Sensata Technologies Holding plc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations 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. Overview For the three and nine months ended September 30, 2022, net revenue increased 7.1% and 4.4%, respectively, from the corresponding periods of fiscal year 2021. For the three and nine months ended September 30, 2022, operating income increased 56.8% and 7.1%, respectively, to $252.9 million (24.8% of net revenue) and $517.8 million (17.2% of net revenue), respectively, compared to $161.3 million (17.0% of net revenue) and $483.5 million (16.8% of net revenue), respectively, in the corresponding periods of fiscal year 2021. For the three and nine months ended September 30, 2022, income before taxes increased to $186.7 million and $271.6 million, respectively, compared to $106.8 million and $301.4 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"). Acquisitions and Dispositions 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 the below. In the first quarter of 2022, we completed the strategic acquisition of Elastic M2M for $51.6 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 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 $577.7 million, subject to certain post-closing items. 25 Table of Contents 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 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 LTI 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 was included in our Sensing Solutions segment (and Industrial Solutions reporting unit). We received consideration at Closing of approximately $198.8 million and recognized a pre-tax gain of approximately $135.1 million in the three months ended September 30, 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, 2022 compared to the three and nine months ended September 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. 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, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Amount Margin* Amount Margin* Amount Margin* Amount Margin* Net revenue: Performance Sensing $ 754.5 74.1 % $ 706.5 74.3 % $ 2,219.1 73.6 % $ 2,162.8 74.9 % Sensing Solutions 263.7 25.9 244.6 25.7 795.5 26.4 723.4 25.1 Net revenue 1,018.3 100.0 951.0 100.0 3,014.6 100.0 2,886.2 100.0 Operating costs and expenses 765.4 75.2 789.7 83.0 2,496.8 82.8 2,402.7 83.2 Operating income 252.9 24.8 161.3 17.0 517.8 17.2 483.5 16.8 Interest expense, net (44.9) (4.4) (45.1) (4.7) (135.1) (4.5) (134.4) (4.7) Other, net (21.4) (2.1) (9.4) (1.0) (111.1) (3.7) (47.8) (1.7) Income before taxes 186.7 18.3 106.8 11.2 271.6 9.0 301.4 10.4 Provision for income taxes 46.4 4.6 21.8 2.3 74.0 2.5 49.8 1.7 Net income $ 140.3 13.8 % $ 85.0 8.9 % $ 197.5 6.6 % $ 251.6 8.7 % ___________________________________ * Represents the amount presented divided by total net revenue. Net Revenue Net revenue for the three months ended September 30, 2022 increased 7.1% compared to the three months ended September 30, 2021. Excluding a decrease of 3.3% attributed to changes in foreign currency exchange rates and an increase of 3.3% due to the net effect of acquisitions and divestitures, net revenue for the three months ended September 30, 2022 increased 7.1% on an organic basis, representing market outgrowth of 650 basis points. Net revenue for the nine months ended September 30, 2022 increased 4.4% compared to the nine months ended September 30, 2021. Excluding a decrease of 2.1% attributed to changes in foreign currency exchange rates and an increase of 3.4% due to the net effect of acquisitions and divestitures, net revenue for the nine months ended September 30, 2022 increased 3.1% on an organic basis, representing market outgrowth of 700 basis points. Organic revenue growth (or decline), discussed throughout this MD&A, is a financial measure not presented in accordance with U.S. GAAP. Refer to the section entitled Non-GAAP Financial Measures below for additional information related to our use of organic revenue growth (or decline). 26 Table of Contents Performance Sensing Performance Sensing net revenue for the three months ended September 30, 2022 increased 6.8% compared to the three months ended September 30, 2021. Excluding a decrease of 3.6% attributed to changes in foreign currency exchange rates and an increase of 3.2% due to the effect of acquisitions, Performance Sensing net revenue for the three months ended September 30, 2022 increased 7.2% 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, 2022 grew 7.6% compared to the three months ended September 30, 2021. Excluding a decline of 4.3% attributed to changes in foreign currency exchange rates, Automotive net revenue for the three months ended September 30, 2022 grew 11.9% on an organic basis, primarily due to improved market performance and market outgrowth, partially offset by the net impacts of original equipment manufacturer efforts to replenish and reduce channel inventory in 2021 and 2022, respectively. HVOR net revenue for the three months ended September 30, 2022 grew 5.0% compared to the three months ended September 30, 2021. Excluding a decline of 2.2% attributed to changes in foreign currency exchange rates and an increase of 10.6% due to the effect of acquisitions, HVOR net revenue for the three months ended September 30, 2022 declined 3.4% on an organic basis. This was primarily due to declining market conditions and the impacts of original equipment manufacturer efforts to replenish channel inventory in 2021, partially offset by market outgrowth. Performance Sensing net revenue for the nine months ended September 30, 2022 increased 2.6% compared to the nine months ended September 30, 2021. Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of 3.7% due to the effect of acquisitions, Performance Sensing net revenue for the nine months ended September 30, 2022 increased 1.1% 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, 2022 declined 0.6% compared to the nine months ended September 30, 2021. Excluding a decrease of 2.4% attributed to changes in foreign currency exchange rates, automotive net revenue for the nine months ended September 30, 2022 grew 1.8% on an organic basis. HVOR net revenue for the nine months ended September 30, 2022 grew 10.6% compared to the nine months ended September 30, 2021. Excluding a decrease of 1.5% attributed to changes in foreign currency exchange rates and an increase of 12.8% due to the effect of acquisitions, HVOR net revenue for the nine months ended September 30, 2022 declined 0.7% on an organic basis. Sensing Solutions Sensing Solutions net revenue for the three months ended September 30, 2022 increased 7.8% compared to the three months ended September 30, 2021. Excluding a decline of 2.4% attributed to changes in foreign currency exchange rates and an increase of 3.3% due to the net effect of acquisitions and divestitures, Sensing Solutions net revenue for the three months ended September 30, 2022 grew 6.9% on an organic basis, which primarily reflects the launch of new industrial electrification applications. Sensing Solutions net revenue for the nine months ended September 30, 2022 increased 10.0% compared to the nine months ended September 30, 2021. Excluding a decline of 1.6% attributed to changes in foreign currency exchange rates and an increase of 2.5% due to the net effect of acquisitions and divestitures, Sensing Solutions net revenue for the nine months ended September 30, 2022 grew 9.1% on an organic basis, which primarily reflects the launch of new industrial electrification applications. 27 Table of Contents Operating costs and expenses Operating costs and expenses for the three and nine months ended September 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 For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Amount Margin* Amount Margin* Amount Margin* Amount Margin* Operating costs and expenses: Cost of revenue $ 694.5 68.2 % $ 628.9 66.1 % $ 2,038.2 67.6 % $ 1,922.6 66.6 % Research and development 47.9 4.7 40.1 4.2 141.9 4.7 118.9 4.1 Selling, general and administrative 90.0 8.8 85.8 9.0 283.0 9.4 249.7 8.7 Amortization of intangible assets 40.3 4.0 34.6 3.6 114.5 3.8 101.5 3.5 Restructuring and other charges, net (107.4) (10.6) 0.3 0.0 (80.8) (2.7) 10.0 0.3 Total operating costs and expenses $ 765.4 75.2 % $ 789.7 83.0 % $ 2,496.8 82.8 % $ 2,402.7 83.2 % ___________________________________ * Represents the amount presented divided by total net revenue. Cost of revenue For the three months ended September 30, 2022, cost of revenue as a percentage of net revenue increased from the three months ended September 30, 2021, primarily due to the impacts of inflation on material and logistics costs, the unfavorable impact of product mix, and the unfavorable effect of changes in foreign currency exchange rates. For the nine months ended September 30, 2022, cost of revenue as a percentage of net revenue increased from the nine months ended September 30, 2021, primarily due to the impacts of inflation on material and logistics costs and the unfavorable impact of product mix. Research and development expense For the three and nine months ended September 30, 2022, research and development ("R&D") expense increased from the three and nine months ended September 30, 2021, primarily as a result of continued investment to support megatrend growth initiatives of Electrification and Insights 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 nine months ended September 30, 2022 was $17.0 million and $50.9 million, respectively, increases of $4.1 million and $14.1 million, respectively, from the three and nine months ended September 30, 2021. Selling, general and administrative expense For the three and nine months ended September 30, 2022, selling, general and administrative ("SG&A") expense increased from the three and nine months ended September 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 16: Acquisitions and Divestitures and 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 acquired businesses and share-based compensation, respectively. Amortization of intangible assets For the three and nine months ended September 30, 2022, amortization expense increased from the three and nine months ended September 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. 28 Table of Contents Restructuring and other charges, net For the three and nine months ended September 30, 2022, restructuring and other charges, net included the gain on sale of the Qinex Business of $135.1 million in both periods, and $13.5 million and $15.6 million, respectively, of transaction-related charges to sell the Qinex Business. The three and nine months ended September 30, 2022, also included acquisition-related incentive compensation of $7.4 million and $38.4 million, respectively. These increases were partially offset by a gain resulting from reduction of the liability for contingent consideration for Spear in the nine months ended September 30, 2022. 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 the components of restructuring and other charges, net. Operating income For the three months ended September 30, 2022, operating income increased compared to the three months ended September 30, 2021, primarily due to the gain on the sale of the Qinex Business, partially offset by (1) higher transaction-related charges, (2) the unfavorable effect of changes in foreign currency exchange rates, (3) higher acquisition-related incentive compensation, (4) higher amortization due to acquired intangibles, (5) higher spend to support our megatrends initiatives, and (6) higher selling costs to support growth and our ability to execute for our customers. For the nine months ended September 30, 2022, operating income increased compared to the nine months ended September 30, 2021, primarily due to (1) the gain on the sale of the Qinex Business and (2) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear, partially offset by (1) higher acquisition-related incentive compensation, (2) higher amortization due to acquired intangibles, (3) higher transaction-related charges, (4) higher spend to support our megatrends initiatives, (5) higher selling costs to support growth and our ability to execute for our customers, (6) higher share-based compensation, and (7) the unfavorable of changes in foreign currency exchange rates. Interest expense, net For the three months ended September 30, 2022, interest expense, net decreased $0.3 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, interest expense, net increased $0.8 million from the nine months ended September 30, 2021. Other, net Other, net primarily includes currency remeasurement gains and losses on net monetary assets, gains and losses on foreign currency and commodity forward contracts not designated as hedging instruments, 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 September 30, 2022, other, net represented a net loss of $21.4 million, an unfavorable impact on earnings of $12.0 million compared to a net loss of $9.4 million in the three months ended September 30, 2021. This was primarily due to (1) increased currency remeasurement losses on net monetary assets, primarily related to CNY, (2) a loss on debt financing and (3) $4.0 million in mark-to-market losses on equity investments, primarily related to Quanergy, partially offset by a gain on foreign currency forward contracts. 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 nine months ended September 30, 2022, other, net represented a net loss of $111.1 million, an unfavorable impact on earnings of $63.3 million compared to a net loss of $47.8 million in the nine months ended September 30, 2021. This was largely due to (1) $75.1 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 (1) a reduction in loss on debt financings and (2) a gain on foreign currency forward contracts. Provision for income taxes For the three months ended September 30, 2022, the provision for income taxes increased $24.6 million from the three months ended September 30, 2021, predominantly due to the increase in profit before tax as impacted by the jurisdictional mix of profits, including our recent Qinex Business sale, and the impacts of nondeductible expenses related to our recent acquisitions. 29 Table of Contents For the nine months ended September 30, 2022, the provision for income taxes increased $24.3 million from the nine months ended September 30, 2021, predominantly due to the impacts of nondeductible expenses related to our recent acquisitions and the inability to benefit the mark-to-market loss on our investment in Quanergy, partially offset by changes in income before tax, including the recent Qinex Business sale, as impacted by the jurisdictional mix of profits where we operate. 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, 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 This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted earnings per share ("EPS"), free cash flow, net leverage ratio, and adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which are used by our management, Board of Directors, and investors. We use these non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance, and as a factor in determining compensation for certain employees. The use of our non-GAAP financial measures 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, net cash provided by operating activities, total debt, finance lease and other financing obligations, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, free cash flow, net leverage ratio, and adjusted EBITDA may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies. Organic revenue growth (or decline) Organic revenue growth (or decline) is defined as the reported percentage change in net revenue, calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign currency exchange rate differences as well as the net impact of material acquisitions and divestitures for the 12-month period following the respective transaction date(s). We believe that organic revenue growth (or decline) provides investors with helpful information with respect to our operating performance, and we use organic revenue growth (or decline) to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth (or decline) provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period. 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 under the heading Non-GAAP adjustments below. Adjusted operating margin is calculated by dividing adjusted operating income by net revenue determined in accordance with U.S. GAAP. 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 under the heading Non-GAAP Adjustments below. Adjusted EPS is calculated by dividing adjusted net income by the number of diluted weighted-average ordinary shares outstanding in the period. Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS as measures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as factors in determining compensation for certain employees. We believe investors and securities analysts also use these non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies. These non-GAAP financial measures are not measures of liquidity. 30 Table of Contents Free cash flow 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. Adjusted EBITDA Adjusted EBITDA is defined as net income (or loss), determined in accordance with U.S. 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 gain or loss on derivative instruments, and (4) step-up inventory amortization. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments. Net leverage ratio Net leverage ratio represents net debt (total debt, finance lease and other financing obligations less cash and cash equivalents) divided by last twelve months ("LTM") adjusted EBITDA. We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition. Non-GAAP adjustments Many of our non-GAAP adjustments relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain business, supply chain, or corporate activities, and various financing transactions. We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable. • Restructuring related and other : includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. • Financing and other transaction costs : 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 : includes unrealized losses or gains on derivative instruments that do not qualify for hedge accounting as well as the impact of commodity prices on our raw material costs relative to the strike price on our commodity forward contracts. • Step-up depreciation and amortization : includes depreciation and amortization expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., property, plant and equipment, definite-lived intangible assets, and inventories). • 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 benefits and withholding tax on repatriation of foreign earnings. • Amortization of debt issuance costs: 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. 31 Table of Contents 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 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 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 September 30, 2022 For the three months ended September 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) $ 252.9 24.8 % $ 140.3 $ 0.91 $ 161.3 17.0 % $ 85.0 $ 0.53 Non-GAAP adjustments: Restructuring related and other 16.4 1.6 16.0 0.10 5.4 0.6 5.4 0.03 Financing and other transaction costs (110.9) (10.9) (97.6) (0.63) (1.0) (0.1) 1.7 0.01 Step-up depreciation and amortization 39.0 3.8 39.0 0.25 32.7 3.4 32.7 0.20 Deferred (gain)/loss on derivative instruments (0.1) (0.0) 4.5 0.03 2.6 0.3 10.2 0.06 Amortization of debt issuance costs — — 1.8 0.01 — — 1.7 0.01 Deferred taxes and other tax related — — 27.1 0.18 — — 2.0 0.01 Total adjustments (55.6) (5.5) (9.2) (0.06) 39.7 4.2 53.6 0.34 Adjusted (non-GAAP) $ 197.3 19.4 % $ 131.0 $ 0.85 $ 201.0 21.1 % $ 138.6 $ 0.87 For the nine months ended September 30, 2022 For the nine months ended September 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) $ 517.8 17.2 % $ 197.5 $ 1.26 $ 483.5 16.8 % $ 251.6 $ 1.58 Non-GAAP adjustments: Restructuring related and other 24.4 0.8 24.3 0.15 15.7 0.5 19.6 0.12 Financing and other transaction costs (80.6) (2.7) 5.2 0.03 6.1 0.2 35.8 0.22 Step-up depreciation and amortization 110.3 3.7 110.3 0.70 96.0 3.3 96.0 0.60 Deferred loss on derivative instruments 1.7 0.1 13.0 0.08 7.0 0.2 13.5 0.08 Amortization of debt issuance costs — — 5.3 0.03 — — 5.1 0.03 Deferred taxes and other tax related — — 28.5 0.18 — — 5.9 0.04 Total adjustments 55.8 1.9 186.5 1.19 124.9 4.3 175.9 1.10 Adjusted (non-GAAP) $ 573.6 19.0 % $ 384.0 $ 2.45 $ 608.4 21.1 % $ 427.5 $ 2.68 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 nine months ended September 30, (in millions) 2022 2021 Net cash provided by operating activities (GAAP) $ 235.7 $ 393.2 Additions to property, plant and equipment and capitalized software (110.4) (100.4) Free cash flow (non-GAAP) $ 125.3 $ 292.8 32 Table of Contents The following table provides a reconciliation of corporate and other expenses in accordance with U.S. GAAP to adjusted corporate and other expenses. For the three months ended September 30, For the nine months ended September 30, (in millions) 2022 2021 2022 2021 Corporate and other expenses (GAAP) $ (76.4) $ (72.7) $ (228.9) $ (215.4) Restructuring related and other 8.0 1.7 13.1 4.4 Financing and other transaction costs 5.0 2.5 11.5 7.5 Step-up depreciation and amortization 0.3 0.4 0.9 1.3 Deferred (gain)/loss on derivative instruments (0.1) 2.6 1.7 7.0 Total adjustments 13.1 7.0 27.3 20.1 Adjusted corporate and other expenses (non-GAAP) $ (63.3) $ (65.7) $ (201.6) $ (195.2) The following table provides a reconciliation of net income in accordance with U.S. GAAP to Adjusted EBITDA. For the three months ended September 30, For the nine months ended September 30, (in millions) LTM (1) 2022 2021 2022 2021 Net income $ 309.5 $ 140.3 $ 85.0 $ 197.5 $ 251.6 Interest expense, net 180.0 44.9 45.1 135.1 134.4 Provision for income taxes 74.6 46.4 21.8 74.0 49.8 Depreciation expense 125.2 31.7 31.5 94.6 94.4 Amortization of intangible assets 147.1 40.3 34.6 114.5 101.5 EBITDA 836.4 303.5 218.0 615.8 631.6 Non-GAAP adjustments Restructuring related and other 29.8 16.4 4.3 24.9 18.7 Financing and other transaction costs 7.7 (101.4) (1.8) 2.5 35.8 Deferred loss on derivative instruments 14.2 5.7 9.1 16.3 13.5 Adjusted EBITDA $ 888.1 $ 224.2 $ 229.6 $ 659.4 $ 699.6 ___________________________________ (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) September 30, 2022 December 31, 2021 Current portion of long-term debt, finance lease and other financing obligations $ 6.5 $ 6.8 Finance lease and other financing obligations, less current portion 25.2 26.6 Long-term debt, net 4,208.7 4,214.9 Total debt, finance lease and other financing obligations 4,240.4 4,248.3 Less: discount, net of premium (3.7) (5.2) Less: deferred financing costs (31.0) (26.7) Total gross indebtedness 4,275.1 4,280.2 Less: cash and cash equivalents 1,103.9 1,709.0 Net debt $ 3,171.2 $ 2,571.3 Adjusted EBITDA (LTM) $ 888.1 $ 928.3 Net leverage ratio 3.6 2.8 33 Table of Contents Liquidity and Capital Resources As of September 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) September 30, 2022 December 31, 2021 United Kingdom $ 16.7 $ 20.4 United States 16.5 25.0 The Netherlands 807.4 1,304.3 China 194.6 293.8 Other 68.7 65.5 Total $ 1,103.9 $ 1,709.0 The amount of cash and cash equivalents held in these geographic regions fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We recognize a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax-free manner. 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 September 30, 2022 (In millions) USD EUR GBP CNY Other United Kingdom $ 1.9 € 0.0 £ 11.2 ¥ — United States 16.5 0.0 — — The Netherlands 796.2 10.9 — — China 90.9 — — 741.1 Other 54.5 2.2 — — Total $ 960.0 € 13.1 £ 11.2 ¥ 741.1 USD Equivalent $ 12.8 $ 12.1 $ 103.9 $ 15.1 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 34 Table of Contents Cash Flows: The table below summarizes our primary sources and uses of cash for the nine months ended September 30, 2022 and 2021. We have derived these summarized statements of cash flows from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding. For the nine months ended (In millions) September 30, 2022 September 30, 2021 Net cash provided by/(used in): Operating activities: Net income adjusted for non-cash items $ 402.0 $ 509.8 Changes in operating assets and liabilities, net (166.3) (116.6) Operating activities 235.7 393.2 Investing activities (551.9) (516.1) Financing activities (288.9) 219.0 Net change $ (605.0) $ 96.2 Operating activities. Net cash provided by operating activities for the nine months ended September 30, 2022 decreased compared to the corresponding period of the prior year, primarily due to lower net income, cash payments of $23.5 million for earned acquisition-related incentive compensation, and timing of supplier payments and customer receipts. Investing activities. Net cash used in investing activities for the nine months ended September 30, 2022 increased compared to the corresponding period of the prior year, primarily due to higher cash paid for acquisitions (which included Dynapower and Elastic M2M in the nine months ended September 30, 2022 and Xirgo Technologies, LLC in the nine months ended September 30, 2021), and higher capital expenditures, partially offset by cash proceeds of $198.8 million from the divestiture of the Qinex Business. 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 nine months ended September 30, 2022, net cash used in financing activities primarily comprised cash outflows of $241.9 million for share repurchases and $34.3 million for cash dividends, each of which did not have a comparable payment in the prior year. We also issued the 5.875% Senior Notes and redeemed the 4.875% Senior Notes in the third quarter of 2022, the cash impact of which largely offset. In the nine months ended September 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 the nine months ended September 30, 2022 we used $13.4 million in cash related to debt financing transactions, compared to $33.1 million in the prior year. Indebtedness and Liquidity As of September 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 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 35 Table of Contents 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. Senior Notes On August 29, 2022, we issued $500.0 million aggregate principal amount of 5.875% Senior Notes. On September 28, 2022, we redeemed the $500.0 million aggregate principal amount outstanding on the 4.875% Senior Notes, which would have matured in October 2023, at a redemption price of 101.0% of the aggregate principal amount outstanding, plus accrued and unpaid interest to (but not including) the redemption date. 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. 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 September 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 September 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 September 30, 2022, availability under the Accordion was approximately $0.7 billion. We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, 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. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future. 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, 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 nine months ended September 30, 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 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, 2022, we believe we were in compliance with all covenants and default provisions under our credit arrangements. 36 Table of Contents 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 $272.2 million remained available as of September 30, 2022. Dividends On August 24, 2022, we paid a cash dividend of $0.11 per share, or $17.0 million in aggregate, to shareholders of record as of August 10, 2022. On October 20, 2022, we announced that our Board had declared a quarterly dividend of $0.11 per share, payable on November 23, 2022 to shareholders of record as of November 9, 2022. Recently Issued Accounting Pronouncements There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations. Critical Accounting Policies and Estimates For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates included in our 2021 Annual Report. Item 3. 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 2021 Annual Report.