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 2022 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 Net revenue for the three months ended June 30, 2023 was $1,062.1 million, an increase of 4.1% compared to $1,020.5 million in the three months ended June 30, 2022. Excluding a decrease of 1.4% attributed to changes in foreign currency exchange rates and an increase of 2.1% due to the net effect of acquisitions and divestitures, net revenue increased 3.4% on an organic basis. Organic revenue growth (or decline), discussed throughout this Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A"), is a financial measure not presented in accordance with U.S. GAAP. Refer to Non-GAAP Financial Measures included elsewhere in this MD&A for additional information regarding our use of organic revenue growth (or decline). Net revenue for the six months ended June 30, 2023 was $2,060.3 million, an increase of 3.2% compared to $1,996.3 million in the six months ended June 30, 2022. Excluding a decrease of 1.9% attributed to changes in foreign currency exchange rates and an increase of 1.1% due to the net effect of acquisitions and divestitures, net revenue increased 4.0% on an organic basis. Operating income for the three months ended June 30, 2023 decreased $20.9 million, or 15.1%, to $118.0 million (11.1% of net revenue) from $138.9 million (13.6% of net revenue) in the three months ended June 30, 2022. This decline was largely driven by our decision to exit the Marine Business in the second quarter of 2023 (reflecting $38.3 million of charges incurred, including those related to accelerated amortization of intangible assets, write-down of inventory, and other restructuring charges), partially offset by the net impacts of pricing recoveries from customers, inflation on material and logistics costs, and volume leverage. Refer to Note 5: Restructuring and Other Charges, Net , of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information regarding the exit of the Marine Business. 21 Table of Contents Operating income for the six months ended June 30, 2023 increased $2.0 million, or 0.7%, to $266.9 million (13.0% of net revenue) compared to $264.9 million (13.3% of net revenue) in the six months ended June 30, 2022, as the charges incurred related to the Marine Business were more than offset by the net impacts of pricing recoveries from customers, inflation on material and logistics costs, and volume leverage. Refer to Results of Operations included elsewhere in this MD&A for additional discussion of our earnings results for the three and six months ended June 30, 2023 compared to the prior year period. We generated $212.6 million of operating cash flows in the six months ended June 30, 2023, ending the quarter with $857.3 million in cash and cash equivalents. In the six months ended June 30, 2023, we used approximately $448.4 million to pay down the remaining balance on our variable-rate Term Loan, bringing our gross indebtedness to $3.8 billion as of June 30, 2023 (a net leverage ratio of 3.2x) compared to $4.3 billion as of December 31, 2022 (a net leverage ratio of 3.4x). In the six months ended June 30, 2023, we used cash of approximately $84.4 million for capital expenditures, $35.1 million for payment of dividends, and $25.1 million for share repurchases as part of our share repurchase plan. In the three months ended June 30, 2023, we increased our cash dividends to $0.12 per share, first paid to shareholders of record in May 2023. In fiscal year 2023, we will continue to return capital to shareholders through our dividend and opportunistic share repurchases. We expect improving free cash flow will naturally allow leverage to decline and returns on invested capital to improve over time. 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 six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. We have derived the results of operations from the unaudited 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 six months ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Amount Margin (1) Amount Margin (1) Amount Margin (1) Amount Margin (1) Net revenue: Performance Sensing $ 757.4 71.3 % $ 731.6 71.7 % $ 1,495.7 72.6 % $ 1,434.3 71.8 % Sensing Solutions 304.7 28.7 288.9 28.3 564.6 27.4 562.0 28.2 Net revenue 1,062.1 100.0 1,020.5 100.0 2,060.3 100.0 1,996.3 100.0 Operating costs and expenses 944.1 88.9 881.6 86.4 1,793.4 87.0 1,731.4 86.7 Operating income 118.0 11.1 138.9 13.6 266.9 13.0 264.9 13.3 Interest expense, net (38.1) (3.6) (44.8) (4.4) (78.2) (3.8) (90.3) (4.5) Other, net (10.9) (1.0) (39.2) (3.8) (9.5) (0.5) (89.7) (4.5) Income before taxes 69.0 6.5 54.9 5.4 179.1 8.7 84.9 4.3 Provision for income taxes 19.9 1.9 20.0 2.0 43.6 2.1 27.6 1.4 Net income $ 49.1 4.6 % $ 34.8 3.4 % $ 135.5 6.6 % $ 57.3 2.9 % ___________________________________ (1) Represents the amount presented divided by total net revenue. Net Revenue Net revenue for the three months ended June 30, 2023 increased 4.1% compared to the prior period. Net revenue increased 3.4% on an organic basis, which excludes a decrease of 1.4% attributed to changes in foreign currency exchange rates and an increase of 2.1% due to the net effect of acquisitions and divestitures. Net revenue for the six months ended June 30, 2023 increased 3.2% compared to the prior period. Net revenue increased 4.0% on an organic basis, which excludes a decrease of 1.9% attributed to changes in foreign currency exchange rates and an increase of 1.1% due to the net effect of acquisitions and divestitures. Effective April 1, 2023, we moved our material handling products from the HVOR operating segment (in the Performance Sensing reportable segment) to the Sensing Solutions operating segment to align with new management reporting. In the table above and the discussion below, the revenue previously reported for our Performance Sensing and Sensing Solutions reportable segments for the three and six months ended June 30, 2022 have been retrospectively recast to reflect this change. In addition, the six months ended June 30, 2023 includes amounts for the three months ended March 31, 2023 that have been retrospectively adjusted for this change. 22 Table of Contents Performance Sensing Performance Sensing net revenue for the three months ended June 30, 2023 increased 3.5% compared to the prior period. Excluding a decrease of 1.7% attributed to changes in foreign currency exchange rates, Performance Sensing net revenue increased 5.2% 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, 2023 grew 4.7% compared to the prior period. Excluding a decline of 2.0% attributed to changes in foreign currency exchange rates, automotive net revenue grew 6.7% on an organic basis, primarily due to market growth and improved pricing. HVOR net revenue for the three months ended June 30, 2023 grew 0.8% compared to the prior period. Excluding a decline of 1.0% attributed to changes in foreign currency exchange rates, HVOR net revenue grew 1.8% on an organic basis, primarily due to market growth, partially offset by channel inventory de-stocking. Performance Sensing net revenue for the six months ended June 30, 2023 increased 4.3% compared to the prior period. Excluding a decrease of 2.1% attributed to changes in foreign currency exchange rates and an increase of 0.2% due to the effect of acquisitions, Performance Sensing net revenue increased 6.2% 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, 2023 grew 3.8% compared to the prior period. Excluding a decrease of 2.5% attributed to changes in foreign currency exchange rates, automotive net revenue grew 6.3% on an organic basis, primarily due to market growth and improved pricing. HVOR net revenue for the six months ended June 30, 2023 grew 5.4% compared to the prior period. Excluding a decrease of 1.4% attributed to changes in foreign currency exchange rates and an increase of 0.7% due to the effect of acquisitions, HVOR net revenue grew 6.1% on an organic basis, primarily due to market growth and outgrowth, partially offset by channel inventory de-stocking. Sensing Solutions Sensing Solutions net revenue for the three months ended June 30, 2023 increased 5.5% compared to the prior period. Excluding a decline of 0.9% attributed to changes in foreign currency exchange rates and an increase of 7.6% due to the net effect of acquisitions and divestitures, Sensing Solutions net revenue declined 1.2% on an organic basis, which primarily reflects weakness in our appliance and HVAC markets, partially offset by growth in the aerospace markets. Sensing Solutions net revenue for the six months ended June 30, 2023 increased 0.5% compared to the prior period. Excluding a decline of 1.2% 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 declined 1.6% on an organic basis, which primarily reflects weakness in our appliance and HVAC markets, partially offset by growth in the aerospace markets. Operating costs and expenses Operating costs and expenses for the three and six months ended June 30, 2023 and 2022 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 six months ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Amount Margin (1) Amount Margin (1) Amount Margin (1) Amount Margin (1) Operating costs and expenses: Cost of revenue $ 732.1 68.9 % $ 686.6 67.3 % $ 1,402.6 68.1 % $ 1,343.7 67.3 % Research and development 44.9 4.2 48.0 4.7 90.8 4.4 94.0 4.7 Selling, general and administrative 91.3 8.6 97.3 9.5 177.5 8.6 193.0 9.7 Amortization of intangible assets 54.6 5.1 36.8 3.6 95.3 4.6 74.2 3.7 Restructuring and other charges, net 21.3 2.0 12.9 1.3 27.3 1.3 26.6 1.3 Total operating costs and expenses $ 944.1 88.9 % $ 881.6 86.4 % $ 1,793.4 87.0 % $ 1,731.4 86.7 % ___________________________________ (1) Represents the amount presented divided by total net revenue. 23 Table of Contents Cost of revenue For the three months ended June 30, 2023, cost of revenue as a percentage of net revenue increased from the prior period, primarily due to (1) the $10.5 million write-down of inventory as a result of our decision to exit the Marine Business, (2) the unfavorable effect of acquisitions and divestitures on gross margin, (3) the unfavorable effect of product mix, and (4) the unfavorable effect of changes in foreign currency exchange rates, partially offset by the net impacts of pricing recoveries from customers, inflation on material and logistics costs, and volume leverage. Refer to Note 5: Restructuring and Other Charges, Net , of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional details regarding the charges related to the exit of the Marine Business. For the six months ended June 30, 2023, cost of revenue as a percentage of net revenue increased from the prior period, primarily due to (1) the unfavorable effect of product mix, (2) the $10.5 million write-down of inventory as a result of our decision to exit the Marine Business, (3) the unfavorable effect of acquisitions and divestitures on gross margin, and (4) the unfavorable effect of changes in foreign currency exchange rates, partially offset by the net impacts of pricing recoveries, inflation, and volume leverage. Research and development expense For the three months ended June 30, 2023, research and development ("R&D") expense decreased from the prior period, primarily due to lower costs as a result of repositioning actions taken in fiscal year 2022, partially offset by higher spend to support increased revenue. For the six months ended June 30, 2023, R&D expense decreased from the prior period, primarily due to (1) lower costs as a result of repositioning actions taken in fiscal year 2022 and (2) the favorable effect of changes in foreign currency exchange rates, partially offset by higher spend to support increased revenue. Selling, general and administrative expense For the three months ended June 30, 2023, selling, general and administrative ("SG&A") expense decreased from the prior period, primarily as a result of (1) cost savings as a result of repositioning actions taken in fiscal year 2022, and (2) lower transaction costs as a result of reduced mergers and acquisitions activity, partially offset by (1) increased SG&A expense from our acquisitions (net of divestitures) and (2) increased share-based compensation expense. Refer to Note 15: Acquisitions and Divestitures and Note 4: Share-Based Payment Plans of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information regarding acquired businesses and share-based compensation. For the six months ended June 30, 2023, SG&A expense decreased from the prior period, primarily as a result of (1) cost savings as a result of repositioning actions taken in fiscal year 2022, (2) lower transaction costs as a result of reduced mergers and acquisitions activity, and (3) the favorable effect of changes in foreign currency exchange rates, partially offset by increased SG&A expense from our acquisitions (net of divestitures). Amortization of intangible assets For the three and six months ended June 30, 2023, amortization of intangible assets increased from the prior period, primarily due to (1) a charge of $13.5 million for accelerated amortization of intangible assets as a result of our exit from the Marine Business and (2) increased amortization due to newly acquired intangible assets. Refer to Note 5: Restructuring and Other Charges, Net , of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional details regarding the charges regarding the exit of the Marine Business. Restructuring and other charges, net For the three months ended June 30, 2023, restructuring and other charges, net increased from the prior period, primarily due to (1) charges incurred as a result of our exit from the Marine Business and (2) an increase in severance charges that were not the result of initiation of a larger restructuring plan, partially offset by lower acquisition-related deferred compensation. Refer to Note 5: Restructuring and Other Charges, Net of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information regarding the components of restructuring and other charges, net, including the exit of the Marine Business. 24 Table of Contents For the six months ended June 30, 2023, restructuring and other charges, net increased slightly from the prior period, as negative factors such as (1) charges incurred as a result of our exit from the Marine Business, (2) the non-recurrence of a gain recognized in the first quarter of 2022 related to the reduction of the liability for contingent consideration for Spear, and (3) an increase in severance charges that were not the result of initiation of a larger restructuring plan, were largely offset by positive factors such as (1) a reduction in expense for acquisition-related compensation arrangements and (2) the gain on sale of a business in the first quarter of 2023. Operating income For the three months ended June 30, 2023, operating income decreased compared to the prior period, primarily due to (1) $38.3 million of charges incurred as a result of our exit from the Marine Business, (2) the unfavorable effect of changes in foreign currency exchange rates, (3) the dilutive impact of acquisitions and divestitures, and (4) unfavorable product mix, partially offset by (1) the net impacts of pricing recoveries, inflation, and volume leverage, (2) cost savings as a result of repositioning actions taken in fiscal year 2022, and (3) lower acquisition-related deferred compensation. For the six months ended June 30, 2023, operating income increased compared to the prior period, primarily due to (1) the net impacts of pricing recoveries, inflation, and volume leverage, (2) cost savings as a result of repositioning actions taken in fiscal year 2022, (3) lower acquisition-related deferred compensation, and (4) the gain on the sale of a business in the first quarter of 2023. These drivers were partially offset by (1) $38.3 million of charges incurred as a result of our exit from the Marine Business, (2) the dilutive impact of acquisitions and divestitures, (3) the unfavorable effect of changes in foreign currency exchange rates, (4) unfavorable product mix, (5) the impact of the non-recurrence of a gain recognized in the first quarter of 2022 related to the reduction of the liability for contingent consideration for Spear, and (6) an increase in severance charges that were not the result of initiation of a larger restructuring plan. Interest expense, net For the three months ended June 30, 2023, interest expense, net decreased $6.7 million from the prior period, primarily due to (1) increased interest income as a result of increasing interest rates and (2) lower interest expense on the Term Loan due to the early payment on the Term Loan in the first and second quarters of 2023, partially offset by increased interest expense due to the net impact of the early redemption of the 4.875% Senior Notes and the issuance of the 5.875% Senior Notes in the third quarter of 2022. Refer to Note 14: Debt of the audited consolidated financial statements and notes thereto included in the 2022 Annual Report and Note 10: Debt , of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information regarding these debt transactions. For the six months ended June 30, 2023, interest expense, net decreased $12.1 million from the prior period, primarily due to increased interest income as a result of increasing interest rates, partially offset by increased interest expense due to the net impact of the early redemption of the 4.875% Senior Notes and the issuance of the 5.875% Senior Notes in the third quarter of 2022. 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 unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for more details regarding the components of other, net. For the three months ended June 30, 2023, other, net represented a net loss of $10.9 million, a favorable impact on earnings of $28.3 million compared to a net loss of $39.2 million in the prior period. This favorable impact was primarily due to (1) the non-recurrence of mark-to-market losses on equity investments, primarily our investment in Quanergy Systems Inc. ("Quanergy"), in the second quarter of 2022, (2) lower losses on commodity forward contracts, and (3) lower currency remeasurement loss on net monetary assets. For the six months ended June 30, 2023, other, net represented a net loss of $9.5 million, a favorable impact on earnings of $80.2 million compared to a net loss of $89.7 million in the prior period. This was largely due to (1) the non-recurrence of mark-to-market losses on equity investments, primarily our investment in Quanergy, in the six months ended June 30, 2022, (2) the combined impact of lower currency remeasurement loss on net monetary assets and higher gains on foreign currency forward contracts, and (3) lower losses on commodity forward contracts. 25 Table of Contents Provision for income taxes 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. For the three months ended June 30, 2023, the provision for income taxes decreased $0.1 million from the prior period, predominantly due to the inability to benefit the 2022 mark-to-market loss on our investment in Quanergy. For the six months ended June 30, 2023, the provision for income taxes increased $16.0 million from the prior period, predominantly due to the increase in profit before tax and the inability to benefit the 2022 mark-to-market loss on our investment in Quanergy. 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, or 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) and market outgrowth 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. Market outgrowth is calculated as organic revenue growth less our weighted market growth. Our weighted market growth is calculated using our regional and platform sales mix, as applicable, in the corresponding prior period. Market outgrowth is used to describe the impact of an increasing quantity and value of our products used in customer systems and applications above market growth. We believe this provides a more meaningful comparison of our revenue growth relative to the markets we serve. 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. 26 Table of Contents We may also refer to certain of these measures, or changes in these measures, on a constant currency basis. Adjusted operating margin calculated on a constant currency basis is determined by stating revenues and expenses at prior period foreign currency exchange rates and excludes the impact of foreign currency exchange rates on all hedges. Adjusted EPS on a constant currency basis is determined in the same manner as adjusted operating margin, but also excludes the change in gain or loss on the remeasurement of monetary assets and liabilities. Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS (and the constant currency equivalent of each) as measures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as factors in determining compensation for certain employees. We believe investors and securities analysts also use these non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies. These non-GAAP financial measures are not measures of liquidity. Free cash flow Free cash flow is defined as net cash provided by 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, and (3) deferred loss or gain on derivative instruments. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments. We believe that this measure is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. 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 net charges 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. 27 Table of Contents • Step-up depreciation and amortization : includes depreciation expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., property, plant and equipment and inventories) and amortization of intangible assets. • 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. 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 three months ended June 30, 2023 and 2022. Refer to the Non-GAAP Adjustments section above for additional information regarding 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 June 30, 2023 (Dollars in millions, except per share amounts) Operating Income Operating Margin Income Taxes Net Income Diluted EPS Reported (GAAP) $ 118.0 11.1 % $ 19.9 $ 49.1 $ 0.32 Non-GAAP adjustments: Restructuring related and other 31.1 2.9 (0.6) 30.4 0.20 Financing and other transaction costs 4.3 0.4 (0.1) 3.9 0.03 Step-up depreciation and amortization 53.3 5.0 — 53.3 0.35 Deferred (gain)/loss on derivative instruments (0.9) (0.1) (1.1) 4.2 0.03 Amortization of debt issuance costs — — — 1.7 0.01 Deferred taxes and other tax related — — 6.4 6.4 0.04 Total adjustments 87.7 8.3 4.6 100.0 0.65 Adjusted (non-GAAP) $ 205.7 19.4 % $ 15.3 $ 149.2 $ 0.97 For the three months ended June 30, 2022 (Dollars in millions, except per share amounts) Operating Income Operating Margin Income Taxes Net Income Diluted EPS Reported (GAAP) $ 138.9 13.6 % $ 20.0 $ 34.8 $ 0.22 Non-GAAP adjustments: Restructuring related and other 3.9 0.4 0.0 4.3 0.03 Financing and other transaction costs 14.4 1.4 (0.5) 28.3 0.18 Step-up depreciation and amortization 35.3 3.5 — 35.3 0.22 Deferred loss on derivative instruments 1.2 0.1 (4.0) 15.4 0.10 Amortization of debt issuance costs — — — 1.7 0.01 Deferred taxes and other tax related — — 9.7 9.7 0.06 Total adjustments 54.8 5.4 5.2 94.7 0.60 Adjusted (non-GAAP) $ 193.8 19.0 % $ 14.9 $ 129.5 $ 0.83 28 Table of Contents 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 six months ended June 30, 2023 and 2022. For the six months ended June 30, 2023 (Dollars in millions, except per share amounts) Operating Income Operating Margin Income Taxes Net Income Diluted EPS Reported (GAAP) $ 266.9 13.0 % $ 43.6 $ 135.5 $ 0.88 Non-GAAP adjustments: Restructuring related and other 34.0 1.7 (1.3) 32.7 0.21 Financing and other transaction costs 8.5 0.4 2.8 11.5 0.08 Step-up depreciation and amortization 92.5 4.5 — 92.5 0.60 Deferred (gain)/loss on derivative instruments (3.2) (0.2) (0.2) 0.9 0.01 Amortization of debt issuance costs — — — 3.4 0.02 Deferred taxes and other tax related — — 13.2 13.2 0.09 Total adjustments 131.8 6.4 14.5 154.3 1.01 Adjusted (non-GAAP) $ 398.6 19.3 % $ 29.1 $ 289.8 $ 1.89 For the six months ended June 30, 2022 (Dollars in millions, except per share amounts) Operating Income Operating Margin Income Taxes Net Income Diluted EPS Reported (GAAP) $ 264.9 13.3 % $ 27.6 $ 57.3 $ 0.36 Non-GAAP adjustments: Restructuring related and other 8.0 0.4 (0.1) 8.3 0.05 Financing and other transaction costs 30.3 1.5 (1.0) 102.8 0.65 Step-up depreciation and amortization 71.3 3.6 — 71.3 0.45 Deferred loss on derivative instruments 1.8 0.1 (2.2) 8.5 0.05 Amortization of debt issuance costs — — — 3.4 0.02 Deferred taxes and other tax related — — 1.3 1.3 0.01 Total adjustments 111.4 5.6 (2.0) 195.7 1.24 Adjusted (non-GAAP) $ 376.3 18.8 % $ 29.6 $ 253.0 $ 1.60 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 six months ended June 30, (In millions) 2023 2022 Net cash provided by operating activities (GAAP) $ 212.6 $ 141.9 Additions to property, plant and equipment and capitalized software (84.4) (74.1) Free cash flow (non-GAAP) $ 128.2 $ 67.8 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 June 30, For the six months ended June 30, (In millions) 2023 2022 2023 2022 Corporate and other expenses (GAAP) $ (81.5) $ (76.4) $ (143.9) $ (152.5) Restructuring related and other 13.1 2.6 11.7 5.2 Financing and other transaction costs 1.0 2.8 3.6 6.5 Step-up depreciation and amortization 0.3 0.3 0.3 0.6 Deferred (gain)/loss on derivative instruments (0.9) 1.2 (3.2) 1.8 Total adjustments 13.4 6.9 12.4 14.1 Adjusted corporate and other expenses (non-GAAP) $ (68.1) $ (69.4) $ (131.5) $ (138.4) 29 Table of Contents The following table provides a reconciliation of net income in accordance with U.S. GAAP to Adjusted EBITDA. For the three months ended June 30, For the six months ended June 30, (In millions) LTM 2023 2022 2023 2022 Net income $ 388.9 $ 49.1 $ 34.8 $ 135.5 $ 57.3 Interest expense, net 166.7 38.1 44.8 78.2 90.3 Provision for income taxes 102.0 19.9 20.0 43.6 27.6 Depreciation expense 127.9 32.6 31.4 63.6 62.9 Amortization of intangible assets 175.0 54.6 36.8 95.3 74.2 EBITDA 960.5 194.3 167.9 416.2 312.2 Non-GAAP adjustments Restructuring related and other 63.6 31.1 4.3 34.0 8.5 Financing and other transaction costs (87.6) 4.0 28.7 8.8 103.8 Deferred (gain)/loss on derivative instruments (7.6) 5.3 19.4 1.2 10.7 Adjusted EBITDA $ 928.8 $ 234.7 $ 220.4 $ 460.2 $ 435.2 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) June 30, 2023 December 31, 2022 Current portion of long-term debt, finance lease and other financing obligations $ 1.8 $ 256.5 Finance lease and other financing obligations, less current portion 23.8 24.7 Long-term debt, net 3,770.5 3,958.9 Total debt, finance lease and other financing obligations 3,796.1 4,240.1 Less: debt discount, net of premium (2.4) (3.4) Less: deferred financing costs (27.1) (29.9) Total gross indebtedness 3,825.6 4,273.4 Less: cash and cash equivalents 857.3 1,225.5 Net debt $ 2,968.3 $ 3,047.9 Adjusted EBITDA (LTM) $ 928.8 $ 903.9 Net leverage ratio 3.2 3.4 Liquidity and Capital Resources As of June 30, 2023 and December 31, 2022, we held cash and cash equivalents in the following regions: (In millions) June 30, 2023 December 31, 2022 United Kingdom $ 11.7 $ 15.7 United States 13.8 16.1 The Netherlands 400.3 861.3 China 350.1 210.0 Other 81.4 122.5 Total $ 857.3 $ 1,225.5 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. 30 Table of Contents Our cash and cash equivalents balances are held in the following significant currencies (amounts 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): As of June 30, 2023 (In millions) USD EUR GBP CNY Other United Kingdom $ (1.8) € 0.0 £ 10.5 ¥ — United States 13.6 0.2 — — The Netherlands 385.4 12.4 1.0 — China 134.8 — — 1,557.6 Other 62.7 2.1 0.1 — Total $ 594.6 € 14.7 £ 11.6 ¥ 1,557.6 USD Equivalent $ 16.0 $ 14.6 $ 215.3 $ 16.8 As of December 31, 2022 (In millions) USD EUR GBP CNY Other United Kingdom $ 2.7 € 0.0 £ 10.7 ¥ — United States 16.1 — — — The Netherlands 848.6 10.9 0.2 — China 95.0 — — 794.4 Other 99.9 2.3 — — Total $ 1,062.3 € 13.2 £ 10.9 ¥ 794.4 USD Equivalent $ 14.0 $ 13.2 $ 115.2 $ 20.8 Cash Flows: The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2023 and 2022. We have derived these summarized statements of cash flows from the unaudited 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 six months ended (In millions) June 30, 2023 June 30, 2022 Net cash provided by/(used in): Operating activities: Net income adjusted for non-cash items $ 338.9 $ 300.1 Changes in operating assets and liabilities, net (117.8) (143.2) Cash operating activities (8.4) (15.0) Operating activities 212.6 141.9 Investing activities (65.8) (129.8) Financing activities (515.0) (162.5) Net change $ (368.2) $ (150.4) Operating activities. Net cash provided by operating activities for the six months ended June 30, 2023 increased compared to the corresponding period of the prior year, primarily due to higher net income and timing of supplier payments and customer receipts. The increase was partially offset by additional cash paid on interest of $15.2 million in the six months ended June 30, 2023 compared to the prior period. Investing activities. Net cash used in investing activities for the six months ended June 30, 2023 decreased compared to the corresponding period of the prior year, primarily due to (1) the fact that there were no acquisitions in the six months ended June 30, 2023 (compared to $49.0 million paid for Elastic M2M in the prior period) and (2) we paid $0.4 million to invest in debt and equity securities (compared to $6.9 million in the prior period), partially offset by an increase in capital expenditures of $10.4 million. In addition, we received cash proceeds of $19.0 million from the sale of businesses in the six months ended June 30, 2023. For fiscal year 2023, we anticipate capital expenditures of approximately $170.0 million to $180.0 million, which we expect to fund with cash on hand. 31 Table of Contents Financing activities . Net cash used in financing activities for the six months ended June 30, 2023 increased primarily due to (1) the early payment of the entire Term Loan balance made in the six months ended June 30, 2023 and (2) an increase in cash paid to shareholders in the form of cash dividends of $17.9 million, partially offset by lower cash paid to repurchase ordinary shares as part of our share repurchase program. Indebtedness and Liquidity As of June 30, 2023, we had $3.8 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. In the six months ended June 30, 2023, we repaid the Term Loan balance in full. 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 June 30, 2023, 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 June 30, 2023, 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 June 30, 2023, availability under the Accordion was approximately $1.2 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 July 21, 2023, 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 six months ended June 30, 2023. 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 2022 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 June 30, 2023, we believe we were in compliance with all covenants and default provisions under our credit arrangements. 32 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 authorization for the January 2022 Program, under which approximately $199.4 million remained available as of June 30, 2023. In the six months ended June 30, 2023 and 2022, we repurchased 0.6 million and 2.8 million ordinary shares, respectively, under the January 2022 Program. Dividends In the second quarter of 2022, we began paying cash dividends of $0.11 per share to our shareholders. In the second quarter of 2023, we increased the dividends to $0.12 per share. In the six months ended June 30, 2023 and 2022, we paid aggregate cash dividends of $35.1 million and $17.2 million, respectively. On July 20, 2023, we announced that our Board of Directors approved a quarterly dividend of $0.12 per share, payable on August 23, 2023 to shareholders of record as of August 9, 2023. 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 2022 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. No significant changes to our market risk have occurred since December 31, 2022. For a discussion of market risks affecting us, refer to Part II, Item 7A: Quantitative and Qualitative Disclosures About Market Risk included in our 2022 Annual Report.