What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-01 compared with 2022-04-26 · 167 added, 103 removed, 203 unchanged (57% of the section changed)

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

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:

For the three and six months ended June 30, 2022, net revenue increased 2.8% and 3.2%, respectively, from the corresponding periods of fiscal year 2021.

This revenue growth was primarily driven by outgrowth to market and revenue from recent acquisitions.

In addition, we continued to drive new business wins, with a significant portion coming in areas representing our megatrend initiatives of Electrification and Insights, and which will help drive future revenue growth.

For the three and six months ended June 30, 2022, operating income decreased 15.7% and 17.8%, respectively, to $138.9 million (13.6% of net revenue) and $264.9 million (13.3% of net revenue), respectively, compared to $164.8 million (16.6% of net revenue) and $322.2 million (16.7% of net revenue), respectively, in the corresponding periods of fiscal year 2021.

For the three and six months ended June 30, 2022, income before taxes decreased to $54.9 million and $84.9 million, respectively, compared to $120.6 million and $194.6 million, respectively, in the corresponding periods of fiscal year 2021.

Refer to discussion of the drivers of these changes under the heading Results of Operations included 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.

Acquisitions and Dispositions

In the first quarter of 2022, we completed the strategic acquisition of Elastic M2M for $51.4 million.

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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.

On July 12, 2022, we completed the acquisition of 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

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.

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

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.

In July 2022, we sold the Qinex Business to Boyd Corporation for total consideration of approximately $219.0 million, subject to working capital and other adjustments.

The Qinex Business manufactures semiconductor burn-in test sockets and thermal control solutions and was formed through the combination of Sensata’s semiconductor interconnect business with Wells-CTI in 2012.

The Qinex Business is included in our Sensing Solutions segment (and Industrial Solutions reporting unit).

We have not finalized the calculation of gain on the transaction but preliminarily expect it to be between approximately $125 million and $150 million.

Results of Operations

The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.

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

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

For the three months ended

March 31, 2022 March 31, 2021

Amount Margin* Amount Margin*

For the three months ended For the six months ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

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

Performance Sensing $ 746.9 73.2 % $ 741.9 74.7 % $ 1,464.6 73.4 % $ 1,456.4 75.3 %

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* Represents the amount presented divided by total net revenue.

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.

Net revenue for the three months ended June 30, 2022 increased 2.8% compared to the three months ended June 30, 2021.

Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of 2.8% due to the effect of acquisitions, net revenue for the three months ended June 30, 2022 increased 2.2% on an organic basis, representing market outgrowth of 650 basis points.

Net revenue for the six months ended June 30, 2022 increased 3.2% compared to the six months ended June 30, 2021.

Excluding a decrease of 1.3% attributed to changes in foreign currency exchange rates and an increase of 3.4% due to the effect of acquisitions, net revenue for the six months ended June 30, 2022 increased 1.1% on an organic basis, representing market outgrowth of 720 basis points.

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

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Performance Sensing

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.

Performance Sensing net revenue for the three months ended June 30, 2022 increased 0.7% compared to the three months ended June 30, 2021.

Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of

3.0% due to the effect of acquisitions, Performance Sensing net revenue for the three months ended June 30, 2022 was flat on an organic basis.

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

Automotive net revenue for the three months ended June 30, 2022 declined 2.3% compared to the three months ended June 30, 2021.

Excluding a decline of 2.4% attributed to changes in foreign currency exchange rates, Automotive net revenue for the three months ended June 30, 2022 grew 0.1% on an organic basis.

HVOR net revenue for the three months ended June 30, 2022 grew 7.7% compared to the three months ended June 30, 2021.

Excluding a decline of 1.7% attributed to changes in foreign currency exchange rates and an increase of 10.0% due to the effect of acquisitions, HVOR net revenue for the three months ended June 30, 2022 declined 0.6% on an organic basis.

Performance Sensing net revenue for the six months ended June 30, 2022 increased 0.6% compared to the six months ended June 30, 2021.

Excluding a decrease of 1.4% attributed to changes in foreign currency exchange rates and an increase of 3.9% due to the effect of acquisitions, Performance Sensing net revenue for the six months ended June 30, 2022 decreased 1.9% on an organic basis.

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

Automotive net revenue for the six months ended June 30, 2022 declined 4.4% compared to the six months ended June 30, 2021.

Excluding a decrease of 1.5% attributed to changes in foreign currency exchange rates, automotive net revenue for the six months ended June 30, 2022 declined 2.9% on an organic basis, primarily as a result of the impacts of original equipment manufacturer efforts to replenish inventory channels in 2021.

HVOR net revenue for the six months ended June 30, 2022 grew 13.6% compared to the six months ended June 30, 2021.

Excluding a decrease of 1.2% attributed to changes in foreign currency exchange rates and an increase of 14.0% due to the effect of acquisitions, HVOR net revenue for the six months ended June 30, 2022 grew 0.8% on an organic basis.

Sensing Solutions

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.

Sensing Solutions net revenue for the three months ended June 30, 2022 increased 9.1% compared to the three months ended June 30, 2021.

Excluding a decline of 1.9% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of acquisitions, Sensing Solutions net revenue for the three months ended June 30, 2022 grew 9.0% on an organic basis.

The organic revenue growth primarily reflects the launch of new industrial electrification applications, partially offset by declines in the Industrial market.

Sensing Solutions net revenue for the six months ended June 30, 2022 increased 11.1% compared to the six months ended June 30, 2021.

Excluding a decline of 1.2% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of acquisitions, Sensing Solutions net revenue for the six months ended June 30, 2022 grew 10.3% on an organic basis.

The organic revenue growth primarily reflects the launch of new industrial electrification applications, partially offset by declines in the Aerospace market.

Operating costs and expenses

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.

Operating costs and expenses for the three and six months ended June 30, 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

March 31, 2022 March 31, 2021

Amount Margin* Amount Margin*

For the three months ended For the six months ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

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

Operating costs and expenses:

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Cost of revenue

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.

For the three months ended June 30, 2022, cost of revenue as a percentage of net revenue increased from the three months ended June 30, 2021, primarily due to the impacts of inflation on material and logistics costs.

For the six months ended June 30, 2022, cost of revenue as a percentage of net revenue increased from the six months ended June 30, 2021, primarily due to the impacts of inflation on material and logistics costs, partially offset by the favorable effect of changes in foreign currency exchange rates.

Research and development expense

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.

For the three and six months ended June 30, 2022, research and development ("R&D") expense increased from the three and six months ended June 30, 2021, primarily as a result of higher spend to support megatrend growth initiatives and incremental R&D expense related to acquired businesses, partially offset by the favorable effect of foreign currency exchange rates.

R&D expense related to megatrends during the three and six months ended June 30, 2022 was $17.6 million and $34.0 million, respectively, increases of $5.0 million and $10.1 million, respectively, from the three and six months ended June 30, 2021.

Selling, general and administrative expense

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.

For the three and six months ended June 30, 2022, selling, general and administrative ("SG&A") expense increased from the three and six months ended June 30, 2021, primarily as a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher selling costs to support growth and our ability to execute for our customers, and (3) higher share-based compensation, partially offset by the favorable effect of changes in foreign currency exchange rates.

Refer to Note 4:

Share-Based Payment Plans of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information related to our share-based compensation.

Amortization of intangible assets

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.

For the three and six months ended June 30, 2022, amortization expense increased from the three and six months ended June 30, 2021, primarily due to increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method.

Refer to Note 16:

Acquisitions and Divestitures of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information related to recent acquisitions.

Restructuring and other charges, net

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.

For the three and six months ended June 30, 2022, restructuring and other charges, net increased from the three and six months ended June 30, 2021, primarily due to acquisition-related incentive compensation partially offset by a gain resulting from reduction of the liability for contingent consideration for Spear.

In addition, we did not incur restructuring charges related to the Q2 2020 Global Restructure Program in the three and six months ended June 30, 2022, compared to $3.8 million and $5.7 million in the three and six months ended June 30, 2021, respectively.

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 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.

For the three months ended June 30, 2022, operating income decreased compared to the three months ended June 30, 2021, primarily due to (1) increased acquisition-related incentive compensation, (2) higher spend to support our megatrends initiatives, (3) the impacts of lower volume, (4) increased transaction-related costs, (5) higher amortization due to acquired intangibles, (6) higher selling costs to support growth and our ability to execute for our customers, and (7) higher share-based compensation, partially offset by (1) a reduction in restructuring charges related to the Q2 2020 Global Restructure Program and (2) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear.

For the six months ended June 30, 2022, operating income decreased compared to the six months ended June 30, 2021, primarily due to (1) increased acquisition-related incentive compensation, (2) higher amortization due to acquired intangibles, (3) the impacts of inflation, (4) higher spend to support our megatrends initiatives, (5) the impacts of lower volume, (6) higher selling costs to support growth and our ability to execute for our customers, (7) increased transaction-related costs, and (8) higher share-based compensation, partially offset by (1) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear, (2) a reduction in restructuring charges related to the Q2 2020 Global Restructure Program, and (3) the favorable effect of changes in foreign currency exchange rates.

Interest expense, net

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 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.

For the three months ended June 30, 2022, interest expense, net decreased $0.4 million from the three months ended June 30, 2021, as increased interest rates impacted interest income earned on our cash equivalents balances slightly more than interest expense on our variable rate debt (the Term Loan).

For the six months ended June 30, 2022, interest expense, net increased $1.0 million from the six months ended June 30, 2021, primarily as a result of (1) a full six months of interest expense on the 4.0% Senior Notes in the six months ended June 30, 2022, which were issued on March 29, 2021 and April 8, 2021, and (2) increased interest expense on our variable rate debt resulting from higher interest rates in the period, partially offset by (1) reduced interest expense resulting from our March 5, 2021 redemption of the 6.25% Senior Notes and (2) increased interest income earned on our cash equivalents balances.

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, mark-to-market gains and losses on investments, 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 details related to the components of other, net.

For the three months ended June 30, 2022, other, net represented a net loss of $39.2 million, an unfavorable impact on earnings of $40.3 million compared to a net gain of $1.0 million in the three months ended June 30, 2021.

This was primarily due to (1) increased losses on commodity forward contracts, (2) increased currency remeasurement losses on net monetary assets, primarily related to CNY, and (3) $11.8 million in mark-to-market losses on equity investments, primarily related to Quanergy.

Refer to Note 14:

Fair Value Measures of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for detailed information on our investment in Quanergy.

For the six months ended June 30, 2022, other, net represented a net loss of $89.7 million, an unfavorable impact on earnings of $51.3 million compared to a net loss of $38.4 million in the six months ended June 30, 2021.

This was largely due to (1) $71.1 million in mark-to-market losses on equity investments, primarily related to Quanergy, (2) increased losses on net monetary assets, primarily related to CNY, and (3) increased losses on commodity forward contracts, partially offset by the non-recurrence of a $30.1 million loss on debt financing related to the redemption of our 6.25% Senior Notes on March 5, 2021.

Provision for income taxes

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.

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;

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.

For the three months ended June 30, 2022, the provision for income taxes increased $12.4 million from the three months ended June 30, 2021, predominantly related to the jurisdictional mix of profits, the impacts of nondeductible earnout and compensation expenses resulting from recent acquisitions, and the inability to benefit the mark-to market loss on our investment in Quanergy.

For the six months ended June 30, 2022, the provision for income taxes decreased $0.3 million from the six months ended June 30, 2021, 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, offset by the impacts of nondeductible expenses resulting from our recent acquisitions and the inability to benefit the mark-to-market loss on our investment in Quanergy.

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, and (c) changes in withholding taxes on unremitted earnings.

Other items impacting deferred tax expense include changes in tax rates and changes in our assessment of the realizability of our deferred tax assets.

Non-GAAP Financial Measures

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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.

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, net cash provided by operating activities, total debt, finance lease and other financing obligations, 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)

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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 gain or loss 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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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.

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.

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• Financing and other transaction costs :

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

includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction, mark-to-market losses or gains on our equity investments, expenses related to compensation arrangements entered into concurrent with the closing of an acquisition, and gains related to changes in the fair value of acquisition-related contingent consideration amounts.

• Deferred loss or gain on derivative instruments :

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• 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 the consolidated statements of operations.

represents interest expense related to the amortization of deferred financing costs as well as debt discounts, net of premiums .

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

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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

For the three months ended June 30, 2022 For the three months ended June 30, 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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Step-up depreciation and amortization 35.3 3.5 35.3 0.22 33.7 3.4 33.7 0.21

Deferred loss/(gain) on derivative instruments 0.7 0.1 (7.0) (0.04) 1.8 0.2 2.2 0.01

Deferred loss on derivative instruments 1.2 0.1 15.4 0.10 2.6 0.3 1.1 0.01

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

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Adjusted (non-GAAP) $ 193.8 19.0 % $ 129.5 $ 0.83 $ 209.3 21.1 % $ 151.4 $ 0.95

For the six months ended June 30, 2022 For the six months ended June 30, 2021

(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) $ 264.9 13.3 % $ 57.3 $ 0.36 $ 322.2 16.7 % $ 166.6 $ 1.05

Non-GAAP adjustments:

Restructuring related and other 8.0 0.4 8.3 0.05 10.3 0.5 14.2 0.09

Financing and other transaction costs 30.3 1.5 102.8 0.65 7.1 0.4 34.1 0.21

Step-up depreciation and amortization 71.3 3.6 71.3 0.45 63.4 3.3 63.4 0.40

Deferred loss on derivative instruments 1.8 0.1 8.5 0.05 4.4 0.2 3.3 0.02

Amortization of debt issuance costs — — 3.4 0.02 — — 3.4 0.02

Deferred taxes and other tax related — — 1.3 0.01 — — 3.9 0.02

Total adjustments 111.4 5.6 195.7 1.24 85.2 4.4 122.3 0.77

Adjusted (non-GAAP) $ 376.3 18.8 % $ 253.0 $ 1.60 $ 407.4 21.1 % $ 289.0 $ 1.81

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,

For the six months ended June 30,

(in millions) 2022 2021

Net cash provided by operating activities $ 47.4 $ 104.5

Net cash provided by operating activities (GAAP) $ 141.9 $ 267.9

Additions to property, plant and equipment and capitalized software (74.1) (63.6)

Free cash flow $ 11.7 $ 77.3

Free cash flow (non-GAAP) $ 67.8 $ 204.4

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,

For the three months ended June 30, For the six months ended June 30,

(in millions) LTM (1)

2022 2021 2022 2021

Net income $ 254.2 $ 34.8 $ 112.9 $ 57.3 $ 166.6

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Financing and other transaction costs 107.3 28.7 1.7 103.8 37.6

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

Deferred loss on derivative instruments 17.6 19.4 1.4 10.7 4.4

Adjusted EBITDA $ 893.5 $ 220.4 $ 242.4 $ 435.2 $ 470.0

___________________________________

(1) Last twelve months

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.

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

(Dollars in millions) June 30,

2022 December 31,

Current portion of long-term debt, finance lease and other financing obligations $ 6.6 $ 6.8

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Liquidity and Capital Resources

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;

As of June 30, 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) March 31, 2022 December 31, 2021

(In millions) June 30,

2022 December 31,

United Kingdom $ 23.9 $ 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 three months ended March 31, 2022 and 2021.

In certain jurisdictions, our cash balances are subject to withholding taxes immediately upon withdrawal of funds to a different jurisdiction.

In addition, in order to take advantage of incentive programs offered by various jurisdictions, including tax incentives, we are required to maintain minimum cash balances in these jurisdictions.

The transfer of cash from these jurisdictions could result in loss of incentives or higher cash tax expense, but those impacts are not expected to be material.

Our cash and cash equivalent balances are held in the following significant currencies:

As of June 30, 2022

(In millions) USD EUR GBP CNY Other

United Kingdom $ (0.6) € 0.0 £ 15.5 ¥ —

United States 598.8 0.0 — —

The Netherlands 588.1 17.8 — —

China 147.2 — — 766.2

Other 44.9 3.1 — —

Total $ 1,378.4 € 20.9 £ 15.5 ¥ 766.2

USD Equivalent $ 22.0 $ 18.9 $ 114.5 $ 24.8

As of December 31, 2021

(In millions) USD EUR GBP CNY Other

United Kingdom $ 1.8 € 0.0 £ 13.2 ¥ —

United States 25.0 — — —

The Netherlands 1,294.2 8.9 — —

China 50.8 — — 1,549.4

Other 51.0 1.7 — —

Total $ 1,422.8 € 10.6 £ 13.2 ¥ 1,549.4

USD Equivalent $ 12.0 $ 17.8 $ 243.1 $ 13.3

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

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

For the six months ended

(In millions) June 30, 2022 June 30, 2021

Net cash provided by/(used in):

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Operating activities.

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.

Net cash provided by operating activities for the six months ended June 30, 2022 decreased compared to the corresponding period of the prior year, 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 $15.0 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 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.

Net cash used in investing activities for the six months ended June 30, 2022 decreased compared to the corresponding period of the prior year, primarily due to lower cash paid for acquisitions, which included Elastic M2M in the six months ended June 30, 2022 and Xirgo Technologies, LLC in the six months ended June 30, 2021.

This impact was partially offset by higher capital expenditures.

For fiscal year 2022, we anticipate capital expenditures of approximately $135.0 million to $145.0 million, which we expect to fund with cash on hand.

Financing activities .

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.

In the six months ended June 30, 2022, net cash used in financing activities was primarily driven by $144.3 million cash paid for share repurchases and $17.2 million paid for cash dividends, each of which did not have a comparable payment in the prior year.

In the six months ended June 30, 2021, cash provided by financing activities was primarily the result of the issuance of $1.0 billion of the 4.0% Senior Notes, partially offset by the redemption of $750.0 million of the 6.25% Senior Notes.

In addition, in fiscal year 2021 we used $33.0 million in cash related to debt financing transactions.

Indebtedness and Liquidity

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.

As of June 30, 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

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.

The Credit Agreement provides for 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.

On June 23, 2022, certain of our indirect, wholly-owned subsidiaries, including STI, STIHBV, and STBV, entered into the Eleventh Amendment to the Credit Agreement and the Foreign Guaranty, dated as of May 12, 2011.

Among other changes to the Credit Agreement, the Eleventh Amendment (i) increased the aggregate principal amount of the Revolving Credit Facility to $750.0 million;

(ii) extended the maturity date of the Revolving Credit Facility to June 23, 2027 (which could be accelerated to June 22, 2026 if, prior to June 22, 2026, the Term Loan is not refinanced with a maturity date that is on or after June 23, 2027);

(iii) released the Foreign Guarantors (as defined in the Credit Agreement), excluding STBV, from their obligations to guarantee the obligations of STI and the other Loan Parties (as defined in the Credit Agreement) relating to the Revolving Credit Facility and certain related obligations, subject to an obligation to reinstate such guaranties under certain conditions;

(iv) replaced the LIBOR-based interest rates referenced by the Credit Agreement regarding revolving credit loans to (a) for revolving credit loans denominated in U.S.

dollars, an interest rate based on the SOFR published by the Federal Reserve Bank of New York and (b) for revolving credit loans denominated in pounds sterling, an interest rate based on the SONIA;

and (v) certain of the operational and restrictive covenants and other terms and conditions of the Credit Agreement were modified to provide STI and its affiliates increased flexibility and permissions thereunder.

Sources of liquidity

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

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.

As of June 30, 2022, we had $746.1 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 March 31, 2022, no amounts had been drawn against these outstanding letters of credit.

As of June 30, 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 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.

As of June 30, 2022, availability under the Accordion was approximately $0.6 billion.

We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, dividend payments, 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 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.

As of July 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.

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 three months ended March 31, 2022.

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

These provisions were not triggered during the six months ended June 30, 2022.

We do not expect that the sale of the Qinex Business, which occurred subsequent to June 30, 2022, will trigger these provisions.

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.

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

As of March 31, 2022, we believe we were in compliance with all covenants and default provisions under our credit arrangements.

As of June 30, 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 (the "January 2022 Program") under which approximately $449.5 million remained available as of March 31, 2022.

We currently have an authorized $500.0 million share repurchase program (the "January 2022 Program") under which approximately $370.6 million remained available as of June 30, 2022.

On May 25, 2022, we paid a cash dividend of $0.11 per share, or $17.2 million in aggregate, to shareholders of record as of May 11, 2022.

On July 21, 2022, we announced that our Board had declared a quarterly dividend of $0.11 per share, payable on August 24, 2022 to shareholders of record as of August 10, 2022.

Recently Issued Accounting Pronouncements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis