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 since the first quarter of 2020. 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.
In the third quarter of 2020, the global economic rebound from government-instituted lockdowns and quarantines has been dramatic. We continue to deliver strong market "outgrowth," defined as the amount by which revenue performance of our business is favorable to the performance of the markets that the business serves. For the first nine months of 2020, we delivered 840 basis points of outgrowth in our HVOR business and 610 basis points of outgrowth in our automotive business. We continue to monitor all of our end markets and customers to ensure that our resources are balanced against forecasts and prioritized against critical growth opportunities.
During the third quarter of 2020, we closed over $95 million in new business wins, bringing the year-to-date total to $320 million, including $140 million in Electrification wins, ahead of the pace of new business wins in the prior year. We define new business wins as incremental revenue to our current base of business that is expected to be recognized on average in the fifth year after entry into the agreement, when the program reaches its normal volume. We have demonstrated progress against our megatrend initiatives, and intend to continue these efforts to expand our markets and provide strong growth and differentiation for the future. We continue to believe investments in these megatrends, including technology collaborations and partnerships with third parties to expand our technological capabilities, will further our end market diversification, increase our long-term growth rate and provide important competitive advantages as these trends transform our world. In addition, we believe that the overall market environment may provide meaningful opportunities to further strengthen our portfolio through strategically important, value-creating acquisitions.
We have taken multiple steps to enhance our financial flexibility. In the second quarter of 2020, we commenced the Q2 2020 Global Restructure Program. No additional charges related to this program were recognized in the third quarter of 2020.
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However, we continue to realize savings, primarily from actions related to the Q2 2020 Global Restructure Program, but also from ongoing cost reduction activities and spend controls. Such savings represented approximately $7 million in the third quarter of 2020. We expect to realize at least that amount in the fourth quarter. In the third quarter of 2020, we took advantage of historically low interest rates to raise $750.0 million through the issuance and sale of the 3.75% Senior Notes, extending the maturity of our debt profile and lowering our cost of capital. Given improving market conditions and strengthening financial markets, we repaid approximately $400.0 million of outstanding borrowings under the Revolving Credit Facility that we had drawn in April.
Megatrends
Despite the impact of COVID-19, we continue to invest in our megatrend growth initiatives, seeing no evidence that customers are meaningfully slowing their investments in these areas. Our three initiatives of focus are (1) Smart & Connected, (2) Electric Vehicles and Smart Grid Electrification, and (3) Industrial Internet of Things (IIoT)/Digitization of Factories & Warehouses.
Smart & Connected
Our objective with the Smart & Connected initiative, which provides a large market opportunity across heavy vehicle management and medium and light vehicles, is to become the leader in insight and prognostics to fleet operators and owners. In the third quarter of 2020, we signed our first Smart & Connected commercial fleet management agreement with a leading North American fleet manager, under which we will install and operate our Smart & Connected suite of hardware and data services on a full subscription basis, beginning in the fourth quarter of 2020.
Electrification
Our objective with the Electric Vehicles and Smart Grid Electrification (Electrification) initiative, which provides a large market opportunity across high voltage components and advanced grid technologies, is to become the leading and foundational player in mission critical high voltage components and subsystems with high value solutions in advanced smart grid technologies. During the third quarter of 2020, we closed $32 million in Electrification new business wins; bringing the year-to-date total to $140 million, spanning across all geographies and many of the largest automotive original equipment manufacturers ("OEMs").
While the automotive space will be a large beneficiary of the Electrification megatrend, the effects will impact all of our end markets, including heavy vehicles, charging infrastructure, and smart grid applications, in total representing an expected $6.5 billion addressable market for Sensata by 2030. We are expanding our capabilities here, including through third party collaboration, and expect continued material expansion of Electrification within our industrial business.
Industrial Internet of Things
As part of the broader Smart & Connected megatrend, our objective in the Industrial Internet of Things (IIoT)/Digitization of Factories & Warehouses initiative is to become a leader in factory smart sensing and edge intelligence with solutions in machine health and materials tracking. The digitization of factories and warehouses represent fast-growing opportunities that we believe will drive new business wins and market outgrowth for our Industrial business unit. 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.
Financial Flexibility
We have taken multiple steps to enhance our financial flexibility. In the second quarter, we implemented various cost reduction activities, including temporary salary reductions and furloughs, resulting in savings in the second quarter of approximately $21.8 million, including the impact of government subsidies. These salary reductions and furloughs did not continue in the third quarter. However, we have continued working to align our long-term operating costs with future expected demand levels, maintaining lower levels of discretionary spending and keeping production in certain facilities at a level necessary to be in line with end market demand. In addition, we reduced our capital expenditures forecast for the year and are carefully managing our working capital. Also in the second quarter, we commenced the Q2 2020 Global Restructure Program, discussed in more detail below.
We believe that we are in a strong financial position today, having generated $293.3 million of operating cash flow in the nine months ended September 30, 2020. Additionally, in the third quarter of 2020, we took advantage of historically low interest rates in issuing $750.0 million aggregate principal amount of 3.75% Senior Notes. Given improving market conditions and strengthening financial markets, we decided to use a portion of the proceeds to repay approximately $400.0 million of outstanding borrowings under the Revolving Credit Facility. In taking these actions, we extended the maturity of our debt profile and lowered our cost of capital.
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Q2 2020 Global Restructure Program
On June 30, 2020, in response to the potential long-term impact of COVID-19 on our business, 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 $38.0 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 nine months ended September 30, 2020, we accrued $24.1 million of severance charges related to this program (all in the second quarter). As of September 30, 2020, our severance liability related to the Q2 2020 Global Restructure Program was $12.9 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 on this restructuring program.
We continue to realize savings in the third quarter related to the Q2 2020 Global Restructure Program, but also from ongoing cost reduction activities and spend controls. Such savings represented approximately $7 million in the third quarter of 2020. We expect to realize at least that amount in the fourth quarter. 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.
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 nine months ended September 30, 2020 compared to the three and nine months ended September 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 nine months ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Amount Margin* Amount Margin* Amount Margin* Amount Margin*
Net revenue:
Performance Sensing $ 580.9 73.7 % $ 628.6 74.0 % $ 1,534.8 71.8 % $ 1,913.1 73.5 %
Sensing Solutions 207.4 26.3 221.1 26.0 604.3 28.2 690.8 26.5
Net revenue 788.3 100.0 849.7 100.0 2,139.1 100.0 2,603.9 100.0
Operating costs and expenses 661.5 83.9 703.6 82.8 1,955.5 91.4 2,167.8 83.2
Operating income 126.8 16.1 146.1 17.2 183.6 8.6 436.2 16.8
Interest expense, net (44.1) (5.6) (39.6) (4.7) (124.3) (5.8) (118.4) (4.5)
Other, net 9.2 1.2 (7.6) (0.9) (1.5) (0.1) (7.9) (0.3)
Income before taxes 91.9 11.7 99.0 11.7 57.7 2.7 309.8 11.9
Provision for income taxes 15.2 1.9 28.3 3.3 15.1 0.7 80.6 3.1
Net income $ 76.7 9.7 % $ 70.7 8.3 % $ 42.6 2.0 % $ 229.2 8.8 %
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* Represents the amount presented divided by total net revenue.
Net Revenue - Overall
For the three and nine months ended September 30, 2020, net revenue declined compared to the prior year largely due to end-market contraction caused by COVID-19.
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 nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019. Refer to the section entitled Non-GAAP Financial Measures below for further information on our use of organic revenue growth or decline.
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Three months ended September 30, 2020 Nine months ended September 30, 2020
Performance Sensing Sensing Solutions Total Performance Sensing Sensing Solutions Total
Reported net revenue decline (7.6) % (6.2) % (7.2) % (19.8) % (12.5) % (17.9) %
Percent impact of:
Foreign currency remeasurement (1)
0.3 % 0.2 % 0.3 % (0.5) % (0.3) % (0.5) %
Organic revenue decline (7.9) % (6.4) % (7.5) % (19.3) % (12.2) % (17.4) %
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(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.
Net Revenue - Performance Sensing
For the three months ended September 30, 2020, Performance Sensing net revenue declined 7.6%, or 7.9% on an organic basis, driven primarily by impacts from COVID-19. OEM customers ramped production within their facilities through the quarter in an effort to replace production lost during the prior quarter shut-downs. For the nine months ended September 30, 2020, Performance Sensing net revenue declined 19.8%, or 19.3% on an organic basis.
Automotive
For the three months ended September 30, 2020, automotive net revenue declined 7.6% compared to the prior year. Excluding growth of 0.3% attributed to foreign currency exchange rate differences between the two periods, automotive net revenue in the three months ended September 30, 2020 declined 7.9% on an organic basis. During the first half of the year we attributed a portion of automotive revenue growth to supply chain inventory building. During the third quarter, we saw global channel inventory at our customers contract. The combination of this inventory contraction along with lower end market production created a total market decline of 10.8% in the third quarter, representing outgrowth in our automotive business of 290 basis points. This outgrowth continues to be led by emissions, electrification, and safety-related launches.
For the nine months ended September 30, 2020, automotive net revenue declined 20.5% compared to the prior year. Excluding a decline of 0.5% attributed to foreign exchange rate differences between the two periods, automotive net revenue in the nine months ended September 30, 2020 declined 20.0% on an organic basis, representing outgrowth of 610 basis points.
HVOR
For the three months ended September 30, 2020, HVOR net revenue declined 7.5% compared to the corresponding period in the prior year. Excluding growth of 0.3% attributed to foreign exchange rate differences between the two periods, HVOR net revenue in the three months ended September 30, 2020 declined 7.8% on an organic basis, representing outgrowth of 860 basis points compared to a market that was down 16.4%.
Our China on-road truck business continued to post better than expected growth, as a result of the ongoing adoption of NS6 emissions regulations. While our China business grew in the third quarter, we experienced substantial declines in both Europe and the Americas, as production levels in these geographies declined year over year.
For the nine months ended September 30, 2020, HVOR net revenue declined 17.4% compared to the prior year. Excluding a decline of 0.5% attributed to foreign exchange rate differences between the two periods, HVOR net revenue in the nine months ended September 30, 2020, declined 16.9% on an organic basis, representing outgrowth of 840 basis points compared to a market that was down 25.3%.
Net Revenue - Sensing Solutions
For the three months ended September 30, 2020, Sensing Solutions net revenue decreased 6.2%, or 6.4% on an organic basis, primarily driven by the impacts of COVID-19. For the nine months ended September 30, 2020, Sensing Solutions net revenue decreased 12.5%, or 12.2% on an organic basis.
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Industrial and Other
For the three months ended September 30, 2020, industrial and other net revenue declined 2.0% compared to the prior year. Excluding growth of 0.2% attributed to foreign exchange rate differences between the two periods, industrial and other net revenue in the three months ended September 30, 2020 decreased 2.2% on an organic basis. This decrease was driven by continued weak global industrial end markets, partially offset by growth in factory automation and medical equipment, which includes sensors to ventilator manufacturers.
For the nine months ended September 30, 2020, industrial and other net revenue decreased 10.3% compared to the prior year. Excluding a decline of 0.4% attributed to foreign exchange rate differences between the two periods, industrial and other net revenue in the nine months ended September 30, 2020 decreased 9.9% on an organic basis.
Aerospace
For the three months ended September 30, 2020, aerospace net revenue declined 24.4% compared to the prior year on a reported and organic basis, which was negatively impacted by reduced OEM production and lower air traffic, partially offset by new product launches, primarily in the defense market.
For the nine months ended September 30, 2020, aerospace net revenue decreased 22.2% compared to the prior year on a reported and organic basis.
Operating costs and expenses
Operating costs and expenses for the three and nine months ended September 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 nine months ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Amount Margin* Amount Margin* Amount Margin* Amount Margin*
Operating costs and expenses:
Cost of revenue $ 530.3 67.3 % $ 554.9 65.3 % $ 1,509.1 70.5 % $ 1,711.0 65.7 %
Research and development 33.4 4.2 38.2 4.5 98.1 4.6 110.0 4.2
Selling, general and administrative 75.7 9.6 68.2 8.0 217.7 10.2 210.7 8.1
Amortization of intangible assets 32.6 4.1 35.9 4.2 98.4 4.6 108.1 4.2
Restructuring and other charges, net (10.5) (1.3) 6.4 0.8 32.2 1.5 28.0 1.1
Total operating costs and expenses $ 661.5 83.9 % $ 703.6 82.8 % $ 1,955.5 91.4 % $ 2,167.8 83.2 %
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* Represents the amount presented divided by total net revenue.
Cost of revenue
For the three months ended September 30, 2020, cost of revenue as a percentage of net revenue increased from the prior period primarily as a result of (1) productivity headwinds and (2) higher compensation to retain and incentivize critical employee talent, partially offset by (1) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020 and (2) the favorable effect of changes in foreign currency exchange rates.
For the nine months ended September 30, 2020, cost of revenue as a percentage of net revenue increased from the prior period primarily as a result of (1) productivity headwinds from our manufacturing facilities running at lower than normal capacity and (2) a $29.2 million loss related to a judgment against us in intellectual property litigation with Wasica in the first quarter of 2020 (settled in the third quarter 2020), partially offset by (1) savings from temporary cost reductions in the second quarter (including salary reductions and furloughs), (2) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020, and (3) the favorable effect of changes in foreign currency exchange rates. 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 regarding the litigation with Wasica.
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We expect that the actions taken in the Q2 2020 Global Restructure Program will result in improvements of our cost of revenue as a percentage of revenue in future quarters. Refer to Q2 2020 Global Restructure Program section earlier in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for a more detailed discussion of this program.
Research and development ("R&D") expense
For each of the three and nine months ended September 30, 2020, R&D expense decreased from the comparable periods of the prior year primarily as a result of (1) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020 and (2) the favorable effect of changes in foreign currency exchange rates, somewhat offset by increased investments in our megatrend initiatives. R&D expense for the nine months ended September 30, 2020 was also reduced as a result of savings from temporary salary and furlough actions taken in the second quarter of 2020. Refer to Megatrends section earlier in this MD&A for detailed discussion of certain of our megatrends initiatives.
Selling, general and administrative ("SG&A") expense
For the three months ended September 30, 2020, SG&A expense increased from the prior year primarily as a result of (1) higher compensation to retain and incentivize critical employee talent and (2) increased costs related to enhancements and improvements to our global operating processes to increase productivity, partially offset by the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020.
For the nine months ended September 30, 2020, SG&A expense increased from the prior period primarily as a result of (1) increased costs related to enhancements and improvements to our global operating processes to increase productivity, (2) higher compensation to retain and incentivize critical employee talent, and (3) incremental SG&A related to acquired businesses, partially offset by (1) savings resulting from temporary salary reductions and furloughs in the second quarter of 2020 and (2) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020, and (3) the favorable effect of changes in foreign currency exchange rates.
Amortization of intangible assets
For the three and nine months ended September 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
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 more detailed information on these charges.
Restructuring and other charges, net for the three months ended September 30, 2020 amounted to a net gain of $10.5 million, compared to a net charge of $6.4 million in the comparable period of the prior year. The net gain resulted primarily from the release of $11.7 million excess accrual related to the third quarter settlement of a patent infringement case brought against Schrader by Wasica. 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. Restructuring and other charges, net for the three months ended September 30, 2019 primarily related to $6.5 million of termination benefits provided under a one-time benefit arrangement in connection with the shutdown and relocation of an operating site in Germany.
Restructuring and other charges, net for the nine months ended September 30, 2020 increased $4.2 million from the comparable period of the prior year. Restructuring and other charges, net for the nine months ended September 30, 2020 primarily related to second quarter charges incurred under the Q2 2020 Global Restructure Program. Refer to Q2 2020 Global Restructure Program section earlier in this MD&A, and Note 5, "Restructuring and Other Charges, Net," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for detailed discussion of this program. Restructuring and other charges, net for the nine months ended September 30, 2019 included benefits provided under a voluntary retirement incentive program in the U.S. and termination benefits provided under a one-time benefit arrangement related to the shutdown and relocation of an operating site in Germany.
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Operating income
In the three months ended September 30, 2020, operating income decreased $19.3 million, or 13.2%, to $126.8 million (16.1% of net revenue) compared to $146.1 million (17.2% of net revenue) in the three months ended September 30, 2019. The decrease was primarily due to (1) productivity headwinds from our manufacturing facilities operating at lower capacity, (2) lower revenue largely due to end-market contraction caused by COVID-19, (3) higher compensation costs to retain and incentivize critical employee talent, and (4) increased costs to optimize global operating processes, partially offset by (1) the release of $11.7 million excess liability upon our third quarter settlement with Wasica, (2) cost savings, primarily related to actions taken under the Q2 2020 Global Restructure Program, (3) the non-recurrence of certain restructuring charges from the third quarter of 2019, (4) lower R&D expense (net of higher megatrend spend), (5) lower amortization expense due to the impacts of the economic benefit method, and (6) the favorable effect of changes in foreign currency exchange rates.
In the nine months ended September 30, 2020, operating income decreased $252.6 million or 57.9%, to $183.6 million (8.6% of net revenue) compared to $436.2 million (16.8% of net revenue) in the nine months ended September 30, 2019. This decrease was primarily due to (1) lower revenues, (2) productivity headwinds from our manufacturing facilities running at lower than normal capacity, particularly in the second quarter, (3) the settlement of the patent infringement litigation brought against Schrader by Wasica, (4) the $24.1 million charge recognized in the second quarter of 2020 related to the Q2 2020 Global Restructure Program, (5) higher compensation costs to retain and incentivize critical employee talent, and (6) increased costs to optimize global operating processes. These impacts were partially offset by (1) savings of approximately $21.8 million realized in the second quarter of 2020 resulting from temporary salary reductions, furloughs, and government subsidies, (2) the non-recurrence of restructuring charges from 2019, including $12.7 million of charges related to benefits provided under a voluntary retirement incentive program, (3) lower intangible amortization expense due to the impacts of the economic benefit method, (4) the favorable effect of changes in foreign currency exchange rates, (5) cost savings, primarily related to actions taken under the Q2 2020 Global Restructure Program, and (6) lower R&D expense (net of higher megatrend spend).
We expect that the actions taken in the Q2 2020 Global Restructure Program will result in savings that will be favorable to operating income in future quarters. Refer to Q2 2020 Global Restructure Program section earlier in this MD&A for detailed discussion of this program.
Other, net
Other, net primarily includes currency remeasurement gains and losses on net monetary assets, gains and losses on foreign currency and commodity forward contracts not designated as hedging instruments, losses related to debt refinancing, and the portion of our net periodic benefit cost excluding service cost. Refer to Note 6, "Other, Net," of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for more detailed information on amounts included in other, net. 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 on amounts related to derivative instruments.
In the three months ended September 30, 2020, other represented a net gain of $9.2 million, a favorable change of $16.8 million compared to a net loss of $7.6 million in the three months ended September 30, 2019. This change was driven primarily by (1) the favorable impact of changes in foreign currencies, (2) the non-recurrence of a $4.4 million loss on debt financing from the third quarter of 2019, and (3) fair value adjustments related to our commodity forward contracts, which are not designated as hedges.
In the nine months ended September 30, 2020, other represented a net loss of $1.5 million, a favorable change of $6.4 million compared to a net loss of $7.9 million in the nine months ended September 30, 2019. This change was driven primarily by (1) the favorable impact of changes in foreign currencies, (2) the non-recurrence of a $4.4 million loss on debt financing from the third quarter of 2019, and (3) fair value adjustments related to our commodity forward contracts, which are not designated as hedges. These favorable changes were partially offset by higher net periodic benefit costs, excluding service cost, due mainly to increased pension settlement losses associated with restructuring actions.
Provision for income taxes
For the three and nine months ended September 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 nine months ended September 30, 2020, as we were able to utilize additional interest expense that was previously subject to a valuation allowance.
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The provision for income taxes consists of:
• current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions and withholding taxes 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 September 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) September 30, 2020 December 31, 2019
United Kingdom $ 19.9 $ 8.8
United States 13.1 7.0
The Netherlands 1,312.9 522.9
China 140.6 119.3
Other 123.7 116.1
Total $ 1,610.2 $ 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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Cash Flows:
The table below summarizes our primary sources and uses of cash for the nine months ended September 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 nine months ended
(In millions) September 30, 2020 September 30, 2019
Net cash provided by/(used in):
Operating activities:
Net income adjusted for non-cash items
$ 248.7 $ 490.6
Changes in operating assets and liabilities, net 44.6 (57.1)
Operating activities 293.3 433.5
Investing activities (158.5) (160.5)
Financing activities 701.2 (281.5)
Net change $ 836.1 $ (8.4)
Operating activities. Net cash provided by operating activities declined from the nine months ended September 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.
Investing activities. Net cash used in investing activities in the nine months ended September 30, 2019 was primarily impacted by a reduction in capital expenditures as a result of COVID-19, partially offset by an increase in cash used for acquisitions and cash paid for investment in equity securities. In fiscal year 2020, we anticipate capital expenditures of approximately $110.0 million to $120.0 million, which we expect to be funded from cash on hand.
Financing activities . Net cash provided by financing activities for the nine months ended September 30, 2020 included $400.0 million of cash proceeds from the drawdown on the Revolving Credit Facility on April 1, 2020 and $750.0 million of cash proceeds from the issuance and sale of of the 3.75% Senior Notes on August 17, 2020. A portion of the proceeds from the issuance and sale of of the 3.75% Senior Notes was used to repay our borrowings on the Revolving Credit Facility. Additionally, payments to repurchase ordinary shares decreased from $265.8 million for the nine months ended September 30, 2019 to $35.2 million for the nine months ended September 30, 2020 due to the temporary suspension of our share repurchase program, announced on April 2, 2020. The share repurchase program will continue to remain on hold until market conditions show greater improvement and stability.
Indebtedness and Liquidity:
As of September 30, 2020, we had $4,038.0 million in gross indebtedness, which included finance lease and other financing obligations and excluded debt discounts and deferred financing costs. We will evaluate early redemption of the 6.25% senior notes due 2026, after they first become eligible for optional redemption at a fixed redemption price in February 2021. This evaluation will depend on market and financial conditions at the time. 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, including the issue and sale of $750.0 million of the 3.75% Senior Notes on August 17, 2020.
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.
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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. On August 17, 2020, we used a portion of the proceeds from the issuance and sale of $750.0 million of the 3.75% Senior Notes to repay the balance outstanding on the Revolving Credit Facility. As of September 30, 2020, we had $416.1 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 September 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 September 30, 2020, availability under the Accordion was approximately $0.6 billion.
We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, ordinary share repurchases (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 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 nine months ended September 30, 2020.
The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants that limit the ability of our wholly-owned subsidiary, STBV, and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and make other restricted payments. For a full discussion of these restrictions and covenants, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources," included in our 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 September 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 October 23, 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 September 30, 2020. During the nine months ended September 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 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.
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
No significant changes to our market risk have occurred since December 31, 2019. For a discussion of market risks affecting us, refer to Part II, Item 7A—"Quantitative and Qualitative Disclosures About Market Risk" included in our Annual Report on Form 10-K for the year ended December 31, 2019.