What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-26 compared with 2021-10-26 · 123 added, 301 removed, 183 unchanged (70% 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 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 following discussion and analysis of our financial condition and results of operations supplements, and should be read in conjunction with, the discussion in Item 7:

Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report.

The following discussion should also be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Amounts and percentages in the following discussions have been calculated based on unrounded numbers.

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

During the third quarter of 2021, we experienced continued positive momentum from the business and economic growth that began in the second half of 2020 and continued through the first half of 2021.

Sensata responded well to the rapid changes in many of our end markets, demonstrating the strength, resiliency, and reliability of our business and organizational model, enabling us to capitalize on the recovery in end-market demand and deliver on customers’ orders.

However, as we continue to see elevated costs related to the worldwide supply chain shortages and logistics costs, we are working to diminish those effects, including commercial actions with our customers.

Sensata has benefited from its resilient, flexible, and focused organization, which continues to successfully navigate the ever-changing supply chain landscape and deliver on our customers’ needs.

We will continue to focus on delivering industry-leading margins for our shareholders, while also increasing investments in our growth opportunities and our people.

Additionally, we believe that the overall business environment provides opportunities to further strengthen our portfolio through strategically important, value-creating acquisitions and/or joint ventures.

We are also pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our megatrend-driven growth potential.

2021 interim results

Improved market results, combined with our response to increased demand, drove net revenue growth of 20.6% and 34.9% in the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020.

In the three months ended September 30, 2021, Performance Sensing net revenue increased 21.6% and Sensing Solutions net revenue increased 17.9% from the three months ended September 30, 2020.

In the nine months ended September 30, 2021, Performance Sensing net revenue increased 40.9% and Sensing Solutions net revenue increased 19.7% from the nine months ended September 30, 2020.

We continue to produce strong market outgrowth, above our target ranges.

For the three and nine months ended September 30, 2021, we delivered 1,190 basis points and 1,040 basis points, respectively, 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.

Our automotive and HVOR businesses delivered market outgrowth of 1,150 basis points and 2,400 basis points, respectively, in the three months ended September 30, 2021 and market outgrowth of 1,020 basis points and 2,030 basis points, respectively, in the nine months ended September 30, 2021.

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.

We continue to see elevated costs related to the worldwide supply chain shortages and logistics costs, and we are working to diminish those effects, including commercial actions with our customers.

Despite these elevated costs, in the three months ended September 30, 2021, operating income increased $34.5 million to $161.3 million, compared to $126.8 million in the three months ended September 30, 2020.

In the nine months ended September 30, 2021, operating income increased $300.0 million to $483.5 million, compared to $183.6 million in the nine months ended September 30, 2020.

These improved results were due in large part to higher revenues, partially offset by increased costs related to industry-wide supply chain shortages, higher spend to support megatrend growth initiatives and higher incentive compensation aligned to improved financial performance.

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

In the three months ended September 30, 2021, net income increased $8.2 million to $85.0 million, compared to $76.7 million in the three months ended September 30, 2020.

In the nine months ended September 30, 2021, net income increased $209.0 million to $251.6 million, compared to $42.6 million in the nine months ended September 30, 2020.

These increases were primarily a result of improved operating results, partially offset by (1) higher taxes, (2) losses from our commodity forward contracts, and (3) foreign currency remeasurement on net monetary assets, each as discussed elsewhere in our Results of Operations.

For the nine months ended September 30, 2021 net income also reflected the loss on redemption of the 6.25% Senior Notes as discussed at Results of Operations—Other, net.

Forward-looking information

For the fourth quarter of 2021, we expect automotive production to be down approximately 28% compared to the prior year, given ongoing production slowdowns caused by global supply chain shortages.

We do not see production constraints from the global supply chain shortages lifting in the near term.

Our revenue outgrowth to market will be increasingly driven by enhanced positioning in our megatrend areas of Electrification (across our markets) and Insights.

We continue to invest in these growth initiatives both organically and inorganically, with Xirgo, and now the pending acquisitions of Spear and SmartWitness, expanding not only our capabilities, but also our access to end markets and product portfolios in these pivotal areas.

We expect continued significant growth in these megatrend areas over the coming years, driven by electrification trends, the infrastructure requirements to support electrification, and the proliferation of Internet of Things on stationary and mobile equipment.

Since 2018, we have delivered average market outgrowth of 570 basis points as a company, including 1,050 basis points in our HVOR business and 650 basis points in our automotive business.

Our revenue by end market should grow consistent with each market’s production growth plus our targeted outgrowth of approximately 400 to 500 basis points across the entire company.

In addition, we intend to continue to make acquisitions to further expand our market position in our megatrend areas and we aim to have this activity add a material amount to revenue growth each year.

One headwind affecting our outlook is the expected impact from the global supply chain shortages and logistics costs, due in part to large-scale shutdowns early in 2020 caused by the COVID-19 pandemic.

These shortages have resulted in paused production on certain vehicles and increased procurement costs.

These shortages have impacted our margins in the first nine months of 2021, and we believe that impacts from the supply chain shortages will continue throughout next year.

Electrification

Our automotive addressable market is large today and growing, with expectations that it will continue to grow over the next 10 years.

Applications in internal combustion vehicles make up most of our current automotive addressable market.

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.

Our content in electric vehicles represents, on average, 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.

Our design win activity within Electrification has been growing rapidly;

including an 80% increase in Electrification wins last year.

In addition, approximately 50% of our automotive design wins for the nine months ended September 30, 2021 are with electric vehicles.

Looking forward, based on the business wins we’re gaining and the products we are developing, we estimate that our battery-electric content per vehicle is on a path to double that of an internal combustion engine vehicle within five years.

We provide many of our innovative and differentiated components such as braking, tire, and environmental control from traditional vehicles for use in electrical vehicle applications.

Specific to electric vehicles, we also provide and are developing several components that enable safe and efficient operation of electrified platforms such as high voltage electrical protection, advanced temperature sensing, highly sensitive electric motor position, and next-generation current sensing.

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

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 operate with lower voltage while maintaining differentiated technology, which are more common in Asia.

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

In the third quarter of 2021, we reorganized our Sensing Solutions operating segment, moving the portion of our electrical protection product category that includes high voltage contactors, inverters, and battery management systems from the industrial business unit to a new business unit, Clean Energy Solutions.

This business unit will focus on electric vehicle infrastructure, energy storage, smart grid, and renewable energy applications.

Electrification technology is expanding in many markets, not just in passenger vehicles.

Manufacturers of bikes, heavy trucks, material handling equipment, marine vessels, aircraft, and spacecraft are addressing ever-tightening greenhouse gas emissions regulations and taking advantage of falling battery costs to provide electrified solutions to their customers.

However, not all customers can design all aspects of an electrified solution in house.

Thanks to capabilities we have added, or are pending addition via acquisition, we will be able to provide either the subsystem of assembled components to manage battery charging in the form of a power distribution unit or, using technology from Lithium Balance and the pending acquisition of Spear, we will be able to provide the full energy storage system including battery management and a customized battery pack.

In addition, our Electrification megatrend initiative represents a market opportunity in 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 support of the Clean Energy Solutions business unit, on August 23, 2021, we entered into an SPA to acquire all of the outstanding equity interests of Spear for $100 million plus $30 million of contingent consideration.

Spear is headquartered in Grandview, Missouri, and is a leader in electrification solutions, developing next generation scalable lithium-ion battery storage systems for demanding land, sea and air applications.

The transaction contemplated by this SPA is subject to clearance under the Hart-Scott-Rodino Act and other customary closing conditions, and is expected to be completed in the fourth quarter of 2021.

The acquisition of Spear advances Sensata’s Electrification portfolio and strategy into new clean energy markets.

Spear expands on Sensata’s acquisition of Lithium Balance in battery management systems and GIGAVAC in high voltage contactors, and provides energy storage solutions for OEMs and system integrators in fast-growing end markets that offer significant growth opportunities.

With this pending acquisition, we will be able to provide full battery energy storage systems for a variety of specialty transportation markets.

These are highly demanding solutions that include very robust safety features.

Sensata Insights

The Insights megatrend initiative addresses a large and fast-growing market, and we are gaining traction with both current and new customers across various sectors.

On April 1, 2021, we completed the acquisition of Xirgo, a leading telematics and data insights provider for fleet management across the transportation and logistics segments, for $408.7 million, which includes $7.0 million related to employee retention, reflected in operating cash flows.

This acquisition represented a meaningful milestone in our Insights 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.

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

Xirgo is complementary to, and meaningfully extends, our organic Insights solutions for commercial fleet managers, adding cargo, container, and light-vehicle fleet management to our heavy vehicle OEM and fleet focus.

We have branded these offerings, which serve our Insights megatrend initiative, as Sensata Insights.

In addition, on October 4, 2021, we entered into an SPA to acquire all of the outstanding equity interests of SmartWitness, a privately held innovator of video telematics technology for heavy and light duty fleets, for $191.4 million.

SmartWitness is headquartered in Schaumburg, Illinois and expands the capabilities of Sensata Insights into high growth video telematics applications, providing access to applications that will drive adoption of traditional and video telematics solutions.

SmartWitness’ solutions comprise proprietary software and hardware purpose-built for telematics service providers, providing a complementary fit with our Insights business.

Since its founding in 2007, SmartWitness has been a pioneer in video telematics that expands on traditional offerings to include contextually aware data capture that enhances the monitoring of vehicles and their surroundings to increase safety and lower insurance costs for fleets.

SmartWitness will be integrated into the Performance Sensing reportable segment and will be included in Sensata Insights.

Refer to Note 16:

Acquisitions of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information in the acquisitions of Xirgo, Spear, and SmartWitness.

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 nine months ended September 30, 2021, we generated operating cash flows of $393.2 million, ending the quarter on September 30, 2021 with cash and cash equivalents of $1,958.1 million.

This enables us to continue to acquire targeted, innovative businesses that will expand our presence in our targeted growth vectors.

In the first quarter of 2021, we used the flexibility provided by our large cash balance to lower our cost of capital and extend our debt maturity by redeeming the 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 $408.7 million, net of $7.1 million of cash received, to acquire Xirgo, which will help advance our Insights megatrend initiative.

Cash paid to acquire Xirgo includes $7.0 million related to employee retention and which is reflected in operating cash flows.

Refer to Overview—Sensata Insights 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, priced at 100.75%.

Debt Transactions

On March 5, 2021, we 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 recognized 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.

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 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 then anticipated future demand outlook.

As of September 30, 2021, we have completed all actions contemplated under the Q2 2020 Global Restructure Program, with approximately 840 positions impacted.

Since inception of the Q2 2020 Global Restructure Program, we have recognized cumulative costs of $33.2 million, of which $28.4 million related to severance charges and $4.8 million related to facility and exit costs.

As of September 30, 2021, we have a liability of approximately $7.5 million related to actions taken under this plan.

We expect to settle these remaining liabilities with cash on hand.

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 plan.

Sustainability Report

In September 2021, we published our first Sustainability Report, which shares our environmental, social, and governance ("ESG") strategies, performance, and goals that support our vision of creating a cleaner, more efficient, electrified, and connected world.

Our sustainability efforts focus on four key areas of prioritization against which we will measure progress:

• Empowering our workforce:

We promote a culture that values inclusion and diversity and prioritizes employee well-being and safety, while supporting our communities and suppliers.

• Innovating for Sustainability:

We develop products and technology solutions that help create a safer, cleaner, more efficient and connected world.

• Protecting the Environment:

We focus on building products that reduce environmental impact and improve technological efficiencies while optimizing and reducing our operational footprint through energy, water, and waste reduction.

• Operating Responsibly:

We consider transparency and accountability as fundamental in everything that we do, guiding our approach to governance, risk management, and ESG.

As described in the Sustainability Report, we conducted a materiality assessment to identify the ESG issues that were most important to our business and stakeholders.

We identified the following key issues and set corresponding goals as follows:

◦ Diversity, Equity, and Inclusion :

Our goal is to reach (1) 30% female representation in manager and above roles worldwide and (2) 25% racial/ethically diverse representation in manager and above roles in the U.S.

◦ Energy and Emissions :

Our goal is to achieve carbon neutrality by 2050 and reduce greenhouse gas emissions intensity by 10% by 2026.

◦ Responsible Sourcing :

Our goals in this area are by 2026 to (1) achieve 75% response rate on our responsible sourcing campaigns and (2) achieve 100% sourcing of conflict minerals and Cobalt from smelters that are conformant with the Responsible Minerals Assurance Process ("RMAP") or equivalent standard.

In the first quarter of 2022, our net revenue increased 3.5% from the first quarter of 2021.

This revenue growth was primarily driven by outgrowth to market and revenue from acquisitions completed in 2021, offset somewhat by market declines.

In addition, we continued to drive new business wins, most of which were in areas representing our megatrend initiatives, and which will help drive future revenue growth.

Operating income decreased $31.5 million to $125.9 million (12.9% of net revenue) in the first quarter of 2022, compared to $157.5 million (16.7% of net revenue) in the prior year period.

Refer to discussion under the heading Results of Operations elsewhere in this Item 2:

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

Income before taxes decreased to $30.0 million in the first quarter of 2022, compared to $74.0 million in the first quarter of 2021.

Much of this decline related to a mark-to-market loss on our investment in Quanergy as discussed further under the heading Quanergy below.

Global supply chain disruptions and shortages continue to pressure our margins;

however, we have made progress in recovering some of these additional costs from our customers through increased pricing.

In the first quarter of 2022, we completed the strategic acquisition of Elastic M2M for $51.2 million.

Elastic M2M is a privately-held innovator of connected intelligence for operational assets across heavy-duty transport, warehouse, supply chain and logistics, industrial, light-duty passenger car, and a variety of other industry segments.

Elastic M2M primarily serves telematics service providers and resellers, enabling them to leverage Elastic M2M’s cloud platform and analytics capabilities to deliver sensor-based operational insights to their end users.

This acquisition augments our cloud capabilities critical to delivering actionable sensor-based insights, an increasingly important capability in this fast-growing industry segment.

On April 22, 2022, we signed a stock purchase agreement to acquire Dynapower, a leading provider of high-voltage power conversion solutions for clean energy segments, for an aggregate cash purchase price of $580 million, subject to working

capital and other adjustments.

Dynapower's revenue is expected to exceed $100 million on an annualized basis in 2022 with projected revenue growth in excess of 30% over the next several years.

We expect to complete the acquisition in the third quarter of 2022, subject to regulatory approvals and other customary closing conditions.

Dynapower is a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and defense applications.

Dynapower also provides aftermarket sales and service to maintain its equipment in the field.

We are acquiring Dynapower as a foundational addition to our Clean Energy Solutions strategy and complement to our recent acquisitions of GIGAVAC, Lithium Balance, and Spear.

Since fiscal year 2016, we have held a $50.0 million investment in Quanergy Series B Preferred Stock, which was classified as an equity investment without a readily determinable fair value.

As discussed in Note 14:

Fair Value Measures included elsewhere in this Quarterly Report on Form 10-Q, in the first quarter of 2022, Quanergy became a public company traded on the NYSE, as a result of a business combination with CITIC.

Upon closing of the business combination, our $50 million investment in Quanergy Series B Preferred stock was converted to 5.0 million common shares of Quanergy (at a $10 per share implied valuation).

We also contributed $7.5 million to a PIPE investment to Quanergy in exchange for 750,000 unregistered common shares.

Our investment in these two instruments was $57.5 million at February 8, 2022.

Effective as of the date of the business combination (February 8, 2022), we entered into the Support Agreement with Quanergy in exchange for 2.5 million warrants, converted to common stock on that date, valued at $17.6 million as of close of business February 8, 2022.

This additional investment of $17.6 million was recorded as deferred income and will be recognized on a straight-line basis over the four-year term of the agreement.

Accordingly, we held 8.25 million common shares of Quanergy on March 31, 2022, with a carrying value of $75.1 million.

The share price of Quanergy on March 31, 2022 was $1.84 per share, representing a market value of $15.2 million.

As a result, we recorded a $59.9 million mark-to-market adjustment loss on this investment in the first quarter of 2022, which was recorded in other, net.

On April 26, 2022, we announced that our Board had declared a quarterly dividend of $ 0.11 per share, payable on May 25, 2022 to shareholders of record as of May 11, 2022.

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, 2021 compared to the three and nine months ended September 30, 2020.

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, 2022 compared to the three months ended March 31, 2021.

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, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Amount Margin* Amount Margin* Amount Margin* Amount Margin*

For the three months ended

March 31, 2022 March 31, 2021

Amount Margin* Amount Margin*

Performance Sensing $ 717.7 73.6 % $ 714.5 75.8 %

10 unchanged sentences

* Represents the amount presented divided by total net revenue.

Net revenue for the three months ended September 30, 2021 increased 20.6% compared to the three months ended September 30, 2020 largely due to improved market results and our continued outperformance relative to those markets.

Excluding an increase of 1.7% attributed to changes in foreign currency exchange rates and an increase of 2.3% due to the effect of the acquisition of Xirgo, net revenue for the three months ended September 30, 2021 increased 16.6% on an organic basis.

This organic revenue growth reflects increased customer demand and represents market outgrowth of 1,190 basis points.

Net revenue for the three months ended March 31, 2022 increased 3.5% compared to the three months ended March 31, 2021.

Excluding a decrease of 0.6% attributed to changes in foreign currency exchange rates and an increase of 4.1% due to the effect of acquisitions, net revenue for the three months ended March 31, 2022 was flat on an organic basis.

However, we achieved market outgrowth of 790 basis points in the three months ended March 31, 2022.

Organic revenue growth (or decline), discussed 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).

Our continued investment in megatrend initiatives is playing a part in revenue growth by expanding our capabilities, as well as our access to end markets and product portfolios.

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.

Net revenue for the nine months ended September 30, 2021 increased 34.9% compared to the nine months ended September 30, 2020 largely due to improved market results and our continued outperformance relative to those markets.

Excluding an increase of 3.0% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of the acquisition of Xirgo, net revenue for the nine months ended September 30, 2021 increased 29.9% on an organic basis.

This organic revenue growth reflects increased customer demand and represents market outgrowth of 1,040 basis points.

Performance Sensing

Performance Sensing net revenue for the three months ended September 30, 2021 increased 21.6% compared to the three months ended September 30, 2020.

Excluding an increase of 1.8% attributed to changes in foreign currency exchange rates and an increase of 3.1% due to the effect of the acquisition of Xirgo, Performance Sensing net revenue for the three months ended September 30, 2021 increased 16.7% on an organic basis.

Both automotive and HVOR contributed to these results as discussed below.

Automotive net revenue for the three months ended September 30, 2021 grew 7.0% compared to the three months ended September 30, 2020.

Excluding growth of 1.8% attributed to changes in foreign currency exchange rates, automotive net revenue for the three months ended September 30, 2021 grew 5.2% on an organic basis.

Although automotive production was constrained due to supply chain shortages, resulting in end-market contraction of 21.6%, it increased significantly from the abnormally low levels experienced in the third quarter of 2020, which contributed to the organic revenue growth.

In addition, our automotive business benefited from new product launches in powertrain and emissions, safety, and electrification-related applications and systems.

We continued to outperform the automotive end market, delivering 1,150 basis points of market outgrowth, excluding the effects of OEM efforts to replenish inventory channels.

HVOR net revenue for the three months ended September 30, 2021 grew 75.1% compared to the three months ended September 30, 2020.

Excluding growth of 1.8% attributed to changes in foreign currency exchange rates and growth of 14.4% due to the effect of the acquisition of Xirgo, HVOR net revenue for the three months ended September 30, 2021 grew 58.9% on an organic basis.

Similar to automotive, HVOR market production improved significantly from the prior year period despite being adversely impacted by the global supply chain shortages and logistics costs.

Our China on-road truck business continued to post better than expected growth from the adoption of NS6 emissions regulations, and we are also benefiting from a wave of electromechanical operator controls being installed in new off-road equipment.

In addition, HVOR delivered 2,400 basis points of market outgrowth in the quarter, excluding the effects of OEM efforts to replenish inventory channels.

Performance Sensing net revenue for the nine months ended September 30, 2021 increased 40.9% compared to the nine months ended September 30, 2020.

Excluding an increase of 3.3% attributed to changes in foreign currency exchange rates and an increase of 2.9% due to the effect of the acquisition of Xirgo, Performance Sensing net revenue for the nine months ended September 30, 2021 increased 34.7% on an organic basis.

Both automotive and HVOR contributed to these results as discussed below.

Automotive net revenue for the nine months ended September 30, 2021 grew 30.7% compared to the the nine months ended September 30, 2020.

Excluding growth of 3.4% attributed to changes in foreign currency exchange rates, automotive net revenue for the nine months ended September 30, 2021 grew 27.3% on an organic basis.

Although automotive production was constrained due to supply chain shortages, we delivered organic revenue growth due to recovery of customer production combined with our continued outperformance relative to the automotive market, which was led by new product launches in powertrain and emissions, safety, and electrification-related applications and systems.

Excluding the effects of OEM efforts to replenish inventory channels, automotive outgrew its end markets by 1,020 basis points in the nine months ended September 30, 2021.

HVOR net revenue for the nine months ended September 30, 2021 grew 74.8% compared to the nine months ended September 30, 2020.

Excluding growth of 3.1% attributed to changes in foreign currency exchange rates and growth of 12.2% due to the effect of the acquisition of Xirgo, HVOR net revenue for the nine months ended September 30, 2021 grew 59.5% on an organic basis.

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

Excluding the effects of OEM efforts to replenish inventory channels, HVOR outgrew its end markets by 2,030 basis points in the nine months ended September 30, 2021.

Performance Sensing net revenue for the three months ended March 31, 2022 increased 0.4% compared to the three months ended March 31, 2021.

Excluding a decrease of 0.7% attributed to changes in foreign currency exchange rates and an increase of 4.8% due to the effect of acquisitions, Performance Sensing net revenue for the three months ended March 31, 2022 decreased 3.7% on an organic basis, representing market outgrowth of 650 basis points.

Automotive net revenue for the three months ended March 31, 2022 declined 6.4% compared to the three months ended March 31, 2021.

Excluding a decline of 0.6% attributed to changes in foreign currency exchange rates, Automotive net revenue for the three months ended March 31, 2022 declined 5.8% on an organic basis, representing market outgrowth of 410 basis points.

HVOR net revenue for the three months ended March 31, 2022 grew 21.1% compared to the three months ended March 31, 2021.

Excluding a decline of 0.6% attributed to changes in foreign currency exchange rates and growth of 19.2% due to the effect of acquisitions, HVOR net revenue for the three months ended March 31, 2022 grew 2.5% on an organic basis, representing 1,340 basis points of market outgrowth in the quarter.

Sensing Solutions

Sensing Solutions net revenue for the three months ended September 30, 2021 increased 17.9% compared to the three months ended September 30, 2020.

Excluding growth of 1.5% attributed to changes in foreign currency exchange rates, Sensing Solutions net revenue for the three months ended September 30, 2021 grew 16.4% on an organic basis.

The increase in net revenue was driven by the continued recovery of global and industrial end markets in the third quarter, as well as new electrification launches and strong growth in our HVAC business.

Aerospace saw growth in the quarter reflecting somewhat improved OEM production and air traffic, which drives our aerospace aftermarket business.

In addition, new product launches, primarily in defense and improvements in aftermarket, enabled our aerospace business to grow faster than market this quarter.

Sensing Solutions net revenue for the nine months ended September 30, 2021 increased 19.7% compared to the nine months ended September 30, 2020.

Excluding growth of 2.2% attributed to changes in foreign currency exchange rates, Sensing Solutions net revenue for the nine months ended September 30, 2021 grew 17.5% on an organic basis.

The increase in net revenue was mainly driven by the continued recovery of global and industrial end markets, as well as new electrification launches and strong growth in our HVAC business.

Sensing Solutions net revenue for the three months ended March 31, 2022 increased 13.2% compared to the three months ended March 31, 2021.

Excluding a decline of 0.5% attributed to changes in foreign currency exchange rates and growth of 2.1% due to the effect of acquisitions, Sensing Solutions net revenue for the three months ended March 31, 2022 increased 11.6% on an organic basis.

The organic revenue growth reflects the launch of new industrial electrification applications, somewhat offset by declines in the Industrial and Aerospace markets.

Operating costs and expenses

Operating costs and expenses for the three and nine months ended September 30, 2021 and 2020 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, 2022 and 2021 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, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Amount Margin* Amount Margin* Amount Margin* Amount Margin*

For the three months ended

March 31, 2022 March 31, 2021

Amount Margin* Amount Margin*

Operating costs and expenses:

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Cost of revenue

For the three months ended September 30, 2021, cost of revenue as a percentage of net revenue decreased from the three months ended September 30, 2020, primarily as a result of (1) improvement of various factors that drove cost of revenue as a percentage of revenue up in the third 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, (2) the impact in the third quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020, and (3) the favorable effect of changes in foreign currency exchange rates.

These favorable impacts on cost of revenue as a percentage of revenue were partially offset by increased costs related to industry-wide supply chain shortages.

For the nine months ended September 30, 2021, cost of revenue as a percentage of net revenue decreased from the nine months ended September 30, 2020, primarily as a result of (1) improvement of various factors that drove cost of revenue as a percentage of revenue up in the nine months ended September 30, 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 and (2) the impact in the nine months ended September 30, 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020.

In addition, the nine months ended September 30, 2020 included a $29.2 million loss related to a judgment against us in intellectual property litigation with Wasica, which we settled in the third quarter of 2020.

These favorable impacts on cost of revenue as a percentage of revenue were partially offset by (1) increased costs related to industry-wide supply chain shortages, (2) the turnaround of the positive impact in the first nine months of 2020 of temporary salary and furlough cost savings implemented in the second quarter of 2020 in response to the COVID-19 pandemic, and (3) the unfavorable effect of changes in foreign currency exchange rates.

For the three months ended March 31, 2022, cost of revenue as a percentage of net revenue decreased slightly from the three months ended March 31, 2021.

The most significant drivers of cost of revenue as a percentage of net revenue in the first quarter of 2022, which largely offset, were the favorable effect of changes in foreign currency exchange rates and productivity headwinds.

Increased costs related to industry-wide supply chain shortages were largely offset by recovery from customers in the form of pricing increases.

Research and development expense

For the three months ended September 30, 2021, research and development ("R&D") expense increased $6.6 million (19.9%) from the three months ended September 30, 2020, primarily as a result of (1) higher spend to support megatrend growth initiatives, (2) incremental R&D expense related to acquired businesses, and (3) the unfavorable effect of changes in foreign currency exchange rates, partially offset by the impact on the third quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020.

For the nine months ended September 30, 2021, R&D expense increased $20.8 million (21.2%) from the nine months ended September 30, 2020, primarily as a result of (1) higher spend to support megatrend growth initiatives, (2) incremental R&D expense related to acquired businesses, (3) the unfavorable effect of changes in foreign currency exchange rates, and (4) the turnaround impact of cost savings actions taken in the second quarter of 2020, including temporary salary reductions and furloughs, partially offset by the impact on the nine months ended September 30, 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020.

R&D expense related to megatrends during the three and nine months ended September 30, 2021 was $12.9 million and $36.7 million, respectively, an increase of $5.3 million and $18.2 million, respectively, from the three and nine months ended September 30, 2020.

For the three months ended March 31, 2022, research and development ("R&D") expense increased from the three months ended March 31, 2021 primarily as a result of (1) higher spend to support megatrend growth initiatives and (1) incremental R&D expense related to acquired businesses.

R&D expense related to megatrends during the three months ended March 31, 2022 was $16.4 million, an increase of $5.1 million from the three months ended March 31, 2021.

Selling, general and administrative expense

For the three months ended September 30, 2021, selling, general and administrative ("SG&A") expense increased $10.0 million to $85.8 million (9.0% of revenue) from $75.7 million (9.6% of revenue) in the three months ended September 30, 2020.

These increases were partially offset by (1) the impact on the third quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020 and (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.

For the nine months ended September 30, 2021, SG&A expense increased $32.0 million to $249.7 million (8.7% of revenue) from $217.7 million (10.2% of revenue) in the nine months ended September 30, 2020.

The increase in SG&A expense is primarily a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher incentive compensation aligned to improved financial performance, (3) increased selling expenses attributed to organic revenue growth, (4) the unfavorable impact of changes in foreign currency exchange rates, and (5) the turnaround impact of cost savings actions taken in the second quarter of 2020, including temporary salary reductions, furloughs, and savings from repositioning actions.

These increases were partially offset by (1) the impact on the nine months ended September 30, 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020 and (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.

For the three months ended March 31, 2022, selling, general and administrative ("SG&A") expense increased from the three months ended March 31, 2021, primarily as a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher selling costs, and (3) higher share-based compensation, partially offset by the favorable impact of changes in foreign currency exchange rates.

Amortization of intangible assets

For the three and nine months ended September 30, 2021, amortization expense increased 6.2% and 3.1%, respectively, from the three and nine months ended September 30, 2020 primarily due to increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method.

For the three months ended March 31, 2022, amortization expense increased from the three months ended March 31, 2021 primarily due to increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method.

Restructuring and other charges, net

For the three months ended September 30, 2021, we incurred restructuring and other charges, net of $0.3 million, an increase of $10.9 million (103.3%) from a net credit of $(10.5) million for the three months ended September 30, 2020.

In the three months ended September 30, 2020, we settled a patent infringement case brought by Wasica against Schrader and released $11.7 million of the related liability, which is presented in restructuring and other charges, net.

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

For the nine months ended September 30, 2021, we incurred restructuring and other charges, net of $10.0 million, a decrease of $22.2 million (69.1%) from $32.2 million for the nine months ended September 30, 2020.

This includes a decrease of $15.4 million in charges incurred in connection with the Q2 2020 Global Restructure Program from the prior year period.

In addition, for the nine months ended September 30, 2020, the release of the liability related to the Wasica settlement in the third quarter of 2020 largely offset a charge of $12.1 million resulting from a prejudgment interest-related award granted by the court on behalf of Wasica in intellectual property litigation in the second quarter of 2020.

For the three months ended March 31, 2022, restructuring and other charges, net increased from the three months ended March 31, 2021.

This increase is primarily due to acquisition-related incentive compensation of $15.0 million related to Elastic M2M milestones which were met in the first quarter partially offset by a $6.2 million reduction in the liability for contingent consideration for Spear.

Refer to Note 5:

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Operating income

In the three months ended September 30, 2021, operating income increased $34.5 million to $161.3 million (17.0% of net revenue) compared to $126.8 million (16.1% of net revenue) in the three months ended September 30, 2020.

The increase was primarily due to (1) increase in volume from depressed levels experienced last year due to the COVID-19 pandemic and (2) improved gross margins, which were somewhat tempered by increased costs related to industry-wide supply chain shortages.

These improvements were partially offset by increases in other operating costs and expenses, driven primarily by (1) higher incentive compensation aligned to improved financial performance, (2) higher spend to support megatrend growth initiatives, and (3) the release of the liability related to the Wasica settlement in the third quarter of 2021.

In the nine months ended September 30, 2021, operating income increased $300.0 million to $483.5 million (16.8% of net revenue) compared to $183.6 million (8.6% of net revenue) in the nine months ended September 30, 2020.

The increase was primarily due to (1) increase in volume from depressed levels experienced last year due to the COVID-19 pandemic, (2) improved gross margins, which were somewhat tempered by increased costs related to industry-wide supply chain shortages, and (3) lower restructuring costs.

These improvements were partially offset by (1) higher incentive compensation aligned to improved financial performance, (2) higher spend to support megatrend growth initiatives, and (3) the turnaround effect of temporary salary reductions and furloughs taken in the second quarter 2020.

We expect that the supply chain shortages will increase our operating costs in the fourth quarter of 2021, compared to the fourth quarter of 2020, and that it will continue to impact our operating results into 2022.

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.

In the three months ended March 31, 2022, operating income decreased compared to the three months ended March 31, 2021, primarily due to (1) increased restructuring and other charges as described above, (2) higher selling costs, (3) increased amortization expense as described above, (4) higher spend to support our megatrends initiatives, and (5) higher share-based compensation, partially offset by the favorable effect of changes in foreign currency exchange rates.

Acquired businesses had a minor net impact on our operating income in the first quarter of 2022 compared to the first quarter of 2021.

Interest expense, net

For the three months ended September 30, 2021, interest expense, net increased $1.0 million (2.3%) from the three months ended September 30, 2020, primarily as a result of (1) interest expense on the 4.0% Senior Notes, which were issued on March 29, 2021 and April 8, 2021 and (2) interest expense on the 3.75% Senior Notes, which were issued on August 17, 2020, partially offset by the reduced interest expense resulting from our March 5, 2021 redemption of the 6.25% Senior Notes.

For the nine months ended September 30, 2021, interest expense, net increased $10.1 million (8.1%) from the nine months ended September 30, 2020, primarily as a result of (1) interest expense on the 3.75% Senior Notes and (2) interest expense on the 4.0% Senior Notes, partially offset by the reduced interest impact of our redemption of the 6.25% Senior Notes.

Refer to Overview—Debt Transactions elsewhere in this MD&A for additional information related to these transactions.

For the three months ended March 31, 2022, interest expense, net increased from the three months ended March 31, 2021, primarily as a result of interest expense on the 4.0% Senior Notes, which were issued on March 29, 2021 and April 8, 2021 partially offset by the reduced interest expense resulting from our March 5, 2021 redemption of the 6.25% Senior Notes.

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.

In the three months ended September 30, 2021, other, net represented a net loss of $9.4 million, an unfavorable change of $18.6 million compared to a net gain of $9.2 million in the three months ended September 30, 2020.

This was primarily due to increased losses from our commodity forward contracts and increased foreign currency remeasurement losses on net monetary assets.

In the nine months ended September 30, 2021, other, net represented a net loss of $47.8 million, an increase of $46.3 million compared to a net loss of $1.5 million in the nine months ended September 30, 2020.

This was primarily due to the loss of $30.1 million recognized in the first quarter of 2021 related to the redemption of the 6.25% Senior Notes, increased losses from our commodity forward contracts, and increased foreign currency remeasurement losses on net monetary assets.

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.

In the three months ended March 31, 2022, other, net represented a net loss of $50.5 million, an increase of $11.1 million compared to a net loss of $39.4 million in the three months ended March 31, 2021.

This increase was primarily due to $59.3 million in mark-to-market losses on equity investments, primarily related to Quanergy, partially offset by the non-recurrence of $30.1 million loss on debt financing related to the redemption of our 6.25% Senior Notes in the first quarter of 2021 and increased gains from our commodity forward contracts.

Provision for income taxes

For the three months ended September 30, 2021, provision for income taxes increased $6.7 million from the three months ended September 30, 2020, 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.

For the nine months ended September 30, 2021, the provision for income taxes increased $34.7 million from the nine months ended September 30, 2020, 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 recognized 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 recognized 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 (1) current tax expense, which relates primarily to our profitable operations in tax jurisdictions with limited or no net operating loss carryforwards and withholding taxes related to management fees, royalties, and the repatriation of foreign earnings;

For the three months ended March 31, 2022, provision for income taxes decreased $12.7 million from the three months ended March 31, 2021, predominantly related to the overall decrease in income before tax, driven in part by a $59.9 million mark-to-market loss on our investment in Quanergy.

and the repatriation of foreign earnings;

and (2) deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to (a) book versus tax basis in intangible assets, (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.

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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.

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

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

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.

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

Adjusted operating income (or loss), adjusted operating margin, adjusted net income (or loss), and adjusted EPS

We define adjusted operating income (or loss) as operating income (or loss), determined in accordance with U.S.

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 (or loss) by net revenue calculated in accordance with U.S.

We define adjusted net income (or loss) as follows:

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

We define adjusted net income as follows:

net income (or loss) determined in accordance with U.S.

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

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

Management uses adjusted operating income (or loss), adjusted operating margin, adjusted net income (or loss), 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.

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.

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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.

Free cash flow is defined as net cash provided by 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.

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

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

(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.

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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 :

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• 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.

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

• Amortization of debt issuance costs .

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

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

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

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

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

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

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

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

Non-GAAP reconciliations

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

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

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

Refer to Non-GAAP Adjustments section above for additional information 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 September 30, 2021 For the three months ended September 30, 2020

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

Reported (GAAP) $ 161.3 17.0 % $ 85.0 $ 0.53 $ 126.8 16.1 % $ 76.7 $ 0.49

Non-GAAP adjustments:

Restructuring related and other 5.4 0.6 5.4 0.03 (5.6) (0.7) 5.0 0.03

Financing and other transaction costs (1.0) (0.1) 1.7 0.01 1.8 0.2 1.8 0.01

Step-up depreciation and amortization 32.7 3.4 32.7 0.20 31.5 4.0 31.5 0.20

Deferred loss/(gain) on derivative instruments 2.6 0.3 10.2 0.06 0.2 0.0 (5.9) (0.04)

Amortization of debt issuance costs — — 1.7 0.01 — — 1.8 0.01

Deferred taxes and other tax related — — 2.0 0.01 — — (7.3) (0.05)

Total adjustments 39.7 4.2 53.6 0.34 28.0 3.5 26.9 0.17

Adjusted (non-GAAP) $ 201.0 21.1 % $ 138.6 $ 0.87 $ 154.8 19.6 % $ 103.6 $ 0.66

For the nine months ended September 30, 2021 For the nine months ended September 30, 2020

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

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

For the three months ended March 31, 2022 For the three months ended March 31, 2021

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

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GAAP to free cash flow.

For the nine months ended September 30,

For the three months ended March 31,

(in millions) 2022 2021

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GAAP to Adjusted EBITDA.

For the three months ended September 30, For the nine months ended September 30,

For the three months ended March 31,

(in millions) LTM 2022 2021

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Financing and other transaction costs 80.2 75.1 35.9

Deferred loss/(gain) on derivative instruments 11.5 9.1 (5.9) 13.5 (5.0)

Deferred (gain)/loss on derivative instruments (0.5) (8.8) 3.0

Adjusted EBITDA $ 915.5 $ 214.9 $ 227.6

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GAAP to net leverage ratio.

(Dollars in millions) September 30, 2021 December 31, 2020

(Dollars in millions) March 31, 2022 December 31, 2021

Current portion of long-term debt, finance lease and other financing obligations $ 6.7 $ 6.8

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Total debt, finance lease and other financing obligations 4,248.5 4,248.3

discount (5.7) (9.6)

discount, net of premium (4.8) (5.2)

deferred financing costs (25.4) (26.7)

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Liquidity and Capital Resources

As of September 30, 2021 and December 31, 2020, we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers;

As of March 31, 2022 and December 31, 2021, 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, 2021 December 31, 2020

(In millions) March 31, 2022 December 31, 2021

United Kingdom $ 17.3 $ 20.4

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We recognize a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax-free manner.

The table below summarizes our primary sources and uses of cash for the nine months ended September 30, 2021 and 2020.

The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2022 and 2021.

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.

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

For the nine months ended

(In millions) September 30, 2021 September 30, 2020

For the three months ended

(In millions) March 31, 2022 March 31, 2021

Net cash provided by/(used in):

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Operating activities.

Net cash provided by operating activities increased in the nine months ended September 30, 2021 primarily due to higher net income adjusted for non-cash items, partially offset by the impact of changes in working capital.

Changes in working capital in the nine months ended September 30, 2021 were primarily driven by higher accounts receivable balances reflecting higher revenue in the third quarter of 2021 compared to the third quarter of 2020.

In addition, during the three months ended September 30, 2021, we increased raw material purchases in order to maximize production flexibility given widespread parts shortages in our supply chain.

These changes were partially offset by increased accounts payable in the nine months ended September 30, 2021 compared to the prior year period.

Net cash provided by operating activities decreased in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to increased raw material purchases in order to maximize production flexibility given widespread parts shortages in our supply chain and in anticipation of volume increases later in the year, a cash payment of $7.5 million for earned acquisition-related incentive compensation related to Elastic M2M, and timing of supplier payments and customer receipts.

Investing activities.

Net cash used in investing activities increased in the nine months ended September 30, 2021 primarily due to $415.0 million cash paid for the acquisitions of Lithium Balance and Xirgo.

Net cash used in investing activities increased in the three months ended March 31, 2022 primarily due to cash paid for the acquisitions of Elastic M2M and the $7.5 million PIPE investment in Quanergy.

In fiscal year 2022, we anticipate capital expenditures of approximately $165.0 million to $175.0 million, which we expect to be funded from cash on hand.

Financing activities .

In the nine months ended September 30, 2021, net cash provided by financing activities decreased primarily due to the impact of debt financing transactions.

In the nine months ended September 30, 2021, we issued $1.0 billion of 4.0% Senior Notes and redeemed the $750.0 million aggregate principal amount outstanding on the 6.25% Senior Notes, for net cash provided of $208.0 million (including associated fees).

This compares to the issuance of $750 million aggregate principal amount of 3.75% Senior Notes in the nine months ended September 30, 2020 and the borrowing and subsequent repayment of $400.0 million on the Revolving Credit facility, which, including associated fees, provided net cash inflow of $736.5 million.

This decline in net proceeds from the issuance of debt was partially offset by less cash paid to repurchase shares and increased proceeds from option exercises.

We did not repurchase any ordinary shares in the nine months ended September 30, 2021, compared to ordinary share repurchases of $35.2 million in the nine months ended September 30, 2020.

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

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

We intend to resume our share repurchase program in the fourth quarter.

In the three months ended March 31, 2022, net cash used in financing activities increased primarily due to $67.3 million cash paid for share repurchases following the resumption of our program in the fourth quarter of 2021, partially offset by the nonrecurrence of $31.1 million of payments related to debt financing in the three months ended March 31, 2021.

Indebtedness and Liquidity

As of September 30, 2021, we had $4.3 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.

As of March 31, 2022, we had $4.3 billion in gross indebtedness, which includes finance lease and other financing obligations and excludes debt discounts, premiums, and deferred financing costs.

Capital Resources

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

As of September 30, 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.

As of March 31, 2022, we had $416.1 million available under the Revolving Credit Facility, net of $3.9 million of obligations in respect of outstanding letters of credit issued thereunder.

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

As of September 30, 2021, no amounts had been drawn against these outstanding letters of credit.

As of March 31, 2022, 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, 2021, availability under the Accordion was approximately $1.0 billion.

Our primary use of cash on hand is to acquire businesses that will extend our market position within our key growth vectors of Electrification and Insights.

In addition, we intend to resume our share repurchase program, under which we have approximately $302 million available for repurchase, in the fourth quarter.

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 (when resumed), and debt service for at least the next twelve months.

As of March 31, 2022, availability under the Accordion was approximately $1.0 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, 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.

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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 20, 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.

As of April 20, 2022, 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.

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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, 2021.

These provisions were not triggered during the three months ended March 31, 2022.

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 2020 Annual Report.

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 2021 Annual Report.

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

As of March 31, 2022, 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, 2021.

On April 2, 2020, we announced a temporary suspension of this share repurchase program.

We intend to resume our share repurchase program in the fourth quarter.

We currently have an authorized $500.0 million share repurchase program (the "January 2022 Program") under which approximately $449.5 million remained available as of March 31, 2022.

Recently Issued Accounting Pronouncements

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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 2020 Annual Report.

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 2021 Annual Report.

Quantitative and Qualitative Disclosures About Market Risk.

No significant changes to our market risk have occurred since December 31, 2021.

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.

For a discussion of market risks affecting us, refer to Part II, Item 7A:

Quantitative and Qualitative Disclosures About Market Risk included in our 2021 Annual Report.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis