Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 , filed with the U.S. Securities and Exchange Commission on February 11, 2020 , and the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q .
Overview
The COVID-19 pandemic has caused widespread disruptions to our Company, employees, customers, suppliers, and communities. 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.
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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 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 . Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
For the three months ended
For the six months ended
June 30, 2020
June 30, 2019
June 30, 2020
June 30, 2019
Amount
Margin*
Amount
Margin*
Amount
Margin*
Amount
Margin*
Net revenue:
Performance Sensing
$
385.2
66.8
%
$
644.5
72.9
%
$
953.9
70.6
%
$
1,284.5
73.2
%
Sensing Solutions
191.3
33.2
239.2
27.1
396.9
29.4
469.7
26.8
Net revenue
576.5
100.0
883.7
100.0
1,350.8
100.0
1,754.2
100.0
Operating costs and expenses
578.4
100.3
736.3
83.3
1,294.0
95.8
1,464.2
83.5
Operating (loss)/income
(1.9
)
(0.3
)
147.4
16.7
56.7
4.2
290.0
16.5
Interest expense, net
(40.8
)
(7.1
)
(39.6
)
(4.5
)
(80.2
)
(5.9
)
(78.9
)
(4.5
)
Other, net
1.6
0.3
(3.6
)
(0.4
)
(10.7
)
(0.8
)
(0.4
)
(0.0
)
(Loss)/income before taxes
(41.1
)
(7.1
)
104.3
11.8
(34.2
)
(2.5
)
210.8
12.0
Provision for/(benefit from) income taxes
1.4
0.2
30.8
3.5
(0.1
)
(0.0
)
52.3
3.0
Net (loss)/income
$
(42.5
)
(7.4
)%
$
73.4
8.3
%
$
(34.1
)
(2.5
)%
$
158.5
9.0
%
__________________________
* Represents the amount presented divided by total net revenue.
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 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
Total
Performance Sensing
Sensing Solutions
Total
Reported net revenue decline
(40.2
)%
(20.0
)%
(34.8
)%
(25.7
)%
(15.5
)%
(23.0
)%
Percent impact of:
Foreign currency remeasurement (1)
(0.9
)
(0.7
)
(0.9
)
(0.8
)
(0.6
)
(0.7
)
Organic revenue decline
(39.3
)%
(19.3
)%
(33.9
)%
(24.9
)%
(14.9
)%
(22.3
)%
__________________________
(1)
Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign currency denominated revenue transactions into USD , which is the functional currency of the Company and each of its subsidiaries. The percentage amounts presented above related primarily to the USD to CNY and the EUR to USD exchange rates.
Performance Sensing
For the three months ended June 30, 2020 , Performance Sensing net revenue declined 40.2% , or 39.3% on an organic basis.
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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. 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, 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 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 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 .
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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. 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 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. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
For the three months ended
For the six months ended
June 30, 2020
June 30, 2019
June 30, 2020
June 30, 2019
Amount
Margin*
Amount
Margin*
Amount
Margin*
Amount
Margin*
Operating costs and expenses:
Cost of revenue
$
412.4
71.5
%
$
575.2
65.1
%
$
978.8
72.5
%
$
1,156.0
65.9
%
Research and development
30.2
5.2
36.7
4.2
64.7
4.8
71.8
4.1
Selling, general and administrative
64.7
11.2
72.0
8.2
142.0
10.5
142.6
8.1
Amortization of intangible assets
32.7
5.7
36.0
4.1
65.8
4.9
72.2
4.1
Restructuring and other charges, net
38.2
6.6
16.3
1.8
42.7
3.2
21.6
1.2
Total operating costs and expenses
$
578.4
100.3
%
$
736.3
83.3
%
$
1,294.0
95.8
%
$
1,464.2
83.5
%
__________________________
* Represents the amount presented divided by total net revenue.
Cost of revenue
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.
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 .
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Table of Contents
Research and development (" R&D ") expense
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 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 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
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. 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.
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)
June 30, 2020
June 30, 2019
June 30, 2020
June 30, 2019
Q2 2020 Global Restructure Program charges (1)
$
24.1
$
—
$
24.1
$
—
Other restructuring charges
Severance costs, net (2)
—
14.6
3.9
17.5
Facility and other exit costs
—
0.0
—
0.0
Other (3)
14.1
1.6
14.7
4.1
Restructuring and other charges, net
$
38.2
$
16.3
$
42.7
$
21.6
__________________________
(1)
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)
Total
Performance Sensing
$
7.6
Sensing Solutions
7.2
Corporate and other
9.3
Restructuring and other charges, net
$
24.1
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Table of Contents
(2)
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.
(3)
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
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)
June 30, 2020
June 30, 2019
June 30, 2020
June 30, 2019
Currency remeasurement (loss)/gain on net monetary assets (1)
$
(1.1
)
$
(4.3
)
$
0.5
$
(2.5
)
Gain/(loss) on foreign currency forward contracts (2)
0.4
1.0
(3.4
)
1.5
Gain/(loss) on commodity forward contracts
5.4
(0.1
)
(0.1
)
1.0
Net periodic benefit cost, excluding service cost
(2.5
)
(0.3
)
(6.9
)
(0.6
)
Other
(0.7
)
0.1
(0.8
)
0.1
Other, net
$
1.6
$
(3.6
)
$
(10.7
)
$
(0.4
)
__________________________
(1)
Relates to the remeasurement of non- USD denominated monetary assets and liabilities into USD .
(2)
Relates to changes in the fair value of derivative financial instruments 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 additional information.
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Table of Contents
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 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. tax jurisdictions and withholding taxes related to management fees, royalties, and the repatriation of foreign earnings; and
•
deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to (1) the step-up in fair value of fixed and intangible assets acquired in connection with business combination transactions, (2) changes in net operating loss carryforwards, (3) changes in tax rates, and (4) changes in our assessment of the realizability of our deferred tax assets.
Non- GAAP Financial Measures
This Quarterly Report on Form 10-Q includes references to organic revenue growth (or decline), which is a non- GAAP financial measure. 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 exchange rate differences as well as the net impact of material acquisitions and divestitures for the 12-month period following the respective transaction date(s). Refer to the Net revenue section above for a reconciliation of organic revenue decline to reported revenue decline.
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.
Organic revenue growth (or decline) should be considered as supplemental in nature and is not intended to be considered in isolation or as a substitute for reported percentage change in net revenue calculated in accordance with U.S. GAAP . In addition, our measure of organic revenue growth (or decline) may not be the same as, or comparable to, similar non- GAAP financial measures presented by other companies.
Liquidity and Capital Resources
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)
June 30, 2020
December 31, 2019
United Kingdom
$
16.2
$
8.8
United States
7.0
7.0
The Netherlands
952.6
522.9
China
138.5
119.3
Other
128.6
116.1
Total
$
1,242.9
$
774.1
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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Table of Contents
Cash Flows:
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 . Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
For the six months ended
(In millions)
June 30, 2020
June 30, 2019
Net cash provided by/(used in):
Operating activities:
Net (loss)/income adjusted for non-cash items
$
160.7
$
331.9
Changes in operating assets and liabilities, net
9.6
(79.8
)
Operating activities
170.3
252.2
Investing activities
(60.5
)
(82.9
)
Financing activities
359.1
(178.0
)
Net change
$
468.8
$
(8.8
)
Operating activities. 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.
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.
Investing 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 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 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.
Capital Resources
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 Revolving Credit Facility , and incremental availability (the " Accordion ") under which additional secured credit facilities could be issued under certain circumstances.
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.
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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 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. 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 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. (" STBV "), and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and make other restricted payments. For a full discussion of these restrictions and covenants, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources," included in our Annual Report on Form 10-K for the year ended December 31, 2019 .
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 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 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
There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year ended December 31, 2019 .