What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-28 compared with 2020-04-29 · 194 added, 112 removed, 118 unchanged (72% of the section changed)

3 unchanged sentences

The COVID-19 pandemic has caused widespread disruptions to our Company, employees, customers, suppliers, and communities.

During the first quarter, these disruptions were primarily limited to our manufacturing operations in China, most of which were closed for approximately three weeks during the quarter due to government mandates.

As the virus spread to the rest of the world in March, most of our other operations outside of China also were impacted.

As of March 31, 2020, we were still experiencing significant disruptions, and at a minimum, we expect those disruptions to continue throughout the second quarter of 2020.

These disruptions include, depending on the specific location, full or partial shutdowns of our facilities as mandated by government decrees, limited ability to adjust certain costs due to government actions, significant travel restrictions and “work-from-home” orders limiting the availability of our workforce, supplier constraints and material supply-chain interruptions, logistics challenges and limitations, and reduced demand from certain customers.

The COVID-19 outbreak did have a negative impact on our first quarter 2020 results, and we expect it to have a negative impact on our second quarter 2020 results.

The extent of the impact on our second quarter 2020 results and beyond will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable.

Given these uncertainties and negative impact of the COVID-19 pandemic, we have taken steps to manage and reduce operating costs and further enhance our financial flexibility, including the Board’s formation of a Health & Economic Response Committee to oversee the impact of the COVID-19 pandemic.

These steps also include the following actions to reduce compensation expense in the second quarter 2020:

(1) a 50% reduction to the cash retainers paid to non-employee directors;

(2) a reduction to the Chief Executive officer salary to $1.00;

(3) a 25% reduction to the salaries of all senior leaders of the Company;

and (4) temporary furloughs or equivalent cost saving methods for the remaining workforce.

We also are taking steps to reduce capital and discretionary expenditures and to ramp down certain production facilities in line with end market demand.

We expect these actions to generate approximately $15 million to $20 million in cost savings during the second quarter of 2020.

Further, to provide maximum financial flexibility due to COVID-19, we drew down $400.0 million on the Revolving Credit Facility on April 1, 2020, resulting in cash on hand as of that date of approximately $1.2 billion .

In addition, effective April 1, 2020, we have temporarily suspended our share repurchase program.

Given the foregoing and unprecedented market uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations.

The Company plans to continue taking actions to help mitigate, as best we can, the impact of the COVID-19 pandemic on the health and well-being of our employees, the communities in which we operate and our business partners, as well as the impact on our operations and business as a whole.

However, there can be no assurance that the COVID-19 pandemic will not have a material adverse impact on our financial condition, liquidity, and results of operations.

We recognized the global impact of COVID-19 early, and took a wide range of actions across our organization designed to benefit the health and safety of employees, while also enabling us to respond to customer needs and enhance our financial flexibility during the pandemic.

We are continuing to work with local, state, and federal governmental health agencies in many countries, implementing measures to help protect employees and minimize the spread of COVID-19 in our communities.

Reduced demand, in addition to elevated logistics costs, government mandates, and actions to safeguard our employees, contributed to lower margins.

Savings related to our previously announced cost reduction activities in the second quarter were approximately $21.8 million, resulting from temporary salary reductions, furloughs, and government subsidies.

Given the economic response to the spread of COVID-19 worldwide, the end markets that we serve were down substantially (approximately 39.9% ) in the second quarter.

However, most of our businesses performed better than their respective end markets, and our net revenue contracted 33.9% organically in the second quarter.

Additionally, revenue improved sequentially each month of the second quarter.

On this basis, we expect sequential improvements in the third and fourth quarters, unless COVID-19 causes further economic slowdown from our expectations, which could result in customers further reducing or shutting down their production.

We are also continuing to win new business and invest in opportunities that will drive long-term growth for Sensata.

In the first half of 2020, we closed new business wins at a pace faster than the average new business wins over the past five years, including $100 million in electrification wins during the first half of 2020.

We believe these wins demonstrate the mission-critical nature of our products and designs, as customers have been eager to continue business awards even in the midst of shutdowns related to COVID-19 .

In addition, we continue to believe that our investments in megatrend initiatives will further our end market diversification, increase our long-term growth rate, and provide important competitive advantages as these trends transform our world.

Despite the impact of COVID-19 , we see no evidence that customers are meaningfully slowing their investments in these areas.

We are making progress on both Smart & Connected and Electrification initiatives.

In the Industrial space, we are increasing our focus on high-growth areas such as the Industrial Internet of Things, Smart Manufacturing, Smart Buildings, and Infrastructure.

Bringing our sensing solutions to enhance material handling and electrification charging infrastructure represent fast growing opportunities that we believe will drive industrial business content and market outgrowth.

We believe that we are in a strong financial position today, having generated $170.3 million of operating cash flow in the six months ended June 30, 2020.

In addition, we have taken multiple steps to enhance our financial flexibility.

We lowered our operating expenses for the second quarter through management salary reductions and employee furloughs, implemented reductions in discretionary spending, and ramped down production in certain facilities in line with end market demand.

We are reducing capital expenditures for the year and carefully managing our working capital.

Q2 2020 Global Restructure Program

In the second quarter of 2020, we commenced the Q2 2020 Global Restructure Program , which consists of actions such as voluntary and involuntary reductions-in-force and certain site closures in order to align our cost structure to the demand levels that we anticipate in the coming quarters.

This program is expected to impact approximately 980 positions.

The majority of the actions under the Q2 2020 Global Restructure Program are expected to be completed on or before June 30, 2021 .

Over the life of the Q2 2020 Global Restructure Program , we expect to incur restructuring charges of between $35.0 million and $39.0 million related to reductions-in-force and between $8.0 million and $10.0 million related to site closures.

We expect to settle these charges with cash on hand.

In the three months ended June 30, 2020 , we accrued $24.1 million of severance charges related to this program.

Refer to the discussion on restructuring and other related charges in Results of Operations below for further information.

As of June 30, 2020 , our severance liability related to the Q2 2020 Global Restructure Program was $21.5 million .

Refer to Note 5, " Restructuring and Other Charges, Net ," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

We expect that the actions taken in the Q2 2020 Global Restructure Program will result in annualized savings of personnel- and facilities-related costs of approximately $49 million by 2021.

We expect savings in the third quarter of 2020 to be approximately $7 million .

Results of Operations

The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 .

The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 .

We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q .

2 unchanged sentences

For the three months ended

March 31, 2020

March 31, 2019

For the six months ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Performance Sensing

1 unchanged sentence

Operating costs and expenses

Operating income

Operating (loss)/income

Interest expense, net

Income before taxes

(Benefit from)/provision for income taxes

(Loss)/income before taxes

Provision for/(benefit from) income taxes

Net (loss)/income

__________________________

* Represents the amount presented divided by total net revenue.

Overall, volumes were lower than prior periods, both sequentially and year over year, due to severe end market decline caused by COVID-19.

However, our end market environment is expected to improve sequentially overall through the balance of 2020.

Refer to detailed discussion of revenue by segment below.

The following table presents a reconciliation of organic revenue decline, a non- GAAP financial measure, to reported net revenue decline, a financial measure determined in accordance with U.S.

GAAP, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Refer to the section entitled Non-GAAP Financial Measures below for further information on our use of organic revenue decline.

Three-Month Decline

GAAP , for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 .

Refer to the section entitled Non- GAAP Financial Measures below for further information on our use of organic revenue growth or decline.

Three months ended June 30, 2020

Six months ended June 30, 2020

Performance Sensing

Sensing Solutions

Performance Sensing

Sensing Solutions

Reported net revenue decline

6 unchanged sentences

Performance Sensing

For the three months ended March 31, 2020 , Performance Sensing net revenue declined 11.1% , or 10.4% on an organic basis.

Automotive net revenue declined 11.0% in the first quarter of 2020 versus the corresponding prior-year period.

Excluding a 0.6% decline attributed to foreign exchange rate differences between the two periods, automotive net revenue declined 10.4% on an organic basis.

HVOR net revenue declined 11.5% in the three months ended March 31, 2020 versus the corresponding prior-year period.

Excluding a 0.8% decline attributed to foreign exchange rate differences between the two periods, HVOR net revenue declined 10.7% on an organic basis.

While our automotive business experienced a 10.4% organic revenue decline, our end-market production was down 19.5% in the first quarter of 2020 versus the corresponding prior-year period.

The difference between the performance of our automotive business and that of the end-markets we serve is due primarily to two factors.

For the three months ended June 30, 2020 , Performance Sensing net revenue declined 40.2% , or 39.3% on an organic basis.

For the three months ended June 30, 2020 , automotive net revenue declined 42.5% compared to the prior year.

Excluding a decline of 0.9% attributed to foreign currency exchange rate differences between the two periods, automotive net revenue in the three months ended June 30, 2020 declined 41.6% on an organic basis, representing outgrowth of 890 bps compared to a market that was down 50.5% .

We refer to better performance by our business compared to the markets that the business serves, which relates to content growth partially offset by pricing, as "outgrowth." Our automotive market outgrowth was led primarily by new sensor launches in mission-critical emissions, electrification, and safety applications, as well as favorable pricing.

The difference between the performance of our automotive business and that of the end markets we serve was due primarily to two factors.

First, we were able to alleviate the impact of end market declines by delivering market outgrowth, driven by increased content in all regions, but particularly in China where we experienced strong content growth following the adoption of NS6 emissions regulations.

Additionally, we noted growth as the result of automotive OEMs, particularly in China, stocking inventory to ensure adequate supply levels in anticipation of reopening plants and ramping up production.

We expect automotive end-markets to be worse in the second quarter of 2020 as OEM plant shutdowns and production declines continue.

Our primary independent third-party source for information on automotive production in future periods is predicting a 47% decline in automotive production for the second quarter of 2020 and a 22% decline in automotive production for the full year 2020.

While our HVOR business generated a 10.7% organic revenue decline, end-market production was down 20.0% in the first quarter of 2020 versus the corresponding prior-year period.

During the first quarter, we attributed a portion of automotive revenue growth to inventory build, particularly in China.

In most regions in which we operate, inventory movements overall were negligible in the second quarter of 2020.

We expect inventories at our customers to return to normalized levels by the end of the year.

We expect that the automotive markets in North America and Europe will grow sequentially in the third and fourth quarters of 2020.

The China automotive end market was up 4.3% in the second quarter compared to the prior year, rebounding from first quarter declines resulting from COVID-19 , as customer facilities re-opened and production ramped back up in this region, as expected.

We expect production in other regions to ramp up at a slower pace.

In the North American automotive markets, improving production levels sequentially from the second quarter are expected as original equipment manufacturer ("OEM") and Tier 1 sales to their customers improve.

In Europe, consumer and business confidence are showing improvements as vehicle registrations and OEM factory production levels improve from low levels in the second quarter.

For the three months ended June 30, 2020 , HVOR net revenue declined 32.5% compared to the corresponding period in the prior year.

Excluding a decline of 1.0% attributed to foreign exchange rate differences between the two periods, HVOR net revenue in the three months ended June 30, 2020 declined 31.5% on an organic basis, representing outgrowth of 750 bps compared to a market that was down 39.0% .

The difference between the performance of our HVOR business and the performance of the end markets it serves is the result of market outgrowth, due primarily to increased content.

Similar to our automotive business, a significant portion of this content came from China following the adoption of NS6 emissions regulations.

Similar to our automotive business, a significant portion of this content came from China, where the on-road truck business has continued to post better-than-expected growth following the adoption of NS6 emissions regulations.

While our HVOR business in China grew in the second quarter, we experienced substantial declines in both Europe and the Americas.

We evaluate key economic indicators to gauge the health of our HVOR customers and the markets they serve, including freight load factors, truck inventory to sales ratios, building permits, industrial production, crop futures, and farm machinery.

Based on some of these indicators, we expect HVOR end-markets to remain down throughout the second quarter of 2020.

Based on these indicators, we expect HVOR end markets to improve sequentially in the third and fourth quarters of 2020.

For the six months ended June 30, 2020 , Performance Sensing net revenue declined 25.7% , or 24.9% on an organic basis.

For the six months ended June 30, 2020 , automotive net revenue declined 26.9% compared to the prior year.

Excluding a decline of 0.8% attributed to foreign exchange rate differences between the two periods, automotive net revenue in the six months ended June 30, 2020 declined 26.1% on an organic basis.

For the six months ended June 30, 2020 , our automotive business reported content growth in all of our major regions, particularly Asia, of which most related to China.

For the six months ended June 30, 2020 , HVOR net revenue declined 21.9% compared to the prior year.

Excluding a decline of 0.9% attributed to foreign exchange rate differences between the two periods, HVOR net revenue in the six months ended June 30, 2020 , declined 21.0% on an organic basis.

For the six months ended June 30, 2020 , our HVOR business reported content growth in most markets, most notably in the China on-road truck market, but also globally in agriculture and construction markets.

Sensing Solutions

For the three months ended March 31, 2020 , Sensing Solutions net revenue declined 10.8% , or 10.4% on an organic basis.

Industrial and other net revenue declined 12.8% in the first quarter of 2020 versus the corresponding prior-year period.

Excluding a 0.5% decline attributed to foreign exchange rate differences between the two periods, industrial and other net revenue declined 12.3% on an organic basis.

Aerospace net revenue declined 2.0%, on a reported and organic basis, in the first quarter of 2020 versus the corresponding prior-year period.

Our industrial and other business observed a 15.0% decline in the global end-markets it serves.

These market declines were primarily attributed to China, where the COVID-19 pandemic resulted in government mandated shutdowns.

The key economic indicators we routinely evaluate for our industrial end-markets, such as regional PMI data, GDP, and housing starts, help develop a forward-looking view of future demand levels.

These currently indicate further deterioration in demand in the second quarter of 2020 and, as a result, we believe our industrial and other business will be adversely impacted.

While our Aerospace business generated a 2.0% organic revenue decline, end-market production was down 6.3% in the first quarter of 2020 versus the corresponding prior year period.

For our aerospace business, this market outgrowth, which we define as the difference between the performance of our aerospace business and the performance of the end-markets it serves, was primarily attributed to increased content.

For the three months ended June 30, 2020 , Sensing Solutions net revenue decreased 20.0% , or 19.3% on an organic basis .

For the six months ended June 30, 2020 , Sensing Solutions net revenue decreased 15.5% , or 14.9% on an organic basis.

For the three months ended June 30, 2020 , industrial and other net revenue decreased 15.5% compared to the prior year.

Excluding a decline of 0.9% attributed to foreign exchange rate differences between the two periods, industrial and other net revenue in the three months ended June 30, 2020 decreased 14.6% on an organic basis.

For the six months ended June 30, 2020 , industrial and other net revenue decreased 14.2% compared to the prior year.

Excluding a decline of 0.7% attributed to foreign exchange rate differences between the two periods, industrial and other net revenue in the six months ended June 30, 2020 declined 13.5% on an organic basis .

The decline in industrial and other net revenue for the second quarter and first half of 2020 was primarily driven by shutdowns related to COVID-19 and the resulting global industrial market slowdown.

In the second quarter, industrial markets fared better than other markets in which we operate, as Purchasing Managers' Index data in all areas of the world improved during the quarter.

For the balance of the year, we expect the industrial markets to continue to decline, but less significantly than in the second quarter.

For the three months ended June 30, 2020 , aerospace net revenue declined 39.4% compared to the prior year on a reported and organic basis.

For the six months ended June 30, 2020 , aerospace net revenue declined 21.1% compared to the prior year on a reported and organic basis.

Reduced commercial OEM production in the second quarter led to a 32.0% decline in the aerospace market, and grounding of aircraft led to weakness in our aerospace aftermarket business.

Expectations for future OEM commercial and defense production build rates and passenger miles flown are good indicators of future demand for our aerospace products and aftermarket services.

We expect demand to be down in the second quarter of 2020 due to continued lower OEM production levels driven by COVID-19 and the worldwide travel restrictions which will continue to be in place in the second quarter of 2020.

Accordingly, as air traffic resumes, we expect the aerospace aftermarket to return to growth.

The defense portion of the aerospace production market is expected to remain steady this year, while commercial production is expected to improve from very low levels in the second quarter.

Operating costs and expenses

Operating costs and expenses for the three months ended March 31, 2020 and 2019 are presented, in millions of dollars and as a percentage of net revenue, in the following table.

Operating costs and expenses for the three and six months ended June 30, 2020 and 2019 are presented, in millions of dollars and as a percentage of net revenue, in the following table.

Amounts and percentages in the table below have been calculated based on unrounded numbers.

1 unchanged sentence

For the three months ended

March 31, 2020

March 31, 2019

For the six months ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Operating costs and expenses:

8 unchanged sentences

Cost of revenue

For the three months ended March 31, 2020 , cost of revenue as a percentage of net revenue increased from the prior period.

The largest driver of this increase was a $29.2 million loss recognized in cost of revenue related to a judgment against us in an intellectual property litigation with Wasica Finance Gmbh.

We continue to deny any wrongdoing and will appeal the decision.

For the three months ended June 30, 2020 , cost of revenue as a percentage of net revenue increased from the prior period, primarily as a result of productivity headwinds from our manufacturing facilities running at significantly lower than normal capacity and elevated logistics costs, partially offset by savings from temporary cost reductions in the second quarter, including salary reductions and furloughs, repositioning actions taken in 2019, and the positive impact of changes in foreign currency exchange rates.

For the six months ended June 30, 2020 , cost of revenue as a percentage of net revenue increased from the prior period, primarily as a result of a $29.2 million loss related to a judgment against us in intellectual property litigation with Wasica in the first quarter of 2020, productivity headwinds from our manufacturing facilities running at significantly lower than normal capacity and elevated logistics costs, partially offset by savings from temporary cost reductions in the second quarter, including salary reductions and furloughs, repositioning actions taken in 2019, and the positive impact of changes in foreign currency exchange rates.

We continue to deny any wrongdoing in the intellectual property litigation with Wasica, and intend to appeal the judgment.

Refer to Note 12, " Commitments and Contingencies ," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Other drivers of the increase included productivity headwinds and volume declines primarily resulting from the impacts of COVID-19, partially offset by the positive impact of changes in foreign currency exchange rates.

In response to the impacts we are seeing to our business due to COVID-19, we will continue to align our costs to the demand we are experiencing by ramping down certain production facilities in line with end market demand.

This will be a challenge in the second quarter of 2020, as we address COVID-19 and corresponding government actions, which are creating operating restrictions, supply disruptions and increased freight costs, which will negatively impact our future cost of revenue margin.

We are also taking steps to reduce discretionary spend and to reduce or delay capital expenditures for the near future.

In the second quarter of 2020, we commenced the Q2 2020 Global Restructure Program , which includes reductions-in-force and certain site closures.

Costs related to this program have been recognized in restructuring and other charges, net line on our condensed consolidated financial statements.

We expect that the actions taken in the Q2 2020 Global Restructure Program will result in annualized savings of personnel- and facilities-related costs of approximately $49 million by 2021.

We expect savings in the third quarter of 2020 to be approximately $7 million .

Research and development (" R&D ") expense

For the three months ended March 31, 2020 , R&D expense decreased from the prior period, primarily as a result of the positive impact of changes in foreign currency exchange rates.

For each of the three and six months ended June 30, 2020 , R&D expense decreased from the prior comparable periods .

R&D expense declined compared to the prior year periods, primarily as a result of temporary salary and furlough cost savings in the second quarter and savings from repositioning actions taken in 2019, as well as the positive impact of foreign currency exchange rates, somewhat offset by increased investments in our megatrend initiatives.

Selling, general and administrative (" SG&A ") expense

For the three months ended March 31, 2020 , SG&A expense increased from the prior period, primarily due to higher compensation to retain and incentivize critical employee talent and increased costs related to optimization of our global operating processes to increase productivity.

For the three months ended June 30, 2020 , SG&A expense decreased from the prior year, primarily as a result of temporary salary reductions, lower incentive compensation, furloughs, and savings from repositioning actions taken in 2019, as well as the positive impact of foreign currency exchange rates.

For the six months ended June 30, 2020 , SG&A expense decreased from the prior period, primarily due to temporary salary reductions and furloughs, savings from repositioning actions taken in 2019, and the positive impact of foreign currency exchange rates, partially offset by higher compensation to retain and incentivize critical employee talent and increased costs related to enhancements and improvements to our global operating processes to increase productivity.

Amortization of intangible assets

For the three months ended March 31, 2020 , amortization expense decreased from the prior period due to the effect of the economic benefit method.

For the three and six months ended June 30, 2020 , amortization expense decreased from the corresponding prior periods primarily due to the effect of the economic benefit method.

Restructuring and other charges, net

Restructuring and other charges, net for the three months ended March 31, 2020 and 2019 consisted of the following (amounts in the table below have been calculated based on unrounded numbers;

On June 30, 2020 , we analyzed the potential long-term impact of COVID-19 on our business and, as a result, committed to the Q2 2020 Global Restructure Program , which consists of voluntary and involuntary reductions-in-force and certain site closures.

It was commenced in order to align our cost structure to the demand levels that we anticipate over the coming quarters.

The majority of the actions under the Q2 2020 Global Restructure Program are expected to be completed on or before June 30, 2021 .

The reductions-in-force, which are subject to the laws and regulations of the countries in which the actions are planned, are expected to impact approximately 980 positions.

We expect to settle these charges with cash on hand.

Restructuring and other charges, net for the three and six months ended June 30, 2020 and 2019 consisted of the following (amounts in the table below have been calculated based on unrounded numbers;

accordingly, certain amounts may not appear to recalculate due to the effect of rounding):

For the three months ended

For the six months ended

(In millions)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Q2 2020 Global Restructure Program charges (1)

Other restructuring charges

Severance costs, net (2)

Facility and other exit costs

Restructuring and other charges, net

__________________________

Severance costs, net for the three months ended March 31, 2020 , were primarily related to termination benefits arising from the shutdown and relocation of an operating site in Northern Ireland.

Severance costs for the three months ended March 31, 2019 were primarily related to limited workforce reductions of manufacturing, engineering, and administrative positions.

Other charges in the three months ended March 31, 2020 and 2019 were primarily related to deferred compensation incurred in connection with the acquisition of GIGAVAC, LLC.

Operating income

Operating income decreased $84.0 million , or 58.9% , to $58.6 million ( 7.6% of net revenue) in the three months ended March 31, 2020 , from $142.6 million ( 16.4% of net revenue) in the three months ended March 31, 2019 .

The decline in operating income was due primarily to the impact of the global economic downturn caused by COVID-19 as well as the $29.2 million loss recognized in cost of revenue related to a judgment against us in an intellectual property litigation with Wasica Finance Gmbh (refer to Note 12, "Commitments and Contingencies," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information).

Other, net for the three months ended March 31, 2020 and 2019 consisted of the following (amounts in the table below have been calculated based on unrounded numbers;

Amounts accrued in the three months ended June 30, 2020 related to the Q2 2020 Global Restructure Program are detailed by segment below.

All charges related to this program incurred in the three months ended June 30, 2020 were related to severance costs and recorded in restructuring and other charges, net.

(In millions)

Performance Sensing

Sensing Solutions

Corporate and other

Restructuring and other charges, net

Severance costs, net (excluding those related to the Q2 2020 Global Restructure Program ) for the six months ended June 30, 2020 were related to termination benefits arising from the shutdown and relocation of an operating site in Northern Ireland.

Severance costs, net for the three and six months ended June 30, 2019 were primarily related to benefits provided for under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.S.

Other charges in the three and six months ended June 30, 2020 were primarily related to a $12.1 million pre-judgment interest-related award granted by the court on behalf of the plaintiffs, Wasica, in connection with a patent infringement case against Schrader.

Refer to Note 12, "Commitments and Contingencies," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to this matter.

Other charges in the three and six months ended June 30, 2019 were primarily related to deferred compensation incurred in connection with the acquisition of GIGAVAC .

Operating (loss)/income

In the three months ended June 30, 2020 , operating (loss)/income decreased $149.3 million , or 101.3% , to a loss of $1.9 million ( 0.3% of net revenue) compared to income of $147.4 million ( 16.7% of net revenue) in the three months ended June 30, 2019 .

This decrease was primarily due to lower revenues, productivity headwinds from our manufacturing facilities running at significantly lower than normal capacity, a charge of $24.1 million recognized in the second quarter related to the Q2 2020 Global Restructure Program , $12.1 million of pre-judgment interest-related damages assessed against us related to the Wasica judgment, and elevated operating costs, partially offset by the non-recurrence of charges recognized in the second quarter of 2019 related to benefits provided under a voluntary retirement incentive program and the positive impact of foreign currency exchange rates.

In addition, we realized savings of approximately $21.8 million in the second quarter resulting from temporary salary reductions, furloughs, and government subsidies.

In the six months ended June 30, 2020 , operating income decreased $233.3 million , or 80.4% , to $56.7 million ( 4.2% of net revenue) compared to $290.0 million ( 16.5% of net revenue) in the six months ended June 30, 2019 .

This decrease was primarily due to lower revenues, productivity headwinds from our manufacturing facilities running at significantly lower than normal capacity, a $29.2 million loss related to a judgment against us in the intellectual property litigation with Wasica in the first quarter of 2020, a charge of $24.1 million recognized in the second quarter related to the Q2 2020 Global Restructure Program , $12.1 million of pre-judgment interest-related damages assessed against us related to the Wasica judgment, and elevated operating costs, partially offset by the non-recurrence of charges recognized in the second quarter of 2019 related to benefits provided under a voluntary retirement incentive program and the positive impact of foreign currency exchange rates.

In addition, we realized savings of approximately $21.8 million in the second quarter resulting from temporary salary reductions, furloughs, and government subsidies.

We expect that the actions taken in the Q2 2020 Global Restructure Program will result in annualized savings of personnel- and facilities-related costs of approximately $49 million by 2021.

We expect savings in the third quarter of 2020 to be approximately $7 million .

Other, net for the three and six months ended June 30, 2020 and 2019 consisted of the following (amounts in the table below have been calculated based on unrounded numbers;

accordingly, certain amounts may not appear to recalculate due to the effect of rounding):

For the three months ended

For the six months ended

(In millions)

March 31, 2020

March 31, 2019

Currency remeasurement loss on net monetary assets (1)

(Loss)/gain on foreign currency forward contracts (2)

(Loss)/gain on commodity forward contracts

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

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

Gain/(loss) on foreign currency forward contracts (2)

Gain/(loss) on commodity forward contracts

Net periodic benefit cost, excluding service cost

2 unchanged sentences

Relates to changes in the fair value of derivative financial instruments not designated as hedges.

Refer to Note 15, "Derivative Instruments and Hedging Activities" of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a more detailed discussion.

(Benefit from)/provision for income taxes

The decrease in total tax from the prior period was predominantly related to the overall decrease in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate.

In response to COVID-19, the U.S.

Refer to Note 15, " Derivative Instruments and Hedging Activities " of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Provision for/(benefit from) income taxes

For the three and six months ended June 30, 2020 , the decrease in total tax from the prior periods was predominantly related to the overall decrease in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate.

In response to the global financial and health crisis caused by COVID-19 , the U.S.

federal government enacted the CARES Act on March 27, 2020.

Federal limitations on interest deductions were reduced in connection with this legislation, and we recorded a deferred tax benefit of $7.5 million in the three months ended March 31, 2020 , as we were able to utilize additional interest expense that was previously subject to a valuation allowance.

The (benefit from)/provision for income taxes consists of:

Federal limitations on interest deductions were reduced in connection with this legislation, and we recorded a deferred tax benefit of $7.5 million in the six months ended June 30, 2020 , as we were able to utilize additional interest expense that was previously subject to a valuation allowance.

The provision for/(benefit from) income taxes consists of:

current tax expense, which relates primarily to our profitable operations in non- U.S.

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Liquidity and Capital Resources

As of March 31, 2020 and December 31, 2019 , we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers;

As of June 30, 2020 and December 31, 2019 , we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers;

accordingly, certain amounts may not appear to recalculate due to the effect of rounding):

(In millions)

March 31, 2020

June 30, 2020

December 31, 2019

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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.

The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2020 and 2019 .

The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2020 and 2019 .

We have derived the summarized statements of cash flows from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q .

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Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.

For the three months ended

For the six months ended

(In millions)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Net cash provided by/(used in):

Operating activities:

Net income adjusted for non-cash items

Net (loss)/income adjusted for non-cash items

Changes in operating assets and liabilities, net

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Operating activities.

Net cash provided by operating activities declined primarily due to lower net income, higher inventory balances, higher payments to third parties and suppliers, and timing of income tax payments, partially offset by timing of customer payments.

Net cash provided by operating activities declined from the six months ended June 30, 2019 primarily due to lower operating profitability, partially offset by improved management of working capital.

Savings related to our cost-reduction activities in the second quarter were approximately $21.8 million, resulting from temporary salary reductions and furloughs.

These savings are included in operating profitability.

We expect to settle these charges with cash on hand.

Investing activities.

Net cash used in investing activities declined from the first quarter of 2019 primarily due to a reduction in capital expenditures as a result of COVID-19.

In fiscal year 2020 , we anticipate capital expenditures of approximately $120.0 million to $130.0 million , a decline from previously forecasted capital expenditures, which we expect to be funded from net cash provided by operating activities.

Net cash used in investing activities declined from the six months ended June 30, 2019 primarily due to a reduction in capital expenditures as a result of COVID-19 .

In fiscal year 2020 , we anticipate capital expenditures of approximately $120.0 million to $130.0 million , which we expect to be funded from cash on hand.

Financing activities .

Net cash used in financing activities declined from the first quarter of 2019 primarily due to a reduction in share repurchases.

On April 2, 2020 we announced a temporary suspension of our share repurchase program to further enhance our financial flexibility in light of COVID-19.

Net cash provided by financing activities for the six months ended June 30, 2020 included $400.0 million of cash proceeds from the drawdown on the Revolving Credit Facility on April 1, 2020.

In addition, on April 2, 2020, we announced a temporary suspension of our share repurchase program.

As a result, payments to repurchase ordinary shares decreased from $168.2 million for the six months ended June 30, 2019 to $35.2 million for the six months ended June 30, 2020 .

The share repurchase program will continue to remain on hold until end market conditions show greater improvement and stability.

Indebtedness and Liquidity:

As of March 31, 2020 , we had $3,290.3 million in gross indebtedness, which included finance lease and other financing obligations and excluded debt discounts and deferred financing costs.

As of June 30, 2020 , we had $3,689.1 million in gross indebtedness, which included finance lease and other financing obligations and excluded debt discounts and deferred financing costs.

Refer to Note 11, " Debt ," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the components of our debt.

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Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility .

In order to enhance our financial flexibility given the general uncertainty associated with COVID-19 , we withdrew $400.0 million from the Revolving Credit Facility on April 1, 2020.

As of June 30, 2020 , we had $16.1 million available under the Revolving Credit Facility , net of $3.9 million of obligations related to outstanding letters of credit issued thereunder.

Outstanding letters of credit are issued primarily for the benefit of certain operating activities.

As of June 30, 2020 , no amounts had been drawn against these outstanding letters of credit.

Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the " Senior Notes Indentures ").

As of March 31, 2020 , availability under the Accordion was approximately $0.9 billion .

We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that 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.

As of June 30, 2020 , availability under the Accordion was approximately $0.7 billion .

We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures , that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases (if and when resumed), 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.

As a result of COVID-19, although we believe our financial position to be strong, we decided to further enhance our financial flexibility by executing a $400 million drawdown on the Revolving Credit Facility on April 1, 2020, leaving us with cash on hand of approximately $1.2 billion on that date.

On April 2, 2020, we announced a temporary suspension of our share repurchase program, which will continue to remain on hold until end market conditions show greater improvement and stability.

The Credit Agreement provides that, if our senior secured net leverage ratio exceeds a specified level, we are required to use a portion of our excess cash flow, as defined in the Credit Agreement , generated by operating, investing, or financing activities to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities .

The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and upon the incurrence of certain indebtedness (excluding any permitted indebtedness).

These provisions were not triggered during the three months ended March 31, 2020 .

These provisions were not triggered during the six months ended June 30, 2020 .

The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants that limit the ability of our wholly-owned subsidiary, Sensata Technologies B.V.

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These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures , were taken into consideration when we established our share repurchase programs, and will be evaluated periodically with respect to future potential funding of those programs.

As of March 31, 2020 , we believe we were in compliance with all covenants and default provisions under our credit arrangements.

As of June 30, 2020 , we believe we were in compliance with all covenants and default provisions under our credit arrangements.

Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios.

As of April 24, 2020 , Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was BB+ with a negative outlook.

The Standard & Poor's outlook represents a decline from our prior quarter outlook of "stable." The change in outlook reflects the uncertainties in the markets caused by COVID-19.

Any future downgrades to STBV's credit ratings may increase our future borrowing costs, but will not reduce availability under the Credit Agreement.

From time to time, our Board of Directors has authorized various share repurchase programs.

The authorized amount of our various share repurchase programs may be modified or terminated by our Board of Directors at any time.

We currently have an authorized $500.0 million share repurchase program under which approximately $302.3 million remained available as of March 31, 2020 .

During the three months ended March 31, 2020 , we repurchased approximately 0.9 million ordinary shares under our share repurchase program for a total purchase price of approximately $35.2 million , which are now held as treasury shares.

On April 2, 2020 , we announced a temporary suspension of our share repurchase program to enhance our financial flexibility in light of the uncertainties surrounding COVID-19.

As of July 24, 2020 , Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was BB+ with a negative outlook.

The Standard & Poor's outlook represents a decline from their outlook of "stable" as of December 31, 2019.

The change in outlook reflects the uncertainties in the markets caused by COVID-19 .

From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by our Board at any time.

We currently have an authorized $500.0 million share repurchase program under which approximately $302.3 million remained available as of June 30, 2020 .

During the six months ended June 30, 2020 , we repurchased approximately 0.9 million ordinary shares under our share repurchase program for a total purchase price of approximately $35.2 million , which are now held as treasury shares.

On April 2, 2020 , we announced a temporary suspension of this share repurchase program, which will continue to remain on hold until end market conditions show greater improvement and stability.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis