. This equity investment did not have a readily determinable fair value and it was held using the measurement alternative prescribed in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 321, Investments - Equity Securities. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
On June 22, 2021, Quanergy announced that it had entered into a definitive business combination agreement with CITIC Capital Acquisition Corp ("CITIC") (NYSE: CCAC). On July 16, 2021, CITIC filed a Registration Statement on Form S-4 with the SEC, the effectiveness of which was a condition to closing of the business combination. At December 31, 2021, we assessed our investment in Quanergy based on the proposed terms of the business combination agreement and concluded that there were no indicators of impairment.
On January 6, 2022, the related Registration Statement on Form S-4 was declared effective by the SEC. An Extraordinary General Meeting of shareholders of CITIC was held on January 31, 2022, at which time the business combination was approved. The business combination closed on February 8, 2022. Beginning on February 9, 2022, the combined company, which retained the name "Quanergy Systems, Inc.," was listed on the New York Stock Exchange (the "NYSE") under the ticker symbol QNGY.
Upon closing of the business combination, our investment in Quanergy comprised the following:
•5.0 million common shares, which represented the conversion of our $50 million Series B Preferred Stock investment (at a $10 per share implied valuation);
•750,000 unregistered common shares, representing a $7.5 million private investment in public equity ("PIPE") contribution; and
•2.5 million common shares (the "Warrant Shares"), representing the conversion of 2.5 million warrants provided by Quanergy as up-front consideration for a four-year technical and marketing support agreement (the "Support Agreement").
The 5.75 million common share investment in Quanergy (excluding the Warrant Shares) have a historical cost basis of $57.5 million. The Warrant Shares were converted at a share price of $7.05 per share (the closing market price on February 8, 2022), or approximately $17.6 million, which was recorded as deferred income. Refer to below discussion for additional details on the Support Agreement. Refer to the below table for a summary of our investment in Quanergy as of March 31, 2022,
13
February 8, 2022, and December 31, 2021, which is presented in other assets on our consolidated balance sheets as of March 31, 2022 and December 31, 2021.
| As of | ||||||||||||||||||||
| March 31, 2022 | February 8, 2022 | December 31, 2021 | ||||||||||||||||||
| Series B Preferred Stock | $ | $ | $ | |||||||||||||||||
| Common shares | ||||||||||||||||||||
| PIPE investment | ||||||||||||||||||||
| Warrant Shares | ||||||||||||||||||||
| Total equity investment in Quanergy | $ | $ | $ | |||||||||||||||||
| For the three months ended March 31, 2022 | ||||||||||||||||||||
| Mark-to-market loss | $ | |||||||||||||||||||
The mark-to-market loss presented in the table above is presented in other, net, and is the result of the decline in Quanergy share price to $1.84 per share on March 31, 2022.
In exchange for the Warrant Shares, we entered into the Support Agreement, whereby we agreed to provide technical and marketing assistance to Quanergy for a term of four years from the effective date of February 8, 2022. We will recognize the consideration ($17.6 million) for the Support Agreement on a straight-line basis over the term of the agreement. We recognized approximately $0.7 million of income in the three months ended March 31, 2022 and will recognize approximately $1.1 million of income each quarter through the end of the term of the Support Agreement.
Measured on a Nonrecurring Basis
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2021 and determined that they were not impaired. During the three months ended March 31, 2022, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of these assets.
Financial Instruments Not Recorded at Fair Value
The following table presents the carrying values and fair values of financial instruments not recorded at fair value in the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
Carrying Value (1) | Fair Value | Carrying Value (1) | Fair Value | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Term Loan | $ | $ | $ | $ | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
___________________________________
(1) Excluding any related debt discounts, premiums, and deferred financing costs.
Cash and cash equivalents are carried at cost, which approximates fair value because of their short-term nature.
In addition to the above, we hold certain equity investments that do not have readily determinable fair values for which we use the measurement alternative prescribed in FASB ASC Topic 321. There were no impairments or changes resulting from observable transactions for any of these investments and no adjustments were made to their carrying values.
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Refer to the table below for the carrying values of equity investments using the measurement alternative, which are presented as a component of other assets in the condensed consolidated balance sheets.
| March 31, 2022 | December 31, 2021 | ||||||||||
Quanergy Systems, Inc. (1) | $ | — | $ | ||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
___________________________________
(1) As of March 31, 2022, Quanergy is no longer classified as an equity investment without a readily determinable fair value. See additional discussion under the heading Quanergy elsewhere in this Note.
15. Derivative Instruments and Hedging Activities
Hedges of Foreign Currency Risk
For the three months ended March 31, 2022 and 2021, amounts excluded from the assessment of effectiveness of our foreign currency forward contracts that are designated as cash flow hedges were not material. As of March 31, 2022, we estimated that $23.7 million of net gains will be reclassified from accumulated other comprehensive loss to earnings during the twelve-month period ending March 31, 2023.
As of March 31, 2022, we had the following outstanding foreign currency forward contracts:
| Notional (in millions) | Effective Date(s) | Maturity Date(s) | Index (Exchange Rates) | Weighted-Average Strike Rate | Hedge Designation (1) | |||||||||||||||||||||||||||
| March 29, 2022 | April 29, 2022 | Euro ("EUR") to USD | Not designated | |||||||||||||||||||||||||||||
| Various from May 2020 to March 2022 | Various from April 2022 to March 2024 | EUR to USD | Cash flow hedge | |||||||||||||||||||||||||||||
| Various in March 2022 | Various in April 2022 | USD to Chinese Renminbi ("CNY") | Not designated | |||||||||||||||||||||||||||||
| Various from October 2021 to March 2022 | Various from April 2022 to December 2022 | USD to CNY | Cash flow hedge | |||||||||||||||||||||||||||||
| March 29, 2022 | April 28, 2022 | USD to Japanese Yen ("JPY") | Not designated | |||||||||||||||||||||||||||||
| Various from May 2020 to March 2022 | Various from April 2022 to February 2024 | USD to Korean Won ("KRW") | Cash flow hedge | |||||||||||||||||||||||||||||
| March 28, 2022 | April 29, 2022 | USD to Malaysian Ringgit ("MYR") | Not designated | |||||||||||||||||||||||||||||
| March 29, 2022 | April 29, 2022 | USD to Mexican Peso ("MXN") | Not designated | |||||||||||||||||||||||||||||
| Various from May 2020 to March 2022 | Various from April 2022 to March 2024 | USD to MXN | Cash flow hedge | |||||||||||||||||||||||||||||
| Various from May 2020 to March 2022 | Various from April 2022 to March 2024 | British Pound Sterling ("GBP") to USD | Cash flow hedge | |||||||||||||||||||||||||||||
_________________________
(1) Derivative financial instruments not designated as hedges are used to manage our exposure to currency exchange rate risk. They are intended to preserve economic value, and they are not used for trading or speculative purposes.
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Hedges of Commodity Risk
As of March 31, 2022, we had the following outstanding commodity forward contracts, none of which were designated for hedge accounting treatment in accordance with FASB ASC Topic 815, Derivatives and Hedging:
| Commodity | Notional | Remaining Contracted Periods | Weighted-Average Strike Price Per Unit | |||||||||||||||||
| Silver | April 2022 - February 2024 | $ | ||||||||||||||||||
| Gold | April 2022 - February 2024 | $ | ||||||||||||||||||
| Nickel | April 2022 - February 2024 | $ | ||||||||||||||||||
| Aluminum | April 2022 - February 2024 | $ | ||||||||||||||||||
| Copper | April 2022 - February 2024 | $ | ||||||||||||||||||
| Platinum | April 2022 - February 2024 | $ | ||||||||||||||||||
| Palladium | April 2022 - February 2024 | $ | ||||||||||||||||||
Financial Instrument Presentation
The following table presents the fair values of our derivative financial instruments and their classification in the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021:
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
| Balance Sheet Location | March 31, 2022 | December 31, 2021 | Balance Sheet Location | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | $ | $ | Accrued expenses and other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other assets | Other long-term liabilities | |||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Commodity forward contracts | Prepaid expenses and other current assets | $ | $ | Accrued expenses and other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Commodity forward contracts | Other assets | Other long-term liabilities | |||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | Accrued expenses and other current liabilities | |||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
These fair value measurements were all categorized within Level 2 of the fair value hierarchy.
The following tables present the effect of our derivative financial instruments on the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three months ended March 31, 2022 and 2021:
| Derivatives designated as hedging instruments | Amount of Deferred Gain/(Loss) Recognized in Other Comprehensive Income | Location of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | Amount of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | Net revenue | $ | $ | ( | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | ( | Cost of revenue | $ | $ | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Amount of Gain/(Loss) Recognized in Net Income | Location of Gain/(Loss) Recognized in Net Income | ||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Commodity forward contracts | $ | $ | ( | Other, net | ||||||||||||||||
| Foreign currency forward contracts | $ | ( | $ | ( | Other, net | |||||||||||||||
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Credit Risk Related Contingent Features
We have agreements with our derivative counterparties that contain a provision whereby if we default on our indebtedness and repayment of the indebtedness has been accelerated by the lender, then we could also be declared in default on our derivative obligations.
16. Acquisitions
Spear Power Systems
On November 19, 2021, we acquired all of the equity interests of Spear, a leader in electrification solutions that supports our newly-established Clean Energy Solutions business unit, for an aggregate purchase price of $113.7 million, subject to certain post-closing items, including the discounted present value of contingent consideration. As of March 31, 2022, the present value of this contingent consideration was $2.3 million. Any gains or losses resulting from adjustments to contingent consideration are recorded in restructuring and other charges, net. We are integrating Spear into the Sensing Solutions reportable segment.
As of March 31, 2022, the allocation of purchase price of Spear is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets. The final allocation of the purchase price to the assets acquired will be completed when the final valuations are completed. Refer to Note 21: Acquisitions of the audited consolidated financial statements and notes thereto included in our 2021 Annual Report for detailed information regarding the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of December 31, 2021.
SmartWitness Holdings, Inc.
On November 19, 2021, we acquired all of the equity interests of SmartWitness Holdings, Inc. ("SmartWitness"), a privately held innovator of video telematics technology for heavy- and light-duty fleets, for an aggregate cash purchase price of $204.2 million, subject to certain post-closing items. In addition to the aggregate purchase price, we paid $8.6 million of cash at closing related to an employee retention arrangement, which was reflected as an operating cash outflow on our consolidated statement of cash flows for the year ended December 31, 2021. We are integrating SmartWitness into the Performance Sensing reportable segment.
As of March 31, 2022, the allocation of purchase price of SmartWitness is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets. The final allocation of the purchase price to the assets acquired will be completed when the final valuations are completed. Refer to Note 21: Acquisitions of the audited consolidated financial statements and notes thereto included in our 2021 Annual Report for detailed information regarding the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of December 31, 2021.
Elastic M2M Inc.
On February 11, 2022, we acquired all of the equity interests of Elastic M2M Inc. ("Elastic M2M") for an aggregate cash purchase price of $51.2 million, subject to certain post-closing items. In addition to the aggregate cash purchase price, the previous shareholders of Elastic M2M are entitled to up to $30.0 million additional acquisition-related incentive compensation, pending the completion of certain technical milestones in fiscal year 2022 and achievement of revenue targets in fiscal years 2022 and 2023. In the first quarter of 2022, we determined that $15.0 million of that acquisition-related incentive compensation was earned as all of the technical milestones were achieved. This amount is recorded in restructuring and other charges, net. We paid $7.5 million of this acquisition-related incentive compensation in the three months ended March 31, 2022, which is reflected as an operating cash outflow on our condensed consolidated statement of cash flows for the three months ended March 31, 2022.
Elastic M2M is a privately-held innovator of connected intelligence for operational assets across heavy-duty transport, warehouse, supply chain and logistics, industrial, light-duty passenger car, and a variety of other industry segments. Elastic M2M primarily serves telematics service providers and resellers, enabling them to leverage Elastic M2M’s cloud platform and analytics capabilities to deliver sensor-based operational insights to their end users. This acquisition augments our cloud capabilities critical to delivering actionable sensor-based insights, an increasingly important capability in this fast-growing industry segment. We are integrating Elastic M2M into the Performance Sensing reportable segment.
17
17. Segment Reporting
We present financial information for two reportable segments, Performance Sensing and Sensing Solutions. The Performance Sensing reportable segment consists of two operating segments, Automotive and HVOR, which meet the criteria for aggregation in FASB ASC Topic 280, Segment Reporting. The Sensing Solutions reportable segment is also an operating segment.
Our operating segments are businesses that we manage as components of an enterprise, for which separate financial information is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance.
An operating segment’s performance is primarily evaluated based on segment operating income, which excludes amortization of intangible assets, restructuring and other charges, net, certain costs associated with our strategic megatrend initiatives, and certain corporate costs or credits not associated with the operations of the segment, including share-based compensation expense and a portion of depreciation expense associated with assets recognized in connection with acquisitions. Corporate and other costs excluded from an operating (and reportable) segment’s performance are separately stated below and also include costs that are related to functional areas such as finance, information technology, legal, and human resources. We believe that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, and not as a substitute for, or superior to, operating income or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of each of our operating and reportable segments are materially consistent with those described in Note 2: Significant Accounting Policies of the audited consolidated financial statements and notes thereto included in our 2021 Annual Report.
The following table presents net revenue and segment operating income for our reportable segments and other operating results not allocated to our reportable segments for the three months ended March 31, 2022 and 2021:
| For the three months ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| Net revenue: | |||||||||||
| Performance Sensing | $ | $ | |||||||||
| Sensing Solutions | |||||||||||
| Total net revenue | $ | $ | |||||||||
| Segment operating income (as defined above): | |||||||||||
| Performance Sensing | $ | $ | |||||||||
| Sensing Solutions | |||||||||||
| Total segment operating income | |||||||||||
| Corporate and other | ( | ( | |||||||||
| Amortization of intangible assets | ( | ( | |||||||||
| Restructuring and other charges, net | ( | ( | |||||||||
| Operating income | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Income before taxes | $ | $ | |||||||||
18. Subsequent Events
On April 22, 2022, we signed a stock purchase agreement to acquire Dynapower Company, LLC ("Dynapower"), a leading provider of high-voltage power conversion solutions for clean energy segments, for an aggregate cash purchase price of $580 million, subject to working capital and other adjustments. We expect to complete the acquisition in the third quarter of 2022, subject to regulatory approvals and other customary closing conditions. We intend to fund the transaction using available cash on hand.
Dynapower is a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and
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19
Cautionary Statements Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by terminology such as "may," "will," "could," "should," "expect," "anticipate," "believe," "estimate," "predict," "project," "forecast," "continue," "intend," "plan," "potential," "opportunity," "guidance," and similar terms or phrases. Forward-looking statements involve, among other things, expectations, projections, and assumptions about future financial and operating results, objectives, business and market outlook, megatrends, priorities, growth, shareholder value, capital expenditures, cash flows, demand for products and services, share repurchases, and Sensata’s strategic initiatives, including those relating to acquisitions and dispositions and the impact of such transactions on our strategic and operational plans and financial results. These statements are subject to risks, uncertainties, and other important factors relating to our operations and business environment, and we can give no assurances that these forward-looking statements will prove to be correct.
A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by these forward-looking statements, including, but not limited to, risks related to public health crises, instability and changes in the global markets, supplier interruption or non-performance, the acquisition of disposition of businesses, adverse conditions or competition in the industries upon which we are dependent, intellectual property, product liability, warranty, and recall claims, market acceptance of new product introductions and product innovations, labor disruptions or increased labor costs, and changes in existing environmental or safety laws, regulations, and programs.
Investors and others should carefully consider the foregoing factors and other uncertainties, risks and potential events including, but not limited to, those described in Item 1A: Risk Factors included in our 2021 Annual Report and as may be updated from time to time in Item 1A: Risk Factors in our quarterly reports on Form 10-Q or other subsequent filings with the SEC. All such forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update these statements other than as required by law.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations supplements, and should be read in conjunction with, the discussion in Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report. The following discussion should also be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the following discussions have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
Overview
In the first quarter of 2022, our net revenue increased 3.5% from the first quarter of 2021. This revenue growth was primarily driven by outgrowth to market and revenue from acquisitions completed in 2021, offset somewhat by market declines. In addition, we continued to drive new business wins, most of which were in areas representing our megatrend initiatives, and which will help drive future revenue growth.
Operating income decreased $31.5 million to $125.9 million (12.9% of net revenue) in the first quarter of 2022, compared to $157.5 million (16.7% of net revenue) in the prior year period. Refer to discussion under the heading Results of Operations elsewhere in this Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
Income before taxes decreased to $30.0 million in the first quarter of 2022, compared to $74.0 million in the first quarter of 2021. Much of this decline related to a mark-to-market loss on our investment in Quanergy as discussed further under the heading Quanergy below. Global supply chain disruptions and shortages continue to pressure our margins; however, we have made progress in recovering some of these additional costs from our customers through increased pricing.
Acquisitions
In the first quarter of 2022, we completed the strategic acquisition of Elastic M2M for $51.2 million. Elastic M2M is a privately-held innovator of connected intelligence for operational assets across heavy-duty transport, warehouse, supply chain and logistics, industrial, light-duty passenger car, and a variety of other industry segments. Elastic M2M primarily serves telematics service providers and resellers, enabling them to leverage Elastic M2M’s cloud platform and analytics capabilities to deliver sensor-based operational insights to their end users. This acquisition augments our cloud capabilities critical to delivering actionable sensor-based insights, an increasingly important capability in this fast-growing industry segment.
On April 22, 2022, we signed a stock purchase agreement to acquire Dynapower, a leading provider of high-voltage power conversion solutions for clean energy segments, for an aggregate cash purchase price of $580 million, subject to working
20
capital and other adjustments. Dynapower's revenue is expected to exceed $100 million on an annualized basis in 2022 with projected revenue growth in excess of 30% over the next several years. We expect to complete the acquisition in the third quarter of 2022, subject to regulatory approvals and other customary closing conditions.
Dynapower is a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and defense applications. Dynapower also provides aftermarket sales and service to maintain its equipment in the field. We are acquiring Dynapower as a foundational addition to our Clean Energy Solutions strategy and complement to our recent acquisitions of GIGAVAC, Lithium Balance, and Spear.
Quanergy
Since fiscal year 2016, we have held a $50.0 million investment in Quanergy Series B Preferred Stock, which was classified as an equity investment without a readily determinable fair value. As discussed in Note 14: Fair Value Measures included elsewhere in this Quarterly Report on Form 10-Q, in the first quarter of 2022, Quanergy became a public company traded on the NYSE, as a result of a business combination with CITIC. Upon closing of the business combination, our $50 million investment in Quanergy Series B Preferred stock was converted to 5.0 million common shares of Quanergy (at a $10 per share implied valuation). We also contributed $7.5 million to a PIPE investment to Quanergy in exchange for 750,000 unregistered common shares. Our investment in these two instruments was $57.5 million at February 8, 2022.
Effective as of the date of the business combination (February 8, 2022), we entered into the Support Agreement with Quanergy in exchange for 2.5 million warrants, converted to common stock on that date, valued at $17.6 million as of close of business February 8, 2022. This additional investment of $17.6 million was recorded as deferred income and will be recognized on a straight-line basis over the four-year term of the agreement.
Accordingly, we held 8.25 million common shares of Quanergy on March 31, 2022, with a carrying value of $75.1 million. The share price of Quanergy on March 31, 2022 was $1.84 per share, representing a market value of $15.2 million. As a result, we recorded a $59.9 million mark-to-market adjustment loss on this investment in the first quarter of 2022, which was recorded in other, net.
On April 26, 2022, we announced that our Board had declared a quarterly dividend of $0.11 per share, payable on May 25, 2022 to shareholders of record as of May 11, 2022.
Results of Operations
The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
| For the three months ended | |||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||||||||||||||
| Amount | Margin* | Amount | Margin* | ||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Performance Sensing | $ | 717.7 | 73.6 | % | $ | 714.5 | 75.8 | % | |||||||||||||||
| Sensing Solutions | 258.1 | 26.4 | 228.0 | 24.2 | |||||||||||||||||||
| Net revenue | 975.8 | 100.0 | 942.5 | 100.0 | |||||||||||||||||||
| Operating costs and expenses | 849.8 | 87.1 | 785.1 | 83.3 | |||||||||||||||||||
| Operating income | 125.9 | 12.9 | 157.5 | 16.7 | |||||||||||||||||||
| Interest expense, net | (45.4) | (4.7) | (44.0) | (4.7) | |||||||||||||||||||
| Other, net | (50.5) | (5.2) | (39.4) | (4.2) | |||||||||||||||||||
| Income before taxes | 30.0 | 3.1 | 74.0 | 7.9 | |||||||||||||||||||
| Provision for income taxes | 7.6 | 0.8 | 20.3 | 2.2 | |||||||||||||||||||
| Net income | $ | 22.4 | 2.3 | % | $ | 53.7 | 5.7 | % | |||||||||||||||
__________________________
* Represents the amount presented divided by total net revenue.
21
Net Revenue
Net revenue for the three months ended March 31, 2022 increased 3.5% compared to the three months ended March 31, 2021. Excluding a decrease of 0.6% attributed to changes in foreign currency exchange rates and an increase of 4.1% due to the effect of acquisitions, net revenue for the three months ended March 31, 2022 was flat on an organic basis. However, we achieved market outgrowth of 790 basis points in the three months ended March 31, 2022. Organic revenue growth (or decline), discussed throughout this MD&A, is a financial measure not presented in accordance with U.S. GAAP. Refer to the section entitled Non-GAAP Financial Measures below for additional information related to our use of organic revenue growth (or decline).
Performance Sensing
Performance Sensing net revenue for the three months ended March 31, 2022 increased 0.4% compared to the three months ended March 31, 2021. Excluding a decrease of 0.7% attributed to changes in foreign currency exchange rates and an increase of 4.8% due to the effect of acquisitions, Performance Sensing net revenue for the three months ended March 31, 2022 decreased 3.7% on an organic basis, representing market outgrowth of 650 basis points.
Automotive net revenue for the three months ended March 31, 2022 declined 6.4% compared to the three months ended March 31, 2021. Excluding a decline of 0.6% attributed to changes in foreign currency exchange rates, Automotive net revenue for the three months ended March 31, 2022 declined 5.8% on an organic basis, representing market outgrowth of 410 basis points. HVOR net revenue for the three months ended March 31, 2022 grew 21.1% compared to the three months ended March 31, 2021. Excluding a decline of 0.6% attributed to changes in foreign currency exchange rates and growth of 19.2% due to the effect of acquisitions, HVOR net revenue for the three months ended March 31, 2022 grew 2.5% on an organic basis, representing 1,340 basis points of market outgrowth in the quarter.
Sensing Solutions
Sensing Solutions net revenue for the three months ended March 31, 2022 increased 13.2% compared to the three months ended March 31, 2021. Excluding a decline of 0.5% attributed to changes in foreign currency exchange rates and growth of 2.1% due to the effect of acquisitions, Sensing Solutions net revenue for the three months ended March 31, 2022 increased 11.6% on an organic basis. The organic revenue growth reflects the launch of new industrial electrification applications, somewhat offset by declines in the Industrial and Aerospace markets.
Operating costs and expenses
Operating costs and expenses for the three months ended March 31, 2022 and 2021 are presented, in millions of dollars and as a percentage of net revenue, in the following table. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
| For the three months ended | |||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||||||||||||||
| Amount | Margin* | Amount | Margin* | ||||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | $ | 657.1 | 67.3 | % | $ | 635.3 | 67.4 | % | |||||||||||||||
| Research and development | 46.0 | 4.7 | 36.0 | 3.8 | |||||||||||||||||||
| Selling, general and administrative | 95.7 | 9.8 | 77.1 | 8.2 | |||||||||||||||||||
| Amortization of intangible assets | 37.4 | 3.8 | 32.1 | 3.4 | |||||||||||||||||||
| Restructuring and other charges, net | 13.7 | 1.4 | 4.6 | 0.5 | |||||||||||||||||||
| Total operating costs and expenses | $ | 849.8 | 87.1 | % | $ | 785.1 | 83.3 | % | |||||||||||||||
__________________________
* Represents the amount presented divided by total net revenue.
Cost of revenue
For the three months ended March 31, 2022, cost of revenue as a percentage of net revenue decreased slightly from the three months ended March 31, 2021. The most significant drivers of cost of revenue as a percentage of net revenue in the first quarter of 2022, which largely offset, were the favorable effect of changes in foreign currency exchange rates and productivity headwinds. Increased costs related to industry-wide supply chain shortages were largely offset by recovery from customers in the form of pricing increases.
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Research and development expense
For the three months ended March 31, 2022, research and development ("R&D") expense increased from the three months ended March 31, 2021 primarily as a result of (1) higher spend to support megatrend growth initiatives and (1) incremental R&D expense related to acquired businesses. R&D expense related to megatrends during the three months ended March 31, 2022 was $16.4 million, an increase of $5.1 million from the three months ended March 31, 2021.
Selling, general and administrative expense
For the three months ended March 31, 2022, selling, general and administrative ("SG&A") expense increased from the three months ended March 31, 2021, primarily as a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher selling costs, and (3) higher share-based compensation, partially offset by the favorable impact of changes in foreign currency exchange rates.
Amortization of intangible assets
For the three months ended March 31, 2022, amortization expense increased from the three months ended March 31, 2021 primarily due to increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method.
Restructuring and other charges, net
For the three months ended March 31, 2022, restructuring and other charges, net increased from the three months ended March 31, 2021. This increase is primarily due to acquisition-related incentive compensation of $15.0 million related to Elastic M2M milestones which were met in the first quarter partially offset by a $6.2 million reduction in the liability for contingent consideration for Spear. Refer to Note 5: Restructuring and Other Charges, Net of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information on our restructuring and other charges, net.
Operating income
In the three months ended March 31, 2022, operating income decreased compared to the three months ended March 31, 2021, primarily due to (1) increased restructuring and other charges as described above, (2) higher selling costs, (3) increased amortization expense as described above, (4) higher spend to support our megatrends initiatives, and (5) higher share-based compensation, partially offset by the favorable effect of changes in foreign currency exchange rates.
Acquired businesses had a minor net impact on our operating income in the first quarter of 2022 compared to the first quarter of 2021.
Interest expense, net
For the three months ended March 31, 2022, interest expense, net increased from the three months ended March 31, 2021, primarily as a result of interest expense on the 4.0% Senior Notes, which were issued on March 29, 2021 and April 8, 2021 partially offset by the reduced interest expense resulting from our March 5, 2021 redemption of the 6.25% Senior Notes.
Other, net
Other, net primarily includes currency remeasurement gains and losses on net monetary assets, gains and losses on foreign currency and commodity forward contracts not designated as hedging instruments, losses related to debt refinancing, and the portion of our net periodic benefit cost excluding service cost. In the three months ended March 31, 2022, other, net represented a net loss of $50.5 million, an increase of $11.1 million compared to a net loss of $39.4 million in the three months ended March 31, 2021. This increase was primarily due to $59.3 million in mark-to-market losses on equity investments, primarily related to Quanergy, partially offset by the non-recurrence of $30.1 million loss on debt financing related to the redemption of our 6.25% Senior Notes in the first quarter of 2021 and increased gains from our commodity forward contracts.
Provision for income taxes
For the three months ended March 31, 2022, provision for income taxes decreased $12.7 million from the three months ended March 31, 2021, predominantly related to the overall decrease in income before tax, driven in part by a $59.9 million mark-to-market loss on our investment in Quanergy.
The provision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in tax jurisdictions with limited or no net operating loss carryforwards and withholding taxes related to management fees, royalties,
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and the repatriation of foreign earnings; and (2) deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to (a) book versus tax basis in intangible assets, (b) changes in net operating loss carryforwards, (c) changes in tax rates, and (d) changes in our assessment of the realizability of our deferred tax assets.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted earnings per share ("EPS"), free cash flow, net leverage ratio, and adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which are used by our management, Board of Directors, and investors. We use these non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance, and as a factor in determining compensation for certain employees.
The use of our non-GAAP financial measures has limitations. They should be considered as supplemental in nature and are not intended to be considered in isolation from, or as an alternative to, reported net revenue growth (or decline), operating income, operating margin, net income, diluted EPS, operating cash flows, total debt, finance lease and other financing obligations, or EBITDA, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, free cash flow, net leverage ratio, and adjusted EBITDA may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth (or decline)
Organic revenue growth (or decline) is defined as the reported percentage change in net revenue, calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign currency exchange rate differences as well as the net impact of material acquisitions and divestitures for the 12-month period following the respective transaction date(s).
We believe that organic revenue growth (or decline) provides investors with helpful information with respect to our operating performance, and we use organic revenue growth (or decline) to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth (or decline) provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.
Adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS
We define adjusted operating income as operating income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted operating margin is calculated by dividing adjusted operating income by net revenue determined in accordance with U.S. GAAP. We define adjusted net income as follows: net income (or loss) determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described in Non-GAAP Adjustments below. Adjusted EPS is calculated by dividing adjusted net income by the number of diluted weighted-average ordinary shares outstanding in the period.
Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS as measures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as factors in determining compensation for certain employees. We believe investors and securities analysts also use these non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies. These non-GAAP financial measures are not measures of liquidity.
Free cash flow
Free cash flow is defined as net cash provided by operating activities less additions to property, plant and equipment and capitalized software. We believe free cash flow is useful to management and investors as a measure of cash generated by business operations that will be used to repay scheduled debt maturities and can be used to, among other things, fund acquisitions, repurchase ordinary shares, and (or) accelerate the repayment of debt obligations.
Adjusted EBITDA
Adjusted EBITDA is defined as net income (or loss), determined in accordance with U.S. GAAP, excluding interest expense, net, provision for (or benefit from) income taxes, depreciation expense, amortization of intangible assets, and the following non-GAAP adjustments, if applicable: (1) restructuring related and other, (2) financing and other transaction costs, (3) deferred
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loss or gain on derivative instruments, and (4) step-up inventory amortization. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments.
Net leverage ratio
Net leverage ratio represents net debt (total debt, finance lease and other financing obligations less cash and cash equivalents) divided by last twelve months ("LTM") adjusted EBITDA. We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition.
Non-GAAP adjustments
Many of our non-GAAP adjustments relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain business, supply chain, or corporate activities, and various financing transactions. We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable.
•Restructuring related and other: includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments.
•Financing and other transaction costs: includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, and costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction.
•Deferred loss or gain on derivative instruments: includes unrealized losses or gains on derivative instruments that do not qualify for hedge accounting as well as the impact of commodity prices on our raw material costs relative to the strike price on our commodity forward contracts.
•Step-up depreciation and amortization: includes depreciation and amortization expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., property, plant and equipment, definite-lived intangible assets, and inventories).
•Deferred taxes and other tax related: includes adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, the utilization of net operating losses, and adjustments to our valuation allowance in connection with certain acquisitions and tax law changes. Other tax related items include certain adjustments to unrecognized tax benefits and withholding tax on repatriation of foreign earnings.
•Amortization of debt issuance costs. We adjust our results recorded in accordance with U.S. GAAP by the amortization of debt issuance costs, which are deferred as a contra-liability against our long-term debt, net on the consolidated balance sheets and which are reflected in interest expense on the consolidated statements of operations.
•Where applicable, the current income tax effect of non-GAAP adjustments.
Our definition of adjusted net income excludes the deferred provision for (or benefit from) income taxes and other tax related items described above. As we treat deferred income taxes as an adjustment to compute adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented.
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Non-GAAP reconciliations
The following tables present reconciliations of certain financial measures calculated in accordance with U.S. GAAP to the related non-GAAP financial measures for the periods presented. Refer to Non-GAAP Adjustments section above for additional information related to these adjustments. Amounts and percentages in the tables below have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
| For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | Operating Income | Operating Margin | Net Income | Diluted EPS | Operating Income | Operating Margin | Net Income | Diluted EPS | ||||||||||||||||||||||||||||||||||||||||||
| Reported (GAAP) | $ | 125.9 | 12.9 | % | $ | 22.4 | $ | 0.14 | $ | 157.5 | 16.7 | % | $ | 53.7 | $ | 0.34 | ||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring related and other | 4.1 | 0.4 | 4.0 | 0.03 | 4.5 | 0.5 | 7.3 | 0.05 | ||||||||||||||||||||||||||||||||||||||||||
| Financing and other transaction costs | 15.8 | 1.6 | 74.6 | 0.47 | 4.6 | 0.5 | 32.8 | 0.21 | ||||||||||||||||||||||||||||||||||||||||||
| Step-up depreciation and amortization | 35.9 | 3.7 | 35.9 | 0.23 | 29.7 | 3.2 | 29.7 | 0.19 | ||||||||||||||||||||||||||||||||||||||||||
| Deferred loss/(gain) on derivative instruments | 0.7 | 0.1 | (7.0) | (0.04) | 1.8 | 0.2 | 2.2 | 0.01 | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of debt issuance costs | — | — | 1.7 | 0.01 | — | — | 1.7 | 0.01 | ||||||||||||||||||||||||||||||||||||||||||
| Deferred taxes and other tax related | — | — | (8.3) | (0.05) | — | — | 10.1 | 0.06 | ||||||||||||||||||||||||||||||||||||||||||
| Total adjustments | 56.6 | 5.8 | 101.0 | 0.64 | 40.6 | 4.3 | 83.9 | 0.53 | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted (non-GAAP) | $ | 182.5 | 18.7 | % | $ | 123.4 | $ | 0.78 | $ | 198.1 | 21.0 | % | $ | 137.6 | $ | 0.86 | ||||||||||||||||||||||||||||||||||
The following table provides a reconciliation of net cash provided by operating activities in accordance with U.S. GAAP to free cash flow.
| For the three months ended March 31, | ||||||||||||||
| (in millions) | 2022 | 2021 | ||||||||||||
| Net cash provided by operating activities | $ | 47.4 | $ | 104.5 | ||||||||||
| Additions to property, plant and equipment and capitalized software | (35.7) | (27.2) | ||||||||||||
| Free cash flow | $ | 11.7 | $ | 77.3 | ||||||||||
The following table provides a reconciliation of net income in accordance with U.S. GAAP to Adjusted EBITDA.
| For the three months ended March 31, | ||||||||||||||||||||
| (in millions) | LTM | 2022 | 2021 | |||||||||||||||||
| Net income | $ | 332.3 | $ | 22.4 | $ | 53.7 | ||||||||||||||
| Interest expense, net | 180.7 | 45.4 | 44.0 | |||||||||||||||||
| Provision for income taxes | 37.6 | 7.6 | 20.3 | |||||||||||||||||
| Depreciation expense | 125.3 | 31.5 | 31.2 | |||||||||||||||||
| Amortization of intangible assets | 139.4 | 37.4 | 32.1 | |||||||||||||||||
| EBITDA | 815.4 | 144.4 | 181.3 | |||||||||||||||||
| Non-GAAP Adjustments | ||||||||||||||||||||
| Restructuring related and other | 20.4 | 4.1 | 7.4 | |||||||||||||||||
| Financing and other transaction costs | 80.2 | 75.1 | 35.9 | |||||||||||||||||
| Deferred (gain)/loss on derivative instruments | (0.5) | (8.8) | 3.0 | |||||||||||||||||
| Adjusted EBITDA | $ | 915.5 | $ | 214.9 | $ | 227.6 | ||||||||||||||
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The following table provides a reconciliation of total debt, finance lease and other financing obligations in accordance with U.S. GAAP to net leverage ratio.
| (Dollars in millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Current portion of long-term debt, finance lease and other financing obligations | $ | 6.7 | $ | 6.8 | ||||||||||
| Finance lease and other financing obligations, less current portion | 26.3 | 26.6 | ||||||||||||
| Long-term debt, net | 4,215.5 | 4,214.9 | ||||||||||||
| Total debt, finance lease and other financing obligations | 4,248.5 | 4,248.3 | ||||||||||||
| Less: discount, net of premium | (4.8) | (5.2) | ||||||||||||
| Less: deferred financing costs | (25.4) | (26.7) | ||||||||||||
| Total gross indebtedness | 4,278.7 | 4,280.2 | ||||||||||||
| Less: cash and cash equivalents | 1,608.5 | 1,709.0 | ||||||||||||
| Net debt | $ | 2,670.2 | $ | 2,571.3 | ||||||||||
| Adjusted EBITDA (LTM) | $ | 915.5 | $ | 928.3 | ||||||||||
| Net leverage ratio | 2.9 | 2.8 | ||||||||||||
Liquidity and Capital Resources
As of March 31, 2022 and December 31, 2021, we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers; accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
| (In millions) | March 31, 2022 | December 31, 2021 | |||||||||
| United Kingdom | $ | 17.3 | $ | 20.4 | |||||||
| United States | 17.3 | 25.0 | |||||||||
| The Netherlands | 1,180.5 | 1,304.3 | |||||||||
| China | 336.3 | 293.8 | |||||||||
| Other | 57.1 | 65.4 | |||||||||
| Total | $ | 1,608.5 | $ | 1,709.0 | |||||||
The amount of cash and cash equivalents held in these geographic regions fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We recognize a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax-free manner.
Cash Flows:
The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2022 and 2021. We have derived this summarized statements of cash flows from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
| For the three months ended | |||||||||||
| (In millions) | March 31, 2022 | March 31, 2021 | |||||||||
| Net cash provided by/(used in): | |||||||||||
| Operating activities: | |||||||||||
Net income adjusted for non-cash items | $ | 150.5 | $ | 162.8 | |||||||
| Changes in operating assets and liabilities, net | (103.2) | (58.3) | |||||||||
| Operating activities | 47.4 | 104.5 | |||||||||
| Investing activities | (90.9) | (49.0) | |||||||||
| Financing activities | (57.0) | (23.5) | |||||||||
| Net change | $ | (100.5) | $ | 31.9 | |||||||
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Operating activities. Net cash provided by operating activities decreased in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to increased raw material purchases in order to maximize production flexibility given widespread parts shortages in our supply chain and in anticipation of volume increases later in the year, a cash payment of $7.5 million for earned acquisition-related incentive compensation related to Elastic M2M, and timing of supplier payments and customer receipts.
Investing activities. Net cash used in investing activities increased in the three months ended March 31, 2022 primarily due to cash paid for the acquisitions of Elastic M2M and the $7.5 million PIPE investment in Quanergy. In fiscal year 2022, we anticipate capital expenditures of approximately $165.0 million to $175.0 million, which we expect to be funded from cash on hand.
Financing activities. In the three months ended March 31, 2022, net cash used in financing activities increased primarily due to $67.3 million cash paid for share repurchases following the resumption of our program in the fourth quarter of 2021, partially offset by the nonrecurrence of $31.1 million of payments related to debt financing in the three months ended March 31, 2021.
Indebtedness and Liquidity
As of March 31, 2022, we had $4.3 billion in gross indebtedness, which includes finance lease and other financing obligations and excludes debt discounts, premiums, and deferred financing costs.
Capital Resources
Senior Secured Credit Facilities
The credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for the Senior Secured Credit Facilities consisting of the Term Loan, the Revolving Credit Facility, and incremental availability (the "Accordion") under which additional secured credit facilities could be issued under certain circumstances.
Sources of liquidity
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. As of March 31, 2022, we had $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 March 31, 2022, no amounts had been drawn against these outstanding letters of credit. Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the "Senior Notes Indentures"). As of March 31, 2022, availability under the Accordion was approximately $1.0 billion.
We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of April 20, 2022, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs but will not reduce availability under the Credit Agreement.
Restrictions and Covenants
The Credit Agreement provides that if our senior secured net leverage ratio exceeds a specified level we are required to use a portion of our excess cash flow, as defined in the Credit Agreement, generated by operating, investing, or financing activities to prepay some or all of the outstanding borrowings under 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 three months ended March 31, 2022.
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The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants that limit the ability of our wholly-owned subsidiary, STBV, and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and make other restricted payments. For a full discussion of these restrictions and covenants, refer to Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources included in our 2021 Annual Report. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration when we established our share repurchase programs and will be evaluated periodically with respect to future potential funding of those programs. As of March 31, 2022, we believe we were in compliance with all covenants and default provisions under our credit arrangements.
Share repurchase programs
From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by our Board at any time. We currently have an authorized $500.0 million share repurchase program (the "January 2022 Program") under which approximately $449.5 million remained available as of March 31, 2022.
Recently Issued Accounting Pronouncements
There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates included in our 2021 Annual Report.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
No significant changes to our market risk have occurred since December 31, 2021. For a discussion of market risks affecting us, refer to Part II, Item 7A: Quantitative and Qualitative Disclosures About Market Risk included in our 2021 Annual Report.
Item 4.Controls and Procedures.
The required certifications of our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer are included as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures and changes in internal control over financial reporting referred to in these certifications. These certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.
Evaluation of Disclosure Controls and Procedures
With the participation of our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2022, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting 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 three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Inherent Limitations on Effectiveness of Controls
There are inherent limitations to the effectiveness of any system of internal control over financial reporting. Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation in accordance with U.S. GAAP. Our internal controls over financial reporting are subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time.
PART II—OTHER INFORMATION
Item 1.Legal Proceedings.
We are regularly involved in a number of claims and litigation matters that arise in the ordinary course of business. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial condition, and/or cash flows.
Item 1A.Risk Factors.
Information regarding risk factors appears in Part I, Item 1A: Risk Factors, included in our 2021 Annual Report. There have been no material changes to the risk factors disclosed therein.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased (in shares) (1) | Weighted-Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Programs (in millions) | ||||||||||||||||||||||
| January 1 through January 31, 2022 | 453,441 | $ | 61.89 | 452,643 | $ | 488.8 | ||||||||||||||||||||
| February 1 through February 28, 2022 | 594,667 | $ | 57.11 | 593,207 | $ | 454.9 | ||||||||||||||||||||
| March 1 through March 31, 2022 | 92,539 | $ | 58.11 | 92,485 | $ | 449.5 | ||||||||||||||||||||
| Quarter total | 1,140,647 | $ | 59.09 | 1,138,335 | $ | 449.5 | ||||||||||||||||||||
__________________________
(1) The number of ordinary shares presented includes ordinary shares that were withheld upon the vesting of restricted securities to cover payment of employee withholding tax. These withholdings took place outside of a publicly announced repurchase plan. There were 798 ordinary shares withheld in January 2022, 1,460 ordinary shares withheld in February 2022, and 54 ordinary shares withheld in March 2022, representing a total aggregate fair value of $135 thousand based on the closing price of our ordinary shares on the date of withholdings.
(2) With the exception of $16.9 million aggregate fair value of ordinary shares repurchased in January 2022 under a $500.0 million share repurchase program authorized by our Board of Directors and publicly announced on July 30, 2019 (the "July 2019 Program"), all purchases during the three months ended March 31, 2021 were conducted pursuant to a $500.0 million share repurchase program authorized by our Board of Directors and publicly announced on January 20, 2022 (the “January 2022 Program”), which replaced the July 2019 Program. The January 2022 Program does not have an established expiration date.
Item 3.Defaults Upon Senior Securities.
None.
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Item 5.Other Information.
On April 22, 2022, Sensata Technologies Holding plc (the "Company") signed a stock purchase agreement to acquire Dynapower Company, LLC ("Dynapower"), a leading provider of high-voltage power conversion solutions for clean energy segments, for an aggregate cash purchase price of $580 million, subject to working capital and other adjustments. Dynapower's annualized revenue is expected to exceed $100 million in 2022 with projected revenue growth in excess of 30% over the next several years. The Company expects to complete the acquisition in the third quarter of 2022, subject to regulatory approvals and other customary closing conditions. The Company intends to fund the transaction using available cash on hand.
Dynapower is a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and defense applications. Dynapower also provides aftermarket sales and service to maintain its equipment in the field. The Company is acquiring Dynapower as a foundational addition to its Clean Energy Solutions strategy and complement to its recent acquisitions of GIGAVAC, Lithium Balance, and Spear.
The foregoing description of the stock purchase agreement is qualified in its entirety by reference to the full text of the stock purchase agreement, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1 and is incorporated in this report by reference. A copy of the press release announcing entry into the stock purchase agreement is attached as Exhibit 99.1 and is incorporated in this report by reference.
On April 26, 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.11 per share, payable May 25, 2022 to shareholders of record as of May 11, 2022. The press release is attached hereto as Exhibit 99.2 and is incorporated by reference herein.
The Company will include a discussion of the acquisition and dividend at its earnings call on April 26, 2022 at 8:00 AM eastern time. The dial-in numbers for the call are 1-844-784-1726 or 1-412-380-7411. Callers should reference the "Sensata Q1 2022 Financial Results Conference Call." A live webcast of the conference call will also be available on the investor relations page of Sensata’s website at http://investors.sensata.com. Additionally, a replay of the call will be available until May 3, 2022. To access the replay, dial 1-877-344-7529 or 1-412-317-0088 and enter confirmation code: 8713067.
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Item 6.Exhibits.
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 31.3 | ||||||||
| 32.1 | ||||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the 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 contained in Exhibit 101). | |||||||
___________________________
* Filed herewith
† Indicates management contract or compensatory plan, contract, or arrangement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 26, 2022
SENSATA TECHNOLOGIES HOLDING PLC | ||
| /s/ Jeffrey Cote | ||
(Jeffrey Cote) Chief Executive Officer and President (Principal Executive Officer) | ||
| /s/ Paul Vasington | ||
(Paul Vasington) Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||
| /s/ Maria Freve | ||
(Maria Freve) Vice President and Chief Accounting Officer (Principal Accounting Officer) | ||
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TABLE OF CONTENTS
Part I, Item 1A: Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 5. Other InformationItem 6. Exhibits