Marketing Salery

SENSATA TECHNOLOGIES HOLDING PLC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

NATURAL GROCERS BY VITAMIN COTTAGE, INC. Management's Discussion and Analysis of Financial Condition and Results
of Operations (form 10-Q)
Written by publisher team

The following discussion and analysis is intended to help the reader understand
our business, financial condition, results of operations, and liquidity and
capital resources. You should read the following discussion in conjunction with
Item 1: Business and our Financial Statements, each included elsewhere in this
Report.
The statements in this discussion regarding industry outlook, our expectations
regarding our future performance, liquidity and capital resources, and other
non-historical statements are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties including, but not
limited to, the risks and uncertainties described in Item 1A: Risk Factors
included elsewhere in this Report. Our actual results may differ materially from
those contained in or implied by any forward-looking statements.
Overview
Sensata continued to deliver mission-critical, highly engineered solutions to
our customers in 2021. As we look towards 2022 and beyond, we are confident in
our ability to sustain total outgrowth in the markets we serve of 400 to 600
basis points per year. We use the term "market outgrowth" to describe the impact
of an increasing quantity and value of our products used in customer systems and
applications, above normal market growth. It is only loosely correlated to
normal unit demand fluctuations in the markets we serve. We believe we can
deliver this end market outgrowth based on our high levels of new business
awards and our large and expanding pipeline of new opportunities.
In fiscal year 2021, we continued to produce strong market outgrowth of 960
basis points, including 860 basis points and 1,930 basis points in our
automotive and heavy vehicle and off-road ("HVOR") businesses, respectively.
We are also targeting adding 400 to 600 basis points of inorganic revenue growth
annually through acquisitions. We believe that the overall business environment
provides opportunities to further strengthen our portfolio through strategically
important, value-creating acquisitions and/or joint ventures. We are also
pursuing new technology collaborations and partnerships with third parties to
expand our capabilities and accelerate our megatrend-driven growth potential.
We will continue to innovate on behalf of our customers, solving some of their
most demanding engineering challenges. We will also continue to provide
differentiated, Electrification and Insights solutions to our broad array of
customers. Solving these mission-critical challenges enables Sensata to continue
to deliver differentiated value for both our customers and shareholders while
also increasing investments in our growth opportunities and our people.
We continue to invest in our megatrend growth initiatives that are enabling
large and rapidly growing opportunities for Sensata across all our end markets.
We are working to become a leading and foundational player in electrification
components and sub-systems across broad industrial, transportation, and
stationary energy storage end-markets and to be a comprehensive solutions
provider in select end-market segments. We are making progress in
Electrification and Insights, both organically through new business wins and
inorganically through bolt-on acquisitions or joint ventures.
To better pursue clean energy components and system opportunities, in the third
quarter of 2021 we reorganized our Sensing Solutions operating segment, moving
the portion of our electrical protection product category that includes
high-voltage contactors, inverters, and battery management systems from the
industrial business unit to a new business unit, Clean Energy Solutions. This
business unit will focus largely on the industrial and stationary,
commercial/industrial energy storage end-markets. Applications include e-bikes,
stationary charging infrastructure, battery-energy storage, and renewable energy
applications. With the acquisition of Spear Power Systems ("Spear") and Sendyne
Corp ("Sendyne") as described in Item 1: Business - Business Combinations
included elsewhere in this Report, we are expanding our portfolio with energy
storage systems and electrical sensing products to expand on existing and new
end-markets and applications. These acquisitions expand on our capabilities in
battery management systems and high-voltage contactors introduced with the
previous acquisitions of Lithium Balance and GIGAVAC, LLC ("GIGAVAC"),
respectively.
With our Insights megatrend initiative, we are focusing on becoming the leader
in delivering data-driven insight, connectivity, and prognostics to commercial
fleet operators and asset managers, by providing solutions that increase overall
productivity and operational efficiency. This initiative addresses a large and
fast-growing market opportunity to deliver data insights across heavy, medium,
and light vehicle fleets; supply chain and logistics including cargo, container,
and warehouse segments; and high-value stationary asset monitoring. As discussed
in Item 1: Business - Business Combinations included elsewhere in this Report,
we acquired Xirgo Technologies, LLC ("Xirgo") and SmartWitness Holdings, Inc.
("SmartWitness") in fiscal year 2021, expanding our capabilities to provide data
insights to transportation and logistics customers through telematics, video
telematics, asset tracking devices, and other cloud-based solutions.
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We continue our journey on Sensata's long-standing mission to help create a
cleaner, safer, and more connected world, not just for our customer's products
but also through our own operations. We're on our way to achieving the targets
laid out in our first sustainability report, bolstering the long-term
sustainability and success of the company for all of its stakeholders.
Refer to Item 1: Business included elsewhere in this Report for detailed
discussion of our business strategies, including those related to our key
megatrend initiatives, and market drivers of our business.
Fiscal Year 2021 Markets and Financial Results
We analyze revenue in terms of inorganic revenue growth/decline (i.e. changes in
foreign currency exchange rate and acquisitions/divestitures) vs organic revenue
growth/decline (market growth and market outgrowth).
Market results
We believe regulatory requirements for safer vehicles, higher fuel efficiency,
and lower emissions, as well as customer demand for operator productivity and
convenience, drive the need for advancements in powertrain management,
efficiency, safety, and operator controls. These advancements lead to sensor
growth rates that we expect to exceed underlying production growth in many of
our key end-markets, which we expect will continue to offer us significant
growth opportunities.
In fiscal year 2021, global production of light vehicles increased 1.2% from
fiscal year 2020, according to third-party data. This increase from the
significant decline in 2020 was tempered due to global supply constraints,
including shortages of semiconductor components. Global production in the HVOR
markets we serve increased 24% from fiscal year 2020. Our China on-road truck
business saw significant market outgrowth from the adoption of NS6 emissions
regulations, and we are also benefiting from a wave of electromechanical
operator controls being installed in new off-road equipment. In addition, we
have continued to see recovery in the global industrial end-markets.
Market outgrowth
We continue to produce strong market outgrowth, above our previously-stated
target ranges. For the year ended December 31, 2021, we delivered 960 basis
points of market outgrowth, including 860 basis points, 1,930 basis points, and
580 basis points in our automotive, HVOR, and Sensing Solutions businesses,
respectively.
During fiscal year 2021, we closed $640 million in new business wins ("NBOs"),
including $270 million in Electrification wins, in each case the highest we have
ever closed. We define NBOs as incremental revenue to our current base of
business that is expected to be recognized on average in the fifth year after
entry into the agreement, when programs typically reach their normal volume.
Revenue
Consolidated net revenue for the year ended December 31, 2021 increased 25.5%
compared to the year ended December 31, 2020. Excluding an increase of 2.3%
attributed to changes in foreign currency exchange rates and an increase of 2.5%
due to the effect of acquisitions, consolidated net revenue increased 20.7% on
an organic basis compared to the year ended December 31, 2020.
Automotive net revenue for the year ended December 31, 2021 increased 17.6%
compared to the year ended December 31, 2020. Excluding an increase of 2.5%
attributed to changes in foreign currency exchange rates, automotive net revenue
increased 15.1% on an organic basis compared to the year ended December 31,
2020, representing market outgrowth of 860 basis points, excluding the estimated
effects of original equipment manufacturer ("OEM") efforts to replenish
inventory channels. This outgrowth was led by new product launches in powertrain
and emissions, safety, and electrification-related applications and systems.
HVOR net revenue for the year ended December 31, 2021 increased 63.3% compared
to the year ended December 31, 2020. Excluding an increase of 2.1% attributed to
changes in foreign currency exchange rates and an increase of 14.8% due to the
effect of acquisitions, HVOR net revenue increased 46.4% on an organic basis
compared to the year ended December 31, 2020, representing market outgrowth of
1,930 basis points, excluding the estimated effects of OEM efforts to replenish
inventory channels. Our China on-road truck business saw significant market
outgrowth from the adoption of NS6 emissions regulations, and we are also
benefiting from a wave of electromechanical operator controls being installed in
new off-road equipment.
Sensing Solutions net revenue for the year ended December 31, 2021 increased
18.4% compared to the year ended December 31, 2020. Excluding an increase of
1.7% attributed to changes in foreign currency exchange rates and an increase of
0.3% due to the effect of acquisitions, Sensing Solutions net revenue increased
16.4% on an organic basis compared to the year
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ended December 31, 2020, representing market outgrowth of 580 basis points. This
outgrowth was driven by new Electrification launches.
Operating Income
We continue to see elevated costs related to the global supply chain shortages,
which are causing production delays on a vast and varied number of products
across industries and geographies and increased procurement and logistics costs,
which are contributing to a higher cost and inflationary environment that has
impacted our margins in fiscal year. Despite these elevated costs, which we are
working to mitigate, operating income increased $295.5 million, or 87.5%, to
$633.2 million (16.6% of net revenue) compared to $337.7 million (11.1% of net
revenue) in fiscal year 2020. This increase is the result of (1) improved gross
margins, due mainly to higher organic sales volumes as well as the turnaround
effect of the settlement of litigation brought by Wasica Finance GmbH ("Wasica")
in 2020, partially offset by increased costs related to global supply chain
shortages, and (2) lower restructuring costs. These improvements were partially
offset by (1) higher spend to support megatrend growth initiatives, (2) higher
incentive compensation aligned to improved financial performance, and (3) the
turnaround effect of temporary salary reductions and furloughs taken in the
second quarter 2020.
We expect to see constraints on global production of light vehicles lifting
slowly throughout the course of fiscal year 2022. Refer to Results of Operations
- Operating Costs and Expenses included elsewhere in this Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations (this
"MD&A") for additional discussion of our operating costs and expenses.
Net Income
Net income increased $199.3 million in fiscal year 2021, to $363.6 million,
compared to $164.3 million in fiscal year 2020. This increase was primarily a
result of higher operating income partially offset by higher taxes and the loss
on redemption of the $750.0 million aggregate principal amount of 6.25% senior
notes due 2026 (the "6.25% Senior Notes").
Forward-looking information
We expect to see constraints on global production of light vehicles lifting
slowly throughout the course of fiscal year 2022. We expect low single-digit end
market growth across all our markets in fiscal year 2022, with automotive growth
of approximately 7% and HVOR production approximately flat. However, in 2021,
our customers ordered over production to compensate for supply chain shortages.
We estimate this amounted to approximately $90 million of revenue over
production in 2021 that will not repeat in fiscal year 2022. Our revenue
outgrowth to market will continue to be driven by ongoing efforts to improve
energy efficiency, safety, and the environment. We continue to invest in our
megatrend initiatives both organically and inorganically, with the acquisitions
of Lithium Balance, Xirgo, Spear, SmartWitness, and Sendyne, expanding not only
our capabilities, but also our access to end-markets and product portfolios in
these pivotal areas. Refer to Item 1: Business - Business Combinations included
elsewhere in this Report for additional information related to these
acquisitions. We expect continued significant growth in these megatrend areas
over the coming years, driven by Electrification trends, the infrastructure
requirements to support Electrification, and the proliferation of Insights on
stationary and mobile equipment.
Liquidity
We have sufficient cash to take advantage of strategic opportunities as they
arise. We generated $554.2 million of operating cash flow in fiscal year 2021,
ending the year with $1.7 billion in cash. Our ability to generate positive cash
flows allows us to continue to pursue the acquisition of innovative businesses
that will expand our presence in our targeted growth vectors. In November 2021,
we resumed our share repurchase program, which we had previously suspended on
April 2, 2020, and we repurchased 0.8 million shares for approximately $47.8
million in fiscal year 2021. On January 20, 2022, we announced that our Board of
Directors had authorized a new ordinary share repurchase program of $500 million
(the "January 2022 Program"), which replaces the $500.0 million program
previously authorized by our Board of Directors in July 2019 (the "July 2019
Program"). Sensata's shareholders have previously approved the forms of share
repurchase agreements and the potential broker counterparties needed to execute
the buyback program. Refer to Liquidity and Capital Resources included elsewhere
in this MD&A for additional information related to our share repurchase program.
In the first quarter of 2021, we used the flexibility provided by our large cash
balance to lower our cost of capital and extend our debt maturity by redeeming
the full amount outstanding on the 6.25% Senior Notes. Subsequently, on March
29, 2021, we issued the first $750.0 million of the $1.0 billion aggregate
principal amount of 4.0% senior notes due 2029 (the "4.0% Senior Notes"), at
par, and on April 8, 2021, we issued an additional $250.0 million of 4.0% Senior
Notes at a price of 100.75%. The combined effect of these transactions was to
extend the average maturity of our debt profile and lower our total cost of
fixed debt. Proceeds from the 4.0% Senior Notes will be used for general
corporate purposes, to fund future acquisitions and our
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capital deployment strategy, and for future debt repayments. Refer to Note 14:
Debt of our Financial Statements included elsewhere in this Report for
additional information related to these transactions and our overall debt.
Acquisitions
We completed various acquisitions in 2021 in support of our key strategic
priorities. A summary of these acquisitions is included in the table below:
(In millions)                                                                                Segment                                       Purchase Price
                                                                                                                                                       Estimated
Acquisition                                         Date                   Performance Sensing         Sensing Solutions            Cash              Contingency
Lithium Balance(1)                            January 29, 2021                                                 X                $    27.2          $            -
Xirgo                                          April 1, 2021                        X                                           $   401.7          $            -
Spear(2)(3)                                  November 19, 2021                                                 X                $   105.8          $          8.6
SmartWitness(2)                              November 19, 2021                      X                                           $   204.2          $            -
Sendyne(2)                                    December 8, 2021                                                 X                $    25.1          $            -


__________________________
(1)  Step acquisition completed on the date indicated
(2)  Purchase price accounting is preliminary
(3)  Contingency estimated as of the date of acquisition, subject to change
Refer to Item 1: Business - Business Combinations and Note 21: Acquisitions of
our Financial Statements, each included elsewhere in this Report, for additional
information related to these acquisitions.
Summary
During fiscal year 2021, we experienced continued positive momentum from the
business and economic growth that began in the second half of 2020. We responded
well to the rapid changes in many of our end-markets, demonstrating the
strength, resiliency, and reliability of our business and organizational model,
enabling us to capitalize on the recovery in end-market demand and deliver on
customers' orders. We will continue to focus on delivering differentiated value
for both our customers and shareholders, while also increasing investments in
our growth opportunities and our people.
Selected Segment Information
We present financial information for two reportable segments, Performance
Sensing and Sensing Solutions. Set forth below is selected information for each
of these segments for the periods presented. Amounts and percentages in the
tables below have been calculated based on unrounded numbers, accordingly,
certain amounts may not appear to recalculate due to the effect of rounding.
The following table presents net revenue by segment for the identified periods:
                                                                                      For the year ended December 31,
                                                        2021                                        2020                                       2019
($ in millions)                            Amount           Percent of Total           Amount          Percent of Total           Amount          Percent of Total
Net revenue:
Performance Sensing                     $  2,847.9                    74.5  %       $ 2,223.8                    73.0  %       $ 2,546.0                    73.8  %
Sensing Solutions                            972.9                    25.5              821.8                    27.0              904.6                    26.2
Total net revenue                       $  3,820.8                   100.0  %       $ 3,045.6                   100.0  %       $ 3,450.6                   100.0  %


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The following table presents segment operating income in US dollars (“USD”) and as a percentage of segment net revenue for the identified periods:

                                                                                        For the year ended December 31,
                                                            2021                                          2020                                      2019
                                                                      Percent of                                Percent of                                Percent of
                                                                       Segment                                   Segment                                   Segment
($ in millions)                               Amount                 Net Revenue             Amount            Net Revenue             Amount            Net Revenue
Segment operating income:
Performance Sensing                     $      777.2                         27.3  %       $ 532.5                     23.9  %       $ 670.5                     26.3  %
Sensing Solutions                              293.2                         30.1  %         241.2                     29.4  %         294.0                     32.5  %
Total segment operating income          $    1,070.4$ 773.7$ 964.4


For a reconciliation of total segment operating income to consolidated operating
income, refer to Note 20: Segment Reporting of our Financial Statements included
elsewhere in this Report.
Selected Geographic Information
We are a global business with significant operations around the world and a
diverse revenue mix by geography, customer, and end-market. The following table
presents (as a percentage of total) property, plant and equipment, net ("PP&E"),
and net revenue by geographic region for the identified periods:
                                                 PP&E, net as of December 31,                    Net revenue for the year ended December 31,
                                                  2021                  2020                  2021                  2020                  2019
Americas                                             32.3  %               33.1  %               38.0  %               39.3  %               42.3  %
Europe                                               22.0  %               24.4  %               26.2  %               26.8  %               28.1  %
Asia and rest of world                               45.7  %               42.5  %               35.8  %               33.9  %               29.6  %


Refer to Note 20: Segment Reporting of our Financial Statements included
elsewhere in this Report for additional information related to our PP&E, net
balances by selected geographic area as of December 31, 2021 and 2020 and net
revenue by selected geographic area for the years ended December 31, 2021, 2020,
and 2019.
Net Revenue by End-Market
Our net revenue for the years ended December 31, 2021, 2020, and 2019 was
derived from the following end-markets (amounts are calculated based on
unrounded numbers, and may not appear to recalculate):
                                             For the year ended December 31,
        (Percentage of total)                 2021                    2020        2019
        Automotive                                       54.0  %     57.5  %     58.8  %
        HVOR                                             21.7  %     16.7  %     16.2  %
        Industrial                                       10.8  %     11.0  %     10.2  %
        Appliance and HVAC (1)                            6.4  %      6.2  %      5.8  %
        Aerospace                                         3.5  %      4.5  %      5.1  %
        Other                                             3.6  %      4.1  %      3.9  %

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(1)  Heating, ventilation and air conditioning
We are a significant supplier to multiple OEMs within many of these end-markets,
thereby reducing customer concentration risk.
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Factors Affecting Our Operating Results
The following discussion describes components of the consolidated statements of
operations as well as factors that impact those components. Refer to Note 2:
Significant Accounting Policies of our Financial Statements included elsewhere
in this Report, and Critical Accounting Policies and Estimates included
elsewhere in this MD&A for additional information related to the accounting
policies and estimates made related to these components. Refer to Results of
Operations included elsewhere in this MD&A for discussion of the actual impact
on our financial statements of these factors.
Net revenue
We generate revenue primarily from the sale of tangible products. Because we
derive a significant portion of our revenue from sales into the automotive
end-market, conditions in the automotive industry can have a significant impact
on the amount of revenue that we recognize. However, outside of the automotive
industry, we sell our products to end-users in a wide range of industries,
end-markets, and geographic regions. As a result, the drivers of demand for
these products vary considerably and are influenced by industry, market, or
geographic conditions. Our overall net revenue is impacted by various factors,
which we characterize as either "organic" or "inorganic."
Our net revenue may be impacted by the following organic factors:
•fluctuations in overall economic activity within the geographic regions in
which we operate;
•underlying growth in one or more of our end-markets, either worldwide or
particular geographies in which we operate;
•the number of our products used within existing applications, or the
development of new applications requiring these products, due to regulations or
other factors;
•the "mix" of products sold, including the proportion of new or upgraded
products and their pricing relative to existing products;
•changes in product sales prices (including quantity discounts, rebates, and
cash discounts for prompt payment);
•changes in the level of competition faced by our products, including the launch
of new products by competitors;
•our ability to successfully develop, launch, and sell new products and
applications; and
•the trend of the automotive market evolving from internal combustion engine
powertrain products to more environmentally-friendly vehicles that rely more
heavily on Electrification and other adjacent technologies.
Our net revenue may be impacted by the following inorganic factors:
•fluctuations in foreign currency exchange rates; and
•acquisitions and divestitures.
While the factors described above may impact net revenue in each of our
reportable segments, the magnitude of that impact can differ. For more
information about revenue risks relating to our business, refer to Item 1A: Risk
Factors included elsewhere in this Report.
Cost of revenue
We manufacture the majority of our products and subcontract only a limited
number of products to third parties. As such, our cost of revenue consists
principally of the following:
•Production Materials Costs. We source materials used in production on a global
basis to ensure a highly-effective and efficient supply chain, but we are still
impacted by local market conditions, including fluctuations in foreign currency
exchange rates. A portion of our production materials contains certain
commodities, resins, and metals, and the cost of these materials may vary with
underlying pricing and foreign currency exchange rates. However, we enter into
forward contracts to economically hedge a portion of our exposure to the
potential change in prices and fluctuation of exchange rates associated with
certain of these commodities. The terms of these contracts fix the price at a
future date for various notional amounts associated with these commodities.
Gains and losses recognized on these derivatives are recorded in other, net and
are not included in cost of revenue. Refer to Note 6: Other, Net of our
Financial Statements included elsewhere in this Report for additional
information.
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•Employee Costs. Employee costs include wages and benefits, including variable
incentive compensation, for employees involved in our manufacturing operations
and certain customer service and engineering activities, including variable
incentive compensation. A significant portion of these costs can fluctuate on an
aggregate basis in direct correlation with changes in production volumes. As a
percentage of net revenue, these costs may decline as a result of economies of
scale associated with higher production volumes, and conversely, may increase
with lower production volumes. These costs also fluctuate based on local market
conditions. We rely on contract workers for direct labor in certain geographies.
As of December 31, 2021, we had approximately 1,900 direct labor contract
workers on a worldwide basis.
•Sustaining Engineering Activity Costs. These costs relate to modifications of
existing products for use by new and existing customers in familiar applications
as well as improvements made to our manufacturing processes.
•Other. Our remaining cost of revenue primarily consists of:
•gains and losses on certain foreign currency forward contracts that are
designated as cash flow hedges;
•material yields;
•costs to import raw materials, such as tariffs;
•depreciation of fixed assets used in the manufacturing process;
•freight costs;
•warehousing expenses;
•maintenance and repair expenses;
•costs of quality assurance;
•operating supplies; and
•other general manufacturing expenses, such as expenses for energy consumption
and operating lease expense.
Changes in cost of revenue as a percentage of net revenue have historically been
impacted by a number of factors, including:
•changes in the price of raw materials, including the impact of changes in costs
to import such raw materials, such as tariffs;
•changes in customer prices and surcharges;
•implementation of cost improvement measures aimed at increasing productivity,
including reduction of fixed production costs, refinements in inventory
management, design and process driven changes, and the coordination of
procurement within each subsidiary and at the business level;
•product lifecycles, as we typically incur higher cost of revenue associated
with new product development (related to excess manufacturing capacity and
higher production costs during the initial stages of product launches) and
during the phase-out of discontinued products;
•changes in production volumes - production costs are capitalized in inventory
based on normal production volumes, as revenue increases, the fixed portion of
these costs does not;
•transfer of production to our lower-cost manufacturing facilities;
•changes in depreciation expense, including those arising from the adjustment of
PP&E to fair value associated with acquisitions;
•fluctuations in foreign currency exchange rates;
•changes in product mix;
•changes in logistics costs;
•acquisitions and divestitures - acquired and divested businesses may generate
higher or lower cost of revenue as a percentage of net revenue than our core
business; and
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•the increase in the carrying value of inventory that is adjusted to fair value
as a result of the application of purchase accounting associated with
acquisitions.
Research and development expense
We develop products that address increasingly complex engineering and operating
performance requirements to help our customers solve their most difficult
challenges in the automotive, HVOR, fleet management, industrial, clean energy,
and aerospace industries. We believe that continued focused investment in
research and development ("R&D") is critical to our future growth and
maintaining our leadership positions in the markets we serve. Our R&D efforts
are directly related to timely development of new and enhanced products that are
central to our business strategy. We continually develop our technologies to
meet an evolving set of customer requirements and new product introductions. We
conduct such activities in areas that we believe will increase our long-term
revenue growth. Our development expense is typically associated with engineering
core technology platforms to specific applications and engineering major
upgrades that improve the functionality or reduce the cost of existing products.
In addition, we continually consider new technologies where we may have
expertise for potential investment or acquisition.
An increasing portion of our R&D activities are being directed towards
technologies and megatrends that we believe have the potential for significant
future growth, but that relate to products that are not currently within our
core business or include new features and capabilities for existing products.
Expenses related to these activities are less likely to result in increased
near-term revenue than our more mainstream development activities.
R&D expense consists of costs related to product design, development, and
process engineering. Costs related to modifications of existing products for use
by new and existing customers in familiar applications are presented in cost of
revenue and are not included in R&D expense. The level of R&D expense in any
period is related to the number of products in development, the stage of the
development process, the complexity of the underlying technology, the potential
scale of the product upon successful commercialization, and the level of our
exploratory research.
Selling, general and administrative expense
Selling, general and administrative ("SG&A") expense consists of all
expenditures incurred in connection with the sale and marketing of our products,
as well as administrative overhead costs, including:
•salary and benefit costs for sales and marketing personnel and administrative
staff;
•share-based incentive compensation expense;
•charges related to the use and maintenance of administrative offices, including
depreciation expense;
•other administrative costs, including expenses relating to information systems,
human resources, and legal and accounting services;
•other selling and marketing related costs, such as expenses incurred in
connection with travel and communications; and
•transaction costs associated with acquisitions.
Changes in SG&A expense as a percentage of net revenue have historically been
impacted by a number of factors, including:
•changes in sales volume, as higher volumes enable us to spread the fixed
portion of our selling, marketing, and administrative expense over higher
revenue (e.g. expenses relating to our sales and marketing personnel can
fluctuate due to prolonged trends in sales volume, while expenses relating to
administrative personnel generally do not increase or decrease directly with
changes in sales volume);
•changes in customer prices and surcharges;
•changes in the mix of products we sell, as some products may require more
customer support and sales effort than others;
•new product launches in existing and new markets, as these launches typically
involve a more intense sales and marketing activity before they are integrated
into customer applications and systems;
•changes in our customer base, as new customers may require different levels of
sales and marketing attention;
•fluctuations in foreign currency exchange rates; and
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•acquisitions and divestitures - acquired and divested businesses may require
different levels of SG&A expense as a percentage of net revenue than our core
business.
Depreciation expense
Depreciation expense includes depreciation of PP&E, which includes assets held
under finance lease and amortization of leasehold improvements. Depreciation
expense is included in either cost of revenue or SG&A expense depending on the
use of the asset as a manufacturing or administrative asset. Depreciation
expense will vary according to the age of existing PP&E and the level of capital
expenditures.
Amortization expense
We have recognized a significant amount of definite-lived intangible assets.
Acquisition-related definite-lived intangible assets are amortized on an
economic-benefit basis according to the useful lives of the assets, or on a
straight-line basis if a pattern of economic benefits cannot be reliably
determined. The amount of amortization expense related to definite-lived
intangible assets depends on the amount and timing of definite-lived intangible
assets acquired and where previously acquired definite-lived intangible assets
are in their estimated life-cycle. In general, the economic benefit of a
definite-lived intangible asset is concentrated towards the beginning of its
useful life.
Restructuring and other charges, net
Restructuring and other charges, net consists of severance, outplacement, other
separation benefits, and facility and other exit costs. These charges may be
incurred as part of an announced restructuring plan or may be individual charges
recognized related to acquired businesses or the termination of a limited number
of employees that do not represent the initiation of a larger restructuring
plan. Restructuring and other charges, net also includes the gain, net of
transaction costs, from the sale of businesses and other operating income or
expense that is not presented elsewhere in operating income.
Amounts recognized in restructuring and other charges, net will vary according
to the extent of our restructuring programs and other income or expense items
not presented elsewhere in operating income.
Interest expense, net
As of December 31, 2021 and 2020, we had gross outstanding indebtedness of
$4,280.2 million and $4,036.6 million, respectively. This indebtedness consists
of a secured credit facility and senior unsecured notes. Refer to Note 14: Debt
of our Financial Statements included elsewhere in this Report for additional
information.
The credit agreement governing our secured credit facility (as amended, the
"Credit Agreement") provides for senior secured credit facilities (the "Senior
Secured Credit Facilities") consisting of a term loan facility (the "Term
Loan"), the $420.0 million revolving credit facility (the "Revolving Credit
Facility"), and incremental availability (the "Accordion") under which
additional secured credit facilities could be issued under certain
circumstances.
Our respective senior unsecured notes (the "Senior Notes") accrue interest at
fixed rates. However, the Term Loan and the Revolving Credit Facility accrue
interest at variable interest rates, which drives some of the variability in
interest expense, net. Refer to Item 7A: Quantitative and Qualitative
Disclosures About Market Risk included elsewhere in this Report for more
information regarding our exposure to potential changes in variable interest
rates.
Interest income, which is netted against interest expense on the consolidated
statements of operations, relates to interest earned on our cash and cash
equivalent balances, and varies according to the balances in, and the interest
rates provided by, these investments.
Other, net
Other, net primarily includes gains and losses associated with the remeasurement
of non-USD denominated monetary assets and liabilities into USD, changes in the
fair value of derivative financial instruments not designated as cash flow
hedges, debt financing transactions, and net periodic benefit cost, excluding
service cost.
Amounts recognized in other, net vary according to changes in foreign currency
exchange rates, changes in the forward prices for the foreign currencies and
commodities that we hedge, the number and magnitude of debt financing
transactions we undertake, and the change in funded status of our pension and
other post-retirement benefit plans.
Refer to Note 6: Other, Net of our Financial Statements included elsewhere in
this Report for additional information related to the components of other, net.
Refer to Item 7A: Quantitative and Qualitative Disclosures About Market Risk
included elsewhere
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in this Report for additional information related to our exposure to potential
changes in foreign currency exchange rates and commodity prices. Refer to Note
14: Debt of our Financial Statements included elsewhere in this Report for
additional information related to our debt financing transactions.
Provision for (or benefit from) income taxes
We are subject to income tax in the various jurisdictions in which we operate.
The provision for (or benefit from) income taxes consists of:
•current tax expense, which relates primarily to our profitable operations in
non-U.S. tax jurisdictions and withholding taxes related to interest, royalties,
and repatriation of foreign earnings; and
•deferred tax expense (or benefit), which represents adjustments in book-to-tax
basis differences primarily related to the step-up in fair value of fixed and
intangible assets, including goodwill, acquired in connection with business
combination transactions, the utilization of net operating losses, changes in
tax rates, and changes in our assessment of the realizability of our deferred
tax assets.
Our current tax expense is favorably impacted by the amortization of
definite-lived intangible assets and other tax benefits derived from our
operating and capital structure, including tax incentives in both the U.K. and
China as well as favorable tax status in Mexico. In addition, our tax structure
takes advantage of participation exemption regimes that permit the receipt of
intercompany dividends without incurring taxable income in those jurisdictions.
While the extent of our future tax liability is uncertain, the impact of
purchase accounting for past and future acquisitions, changes to debt and equity
capitalization of our subsidiaries, and the realignment of the functions
performed and risks assumed by our various subsidiaries are among the factors
that will determine the future book and taxable income of each of our
subsidiaries and of Sensata as a whole.
Our effective tax rate will generally not equal the U.S. statutory tax rate due
to various factors, the most significant of which are described below. As these
factors fluctuate from year to year, our effective tax rate will change. The
factors include, but are not limited to, the following:
•establishing or releasing a portion of the valuation allowance related to our
gross deferred tax assets;
•foreign tax rate differential - we operate in locations outside the U.S.,
including Belgium, Bulgaria, China, Malaysia, Malta, the Netherlands, South
Korea, and the U.K., that historically have had statutory tax rates different
than the U.S. statutory tax rate. This can result in a foreign tax rate
differential that may reflect a tax benefit or detriment. This foreign tax rate
differential can change from year to year based upon the jurisdictional mix of
earnings and changes in current and future enacted tax rates, tax holidays, and
favorable tax regimes available to certain of our foreign subsidiaries;
•changes in tax laws and rates, also Organization for Economic Co-operation and
Development ("OECD") developments and European Commission ("EC") challenges to
sovereign European Union member states;
•losses incurred in certain jurisdictions, which cannot be currently benefited,
as it is not more likely than not that the associated deferred tax asset will be
realized in the foreseeable future;
•foreign currency exchange gains and losses;
•as a result of income tax audit settlements, final assessments, or lapse of
applicable statutes of limitation, we may recognize an income tax expense or
benefit including the reversal of previously accrued interest and penalties; and
•in certain jurisdictions, we recognize withholding and other taxes on
intercompany payments, including dividends, and such taxes are deducted if they
cannot be credited against the recipient's tax liability in its country of
residence.
Seasonality
Refer to Item 1: Business included elsewhere in this Report for discussion of
our assessment of seasonality related to our business.
Legal Proceedings
Refer to Item 3: Legal Proceedings included elsewhere in this Report for
discussion of legal proceedings related to our business.
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Results of Operations
Our discussion and analysis of results of operations are based upon our
Financial Statements included elsewhere in this Report. The Financial Statements
have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). The preparation of the Financial Statements requires us to
make estimates and judgments that affect the amounts reported therein. We base
our estimates on historical experience and assumptions believed to be reasonable
under the circumstances, and we re-evaluate such estimates on an ongoing basis.
Actual results could differ from our estimates under different assumptions or
conditions. Our significant accounting policies and estimates are more fully
described in Note 2: Significant Accounting Policies of our Financial Statements
included elsewhere in this Report and Critical Accounting Policies and Estimates
included elsewhere in this MD&A.
The table below presents our historical results of operations in millions of
dollars and as a percentage of net revenue. We have derived these results of
operations from our Financial Statements. Amounts and percentages in the table
below have been calculated based on unrounded numbers, accordingly, certain
amounts may not appear to recalculate due to the effect of rounding.
                                                                                       For the year ended December 31,
                                                         2021                                        2020                                        2019
                                                                Percent of                                  Percent of                                  Percent of
                                           Amount              Net Revenue              Amount             Net Revenue              Amount             Net Revenue
Net revenue:
Performance Sensing                     $  2,847.9                     74.5  %       $ 2,223.8                     73.0  %       $ 2,546.0                     73.8  %
Sensing Solutions                            972.9                     25.5              821.8                     27.0              904.6                     26.2
Total net revenue                          3,820.8                    100.0  %         3,045.6                    100.0  %         3,450.6                    100.0  %

Operating costs and expenses               3,187.6                     83.4            2,707.8                     88.9            2,893.7                     83.9
Operating income                             633.2                     16.6              337.7                     11.1              556.9                     16.1
Interest expense, net                       (179.3)                    (4.7)            (171.8)                    (5.6)            (158.6)                    (4.6)
Other, net                                   (40.0)                    (1.0)              (0.3)                     0.0               (7.9)                    (0.2)
Income before taxes                          413.9                     10.8              165.6                      5.4              390.4                     11.3
Provision for income taxes                    50.3                      1.3                1.4                      0.0              107.7                      3.1
Net income                              $    363.6                      9.5  %       $   164.3                      5.4  %       $   282.7                      8.2  %


Net revenue - Overall
Net revenue for the year ended December 31, 2021 increased 25.5% compared to the
year ended December 31, 2020 largely due to improved market results and our
continued outperformance relative to those markets. Excluding an increase of
2.3% attributed to changes in foreign currency exchange rates and an increase of
2.5% due to the effect of acquisitions, net revenue increased 20.7% on an
organic basis compared to the year ended December 31, 2020. This represents
market outgrowth of 960 basis points. Organic revenue growth (or decline),
discussed throughout this MD&A, is a financial measure not presented in
accordance with U.S. GAAP. Refer to Non-GAAP Financial Measures included
elsewhere in this MD&A for additional information related to our use of organic
revenue growth (or decline).
Net revenue for the year ended December 31, 2020 declined 11.7% compared to the
year ended December 31, 2019 largely due to end-market contraction caused by the
COVID-19 pandemic. Excluding an increase of 0.2% attributed to changes in
foreign currency exchange rates, net revenue declined 11.9% on an organic basis
compared to the year ended December 31, 2019. This represents market outgrowth
of 650 basis points.
Net Revenue - Performance Sensing
Fiscal year 2021 vs. fiscal year 2020
Performance Sensing net revenue for the year ended December 31, 2021 increased
28.1% compared to the year ended December 31, 2020. Excluding an increase of
2.4% attributed to changes in foreign currency exchange rates and an increase of
3.4% due to the effect of acquisitions, Performance Sensing net revenue
increased 22.3% on an organic basis compared to the year ended December 31,
2020, representing market outgrowth of 1,170 basis points. Price reductions,
primarily to automotive customers, resulted in a 0.9% decrease in net revenue,
and the impact of these price reductions is included in the 1,170 basis points
of market outgrowth recognized by Performance Sensing. Both the Automotive and
HVOR operating segments contributed to these results as discussed below.
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Automotive net revenue for the year ended December 31, 2021 increased 17.6%
compared to the year ended December 31, 2020. Excluding an increase of 2.5%
attributed to changes in foreign currency exchange rates, automotive net revenue
increased 15.1% on an organic basis compared to the year ended December 31,
2020. Although automotive production was constrained due to global supply chain
shortages, resulting in muted end-market growth of 1.2% for the year, we
delivered organic revenue growth due to our continued outperformance relative to
the automotive market, led by new product launches in powertrain and emissions,
safety, and electrification-related applications and systems. Excluding the
estimated effects of OEM efforts to replenish inventory channels, automotive
outgrew its end-markets by 860 basis points in the year ended December 31, 2021.
HVOR net revenue for the year ended December 31, 2021 increased 63.3% compared
to the year ended December 31, 2020. Excluding an increase of 2.1% attributed to
changes in foreign currency exchange rates and an increase of 14.8% due to the
effect of acquisitions, HVOR net revenue increased 46.4% on an organic basis
compared to the year ended December 31, 2020. This organic revenue increase is
primarily due to recovery of customer production combined with our continued
outperformance relative to the HVOR markets. Our China on-road truck business
saw significant market outgrowth from the adoption of NS6 emissions regulations,
and we are also benefiting from a wave of electromechanical operator controls
being installed in new off-road equipment. Excluding the estimated effects of
OEM efforts to replenish inventory channels, HVOR outgrew its end-markets by
1,930 basis points in the year ended December 31, 2021.
Fiscal year 2020 vs. fiscal year 2019
Performance Sensing net revenue for the year ended December 31, 2020 declined
12.7% compared to the year ended December 31, 2019. Excluding an increase of
0.1% attributed to changes in foreign currency exchange rates, Performance
Sensing net revenue declined 12.8% on an organic basis compared to the year
ended December 31, 2019, representing market outgrowth of 770 basis points.
Price reductions, primarily to automotive customers, resulted in a 1.5% decrease
in net revenue, and the impact of these price reductions is included in the 770
basis points of market outgrowth recognized by Performance Sensing. The organic
revenue decline was driven primarily by impacts from the COVID-19 pandemic,
which was mitigated in the second half of the year as OEM customers ramped
production within their facilities through the half in an effort to replace
production lost during shut-downs earlier in the year. The Performance Sensing
results in fiscal year 2020 represented
Automotive net revenue for the year ended December 31, 2020 declined 13.6%
compared to the year ended December 31, 2019. Excluding an increase of 0.3%
attributed to changes in foreign currency exchange rates, Automotive net revenue
declined 13.9% on an organic basis compared to the year ended December 31, 2019.
These results represented market outgrowth of 690 basis points compared to the
combination of an automotive market that was down 18.5% and the impact of OEM
customers working down inventories. This market outgrowth continues to be led by
new product launches in emissions, electrification, and safety-related
applications and systems. A high level of automotive production in the fourth
quarter of 2020 resulted in customers using more inventory on hand to fill
orders, negatively impacting fiscal year 2020 net revenue.
HVOR net revenue for the year ended December 31, 2020 declined 9.2% compared to
the year ended December 31, 2019 on both a reported and an organic basis. These
results represented market outgrowth of 880 basis points compared to an HVOR
market that was down 18.0%. Our China on-road truck business continued to post
better than expected growth as a result of the accelerated adoption of NS6
emissions regulations.
Net Revenue - Sensing Solutions
Fiscal year 2021 vs. fiscal year 2020
Sensing Solutions net revenue for the year ended December 31, 2021 increased
18.4% compared to the year ended December 31, 2020. Excluding an increase of
1.7% attributed to changes in foreign currency exchange rates and an increase of
0.3% due to the effect of acquisitions, Sensing Solutions net revenue increased
16.4% on an organic basis compared to the year ended December 31, 2020. The
increase in net revenue was driven by the continued recovery of global
industrial end-markets, as well as new Electrification launches and HVAC market
recovery.
Fiscal year 2020 vs. fiscal year 2019
Sensing Solutions net revenue for the year ended December 31, 2020 declined 9.2%
compared to the year ended December 31, 2019 on both a reported and an organic
basis. This decrease was the result of year over year declines in the
industrial, appliance and HVAC, and aerospace end-markets. The global industrial
and appliance and HVAC end-markets began recovering in the fourth quarter of
2020, which, in addition to supply chain restocking, reflected strong growth in
HVAC and 5G applications. The decline in the aerospace industry continued
throughout fiscal year 2020, reflecting reduced OEM production and significantly
lower air traffic. New product launches in the fourth quarter of 2020, primarily
in the defense market, partially offset this decline.
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Operating costs and expenses
Operating costs and expenses for the years ended December 31, 2021, 2020, and
2019 are presented, in millions of dollars and as a percentage of revenue, in
the following table. Amounts and percentages in the table below have been
calculated based on unrounded numbers, accordingly, certain amounts may not
appear to recalculate due to the effect of rounding.
                                                                                          For the year ended December 31,
                                                          2021                                          2020                                         2019
                                                                 Percent of                                   Percent of                                   Percent of
                                            Amount               Net Revenue              Amount              Net Revenue              Amount              Net Revenue
Operating costs and expenses:
Cost of revenue                          $  2,542.4                      66.5  %       $ 2,119.0                      69.6  %       $ 2,267.4                      65.7  %
Research and development                      159.1                       4.2              131.4                       4.3              148.4                       4.3
Selling, general and administrative           337.0                       8.8              294.7                       9.7              281.4                       8.2
Amortization of intangible assets             134.1                       3.5              129.5                       4.3              142.9                       4.1
Restructuring and other charges, net           14.9                       0.4               33.1                       1.1               53.6                       1.6
Total operating costs and expenses       $  3,187.6                      83.4  %       $ 2,707.8                      88.9  %       $ 2,893.7                      83.9  %


Cost of revenue
Cost of revenue as a percentage of net revenue decreased in fiscal year 2021
primarily as a result of (1) higher volume and the nonrecurrence of productivity
headwinds from our manufacturing facilities running at lower than normal
capacity in fiscal year 2020 and (2) the nonrecurrence of a $29.2 million loss
from fiscal year 2020 in intellectual property litigation originally brought
against August Cayman Company, Inc. ("Schrader") by Wasica. These favorable
impacts on cost of revenue as a percentage of revenue were partially offset by
increased costs related to global supply chain shortages.
Cost of revenue as a percentage of net revenue increased in fiscal year 2020
primarily as a result of (1) productivity headwinds from lower volume, the
resulting lower than normal capacity, and increased costs related to the
COVID-19 pandemic, (2) a $29.2 million loss in fiscal year 2020 related to the
judgment against us in intellectual property litigation originally brought
against Schrader by Wasica, and (3) higher compensation to retain and
incentivize critical employee talent. These unfavorable impacts were partially
offset by (1) the impact of ongoing savings resulting from cost reduction
activities taken in fiscal years 2019 and 2020, (2) the favorable effect of
changes in foreign currency exchange rates, and (3) savings from temporary cost
reductions in fiscal year 2020 (including salary reductions and furloughs).
Research and development expense
R&D expense increased in fiscal year 2021 primarily as a result of (1) higher
spend to support megatrend growth initiatives, (2) incremental R&D expense
related to acquired businesses, and (3) the unfavorable effect of changes in
foreign currency exchange rates, partially offset by the impact on fiscal year
2021 of ongoing savings resulting from cost reduction activities taken in fiscal
year 2020. R&D expense related to megatrends in fiscal year 2021 was $48.0
million, an increase of $22.0 million from fiscal year 2020. We currently expect
approximately $60 million to $70 million in total spend related to megatrends in
fiscal year 2022, the majority of which will be recorded as R&D expense.
R&D expense decreased in fiscal year 2020 primarily as a result of the impact of
ongoing savings resulting from cost reduction activities taken in fiscal years
2019 and 2020, somewhat offset by increased R&D expense related to our megatrend
initiatives. R&D expense related to our megatrend initiatives was $26.1 million
in fiscal year 2020, an increase of $6.8 million from fiscal year 2019.
Selling, general and administrative expense
SG&A expense increased in fiscal year 2021 primarily as a result of (1)
incremental SG&A expense related to acquired businesses, including related
transaction costs, (2) higher incentive compensation aligned to improved
financial performance, (3) increased selling expenses attributed to organic
revenue growth, and (4) the unfavorable impact of changes in foreign currency
exchange rates. These increases were partially offset by the fiscal year 2020
completion of a project related to enhancements and improvements of our global
operating processes to increase productivity and the resulting reduction in
professional fees.
SG&A expense increased in fiscal year 2020 primarily as a result of (1) higher
incentive compensation to retain and incentivize critical employee talent, (2)
increased costs related to enhancements and improvements of our global operating
processes to
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increase productivity, and (3) incremental SG&A related to acquired businesses,
partially offset by (1) the impact of ongoing savings resulting from cost
reduction activities taken in fiscal years 2019 and 2020 and (2) savings from
temporary cost reductions in fiscal year 2020 (including salary reductions and
furloughs).
Amortization of intangible assets
Amortization expense increased in fiscal year 2021 primarily as a result of
increased intangibles from recent acquisitions partially offset by the effect of
the economic-benefit method of amortization as described in Note 2: Significant
Accounting Policies of our Financial Statements included elsewhere in this
Report. We expect amortization expense to be approximately $140.8 million in
fiscal year 2022. Refer to Note 11: Goodwill and Other Intangible Assets, Net of
our Financial Statements included elsewhere in this Report for additional
information regarding definite-lived intangible assets and the related
amortization.
Amortization expense decreased in fiscal year 2020 primarily as a result of the
effect of the economic-benefit method of amortization.
Restructuring and other charges, net
Restructuring and other charges, net decreased in fiscal year 2021 primarily due
to lower restructuring charges incurred as part of a plan commenced in fiscal
year 2020 to reorganize our business in response to the potential long-term
impact of the global financial and health crisis caused by the COVID-19 pandemic
(the "Q2 2020 Global Restructure Program"). Refer to Note 5: Restructuring and
Other Charges, Net of our Financial Statements included elsewhere in this Report
for additional information related to the Q2 2020 Global Restructure Program.
Restructuring and other charges, net decreased in fiscal year 2020 primarily due
to the nonrecurrence of certain charges incurred in fiscal year 2019 partially
offset by charges incurred under the Q2 2020 Global Restructure Program. The
fiscal year 2019 charges that did not recur include (1) a $17.8 million loss
related to the termination of a supply agreement in connection with the Metal
Seal Precision, Ltd. ("Metal Seal") litigation, (2) $12.7 million of benefits
provided under a voluntary retirement incentive program offered to a limited
number of eligible employees in the U.S., and (3) $6.5 million of termination
benefits provided under a one-time benefit arrangement related to the shutdown
and relocation of an operating site in Germany.
Restructuring and other charges, net for the years ended December 31, 2021,
2020, and 2019 consisted of the following (amounts have been calculated based on
unrounded numbers, accordingly, certain amounts may not appear to recalculate
due to the effect of rounding):
                                                     For the year ended 

December 31,

  (In millions)                                        2021                 

2020 2019

  Q2 2020 Global Restructure Program (1)    $       7.1                   $ 

$24.5 –

Other restructuring charges

  Severance costs, net (2)                          4.5                     

3.0 29.2

  Facility and other exit costs                     2.4                     

1.3 0.8


  Other (3)                                         0.9                     

4.3 23.5

  Restructuring and other charges, net      $      14.9                   $ 

33.1 $53.6

__________________________

(1)  The Q2 2020 Global Restructure Program was completed in fiscal year 2021,
with approximately 840 positions impacted. Since inception of the Q2 2020 Global
Restructure Program, we have recognized cumulative costs of $33.2 million, of
which $28.4 million related to severance charges and $4.8 million related to
facility and other exit costs.
(2)  For each of the years ended December 31, 2021, 2020, and 2019, these
charges include termination benefits provided in connection with workforce
reductions of manufacturing, engineering, and administrative positions,
including the elimination of certain positions related to site consolidations,
net of reversals. For the year ended December 31, 2020, these charges also
related to termination benefits arising from the shutdown and relocation of
operating sites in Northern Ireland and Belgium. For the year ended December 31,
2019, these charges also included approximately $12.7 million of benefits
provided under a voluntary retirement incentive program offered to a limited
number of eligible employees in the U.S., and $6.5 million of termination
benefits provided under a one-time benefit arrangement related to the shutdown
and relocation of an operating site in Germany.
(3)  Represents charges that are not included in one of the other
classifications. In the year ended December 31, 2019, we recognized a $17.8
million loss related to the termination of a supply agreement in connection with
the Metal Seal litigation.
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Refer to Note 5: Restructuring and Other Charges, Net of our Financial
Statements included elsewhere in this Report for additional information related
to our restructuring and other charges, net.
Operating income
In fiscal year 2021, operating income increased $295.5 million or 87.5%, to
$633.2 million (16.6% of net revenue) compared to $337.7 million (11.1% of net
revenue) in fiscal year 2020. This increase was primarily driven by (1) improved
gross margins, due mainly to higher organic sales volumes as well as the
turnaround effect of the Wasica litigation settlement in fiscal year 2020,
partially offset by increased costs related to global supply chain shortages,
and (2) lower restructuring costs. These improvements were partially offset by
(1) higher spend to support megatrend growth initiatives, (2) higher incentive
compensation aligned to improved financial performance, and (3) the turnaround
effect of temporary salary reductions and furloughs taken in the second quarter
2020.
In fiscal year 2020, operating income decreased $219.1 million or 39.4%, to
$337.7 million (11.1% of net revenue) compared to $556.9 million (16.1% of net
revenue) in fiscal year 2019. This decrease was primarily driven by: (1) the
impacts of the COVID-19 pandemic, most significantly lower revenues,
productivity headwinds from our manufacturing facilities running at lower than
normal capacity, and increased costs related to the COVID-19 pandemic; (2)
charges related to the intellectual property litigation brought against Schrader
by Wasica, which was settled in the third quarter, including $29.2 million
recognized in the first quarter of 2020; (3) $24.5 million in severance charges
recognized in fiscal year 2020 related to the Q2 2020 Global Restructure
Program; and (4) higher compensation costs to retain and incentivize critical
employee talent.
These drivers of reduced operating income in fiscal year 2020 were partially
offset by: (1) the non-recurrence of certain restructuring and other charges
from fiscal year 2019 as discussed in Note 5: Restructuring and Other Charges,
Net of our Financial Statements included elsewhere in this Report, including
$17.8 million loss related to the termination of a supply agreement in
connection with the Metal Seal litigation and charges related to benefits
provided under a voluntary retirement incentive program; (2) cost savings of
approximately $21.8 million realized in the second quarter of 2020 resulting
from temporary salary reductions, furloughs, and government subsidies; (3) the
impact of ongoing savings resulting from cost reduction activities taken in
fiscal years 2019 and 2020; (4) the favorable effect of changes in foreign
currency exchange rates; and (5) lower intangible amortization expense due to
the impacts of the economic-benefit method of amortization.
Interest expense, net
Interest expense, net increased in fiscal year 2021 primarily as a result of (1)
interest expense in fiscal year 2021 related to the issuance of the 4.0% Senior
Notes, (2) additional interest expense in fiscal year 2021 related to the $750.0
million aggregate principal amount of 3.75% senior notes due 2031 (the "3.75%
Senior Notes") as a result of their issuance in fiscal year 2020, partially
offset by reduced interest as a result of the redemption of the 6.25% Senior
Notes early in fiscal year 2021. Refer to Overview-Debt Transactions elsewhere
in this MD&A for additional information related to these transactions.
Interest expense, net increased in fiscal year 2020 primarily due to (1) a full
year of interest expense related to the $450.0 million aggregate principal
amount of 4.375% senior notes due 2030 (the "4.375% Senior Notes"), which were
issued in fiscal year 2019, (2) a partial year of interest expense related to
the 3.75% Senior Notes, which were issued in 2020, (3) interest incurred on
outstanding balances of the Revolving Credit Facility in fiscal year 2020, and
(4) lower cash interest income due to declining interest rates. These increases
were partially offset by lower interest expense on the Term Loan, which was
partially repaid in fiscal year 2019 after issuance of the 4.375% Senior Notes.
On April 1, 2020, in order to enhance our financial flexibility given the
general uncertainty associated with the COVID-19 pandemic, we withdrew $400.0
million from our Revolving Credit Facility. On August 17, 2020, we took
advantage of historically low interest rates in issuing the 3.75% Senior Notes.
Given improving market conditions and strengthening financial markets, we
decided to use a portion of the proceeds to repay $400.0 million of outstanding
borrowings under the Revolving Credit Facility.
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Other, net
Other, net for the years ended December 31, 2021, 2020, and 2019 consisted of
the following (amounts have been calculated based on unrounded numbers,
accordingly, certain amounts may not appear to recalculate due to the effect of
rounding):
                                                                        For the year ended December 31,
(In millions)                                                      2021                2020              2019

Currency remeasurement gain/(loss) on net monetary assets (1) $ 3.4

         $   10.8$   (6.8)
(Loss)/gain on foreign currency forward contracts (2)                 (7.6)             (6.8)              2.2
(Loss)/gain on commodity forward contracts (2)                        (3.0)             10.0               4.9
Loss on debt financing (3)                                           (30.1)                -              (4.4)

Net periodic benefit cost, excluding service cost                     (7.5)            (10.0)             (3.2)
Other                                                                  4.6              (4.5)             (0.7)
Other, net                                                    $      (40.0)$   (0.3)$   (7.9)


__________________________
(1)  Relates to the remeasurement of non-USD denominated monetary assets and
liabilities into USD.
(2)  Relates to changes in the fair value of derivative financial instruments
that are not designated as hedges. Refer to Note 19: Derivative Instruments and
Hedging Activities of our Financial Statements included elsewhere in this Report
for additional information related to gains and losses related to our commodity
and foreign currency forward contracts. Refer to Item 7A: Quantitative and
Qualitative Disclosures About Market Risk included elsewhere in this Report for
an analysis of the sensitivity of other, net to changes in foreign currency
exchange rates and commodity prices.
(3)  Refer to Note 14: Debt of our Financial Statements included elsewhere in
this Report for additional information related to our debt financing
transactions.
Provision for income taxes
The components of provision for income taxes for the years ended December 31,
2021, 2020, and 2019 are described in more detail in the table below (amounts
have been calculated based on unrounded numbers, accordingly, certain amounts
may not appear to recalculate due to the effect of rounding):
                                                      For the year ended 

December 31,

 (In millions)                                         2021                 

2020 2019

 Tax computed at statutory rate of 21% (1)   $      86.9                  $ 

34.8 $82.0

 Valuation allowances (2)                           20.5                    

8.9 19.6

 Foreign tax rate differential (4)                 (30.5)                  

(22.0) (19.1)

 Research and development incentives (3)           (11.1)                   

(7.4) (8.4)

 Reserve for tax exposure                          (16.3)                   

(0.2) 20.1

 Withholding taxes not creditable                   13.3                    

12.2 9.5

 Change in tax laws or rates                        (7.1)                   

11.2 5.1

 Intangible property transfers (5)                     -                   (54.2)           -

 Other (6)                                          (5.4)                   18.0         (1.1)
 Provision for income taxes                  $      50.3$  1.4$ 107.7


__________________________
(1)  Represents the product of the applicable statutory tax rate and income
before taxes, as reported in the consolidated statements of operations.
(2)  During the years ended December 31, 2021, 2020, and 2019, we established an
additional valuation allowance and recognized a deferred tax expense. The
valuation allowance as of December 31, 2021 and 2020 was $225.9 million and
$202.1 million, respectively. A significant portion of our valuation allowance
is against interest carryforwards due to our assessment of our inability to
utilize these carryforwards based on our forecasts of future taxable income. The
remaining valuation allowance primarily relates to foreign tax credits, capital
loss carryforwards, goodwill tax basis, and net operating losses in
jurisdictions outside the U.S. It is more likely than not that these attributes
will not be utilized in the foreseeable future. However, any future release of
all or a portion of this valuation allowance resulting from a change in this
assessment will impact our future provision for (or benefit from) income taxes.
(3)  In China, we benefit from the R&D super deduction regime. In the U.K.,
certain of our subsidiaries are eligible for lower
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tax rates under the "patent box" regime. In the U.S., we benefit from the
federal research and development credit.
(4)  We operate in locations outside the U.S., including Belgium, Bulgaria,
China, Malaysia, Malta, the Netherlands, South Korea, and the U.K., that
historically have had statutory tax rates different than the U.S. statutory tax
rate. This can result in a foreign tax rate differential that may reflect a tax
benefit or detriment. This foreign tax rate differential can change from year to
year based upon the jurisdictional mix of earnings and changes in current and
future enacted tax rates. Certain of our subsidiaries are currently eligible, or
have been eligible, for tax exemptions or reduced tax rates in their respective
jurisdictions.
(5)  In the fourth quarter of 2020, we completed the transfer of intangible
property which resulted in a net $54.2 million deferred tax benefit.
(6)  Refer to Note 7: Income Taxes of our Financial Statements included
elsewhere in this Report for additional information related to other components
of our rate reconciliation.
We do not believe that there are any known trends related to the reconciling
items noted above that are reasonably likely to result in our liquidity
increasing or decreasing in any material way.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP
financial measures, including organic revenue growth (or decline), adjusted
operating income, adjusted operating margin, adjusted net income, adjusted
earnings per share ("EPS"), free cash flow, net leverage ratio, and adjusted
earnings before interest, taxes, depreciation, and amortization ("EBITDA"),
which are used by our management, Board of Directors, and investors. We use
these non-GAAP financial measures internally to make operating and strategic
decisions, including the preparation of our annual operating plan, evaluation of
our overall business performance, and as a factor in determining compensation
for certain employees.
The use of our non-GAAP financial measures has limitations. They should be
considered as supplemental in nature and are not intended to be considered in
isolation from, or as an alternative to, reported net revenue growth (or
decline), operating income, operating margin, net income, diluted EPS, operating
cash flows, total debt, finance lease, and other financing obligations, or
EBITDA, respectively, calculated in accordance 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.
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Free cash flow
Free cash flow is defined as net cash provided by operating activities less
additions to PP&E and capitalized software. We believe free cash flow is useful
to management and investors as a measure of cash generated by business
operations that will be used to repay scheduled debt maturities and can be used
to, among other things, fund acquisitions, repurchase ordinary shares, and (or)
accelerate the repayment of debt obligations.
Adjusted EBITDA
Adjusted EBITDA is defined as net income (or loss), determined in accordance
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 loss or gain on
derivative instruments, and (4) step-up inventory amortization. Refer to
Non-GAAP Adjustments below for additional discussion of these adjustments.
Net leverage ratio
Net leverage ratio represents net debt (total debt, finance lease, and other
financing obligations less cash and cash equivalents) divided by last twelve
months ("LTM") adjusted EBITDA. We believe that the net leverage ratio is a
useful measure to management and investors in understanding trends in our
overall financial condition.
Non-GAAP adjustments
Many of our non-GAAP adjustments relate to a series of strategic initiatives
developed by our management aimed at better positioning us for future revenue
growth and an improved cost structure. These initiatives have been modified from
time to time to reflect changes in overall market conditions and the competitive
environment facing our business. These initiatives include, among other items,
acquisitions, divestitures, restructurings of certain business, supply chain, or
corporate activities, and various financing transactions. We describe these
adjustments in more detail below, each of which is net of current tax impacts,
as applicable.
•Restructuring related and other: includes charges, net related to certain
restructuring and other exit activities as well as other costs (or income) that
we believe are either unique or unusual to the identified reporting period, and
that we believe impact comparisons to prior period operating results. Such costs
include charges related to optimization of our manufacturing processes to
increase productivity. This type of activity occurs periodically, however each
action is unique, discrete, and driven by various facts and circumstances. Such
amounts are excluded from internal financial statements and analyses that
management uses in connection with financial planning, and in its review and
assessment of our operating and financial performance, including the performance
of our segments.
•Financing and other transaction costs: includes losses or gains related to debt
financing transactions, losses or gains related to the divestiture of a
business, and costs incurred, including for legal, accounting, and other
professional services, that are directly related to an acquisition, divestiture,
or equity financing transaction.
•Deferred loss or gain on derivative instruments: includes unrealized losses or
gains on derivative instruments that do not qualify for hedge accounting as well
as the impact of commodity prices on our raw material costs relative to the
strike price on our commodity forward contracts.
•Step-up depreciation and amortization: includes depreciation and amortization
expense associated with the step-up in fair value of assets acquired in
connection with a business combination (e.g., PP&E, definite-lived intangible
assets, and inventories).
•Deferred taxes and other tax related: includes adjustments for book-to-tax
basis differences due primarily to the step-up in fair value of fixed and
intangible assets and goodwill, the utilization of net operating losses, and
adjustments to our valuation allowance in connection with certain acquisitions
and tax law changes. Other tax related items include certain adjustments to
unrecognized tax benefits and withholding tax on repatriation of foreign
earnings.
•Amortization of debt issuance costs. We adjust our results recorded in
accordance 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.
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Our definition of adjusted net income excludes the deferred provision for (or
benefit from) income taxes and other tax related items described above. As we
treat deferred income taxes as an adjustment to compute adjusted net income, the
deferred income tax effect associated with the reconciling items presented below
would not change adjusted net income for any period presented.
Non-GAAP reconciliations
The following tables present reconciliations of certain financial measures
calculated in accordance 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 table below have been calculated based on unrounded numbers, accordingly,
certain amounts may not appear to recalculate due to the effect of rounding.
                                                                              For the year ended December 31, 2021
($ in millions, except per share amounts)             Operating Income        Operating Margin           Net Income           Diluted EPS
Reported (GAAP)                                       $       633.2                      16.6  %       $     363.6$       2.28
Non-GAAP adjustments:
Restructuring related and other (d)                            23.6                       0.6                 21.4                  0.13
Financing and other transaction costs (b)                      13.2                       0.3                 41.0                  0.26
Step-up depreciation and amortization                         127.6                       3.3                127.6                  0.80
Deferred loss on derivative instruments                         8.3                       0.2                 11.3                  0.07
Amortization of debt issuance costs                               -                         -                  6.9                  0.04
Deferred taxes and other tax related (c)                          -                         -                 (4.9)                (0.03)
Total adjustments                                             172.8                       4.5                203.3                  1.28
Adjusted (non-GAAP)                                   $       806.0                      21.1  %       $     566.8$       3.56


                                                                              For the year ended December 31, 2020
($ in millions, except per share amounts)             Operating Income        Operating Margin           Net Income           Diluted EPS
Reported (GAAP)                                       $       337.7                      11.1  %       $     164.3$       1.04
Non-GAAP adjustments:
Restructuring related and other (d)                            87.4                       2.9                 93.8                  0.59
Financing and other transaction costs                           8.2                       0.3                  6.4                  0.04
Step-up depreciation and amortization                         125.7                       4.1                125.7                  0.79
Deferred loss/(gain) on derivative instruments                  3.1                       0.1                 (7.0)                (0.04)
Amortization of debt issuance costs                               -                         -                  6.9                  0.04
Deferred taxes and other tax related (a)                          -                         -                (40.9)                (0.26)
Total adjustments                                             224.4                       7.4                184.9                  1.17
Adjusted (non-GAAP)                                   $       562.1                      18.5  %       $     349.2$       2.21


                                                                              For the year ended December 31, 2019
($ in millions, except per share amounts)             Operating Income        Operating Margin           Net Income           Diluted EPS
Reported (GAAP)                                       $       556.9                      16.1  %       $     282.7$       1.75
Non-GAAP adjustments:
Restructuring related and other (d)                            61.9                       1.8                 62.2                  0.38
Financing and other transaction costs                          28.9                       0.8                 34.9                  0.22
Step-up depreciation and amortization                         139.6                       4.0                139.6                  0.86
Deferred gain on derivative instruments                        (1.6)                     (0.0)                (6.5)                (0.04)
Amortization of debt issuance costs                               -                         -                  7.8                  0.05
Deferred taxes and other tax related                              -                         -                 55.2                  0.34
Total adjustments                                             228.8                       6.6                293.2                  1.81
Adjusted (non-GAAP)                                   $       785.7                      22.8  %       $     575.9$       3.56


__________________________
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(a)  In the fourth quarter of 2020, we completed the transfer of intangible
property which resulted in a net $54.2 million deferred tax benefit.
(b)  Includes a $30.1 million loss recognized in fiscal year 2021 related to the
early redemption of the 6.25% Senior Notes. The loss primarily reflects the
payment of $23.4 million for the early redemption premium, with the remaining
loss representing write-off of debt discounts and deferred financing costs. The
loss is presented in other, net in our consolidated statements of operations.
(c)  Includes $10.9 million of current tax expense related to the repatriation
of earnings from certain Asian subsidiaries to their parent company in the
Netherlands. The decision to repatriate these earnings was the result of our
goal to reduce our balance sheet exposure and corresponding earnings volatility
related to changes in foreign currency exchange rates as well as to fund our
deployment of capital.
(d)  The following table presents the components of our restructuring related
and other non-GAAP adjustment to net income for fiscal years 2021, 2020, and
2019 (amounts have been calculated based on unrounded numbers, accordingly,
certain amounts may not appear to recalculate due to the effect of rounding):
                                                                      For the year ended December 31,
(In millions)                                                   2021                2020                2019
Business and corporate repositioning (i)                   $      10.7$     35.8$     40.1
Supply chain repositioning and transition (ii)                     8.2                30.8                16.0
Pre-acquisition legal matters (iii)                                6.0                31.5                 5.3
Other                                                                -                   -                 2.7
Income tax effect (iv)                                            (3.5)               (4.2)               (1.8)

Total non-GAAP restructuring related and other (v) $21.4

$93.8$62.2

__________________________

i.Fiscal year 2020 includes charges incurred under the Q2 2020 Global
Restructure Program and charges for other business and corporate workforce
rationalization. Fiscal year 2019 includes benefits provided under a voluntary
retirement incentive program, costs related to the shutdown and relocation of an
operating site in Germany, and charges for other business and corporate
workforce rationalization.
ii.Primarily includes costs related to optimization of our manufacturing
processes to increase productivity and rationalize our manufacturing footprint
and supply chain workforce rationalization.
iii.Represents charges incurred related to legal matters associated with
acquired businesses, for which new information is brought to light after the
measurement period for the business combination is closed, but for which the
liability relates to events or activities that occurred prior to our acquisition
of the business. Fiscal year 2020 primarily includes the settlement of
intellectual property litigation brought against Schrader by Wasica.
iv.We treat deferred taxes as a non-GAAP adjustment. Accordingly, the income tax
effect of the restructuring related and other non-GAAP adjustment refers only to
the current income tax effect.
v.Total presented is the non-GAAP adjustment to net income. Certain portions of
these adjustments are non-operating and are excluded from the non-GAAP
adjustments to operating income.
The following table presents a reconciliation of net cash provided by operating
activities calculated in accordance with U.S. GAAP to free cash flow.
                                                                      For the year ended December 31,
(In millions)                                                     2021               2020              2019
Net cash provided by operating activities                    $     554.2$  559.8$  619.6
Additions to property, plant and equipment and
capitalized software                                              (144.4)           (106.7)           (161.3)
Free cash flow                                               $     409.7$  453.1$  458.3


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The following table presents a reconciliation of net income calculated in accordance with US GAAP to adjusted EBITDA.

                                                                       For the year ended December 31,
(In millions)                                                      2021               2020              2019
Net income                                                    $     363.6$  164.3$  282.7
Interest expense, net                                               179.3             171.8             158.6
Provision for income taxes                                           50.3               1.4             107.7
Depreciation expense                                                125.0             125.7             115.9
Amortization of intangible assets                                   134.1             129.5             142.9
EBITDA                                                              852.3             592.6             807.7
Non-GAAP Adjustments
Restructuring related and other                                      23.6              93.1              64.1
Financing and other transaction costs                                41.0               6.4              34.9
Deferred loss/(gain) on derivative instruments                       11.3              (7.0)             (6.5)

Adjusted EBITDA                                               $     928.3$  685.1$  900.1

The following table presents a reconciliation of total debt, finance lease, and other financing obligations calculated in accordance with US GAAP to net leverage ratio.

                                                                         For the year ended December 31,
($ in millions)                                                     2021                  2020               2019

Current portion of long-term debt, finance lease and other financing obligations

                                  $        6.8

$757.2$6.9
Finance lease and other financing obligations, less current portion

                                                      26.6                  27.9               28.8
Long-term debt, net                                               4,214.9               3,213.7            3,219.9
Total debt, finance lease, and other financing
obligations                                                       4,248.3               3,998.9            3,255.6
Less: debt discount, net of premium                                  (5.2)                 (9.6)             (11.8)
Less: deferred financing costs                                      (26.7)                (28.1)             (24.5)
Total gross indebtedness                                          4,280.2               4,036.6            3,291.8
Less: cash and cash equivalents                                   1,709.0               1,862.0              774.1
Net debt                                                     $    2,571.3$ 2,174.6$ 2,517.7

Adjusted EBITDA (LTM)                                        $      928.3$   685.1$   900.1
Net leverage ratio                                                          2.8                3.2                2.8


Liquidity and Capital Resources
As of December 31, 2021 and 2020, we held cash and cash equivalents in the
following regions (amounts have been calculated based on unrounded numbers,
accordingly, certain amounts may not appear to recalculate due to the effect of
rounding):
                                                      As of December 31,
              (In millions)                          2021           2020
              United Kingdom                      $    20.4$    25.3
              United States                            25.0           17.2
              The Netherlands                       1,304.3        1,514.1
              China                                   293.8          185.2
              Other                                    65.5          120.2
              Total cash and cash equivalents     $ 1,709.0$ 1,862.0


The amount of cash and cash equivalents held in these geographic regions
fluctuates throughout the year due to a variety of factors, such as our use of
intercompany loans and dividends and the timing of cash receipts and
disbursements in the normal course of business. Our earnings are not considered
to be permanently reinvested in certain jurisdictions in which they were earned.
We recognize a deferred tax liability on these unremitted earnings to the extent
the remittance of such earnings cannot be recovered in a tax-free manner.
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Cash Flows
The table below summarizes our primary sources and uses of cash for the years
ended December 31, 2021, 2020, and 2019. We have derived this summarized
statement of cash flows from our Financial Statements included elsewhere in this
Report. Amounts in the table below have been calculated based on unrounded
numbers, accordingly, certain amounts may not appear to recalculate due to the
effect of rounding.
                                                                      For the year ended December 31,
(In millions)                                                  2021                    2020                2019
Net cash provided by/(used in):
Operating activities:
Net income adjusted for non-cash items                 $      678.2$    405.3$    630.3
Changes in operating assets and liabilities, net             (124.0)                    154.5               (10.7)
Operating activities                                          554.2                     559.8               619.6
Investing activities                                         (882.1)                   (182.1)             (208.8)
Financing activities                                          174.9                     710.2              (366.5)
Net change in cash and cash equivalents                $     (153.0)

$1,087.9$ 44.3



Operating Activities
Net cash provided by operating activities decreased slightly in fiscal year 2021
compared to fiscal year 2020. Net income adjusted for non-cash items increased
significantly from fiscal year 2020, which was substantially offset by changes
in working capital. Refer to Results of Operations included elsewhere in this
MD&A for discussion of the drivers of changes in net income from fiscal year
2020. In fiscal year 2021, management of working capital resulted in a reduction
of cash due to higher raw material purchases in order to maximize production
flexibility given widespread parts shortages in our supply chain and higher
accounts receivables as a result of higher revenue and timing of receipts from
customers. In addition, net cash provided by operating activities was reduced by
cash paid at closing of certain acquisitions related to employee retention
arrangements.
We have non-cancelable purchase agreements with various suppliers, primarily for
services such as information technology support. The terms of these agreements
are fixed and determinable. We have cash commitments under these agreements of
$46.2 million and $16.5 million in fiscal years 2022 and 2023, respectively.
Refer to Note 15: Commitments and Contingencies of our Financial Statements
included elsewhere in this Report for additional information related to our
non-cancelable purchase agreements.
The decrease in net cash provided by operating activities in fiscal year 2020
compared to fiscal year 2019 relates primarily to lower net income adjusted for
non-cash items, partially offset by reduced inventories and the timing of
supplier payments and customer receipts.
Investing Activities
Investing activities primarily include the acquisition or divestiture of a
business or assets, cash paid for additions to PP&E and capitalized software,
and the acquisition or sale of certain debt and equity securities.
Net cash used in investing activities increased in fiscal year 2021 primarily
due to cash paid for acquisitions. One of our primary uses of cash on hand is to
acquire businesses that will extend our market position within our key growth
vectors. In fiscal year 2021, we completed five acquisitions, Lithium Balance,
Xirgo, Spear, SmartWitness, and Sendyne. Refer to Item 1: Business - Business
Combinations and Note 21: Acquisitions of our Financial Statements, each
included elsewhere in this Report, for additional information.
In addition, we took advantage of strong operating cash flows to increase our
capital expenditures in fiscal year 2021. In fiscal year 2022, we anticipate
additions to PP&E and capitalized software of approximately $165.0 million to
$175.0 million, which we expect to be funded with cash flows from operations.
The decrease in cash used in investing activities in fiscal year 2020 compared
to fiscal year 2019 relates primarily to lower capital expenditures, partially
offset by additional cash paid for acquisitions.
Financing Activities
In fiscal year 2021, net cash provided by financing activities decreased
primarily due to the impact of debt financing transactions. In fiscal year 2021,
we issued $1.0 billion of 4.0% Senior Notes and redeemed the $750.0 million
aggregate
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principal amount outstanding on the 6.25% Senior Notes, representing net cash
inflow of $218.8 million (including associated fees). This compares to the
issuance of $750.0 million aggregate principal amount of 3.75% Senior Notes in
fiscal year 2020 and the borrowing and subsequent repayment of $400.0 million on
the Revolving Credit Facility, which, including associated fees, provided net
cash inflow of $732.8 million.
In fiscal year 2020 cash provided by financing activities was $710.2 million
compared to cash used in financing activities of $366.5 million in fiscal year
2019. This change was primarily driven by issuance of the 3.75% Senior Notes and
lower volume of share repurchases.
Indebtedness and Liquidity
The following table details our gross outstanding indebtedness as of
December 31, 2021, and the associated interest expense for the year then ended
(amounts have been calculated based on unrounded numbers, accordingly, certain
amounts may not appear to recalculate due to the effect of rounding):
                                                                                         Interest
                                                                                     Expense, net for
                                                                                      the year ended
                                                               Balance as of           December 31,
(In millions)                                                December 31, 2021             2021
Term Loan                                                    $        451.5          $         8.5
4.875% Senior Notes                                                   500.0                   24.4
5.625% Senior Notes                                                   400.0                   22.5
5.0% Senior Notes                                                     700.0                   35.0
6.25% Senior Notes(1)                                                     -                    8.3
4.375% Senior Notes                                                   450.0                   19.7
3.75% Senior Notes                                                    750.0                   28.1
4.0% Senior Notes                                                   1,000.0                   30.0

Finance lease and other financing obligations                          28.8                    2.5
Total gross outstanding indebtedness                         $      4,280.2
Other interest expense, net (1)                                                                0.4
Interest expense, net                                                                $       179.3


__________________________
(1)    We redeemed the full outstanding balance on the 6.25% Senior Notes in
March 2021.
(2)    Other interest expense, net includes amortization of debt issuance costs
and fees related to our unused balance on the Revolving Credit Facility, largely
offset by interest income and interest costs capitalized in accordance with
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Subtopic 835-20, Capitalization of Interest.
Debt Instruments
As of December 31, 2021, our debt instruments include the Term Loan, the $500.0
million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875%
Senior Notes"), the $400.0 million aggregate principal amount of 5.625% senior
notes due 2024 (the "5.625% Senior Notes"), the $700.0 million aggregate
principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), the
4.375% Senior Notes due 2030, the 3.75% Senior Notes due 2031, and the 4.0%
Senior Notes due 2029.
On March 5, 2021, we redeemed the $750.0 million amount outstanding on the 6.25%
Senior Notes due 2026 at a redemption price equal to 103.125% of the aggregate
principal amount of the outstanding 6.25% Senior Notes, plus accrued and unpaid
interest to (but not including) the redemption date.
On March 29, 2021, we issued $750.0 million aggregate principal amount of the
4.0% Senior Notes at par. On April 8, 2021, we issued an additional $250.0
million of the 4.0% Senior Notes, which were priced at 100.75%.
Refer to Note 14: Debt of our Financial Statements included elsewhere in this
Report for additional information related to the redemption of the 6.25% Senior
Notes, the issuance of the 4.0% Senior Notes, and the terms of our other debt
instruments held as of December 31, 2021.
The aggregate principal amount of each tranche of our Senior Notes is due in
full at its maturity date. The Term Loan must be repaid in full on or prior to
its final maturity date. Loans made pursuant to the Revolving Credit Facility
must be repaid in full at its maturity date and can be repaid prior to then at
par. All letters of credit issued thereunder will terminate at the final
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maturity of the Revolving Credit Facility unless cash collateralized prior to
such time.
The following table presents the remaining mandatory principal repayments of
long-term debt, in millions, excluding finance lease payments, other financing
obligations, and discretionary repurchases of debt, in each of the years ended
December 31, 2022 through 2026 and thereafter. Amounts have been calculated
based on unrounded numbers, accordingly, certain amounts may not appear to
recalculate due to the effect of rounding.
          For the year ended December 31,            Aggregate Maturities
          2022                                      $                 4.6
          2023                                                      504.6
          2024                                                      404.6
          2025                                                      704.6
          2026                                                      432.9
          Thereafter                                              2,200.0
          Total long-term debt principal payments   $             4,251.5


Capital Resources
The Credit Agreement provides for the Senior Secured Credit Facilities
consisting of the Term Loan, the Revolving Credit Facility, and the Accordion.
Our sources of liquidity include cash on hand, cash flows from operations, and
available capacity under the Revolving Credit Facility. As of December 31, 2021,
there was $416.1 million available under the Revolving Credit Facility, net of
$3.9 million of obligations in respect of outstanding letters of credit issued
thereunder. Outstanding letters of credit are issued primarily for the benefit
of certain operating activities. As of December 31, 2021, no amounts had been
drawn against these outstanding letters of credit.
Availability under the Accordion varies each period based on our attainment of
certain financial metrics as set forth in the terms of the Credit Agreement and
the indentures under which our Senior Notes were issued (the "Senior Notes
Indentures"). As of December 31, 2021, availability under the Accordion was
approximately $1.1 billion. Our primary uses of cash on hand are to acquire
businesses that will extend our market position within our key growth vectors of
Electrification and Insights and, following the resumption of our share
repurchase program in November 2021, repurchase our ordinary shares, which
augments our existing capital deployment strategies and enables us to drive
attractive returns on invested capital over the long-term.
We believe, based on our current level of operations for the year ended
December 31, 2021, and taking into consideration the restrictions and covenants
included in the Credit Agreement and Senior Notes Indentures discussed below and
in Note 14: Debt of our Financial Statements included elsewhere in this Report
that these sources of liquidity will be sufficient to fund our operations,
capital expenditures, ordinary share repurchases, and debt service for at least
the next twelve months. However, we cannot make assurances that our business
will generate sufficient cash flows from operations or that future borrowings
will be available to us in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. Further, our highly-leveraged
nature may limit our ability to procure additional financing in the future.
The Credit Agreement provides that if our senior secured net leverage ratio
exceeds a specified level, we are required to use a portion of our excess cash
flow, as defined in the Credit Agreement, generated by operating, investing, or
financing activities to prepay some or all of the outstanding borrowings under
the Senior Secured Credit Facilities. The Credit Agreement also requires
mandatory prepayments of the outstanding borrowings under the Senior Secured
Credit Facilities upon certain asset dispositions and casualty events, in each
case subject to certain reinvestment rights, and upon the incurrence of certain
indebtedness (excluding any permitted indebtedness). These provisions were not
triggered during the year ended December 31, 2021.
All obligations under the Senior Secured Credit Facilities are unconditionally
guaranteed by certain of our subsidiaries (the "Guarantors"). The collateral for
such borrowings under the Senior Secured Credit Facilities consists of
substantially all present and future property and assets of our indirect,
wholly-owned subsidiary, STBV, and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be
impacted by short- and long-term debt ratings assigned by independent rating
agencies, which are based, in significant part, on our performance as measured
by certain credit metrics such as interest coverage and leverage ratios. As of
January 28, 2022, Moody's Investors Service's corporate credit rating for STBV
was Ba2 with a stable outlook, and S&P's corporate credit rating for STBV was
BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may
increase our future borrowing costs but will not reduce availability under
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the Credit Agreement.
The Credit Agreement and the Senior Notes Indentures contain restrictions and
covenants (described in more detail in Note 14: Debt of our Financial Statements
included elsewhere in this Report) that limit the ability of STBV and certain of
its subsidiaries to, among other things, incur subsequent indebtedness, sell
assets, pay dividends, and make other restricted payments. These restrictions
and covenants, which are subject to important exceptions and qualifications set
forth in the Credit Agreement and Senior Notes Indentures, were taken into
consideration when we established our share repurchase programs and will be
evaluated periodically with respect to future potential funding of those
program. We do not believe that these restrictions and covenants will prevent us
from funding share repurchases under our share repurchase programs with
available cash and cash flows from operations. As of December 31, 2021, we
believe that we were in compliance with all the covenants and default provisions
under the Credit Agreement and the Senior Notes Indentures.
Share repurchase program
From time to time, our Board of Directors has authorized various share
repurchase programs, which may be modified or terminated by our Board of
Directors at any time. Under these programs, we may repurchase ordinary shares
at such times and in amounts to be determined by our management, based on market
conditions, legal requirements, and other corporate considerations, on the open
market or in privately negotiated transactions, provided that such transactions
were completed pursuant to an agreement and with a third party approved by our
shareholders at the annual general meeting. On April 2, 2020, we announced a
temporary suspension of the July 2019 Program, which we resumed in November
2021.
During the years ended December 31, 2021 and 2020, we repurchased approximately
0.8 million and 0.9 million ordinary shares, respectively, at a weighted-average
price per share of $59.28 and $39.17, respectively, under the July 2019 Program.
As of December 31, 2021, approximately $254.5 million remained available under
the July 2019 Program.
On January 20, 2022, we announced that our Board of Directors had authorized the
January 2022 Program, which replaces the July 2019 Program. Sensata's
shareholders have previously approved the forms of share repurchase agreements
and the potential broker counterparties needed to execute the buyback program.
Critical Accounting Policies and Estimates
As discussed in Note 2: Significant Accounting Policies of our Financial
Statements included elsewhere in this Report, which more fully describes our
significant accounting policies, the preparation of consolidated financial
statements in accordance with U.S. GAAP requires us to exercise judgment in the
process of applying our accounting policies. It also requires that we make
estimates and assumptions about future events that affect the amounts reported
in the consolidated financial statements and accompanying notes. The accounting
policies and estimates that we believe are most critical to the portrayal of our
financial condition and results of operations are listed below. We believe these
policies require the most difficult, subjective, and complex judgments in
estimating the effect of inherent uncertainties.
Revenue Recognition
The discussion below details the most significant judgments and estimates we
make regarding recognition of revenue in accordance with FASB ASC Topic 606,
Revenue from Contracts with Customers. In accordance with FASB ASC Topic 606, we
recognize revenue to depict the transfer of promised goods to customers in an
amount that reflects the consideration to which we expect to be entitled in
exchange for those goods using a five-step model. The most critical judgments
and estimates we make in the implementation of this model relate to identifying
the contract with the customer and determination of the transaction price
associated with the performance obligation(s) in the contract, specifically
related to variable consideration.
While many of the agreements with our customers specify certain terms and
conditions that apply to any transaction between the parties, many of which are
in effect for a defined term, the vast majority of these agreements do not
result in contracts (as defined in FASB ASC Topic 606) because they do not
create enforceable rights and obligations on the parties. Specifically, (1) the
parties are not committed to perform any obligations in accordance with the
specified terms and conditions until a customer purchase order is received and
accepted by us and (2) there is a unilateral right of each party to terminate
the agreement at any time without compensating the other party. For this reason,
the vast majority of our contracts (as defined in FASB ASC Topic 606) are
customer purchase orders. If this assessment were to change, it could result in
a material change to the amount of net revenue recognized in a period.
The transaction price is the amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services to a
customer. In determining the transaction price related to a contract, we
determine whether the amount promised in a contract includes a variable amount
(variable consideration). Variable consideration may be specified in the
customer purchase order, in another agreement that identifies terms and
conditions of the transaction, or based on our
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customary practices. We have identified certain types of variable consideration
that may be included in the transaction price related to our contracts,
including sales returns (which generally include a right of return for defective
or non-conforming product) and trade discounts (including retrospective volume
discounts and early payment incentives). Such variable consideration has not
historically been material. However, should our judgments and estimates
regarding variable consideration change, it could result in a material change to
the amount of net revenue recognized in a period.
Goodwill, Intangible Assets, and Long-Lived Assets
Businesses acquired are recognized at their fair value on the date of
acquisition, with the excess of the purchase price over the fair value of
identifiable assets acquired and liabilities assumed recognized as goodwill.
Intangible assets acquired may include either definite-lived or indefinite-lived
intangible assets, or both. In accordance with FASB ASC Topic 350,
Intangibles-Goodwill and Other, goodwill and intangible assets determined to
have an indefinite useful life are not amortized. Instead these assets are
evaluated for impairment on an annual basis, and whenever events or business
conditions change that could indicate that the asset is impaired.
Goodwill
Our judgments regarding the existence of indicators of goodwill impairment are
based on several factors, including the performance of the end-markets served by
our customers, as well as the actual financial performance of our reporting
units and their respective financial forecasts over the long-term. We evaluate
goodwill and indefinite-lived intangible assets for impairment in the fourth
quarter of each fiscal year, unless events occur which trigger the need for an
earlier impairment review.
Identification of reporting units. Our reporting units have been identified
based on the definitions and guidance provided in FASB ASC Topic 350.
Identification of reporting units includes an analysis of the components that
comprise each of our operating segments, which considers, among other things,
the manner in which we operate our business and the availability of discrete
financial information. Components of an operating segment are aggregated to form
one reporting unit if the components have similar economic characteristics. We
periodically review these reporting units to ensure that they continue to
reflect the manner in which the business is operated.
As of December 31, 2020, we had identified seven reporting units, Automotive,
HVOR, Electrical Protection, Industrial Sensing, Aerospace, Power Management,
and Interconnection. In the third quarter of 2021, we reorganized our Sensing
Solutions operating segment, which resulted in realignment of our reporting
units. As a result of this reorganization, our electrical protection product
category that includes high-voltage contactors, inverters, and battery
management systems was moved to a new reporting unit, Clean Energy Solutions.
The remaining portions of our Electrical Protection, Industrial Sensing, Power
Management, and Interconnection reporting units were consolidated into a new
reporting unit, Industrial Solutions. This reorganization had no impact on our
Aerospace reporting unit. Accordingly, as of October 1, 2021, we had five
reporting units, Automotive, HVOR, Industrial Solutions, Aerospace, and Clean
Energy Solutions. With the acquisition of SmartWitness in the fourth quarter of
2021, we formed Sensata Insights, a business unit organized under the HVOR
operating segment, to drive growth of our smart and connected offerings to the
transportation market, including both those developed organically and through
the acquisition of Xirgo and SmartWitness. We concluded that Sensata Insights
was a separate reporting unit from HVOR. Accordingly, as of December 31, 2021,
we had six reporting units, Automotive, HVOR, Sensata Insights, Industrial
Solutions, Aerospace, and Clean Energy Solutions.
We have concluded that these reorganizations have not impacted our reportable or
operating segment evaluations. We reassigned assets and liabilities, including
goodwill, to these new reporting units as required by FASB ASC Topic 350. We
evaluated our goodwill and other indefinite-lived intangible assets for
impairment before and after the formation of these reporting units and
determined that they were not impaired.
Assignment of assets, liabilities, and goodwill to reporting units. Some assets
and liabilities relate to the operations of multiple reporting units. We
allocate these assets and liabilities to the reporting units based on methods
that we believe are reasonable and supportable. We apply that allocation method
on a consistent basis from year to year. Other assets and liabilities, such as
debt, cash and cash equivalents, and PP&E associated with our corporate offices,
are viewed as being corporate in nature. Accordingly, we do not assign these
assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including
goodwill) and liabilities among the affected reporting units using a reasonable
and supportable methodology. As businesses are acquired, we assign assets
acquired (including goodwill) and liabilities assumed to a new or existing
reporting unit as of the date of the acquisition. In the event a disposal group
meets the definition of a business, goodwill is allocated to the disposal group
based on the relative fair value of the disposal group to the retained portion
of the related reporting unit.
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Evaluation of goodwill for impairment. We have the option to first assess
qualitative factors to determine whether a quantitative analysis must be
performed. The objective of a qualitative analysis is to assess whether it is
more likely than not that the fair value of a reporting unit is less than its
carrying value. We make this assessment based on macroeconomic conditions,
industry and market considerations, cost factors, overall financial performance,
and other relevant factors as applicable. If we elect not to use this option, or
if we determine that it is more likely than not that the fair value of a
reporting unit is less than its carrying value, then we prepare a discounted
cash flow analysis to determine whether the carrying value of the reporting unit
exceeds its estimated fair value. If the carrying value of a reporting unit
exceeds its estimated fair value, we recognize an impairment of goodwill for the
amount of this excess, in accordance with the guidance in FASB ASC Topic 350.
We evaluated the goodwill of each reporting unit for impairment as of October 1,
2021 using a combination of the quantitative and qualitative methods. As a
result of this evaluation we determined that none of our reporting units were
impaired. For reporting units that were evaluated using the quantitative method,
we estimated the fair values of our reporting units using the discounted cash
flow method. For this method, we prepared detailed annual projections of future
net cash flows for the reporting unit for the subsequent five fiscal years (the
"Discrete Projection Period"). We estimated the value of the net cash flows
beyond the fifth fiscal year (the "Terminal Year") by applying a multiple to the
projected Terminal Year EBITDA. The net cash flows from the Discrete Projection
Period and the Terminal Year were discounted at an estimated weighted-average
cost of capital ("WACC") appropriate for each reporting unit. The estimated WACC
was derived, in part, from comparable companies appropriate to each reporting
unit. We believe that our procedures for estimating discounted future net cash
flows, including the Terminal Year valuation, were reasonable and consistent
with accepted valuation practices.
The preparation of forecasts of revenue growth and profitability for use in the
long-range forecasts, the selection of the discount rates, and the estimation of
the multiples used in valuing the Terminal Year involve significant judgments.
Changes to these assumptions could affect the estimated fair value of one or
more of our reporting units and could result in a goodwill impairment charge in
a future period.
Types of events that could result in a goodwill impairment. As noted above, the
assumptions used in the quantitative calculation of fair value of our reporting
units, including the long-range forecasts, the selection of the discount rates,
and the estimation of the multiples or long-term growth rates used in valuing
the Terminal Year involve significant judgments. Changes to these assumptions
could affect the estimated fair values of our reporting units calculated in
prior years and could result in a goodwill impairment charge in a future period.
We believe that certain factors, such as a future recession, any material
adverse conditions in the automotive industry and other industries in which we
operate, and other factors identified in Item 1A: Risk Factors included
elsewhere in this Report could cause us to revise our long-term projections and
could reduce the multiples used to determine Terminal Year value. Such revisions
could result in a goodwill impairment charge in the future.
We consider a combination of quantitative and qualitative factors to determine
whether a reporting unit is at risk of failing the goodwill impairment test,
including: the timing of our most recent quantitative impairment tests and the
relative amount by which a reporting unit's fair value exceeded its then
carrying value, the inputs and assumptions underlying our valuation models and
the sensitivity of our fair value measurements to those inputs and assumptions,
the impact that adverse economic or market conditions may have on the degree of
uncertainty inherent in our long-term operating forecasts, and changes in the
carrying value of a reporting unit's net assets from the time of our most recent
goodwill impairment test. Based on the results of this analysis, we do not
consider any of our reporting units to be at risk of failing the goodwill
impairment test.
Evaluation of other intangible assets for impairment
Indefinite-lived intangible assets. Similar to goodwill, we perform an annual
impairment review of our indefinite-lived intangible assets in the fourth
quarter of each fiscal year, unless events occur that trigger the need for an
earlier impairment review. We have the option to first assess qualitative
factors in determining whether it is more likely than not that an
indefinite-lived intangible asset is impaired. If we elect not to use this
option, or we determine that it is more likely than not that the asset is
impaired, we perform a quantitative impairment analysis in which we estimate the
fair value of the indefinite-lived intangible asset and compare that amount to
its carrying value. In performing this analysis, we estimate the fair value by
using the relief-from-royalty method, in which we make assumptions about future
conditions impacting the fair value of our indefinite-lived intangible assets,
including projected growth rates, cost of capital, effective tax rates, and
royalty rates. Impairment, if any, is based on the excess of the carrying value
over the fair value of these assets.
We evaluated our indefinite-lived intangible assets for impairment as of
October 1, 2021 (using the quantitative method) and determined that the
estimated fair values of these assets exceeded their carrying values at that
date. Should certain assumptions used in the development of the fair values of
our indefinite-lived intangible assets change, we may be required to recognize
an impairment charge in the future.
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Definite-lived intangible assets. Reviews are regularly performed to determine
whether facts or circumstances exist that indicate that the carrying values of
our definite-lived intangible assets to be held and used are impaired. If we
determine that such facts or circumstances exist, we estimate the recoverability
of these assets by comparing the projected undiscounted net cash flows
associated with these assets to their respective carrying values. If the sum of
the projected undiscounted net cash flows falls below the carrying value of an
asset, the impairment charge is measured as the excess of the carrying value
over the fair value of that asset. We determine fair value by using the
appropriate income approach valuation methodology depending on the nature of the
definite-lived intangible asset.
Evaluation of long-lived assets for impairment
We periodically re-evaluate the carrying values and estimated useful lives of
long-lived assets whenever events or changes in circumstances indicate that the
carrying values of these assets may not be recoverable. We use estimates of
undiscounted net cash flows from long-lived assets to determine whether the
carrying values of such assets are recoverable over the assets' remaining useful
lives. These estimates include assumptions about our future performance and the
performance of the end-markets we serve. If an asset is determined to be
impaired, the impairment is the amount by which its carrying value exceeds its
fair value. These evaluations are performed at a level where discrete net cash
flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to
estimate our provision for (or benefit from) income taxes in each of the
jurisdictions in which we operate. This involves estimating our actual current
tax expense, including assessing the risks associated with tax audits, together
with assessing temporary differences resulting from the different treatment of
items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. Management judgment is required in determining various
elements of our provision for (or benefit from) income taxes, including the
amount of tax benefits on uncertain tax positions, and deferred tax assets that
should be recognized.
In accordance with FASB ASC Topic 740, Income Taxes, we record uncertain tax
positions on the basis of a two-step process. First, we determine whether it is
more likely than not that the tax positions will be sustained based on the
technical merits of the position. Second, for those tax positions that meet the
more-likely-than-not recognition threshold, we recognize the largest amount of
tax benefit that is greater than 50 percent likely to be realized upon ultimate
settlement with the relevant tax authority. Significant judgment is required in
evaluating whether our tax positions meet this two-step process. The
more-likely-than-not recognition threshold must be met in each reporting period
to support continued recognition of any tax benefits claimed, both in the
current year, as well as any year which remains open for review by the relevant
tax authority at the balance sheet date. Penalties and interest related to
uncertain tax positions may be classified as either income taxes or another
expense line item in the consolidated statements of operations. We classify
interest and penalties related to uncertain tax positions within the provision
for (or benefit from) income taxes line of the consolidated statements of
operations.
We recognize deferred tax assets to the extent that we believe these assets are
more likely than not to be realized. In measuring our deferred tax assets, we
consider all available evidence, both positive and negative, including future
reversals of existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations in various
jurisdictions, to determine whether, based on the weight of that evidence, a
valuation allowance is needed for all or some portion of the deferred tax
assets. Significant judgment is required in considering the relative impact of
these items along with the weight that should be given to each category,
commensurate with the extent to which it can be objectively verified. The more
negative evidence that exists, the more positive evidence is necessary, and the
more difficult it is to support a conclusion that a valuation allowance is not
needed. Additionally, we utilize the "more likely than not" criteria established
in FASB ASC Topic 740 to determine whether the future tax benefit from the
deferred tax assets should be recognized.
Ultimately, the ability to realize our deferred tax assets is based on our
assessment of future taxable income, which is based on estimated future results.
In the event that actual results differ from these estimates, or we adjust our
estimates in the future, we may need to adjust our valuation allowance
assessment, which could materially impact our consolidated financial position
and results of operations.
Pension and Other Post-Retirement Benefits
We sponsor various pension and other post-retirement benefit plans covering our
current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans is measured
as the difference between the fair value of plan assets and the benefit
obligation at the measurement date. Changes in the funded status of a pension or
other post-retirement
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benefit plan are recognized in the year in which they occur by adjusting the
recognized (net) liability or asset with an offsetting adjustment to either net
income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the
valuation of our benefit obligations. Benefit obligations represent the
actuarial present value of all benefits attributed by the pension formula as of
the measurement date to employee service rendered before that date and can be
categorized as projected benefit obligations or accumulated benefit obligations.
The value of projected benefit obligations takes into consideration various
actuarial assumptions, including future compensation levels and the probability
of payment between the measurement date and the expected date of payment.
Accumulated benefit obligations differ from projected benefit obligations only
in that they include no assumptions about future compensation levels.
The most significant assumptions used to determine a plan's funded status and
net periodic benefit cost relate to discount rate, expected return on plan
assets, and rate of increase in healthcare costs. These assumptions are reviewed
annually. Refer to Note 13: Pension and Other Post-Retirement Benefits of our
Financial Statements included elsewhere in this Report for additional
information related to the values determined for each of these assumptions in
the last three fiscal years.
The discount rate reflects the current rate at which the pension and other
post-retirement liabilities could be effectively settled, considering the timing
of expected payments for plan participants. It is used to discount the estimated
future obligations of the plans to the present value of the liability reflected
in the financial statements. In estimating this rate in countries that have a
market of high-quality fixed-income investments, we consider rates of return on
these investments included in various bond indices, adjusted to eliminate the
effects of call provisions and differences in the timing and amounts of cash
outflows related to the bonds. In other countries where a market of high-quality
fixed-income investments does not exist, we estimate the discount rate using
government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings
expected on the funds invested to provide for the benefits included in the
projected benefit obligation. To determine the expected return on plan assets,
we consider the historical returns earned by similarly invested assets, the
rates of return expected on plan assets in the future, and our investment
strategy and asset mix with respect to the plans' funds.
The rate of increase of healthcare costs directly impacts the estimate of our
future obligations in connection with our post-retirement medical benefits. Our
estimate of healthcare cost trends is based on historical increases in
healthcare costs under similarly designed plans, the level of increase in
healthcare costs expected in the future, and the design features of the
underlying plan.
Other assumptions used include employee demographic factors such as compensation
rate increases, retirement patterns, employee turnover rates, and mortality
rates. Our review of demographic assumptions includes analyzing historical
patterns and/or referencing industry standard tables, combined with our
expectations around future compensation and staffing strategies. The difference
between these assumptions and our actual experience results in the recognition
of an actuarial gain or loss.
Future changes to assumptions, or differences between actual and expected
outcomes, can significantly affect our future net periodic benefit cost,
projected benefit obligations, and accumulated other comprehensive loss.
Share-Based Compensation
FASB ASC Topic 718, Compensation-Stock Compensation, requires that a company
measure at fair value any new or modified share-based compensation arrangements
with employees, such as stock options and restricted securities, and recognize
as compensation expense that fair value over the requisite service period.
We estimate the fair value of stock options on the date of grant using the
Black-Scholes-Merton option-pricing model. Key assumptions used in this model
are (1) the fair value of the underlying ordinary shares, (2) the time period
for which we expect the stock options will be outstanding (the expected term),
(3) the expected volatility of the price of our ordinary shares, (4) the
risk-free interest rate, and (5) the expected dividend yield. Expected term and
expected volatility are the judgments that we believe are the most critical and
subjective in estimating fair value (and related share-based compensation
expense) of our stock option awards.
The expected term is determined based upon our own historical average term of
exercised and outstanding stock options. We consider our own historical
volatility, as well as our implied volatility, in estimating expected volatility
for stock options. Implied volatility provides a forward-looking indication and
may offer insight into expected volatility.
Other assumptions used include risk-free interest rate and expected dividend
yield. The risk-free interest rate is based on the yield for a U.S.Treasury
security having a maturity similar to the expected term of the related stock
option grant. This assumption is dependent on the assumed expected term. The
dividend yield of 0% is based on our history of having never
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declared or paid any dividends on our ordinary shares, as well as our intention,
at the time of grant, of not declaring dividends in the foreseeable future.
Refer to Item 5: Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities included elsewhere in this
Report for additional information related to limitations on our ability to pay
dividends.
Certain of our restricted securities include performance conditions that require
us to estimate the probable outcome of the performance condition. This
assessment is based on management's judgment using internally developed
forecasts and is assessed at each reporting period. Compensation expense is
recognized if it is probable that the performance condition will be achieved.
We elect to recognize share-based compensation expense net of estimated
forfeitures as permitted by FASB ASC Topic 718, and therefore only recognize
compensation expense for those awards expected to vest over the requisite
service period. The forfeiture rate is based on our estimate of forfeitures by
plan participants after consideration of historical forfeiture rates.
Compensation expense recognized for each award ultimately reflects the number of
units that actually vest.
Material changes to any of these assumptions may have a significant effect on
our valuation of stock options, and, ultimately, the share-based compensation
expense recognized in the consolidated statements of operations.
Recently Issued Accounting Standards
In October 2021, the FASB issued Accounting Standards Update ("ASU") No.
2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and
Contract Liabilities from Contracts with Customers to improve the accounting for
acquired revenue contracts with customers in a business combination. The
amendments in FASB ASU No. 2021-08 require that an entity recognize and measure
contract assets and contract liabilities acquired in a business combination in
accordance with FASB ASC Topic 606 as if it had originated the contracts.
Previous guidance required an entity to recognize contract assets and contract
liabilities at fair value as of the acquisition date. The amendments in FASB ASU
No. 2021-08 are effective for fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years. Early adoption is
permitted, including adoption in an interim period. We have elected to early
adopt FASB ASU No. 2021-08 in the fourth quarter of 2021, and in accordance with
the requirements of FASB ASU No. 2021-08 related to early adoption in an interim
period, we have applied its provisions retrospectively to all acquisitions
completed on or after January 1, 2021 and will apply them prospectively to all
future acquisitions. There was no retrospective impact on our financial
statements resulting from this adoption. Any future impact will be dependent on
facts and circumstances of future acquisitions.
There have been no other recently issued accounting standards that have been
adopted in the current period or will be adopted in future periods that have had
or are expected to have a material impact on our consolidated financial position
or results of operations.

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