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Item 2. Management’s Discussion and Analysis

2021-04-27 compared with 2020-10-27 · 344 added, 197 removed, 86 unchanged (86% of the section changed)

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.

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.

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.

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.

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 2020 Annual Report, filed with the SEC on February 12, 2021, and the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

The COVID-19 pandemic caused widespread disruptions to our company, employees, customers, suppliers, and communities in fiscal year 2020.

In the first quarter of 2020, 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 2020, most of our operations outside of China also began to experience the impacts of the pandemic.

These disruptions included, 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.

We acted early during the pandemic to reduce our cost structure while continuing to invest in megatrends that are shaping our end markets that we believe will enable us to deliver long-term sustainable growth.

As a result, we have continued to capitalize on rapidly improving markets and supported our customers as they have returned to higher levels of production late in 2020 and during the first quarter of 2021.

However, while the most severe impacts of the COVID-19 pandemic appear to be behind us, we continue to monitor leading economic indicators and third-party forecasts to help form our view of future demand.

First quarter results

The economic recovery we experienced during the second half of 2020 continued to gain momentum during the first quarter of 2021.

Improved market results, combined with our response to increased demand, drove net revenue growth of 21.7% compared to the first quarter of 2020.

This represented 790 basis points of market outgrowth.

We use the term "market outgrowth" to describe the impact of an increasing quantity and value of our products used in customer systems and applications.

It is only loosely correlated to normal unit demand fluctuations in the markets we serve.

In the first quarter of 2021, Performance Sensing net revenue increased 25.6% and Sensing Solutions net revenue increased 10.9% from the first quarter of 2020.

Our automotive and HVOR businesses delivered market outgrowth of 910 basis points and 1,070 basis points, respectively.

Refer to Results of Operations—Net Revenue included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for additional discussion.

Operating income increased 168.7% to $157.5 million in the first quarter of 2021, compared to $58.6 million in the first quarter of 2020, primarily as a result of the increased revenue discussed above and improved gross margin.

The extent of this increase is a testament to our leading market positions and the strength and flexibility of our manufacturing and commercial model.

Refer to Results of Operations—Operating costs and expenses — Cost of revenue included elsewhere in this MD&A for additional discussion of our improved gross margin.

Net income increased $45.3 million to $53.7 million in the first quarter of 2021, compared to $8.4 million in the first quarter of 2020.

This increase was primarily a result of increased operating income, partially offset by the loss on redemption of the 6.25% Senior Notes as discussed at Results of Operations—Other, net and higher taxes as discussed at Results of Operations—Provision for/(benefit from) income taxes.

Forward-looking information

For the full year 2021, while a degree of market uncertainty remains, in particular with respect to the impact of the industry-wide semiconductor shortage, we are anticipating a continuation of improved and stable economic and business conditions.

We are also anticipating a return to normal seasonality.

We continue to expect to deliver industry-leading margins for our shareholders, while also increasing investments in our growth opportunities and our people.

Our targeted market outgrowth for the automotive business is 400-600 basis points.

Our targeted market outgrowth for the HVOR business is 600-800 basis points.

For the past three years, on average, we have delivered market outgrowth in our automotive and HVOR businesses of 560 basis points and 780 basis points, respectively, near the top of those ranges.

Automotive production is expected to rebound sharply this year from last year, but at a pace slightly lower than expected in February given production slowdowns caused by the global semiconductor shortage.

Global automotive production for the full year 2021 is now expected to grow 12% from the prior year.

Record low inventory levels at our automotive customers, especially in North America, will help propel strong growth later in 2021.

Offsetting the slower than expected automotive production growth, our HVOR and industrial end markets are now expected to grow faster in 2021 than we had communicated in February.

One headwind affecting our outlook for 2021 is the expected impact from the global semiconductor shortage facing the automotive supply chain, as well as other sectors, due in part to large-scale shutdowns early in 2020 caused by the COVID-19 pandemic.

Semiconductors are the technology used to make microchips, and this shortage has resulted in paused production on certain vehicles and increased costs to procure microchips.

This shortage has impacted our margins in the first quarter of 2021, and we believe it will continue to have an adverse impact on our operating costs in the remainder of fiscal year 2021.

We continue to demonstrate progress in our megatrend initiatives as we increase our investments to pursue these large, fast-growing markets driven by secular trends.

We intend to expand our solutions for these areas organically, through third party collaboration, and through acquisitions, including technology collaborations and partnerships with third parties.

We see numerous opportunities to utilize our strong financial position, engineering capabilities, supply chain, and customer relationships to meaningfully enlarge our addressable markets through organic efforts as well as bolt-on acquisitions and partnerships within these megatrends.

Our automotive addressable market is large today and growing rapidly.

Applications in internal combustion vehicles make up most of our current automotive addressable market, which is expected to continue to grow over the next 10 years, even with the shift in type of vehicles produced.

In addition, while the Electrification applications that we serve represent a smaller market today, these applications are expected to grow very rapidly until they become an even larger opportunity for us than internal combustion engines by 2030.

As a result, we’re expecting a doubling of our automotive addressable market by 2030.

The rapid introduction of new electric vehicles provides a healthy tailwind for our revenue growth.

Our content in electric vehicles represents a 20% uplift in content value as compared to internal combustion vehicles of a similar class.

This content uplift is derived from the broad array of our sensors and other components that we design into battery electric vehicles, in many cases using the same underlying technology product families that we use in internal combustion vehicles.

Additionally, certain sensors carry over directly from internal combustion vehicles, such as brake pressure and tire pressure sensors.

We also build additional sensors or devices unique to electric vehicles, such as contactors and electric motor position sensors.

We are broadening and deepening our product portfolio to support this expanding segment.

In the first quarter, we completed the acquisition of Lithium Balance to add battery management systems to our product capabilities.

In addition, we achieved a meaningful milestone in our Electrification megatrend initiative when we agreed to a joint venture with Churod Electronics ("Churod") on April 8, 2021.

This joint venture extends our electrical protection capabilities to mass-market electric vehicles and other electrified equipment worldwide and expands our contactor capabilities in the automotive market to vehicles that have shorter ranges and longer charging times, which are more common in Asia.

This enables us to offer a broader electrification solution set for electric vehicle manufacturers globally.

The joint venture will provide medium-voltage contactors to transportation original equipment manufacturers ("OEMs") in China, and we will sell the product line to customers elsewhere in the world.

Churod will contribute access to its ceramic, high-levitation contactor intellectual property.

These contactors are optimized for medium-voltage applications in the 150 amp to 400 amp range common in mass-market vehicles.

They will also dedicate engineering resources and contribute manufacturing equipment to the joint venture.

Sensata will contribute $9.5 million and will dedicate application engineers and salespeople.

Our Electrification megatrend initiative does not only represent a market opportunity in electric vehicles, but also electrified heavy vehicles and the charging infrastructure necessary to support this ecosystem.

We see additional opportunities in industrial and grid applications, some of which are more nascent today.

Sensata is already a leading provider of high-voltage protection

on electric vehicles and charging infrastructure and we seek to be the partner of choice for heavy vehicle and industrial OEMs transitioning to electrified solutions as well.

We also intend to participate in other areas of the evolving market that enable Electrification to become more widespread.

In our Smart & Connected megatrend initiative, we acquired Xirgo, a leading telematics and data insights provider for fleet management across the transportation and logistics segments, on April 1, 2021.

Refer to the section Xirgo below for additional information.

In addition, during the first quarter of 2021, we signed up another North American fleet customer to begin installation of our Smart & Connected solution set, demonstrating our ability to move from selling hardware to providing data insight solutions on a monthly recurring subscription model.

We believe that the overall market environment may continue to provide opportunities to further strengthen our portfolio through strategically important, value-creating acquisitions and/or joint ventures.

In addition, we are pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our megatrend growth.

On April 1, 2021, we completed the acquisition of Xirgo, headquartered in Camarillo, California, for $400 million.

This acquisition represents a meaningful milestone in our Smart & Connected megatrend initiative, greatly expanding our ability to provide data insights to transportation and logistics customers, as well as adding a new customer base for these solutions.

Xirgo brings a comprehensive suite of telematics and asset tracking devices, cloud-based data insight solutions, as well as emerging sensing applications and data services.

Xirgo is complementary to, and meaningfully extends, our organic Smart & Connected solution for commercial fleet managers.

This acquisition is consistent with our strategy to move beyond serving vehicle OEMs and engage with the broader transportation and logistics ecosystem.

Xirgo expands our Smart & Connected addressable markets by adding cargo, container, and light-vehicle fleet management to our heavy vehicle OEM and fleet focus.

Xirgo is expected to generate more than $100 million in annualized revenue in 2021 and grow in excess of 20% per year over the next several years.

We already have committed orders for more than 80% of the revenue we expect Xirgo to generate for the remainder of 2021.

We expect to integrate Xirgo into our Performance Sensing reportable segment.

Refer to Note 16:

Acquisitions of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information.

We have sufficient cash to take advantage of strategic opportunities as they arise.

At December 31, 2020, we had cash and cash equivalents of $1,862.0 million.

In the first quarter of 2021, we generated operating cash flows of $104.5 million, ending the quarter with cash and cash equivalents of $1,893.9 million.

In the first quarter of 2021, we used the flexibility provided by such a large cash balance to lower our cost of capital and extend our debt maturity, by redeeming the 6.25% Senior Notes and issuing the 4.0% Senior Notes.

Refer to Overview—Debt Transactions below for additional discussion of these transactions.

On April 1, 2021, we used $400.0 million to acquire Xirgo, which will help advance our Smart & Connected megatrend initiative.

Refer to Overview—Xirgo above for additional discussion of this acquisition.

In addition, on April 8, 2021, we took advantage of continued favorability in the capital markets and issued an additional $250.0 million of 4.0% Senior Notes.

Debt Transactions

On March 5, 2021, we took advantage of our large cash balance and redeemed the $750.0 million aggregate principal amount outstanding on the 6.25% Senior Notes.

The redemption was at a price of 103.125% of principal, resulting in additional payment of $23.4 million upon redemption.

We recorded a loss of $30.1 million as a result of this transaction, consisting primarily of the premium payment and write-off of deferred financing costs.

Subsequently, on March 29, 2021, we issued $750.0 million aggregate principal amount of 4.0% Senior Notes (at par) and on April 8, 2021, we issued an additional $250.0 million of 4.0% Senior Notes at a price of 100.75%.

The combined effect of these transactions was to extend the average maturity of our debt profile and lower our total cost of fixed debt by 80 basis points to 4.5% as compared to the first quarter of 2020.

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 these transactions and our overall debt.

Proceeds from the 4.0% Senior Notes will be used for general corporate purposes, to fund future acquisitions and our capital deployment strategy, and for future debt repayments.

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.

On June 30, 2020, in response to the potential long-term impact of the COVID-19 pandemic on our business, we commenced the Q2 2020 Global Restructure Program, consisting of 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.

Over the life of the Q2 2020

Global Restructure Program, 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 880 positions, for which we expect to incur severance charges of between $31.0 million and $33.7 million.

In addition, over the life of the Q2 2020 Global Restructure Program, we expect to incur between $6.0 million and $8.0 million related to site closures.

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.

Including charges of $1.8 million in the first quarter of 2021, we have recognized charges of $26.3 million since inception of the Q2 2020 Global Restructure Program, of which $24.9 million have been severance charges and $1.4 million have been facility exit costs.

As of March 31, 2021, our severance liability related to the Q2 2020 Global Restructure Program was $8.7 million, which is presented in accrued expenses and other current liabilities of our condensed consolidated balance sheets.

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.

We expect that the actions taken in the Q2 2020 Global Restructure Program will generate approximately $43 million in annual savings of personnel- and facilities-related costs.

We continue to realize savings in the in the first quarter of 2021 related to both the Q2 2020 Global Restructure Program and from ongoing cost reduction activities and spend controls.

Such savings represented approximately $7 million in the first quarter of 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.

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, 2021 compared to the three months ended March 31, 2020.

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

1 unchanged sentence

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*

For the three months ended

March 31, 2021 March 31, 2020

Amount Margin* Amount Margin*

Performance Sensing $ 714.5 75.8 % $ 568.7 73.4 %

6 unchanged sentences

Income before taxes 74.0 7.9 6.9 0.9

Provision for income taxes 15.2 1.9 28.3 3.3 15.1 0.7 80.6 3.1

Provision for/(benefit from) income taxes 20.3 2.2 (1.5) (0.2)

Net income $ 53.7 5.7 % $ 8.4 1.1 %

1 unchanged sentence

* 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.

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) %

__________________________

(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.

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.

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.

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.

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.

Net revenue for the first quarter of 2021 increased 21.7% compared to the first quarter of 2020 largely due to improved market results and our continued outperformance relative to those markets.

Excluding an increase of 2.9% attributed to changes in foreign currency exchange rates, net revenue for the first quarter of 2021 increased 18.8% on an organic basis.

This represents a market outgrowth of 790 basis points.

We are continuing to monitor all of our end markets and customers to ensure that our resources are balanced against forecasts and prioritized against critical growth opportunities.

Organic revenue growth (or decline), presented throughout this MD&A, is a financial measure not presented in accordance with U.S.

Refer to the section entitled Non-GAAP Financial Measures below for additional information related to our use of organic revenue growth (or decline).

Performance Sensing

Performance Sensing net revenue for the first quarter of 2021 increased 25.6% compared to the first quarter of 2020.

Excluding an increase of 3.2% attributed to changes in foreign currency exchange rates, Performance Sensing net revenue for the first quarter of 2021 increased 22.4% on an organic basis.

Both the automotive and HVOR businesses contributed positively to these results.

Automotive net revenue for the first quarter of 2021 grew 22.6% compared to the first quarter of 2020.

Excluding growth of 3.3% attributed to changes in foreign currency exchange rates, automotive net revenue for the first quarter of 2021 grew 19.3% on an organic basis.

This increase is primarily due to recovery of customer production combined with our continued outperformance relative to the automotive market, which was led by continued new product launches in powertrain and emissions, safety, and electrification-related applications and systems.

Market outgrowth was 910 basis points compared to total market growth of 10.2% in the first quarter of 2021.

HVOR net revenue for the first quarter of 2021 grew 35.7% compared to the first quarter of 2020.

Excluding growth of 2.9% attributed to changes in foreign currency exchange rates, HVOR net revenue for the first quarter of 2021 grew 32.8% on an organic basis.

This increase is primarily due to recovery of customer production combined with our continued outperformance relative to the HVOR markets.

Our China on-road truck business continued to achieve better than expected growth, primarily from the adoption of NS6 emissions regulations as well as the benefit from a wave of electromechanical operator controls being installed in new off-road equipment.

Market outgrowth was 1,070 basis points compared to total market growth of 22.1% in the first quarter of 2021.

Sensing Solutions

Sensing Solutions net revenue for the first quarter of 2021 increased 10.9% compared to the first quarter of 2020.

Excluding growth of 2.1% attributed to changes in foreign currency exchange rates, Sensing Solutions net revenue for the first quarter of 2021 grew 8.8% on an organic basis.

The increase in net revenue was driven by continued growth in industrial markets (particularly HVAC), new electrification launches, and supply chain restocking, partially offset by the impacts of a decline in the aerospace industry.

The decline in the aerospace industry has continued throughout fiscal year 2020 and into the first quarter of 2021, reflecting reduced OEM production and significantly lower air traffic, which continues to negatively impact our aerospace aftermarket business.

New product launches, primarily in the defense space, partially offset the significant aerospace market decline this quarter.

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.

Operating costs and expenses for the three months ended March 31, 2021 and 2020 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*

For the three months ended

March 31, 2021 March 31, 2020

Amount Margin* Amount Margin*

Operating costs and expenses:

8 unchanged sentences

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.

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.

For the three months ended March 31, 2021, cost of revenue as a percentage of net revenue decreased from the prior period, primarily as a result of (1) the impact in the first quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020 as well as (2) improvement of various factors that drove cost of revenue as a percentage of revenue up in the first quarter of 2020 (primarily related to the COVID-19 pandemic) such as volume declines and productivity headwinds from our manufacturing facilities running at lower than normal capacity.

In addition, the first quarter of 2020 included a $29.2 million loss related to a judgment against us in intellectual property litigation (settled in the third quarter of 2020).

These favorable impacts on cost of revenue as a percentage of revenue were partially offset by the impacts of the microchip shortage and the unfavorable effect of changes in foreign currency exchange rates.

Research and development expense

For the three months ended March 31, 2021, R&D expense increased $1.5 million (4.4%) from the prior year, primarily as a result of increased investments in our megatrend initiatives and the unfavorable effect of changes in foreign currency exchange

rates, partially offset by the impact in the first quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020.

Megatrend investments were $12.4 million during the first quarter, an increase of $5.8 million from the prior year quarter.

We currently expect approximately $50 to $55 million in megatrend-related spend in 2021 to design and develop differentiated sensor-rich and data insight solutions to enter new markets, develop new business models, and design new product categories in the fast-growing and transformational megatrend vectors of Electrification and Smart & Connected solutions.

Selling, general and administrative expense

For the three months ended March 31, 2021, SG&A expense decreased $0.1 million to $77.1 million (8.2% of revenue) from $77.2 million (10.0% of revenue) in the prior year.

The reduction in SG&A expense is primarily a result of (1) the impact on first quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020, (2) the 2020 completion of a project related to enhancements and improvements of our global operating processes to increase productivity and the resulting reduction in professional fees, and (3) lower share-based compensation expense, largely offset by (1) higher compensation to retain and incentivize critical employee talent, (2) increased acquisition-related transaction costs, (3) incremental SG&A expense related to acquired businesses, and (4) the unfavorable impact 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.

For the three months ended March 31, 2021, amortization expense decreased $1.0 million (3.1%) from the prior year primarily due to the effect of the economic benefit amortization 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.

For the three months ended March 31, 2021, restructuring and other charges, net increased $0.1 million (1.9%) from the prior year.

In the three months ended March 31, 2021, we incurred $1.8 million of charges related to the Q2 2020 Global Restructure Program.

Refer to Overview—Q2 2020 Global Restructure Program elsewhere in this MD&A for additional discussion on this program.

Refer to Note 5:

Restructuring and Other Charges, Net of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information on our restructuring and other charges, net.

Operating income

In the three months ended 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.

In the three months ended March 31, 2021, operating income increased $98.9 million, or 168.7%, to $157.5 million (16.7% of net revenue) compared to $58.6 million (7.6% of net revenue) in the three months ended March 31, 2020.

The increase was primarily due to higher volume and improved gross margin as described elsewhere in this Results of Operations at Net Revenue and Operating costs and expenses — Cost of revenue.

We expect that the microchip shortage will increase our operating costs in the second quarter of 2021, compared to the second quarter of 2020.

If the impacts of this shortage are more severe than we expect, it could result in deterioration of our results, potentially for a longer period than currently anticipated.

Interest expense, net

For the three months ended March 31, 2021, interest expense, net increased $4.6 million (11.8%) from the prior year primarily as a result of interest expense on the 3.75% Senior Notes, which were issued on August 17, 2020, and lower cash interest income due to declining interest rates.

These increases were partially offset by lower interest expense on the 6.25% Senior Notes, which were redeemed on March 5, 2021, and lower interest expense on our term loan facility (the "Term Loan") as a result of lower interest rates.

In addition, on March 29, 2021, we issued $750.0 million aggregate principal amount of 4.0% Senior Notes, and on April 8, 2021, we issued an additional $250.0 million aggregate principal amount of 4.0% Senior Notes.

Refer to Overview—Debt Transactions elsewhere in this MD&A for additional information related to the redemption of the 6.25% Senior Notes and the issuance of the 4.0% Senior Notes.

On an annualized basis, after completing these transactions, interest expense on our fixed rate debt will be $6.9 million lower than it would have been had these transactions not been completed.

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.

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.

The provision for income taxes consists of:

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

In the three months ended March 31, 2021, other, net represented a loss of $39.4 million, an unfavorable change of $27.1 million compared to a net loss of $12.3 million in the three months

ended March 31, 2020.

This change was driven primarily by the loss of $30.1 million recorded on redemption of the 6.25% Senior Notes.

Refer to Overview—Debt Transactions included elsewhere in this MD&A for additional information related to the redemption of the 6.25% Senior Notes.

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.

Provision for/(benefit from) income taxes

For the three months ended March 31, 2021, we recorded a provision for income taxes of $20.3 million, compared to a benefit from income taxes of $1.5 million in the prior quarter.

The increase in total tax from the prior periods was predominantly related to the overall increase in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate as well as the nonrecurrence of the benefit recorded in the first quarter of 2020 as a result of the enactment of the CARES Act, which was enacted by the U.S.

federal government on March 27, 2020 in response to the global financial and health crisis caused by the COVID-19 pandemic.

In connection with this legislation, federal limitations on interest deductions were reduced 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 provision for/(benefit from) income taxes consists of (1) 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;

• 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.

and (2) deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to (a) the step-up in fair value of fixed and intangible assets acquired in connection with business combination transactions, (b) changes in net operating loss carryforwards, (c) changes in tax rates, and (d) changes in our assessment of the realizability of our deferred tax assets.

Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q includes references to organic revenue growth (or decline), which is a non-GAAP financial measure.

This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted earnings per share ("EPS"), free cash flow, net leverage ratio, and adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which are used by our management, Board of Directors, and investors.

We use these non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance, and as a factor in determining compensation for certain employees.

The use of our non-GAAP financial measures have limitations.

They should be considered as supplemental in nature and are not intended to be considered in isolation from, or as an alternative to, reported net revenue growth (or decline), operating income, operating margin, net income, diluted EPS, operating cash flows, segment operating margin, total debt, finance lease, and other financing obligations, or EBITDA, respectively, calculated in accordance with U.S.

In addition, our measures of organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, free cash flow, net leverage ratio, and adjusted EBITDA may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.

Organic revenue growth (or decline)

Organic revenue growth (or decline) is defined as the reported percentage change in net revenue, calculated in accordance with U.S.

GAAP, excluding the period-over-period impact of foreign 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.

GAAP, excluding the period-over-period impact of foreign currency exchange rate differences as well as the net impact of material acquisitions and divestitures for the 12-month period following the respective transaction date(s).

We believe that organic revenue growth (or decline) provides investors with helpful information with respect to our operating performance, and we use organic revenue growth (or decline) to evaluate our ongoing operations as well as for internal planning and forecasting purposes.

We believe that organic revenue growth (or decline) provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.

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.

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.

Adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS

We define adjusted operating income as operating income determined in accordance with U.S.

GAAP, excluding certain non-GAAP adjustments which are described below.

Adjusted operating margin is calculated by dividing adjusted operating income by net revenue calculated in accordance with U.S.

We define adjusted net income as follows:

net income determined in accordance with U.S.

GAAP, excluding certain non-GAAP adjustments which are described in Non-GAAP Adjustments below.

Adjusted EPS is calculated by dividing adjusted net income by the number of diluted weighted-average ordinary shares outstanding in the period.

Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS as measures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as factors in determining compensation for certain employees.

We believe investors and securities analysts also use these non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies.

These non-GAAP financial measures are not measures of liquidity.

Free cash flow

Free cash flow is defined as net cash provided by/(used in) operating activities less additions to property, plant and equipment and capitalized software.

We believe free cash flow is useful to management and investors as a measure of cash generated by business operations that will be used to repay scheduled debt maturities and can be used to, among other things, fund acquisitions, repurchase ordinary shares, and (or) accelerate the repayment of debt obligations.

Adjusted EBITDA

Adjusted EBITDA represents net income, determined in accordance with U.S.

GAAP, excluding interest expense, net, provision for/(benefit from) income taxes, depreciation expense, amortization of intangible assets, and the following non-GAAP adjustments, if applicable:

(1) restructuring related and other, (2) financing and other transaction costs, (3) deferred loss or gain on derivative instruments, and (4) step-up inventory amortization.

Refer to Non-GAAP Adjustments below for additional discussion of these adjustments.

Net leverage ratio

Net leverage ratio represents net debt (total debt, finance lease and other financing obligations less cash and cash equivalents) divided by last twelve months ("LTM") adjusted EBITDA.

We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition.

Non-GAAP adjustments

Many of our non-GAAP adjustments relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure.

These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business.

These initiatives include, among other items, acquisitions, divestitures, restructurings of certain business, supply chain, or corporate activities, and various financing transactions.

We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable.

• Restructuring related and other :

includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results.

Such costs include charges related to optimization of our manufacturing processes to increase productivity.

This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances.

Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments.

Restructuring related and other does not, however, include charges related to the integration of acquired businesses, including such charges that are recognized as restructuring and other charges, net in the consolidated statements of operations.

• Financing and other transaction costs :

includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, losses or gains related to the termination of a long-term unfavorable supply agreement, and costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction.

• Deferred loss or gain on derivative instruments :

includes unrealized losses or gains on derivative instruments that do not qualify for hedge accounting as well as the impact of commodity prices on our raw material costs relative to the strike price on our commodity forward contracts.

• Step-up depreciation and amortization :

includes depreciation and amortization expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., property, plant and equipment, definite-lived intangible assets, and inventory).

• Deferred taxes and other tax related :

includes adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, the utilization of net operating losses, and adjustments to our valuation allowance in connection with certain acquisitions and tax law changes.

Other tax related items include certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.

• Amortization of debt issuance costs .

We adjust our results recorded in accordance with U.S.

GAAP by the amortization of debt issuance costs, which are deferred as a contra-liability against our long-term debt, net on the consolidated balance sheets and which are reflected in interest expense on our consolidated statements of operations.

• Where applicable, the current tax effect of non-GAAP adjustments.

Our definition of adjusted net income excludes the deferred provision for/(benefit from) income taxes and other tax related items described above.

As we treat deferred income taxes as an adjustment to compute adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented.

Non-GAAP reconciliations

The following tables provide reconciliations of certain financial measures calculated in accordance with U.S.

GAAP to the related non-GAAP financial measures for the periods presented.

Refer to Non-GAAP Adjustments section above for additional information on these adjustments.

Amounts and percentages have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding.

For the three months ended March 31, 2021

(Dollars in millions, except per share amounts) Operating Income Operating Margin Net Income Diluted EPS

Reported (GAAP) $ 157.5 16.7 % $ 53.7 $ 0.34

Non-GAAP adjustments:

Restructuring related and other 4.5 0.5 7.3 0.05

Financing and other transaction costs 4.6 0.5 32.8 0.21

Step-up depreciation and amortization 29.7 3.2 29.7 0.19

Deferred loss on derivative instruments 1.8 0.2 2.2 0.01

Amortization of debt issuance costs — — 1.7 0.01

Deferred taxes and other tax related — — 10.1 0.06

Total adjustments 40.6 4.3 83.9 0.53

Adjusted (non-GAAP) $ 198.1 21.0 % $ 137.6 $ 0.86

For the three months ended March 31, 2020

(Dollars in millions, except per share amounts) Operating Income Operating Margin Net Income Diluted EPS

Reported (GAAP) $ 58.6 7.6 % $ 8.4 $ 0.05

Non-GAAP adjustments:

Restructuring related and other 43.8 5.7 38.2 0.24

Financing and other transaction costs 1.7 0.2 1.7 0.01

Step-up depreciation and amortization

32.3 4.2 32.3 0.20

Deferred loss on derivative instruments

0.3 0.0 5.9 0.04

Amortization of debt issuance costs — — 1.6 0.01

Deferred taxes and other tax related — — (4.9) (0.03)

Total adjustments 78.1 10.1 74.8 0.47

Adjusted (non-GAAP) $ 136.7 17.7 % $ 83.2 $ 0.53

The following table provides a reconciliation of net cash provided by operating activities in accordance with U.S.

GAAP to free cash flow.

For the Three Months ended March 31,

(in millions) 2021 2020

Net cash provided by operating activities $ 104.5 $ 98.5

Additions to property, plant and equipment and capitalized software (27.2) (29.5)

Free cash flow $ 77.3 $ 69.0

The following table provides a reconciliation of net income in accordance with U.S.

GAAP to Adjusted EBITDA.

For the three months ended March 31,

(in millions) LTM 2021 2020

Net income $ 209.6 $ 53.7 $ 8.4

Interest expense, net 176.4 44.0 39.4

Provision for/(benefit from) income taxes 23.2 20.3 (1.5)

Depreciation expense 122.2 31.2 34.7

Amortization of intangible assets 128.5 32.1 33.1

EBITDA 659.9 181.3 114.1

Non-GAAP Adjustments

Restructuring related and other 57.9 7.4 42.6

Financing and other transaction costs 40.5 35.9 1.7

Deferred (gain)/loss on derivative instruments (9.9) 3.0 5.9

Adjusted EBITDA $ 748.5 $ 227.6 $ 164.3

The following table provides a reconciliation of total debt, finance lease, and other financing obligations in accordance with U.S.

GAAP to net leverage ratio.

(in millions) March 31, 2021 December 31, 2020

Current portion of long-term debt, finance lease and other financing obligations $ 9.7 $ 757.2

Finance lease and other financing obligations, less current portion 27.6 27.9

Long-term debt, net 3,961.4 3,213.7

Total debt, finance lease, and other financing obligations 3,998.7 3,998.9

discount (8.4) (9.6)

deferred financing costs (30.5) (28.1)

Total gross indebtedness 4,037.6 4,036.6

cash and cash equivalents 1,893.9 1,862.0

Net Debt $ 2,143.7 $ 2,174.6

Adjusted EBITDA (LTM) $ 748.5 $ 685.1

Net leverage ratio 2.9 3.2

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;

As of March 31, 2021 and December 31, 2020, we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers;

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

(In millions) September 30, 2020 December 31, 2019

(In millions) March 31, 2021 December 31, 2020

United Kingdom $ 28.8 $ 25.3

7 unchanged sentences

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 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.

Not reflected in cash and cash equivalents as of March 31, 2021 is $400.0 million of cash paid for the acquisition of Xirgo on April 1, 2021 and $250.0 million of cash proceeds (excluding premium) for the additional offering of 4.0% Senior Notes.

The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2021 and 2020.

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

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

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

For the nine months ended

(In millions) September 30, 2020 September 30, 2019

For the three months ended

(In millions) March 31, 2021 March 31, 2020

Net cash provided by/(used in):

8 unchanged sentences

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.

Net cash provided by operating activities increased from the three months ended March 31, 2020 primarily due to higher net income adjusted for non-cash items, largely offset by the impact of changes in working capital.

Changes in working capital in the three months ended March 31, 2021 were primarily driven by higher accounts receivable balances reflecting higher revenue in the first quarter of 2021 compared to the fourth quarter of 2020.

During the first quarter we built raw material and work-in process inventory to address the increasing demand we experienced in the first quarter, the cash impact of which was offset by increased accounts payable, in part related to this inventory.

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.

Net cash used in investing activities increased in the three months ended March 31, 2021 primarily due to $20.4 million cash paid for the acquisition of Lithium Balance in the first quarter of 2021.

In fiscal year 2021, we anticipate capital expenditures of approximately $160.0 million to $170.0 million, which we expect to be funded from cash on hand.

Subsequent to the reporting period, on April 1, 2021 we closed on the acquisition of Xirgo for an aggregate cash purchase price of $400.0 million, subject to certain post-closing items.

Refer to Overview—Xirgo included elsewhere in this MD&A for additional information.

This purchase price and any other related cash consideration will be presented in cash used in investing activities for the six months ended June 30, 2021.

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.

In the first quarter of 2021, we used cash in financing activities of $23.5 million compared to $36.9 million for the three months ended March 31, 2020.

This change was primarily driven by payments to repurchase ordinary shares, of which there was none in the first quarter of 2021, compared to $35.2 million in the first quarter of 2020.

This decline is the result of the temporary suspension of our share repurchase program on April 2, 2020.

Refer to Capital Resources — Share repurchase programs for additional discussion.

We will resume the share repurchase program when market conditions are favorable to do so.

This decline related to share repurchases was partially offset by cash paid for a $23.4 million premium on the redemption of the 6.25% Senior Notes, and $7.7 million costs related to the issuance of the 4.0% Senior Notes.

Other cash activity presented in cash flows from financing activities in the first quarter of 2021 included cash used for the redemption of the 6.25% Senior Notes, which was largely offset by proceeds received as part of the issuance of the 4.0% Senior Notes on March 29, 2021.

Subsequent to the reporting period, on April 8, 2021, we closed on an additional $250.0 million aggregate principal amount of 4.0% Senior Notes, which will be reflected in cash from financing activities for the six months ended June 30, 2021.

Refer to Overview — Debt Transactions included elsewhere in this MD&A for additional discussion of these transactions.

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.

As of March 31, 2021, we had $4.0 billion in gross indebtedness, which includes finance lease and other financing obligations and excluded debt discounts and deferred financing costs.

In the first quarter of 2021, we redeemed our 6.25% Senior Notes and issued the 4.0% Senior Notes, reducing our cost of capital and extending the maturity profile of our debt.

Refer to Overview — Debt Transactions included elsewhere in this MD&A for additional discussion of these transactions.

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.

Senior Secured Credit Facilities

The credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for the Senior Secured Credit Facilities consisting of the Term Loan, the Revolving Credit Facility, and incremental availability (the "Accordion") under which additional secured credit facilities could be issued under certain circumstances.

Sources of liquidity

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

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.

As of March 31, 2021, 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.

As of March 31, 2021, no amounts had been drawn against these outstanding letters of credit.

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

As of September 30, 2020, availability under the Accordion was approximately $0.6 billion.

As of March 31, 2021, 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 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.

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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.

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 23, 2021, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook.

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

Restrictions and Covenants

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

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

These provisions were not triggered during the nine months ended September 30, 2020.

These provisions were not triggered during the three months ended March 31, 2021.

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.

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.

As of March 31, 2021, we believe we were in compliance with all covenants and default provisions under our credit arrangements.

Share repurchase programs

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

We currently have an authorized $500.0 million share repurchase program 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.

We currently have an authorized $500.0 million share repurchase program under which approximately $302.3 million remained available as of March 31, 2021.

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.

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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.

Quantitative and Qualitative Disclosures About Market Risk.

No significant changes to our market risk have occurred since December 31, 2020.

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.

For a discussion of market risks affecting us, refer to Part II, Item 7A—"Quantitative and Qualitative Disclosures About Market Risk" included in our 2020 Annual Report.

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Item 2. Management’s Discussion and Analysis