NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Basis of Presentation
Description of Business
The accompanying audited consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc ("Sensata plc"), a public limited company incorporated under the laws of England and Wales, and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us."
Prior to March 28, 2018, our parent company issuer was Sensata Technologies Holding N.V. ("Sensata N.V."), which was incorporated under the laws of the Netherlands. On March 28, 2018, Sensata plc completed a cross-border merger (the "Merger") with Sensata N.V., which changed the location of our incorporation from the Netherlands to England and Wales, but did not change the business being conducted by us or our subsidiaries.
We are a global industrial technology company that develops, manufactures, and sells sensors, sensor-based solutions, controls, and other products used in mission-critical systems and applications that create valuable business insights for our customers and end users. Our sensors are devices that translate a physical parameter, such as pressure, temperature, or position, into electronic signals that our customers’ products and solutions can act upon. These actionable insights lead to products that are safer, cleaner and more efficient, more electrified, and increasingly more connected. Our sensor-based solutions can be comprised of various sensors, controllers, receivers, and software, which provide comprehensive solutions to critical problems. Our controls are devices embedded within systems to protect them from excessive heat or current.
Sensata plc conducts its operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the United Kingdom (the "U.K."), and the United States (the "U.S."); and manufacturing operations primarily in Bulgaria, China, Malaysia, Mexico, the U.K., and the U.S.
We operate in, and report financial information for, the following two segments: Performance Sensing and Sensing Solutions. Refer to Note 20, "Segment Reporting," for additional information related to each of our segments.
Basis of Presentation
The accompanying audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated. All U.S. dollar ("USD") and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowance for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets), contingencies, the value of certain equity awards and the measurement of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of plant and equipment, measurement of our post-retirement benefit obligations, and the identification, valuation, and determination of useful lives of identifiable intangible assets acquired in business combinations. The accounting estimates used in the preparation of the
consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. This five step model requires us to identify the contract with the customer, identify the performance obligation(s) in the contract, determine the transaction price, allocate the transaction price to the performance obligation(s), and recognize revenue when (or as) we satisfy the performance obligation(s).
The vast majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders ("POs" and each, a "PO") that require us to transfer specified quantities of tangible products to our customers. These performance obligations are generally satisfied within a short period of time. Amounts billed to our customers for shipping and handling after control has transferred are recognized as revenue and the related costs that we incur are presented in cost of revenue.
In determining the transaction price, we evaluate whether the consideration promised in the contract includes a variable amount and, if applicable, we include in the transaction price some or all of an amount of variable consideration only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may be explicitly stated in the contract or implied based on our customary practices. Examples of variable consideration present in our contracts include rights of return, in the case of a defective or non-conforming product, and trade discounts, including early payment discounts and retrospective volume discounts. Such variable consideration has not historically been material in relation to our net revenue.
Our contract terms generally require the customer to make payment shortly after (that is, less than one year) the shipment date. In such instances, we do not consider the effects of a significant financing component in determining the transaction price. Lastly, we exclude from our determination of the transaction price value-added tax and other similar taxes.
Our performance obligations are satisfied, and revenue is recognized, when control of the product is transferred to the customer. The transfer of control generally occurs at the point in time the product is shipped from our warehouse or, less often, at the point in time it is received by the customer, depending on the specific terms of the arrangement. Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer PO, and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606. Depending on the product, we generally provide such warranties for a period of twelve to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit. We do not offer separately priced extended warranty or product maintenance contracts.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.
Refer to Note 3, "Revenue Recognition," for additional information related to the net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
We measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted securities, and recognize as compensation expense that fair value over the requisite service period as required in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. Share-based compensation expense is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where
the related employee costs are presented, however, such costs, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation expense associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. For awards without performance conditions that are subject to graded vesting, companies have the option to recognize compensation expense either on a straight-line or accelerated basis. We have elected to recognize compensation expense for these awards on a straight-line basis. However, awards that are subject to both graded vesting and performance conditions must be expensed on an accelerated basis.
We estimate the fair value of options on the grant date using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in this model are as follows:
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The fair value of the underlying ordinary shares. This is determined as the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the grant date.
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The expected term. This is determined based upon our own historical average term of exercised and outstanding options.
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Expected volatility. We consider our own historical volatility, as well as our implied volatility, in estimating expected volatility for stock options. Implied volatility provides a forward-looking indication and may offer insight into expected volatility.
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Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
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Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future.
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Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. Compensation expense is recognized if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures. Accordingly, we only recognize compensation expense for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Refer to Note 4, "Share-Based Payment Plans," for additional information related to share-based compensation.
Financial Instruments
Our financial instruments include derivative instruments, debt instruments, debt and equity investments, and trade accounts receivable.
Derivative financial instruments: We account for our derivative financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures and FASB ASC Topic 815, Derivatives and Hedging. In accordance with FASB ASC Topic 815, we recognize all derivatives on the balance sheet at fair value. The fair value of our derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. These analyses utilize observable market-based inputs, including foreign currency exchange rates and commodity forward curves, and reflect the contractual terms of these instruments, including the period to maturity.
Derivative instruments that are designated and qualify as hedges of the exposure to changes in the fair value of an asset, liability, or commitment, and that are attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments that are designated and qualify as hedges of the exposure to variability in expected future cash flows are considered cash flow hedges. Derivative instruments may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Currently, our derivative instruments that are designated as accounting hedges are all cash flow hedges. We also hold derivative instruments that are not designated as accounting hedges.
The accounting for changes in the fair value of our cash flow hedges depends on whether we have elected to designate the derivative as a hedging instrument for accounting purposes and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In accordance with FASB ASC Topic 815, both the effective and ineffective portion of
changes in the fair value of derivatives designated and qualifying as cash flow hedges is recognized in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. Changes in the fair value of derivative instruments that are not designated as accounting hedges are recognized immediately in other, net. Refer to Note 16, "Shareholders' Equity," and Note 19, "Derivative Instruments and Hedging Activities," for additional information related to the reclassification of amounts from accumulated other comprehensive loss into earnings.
We present the cash flows arising from our derivative financial instruments in a manner consistent with the presentation of cash flows that relate to the underlying hedged items.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. We do not offset the fair value amounts recognized for derivative instruments against fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral.
We maintain derivative instruments with major financial institutions of investment grade credit rating and monitor the amount of credit exposure to any one issuer. We believe there are no significant concentrations of risk associated with our derivative instruments.
Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to our derivative instruments.
Debt Instruments: A premium or discount on a debt instrument is recognized on the balance sheet as an adjustment to the carrying amount of the debt liability. In general, amounts paid to creditors are considered a reduction in the proceeds received from the issuance of the debt and are accounted for as a component of the premium or discount on the issuance, not as an issuance cost.
Direct and incremental costs associated with the issuance of debt instruments such as legal fees, printing costs, and underwriters' fees, among others, paid to parties other than creditors, are also reported and presented as a reduction of debt on the consolidated balance sheets.
Debt issuance costs and premiums or discounts are amortized over the term of the respective financing arrangement using the effective interest method. Amortization of these amounts is included as a component of interest expense, net in the consolidated statements of operations.
In accounting for debt refinancing transactions, we apply the provisions of FASB ASC Subtopic 470-50, Modifications and Extinguishments. Our evaluation of the accounting under FASB ASC Subtopic 470-50 is done on a creditor by creditor basis in order to determine if the terms of the debt are substantially different and, as a result, whether to apply modification or extinguishment accounting. In the event that an individual holder of existing debt did not invest in new debt, we apply extinguishment accounting. Borrowings associated with individual holders of new debt that are not holders of existing debt are accounted for as new issuances.
Refer to Note 14, "Debt," for additional information related to our debt instruments and transactions.
Equity Investments: We measure equity investments (other than those accounted for under the equity method, those that result in consolidation of the investee, and certain other investments) either at fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative prescribed in FASB ASC Topic 321, Investments - Equity Securities. Under the measurement alternative, such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
Refer to Note 18, "Fair Value Measures," for additional information related to our measurement of financial instruments.
Trade accounts receivable: Trade accounts receivable are recognized at invoiced amounts and do not bear interest. Trade accounts receivable are reduced by an allowance for losses on receivables, as described elsewhere in this Note 2. Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers in various industries and their dispersion across several geographic areas. Although we do not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of these
individual customers. Our largest customer accounted for approximately 7% of our net revenue for the year ended December 31, 2019.
Allowance for Losses on Receivables
The allowance for losses on receivables is used to present accounts receivable, net at an amount that represents our estimate of the related transaction price recognized as revenue in accordance with FASB ASC Topic 606. The allowance represents an estimate of probable but unconfirmed losses in the receivable portfolio. We estimate the allowance on the basis of specifically identified receivables that are evaluated individually for impairment and a statistical analysis of the remaining receivables determined by reference to past default experience. Customers are generally not required to provide collateral for purchases. The allowance for losses on receivables also includes an allowance for sales returns (variable consideration).
Management judgments are used to determine when to charge off uncollectible trade accounts receivable. We base these judgments on the age of the receivable, credit quality of the customer, current economic conditions, and other factors that may affect a customer’s ability and intent to pay.
Losses on receivables have not historically been significant.
Goodwill and Other Intangible Assets
Businesses acquired are recognized at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Intangible assets acquired may include either definite-lived or indefinite-lived intangible assets, or both.
In accordance with the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Goodwill: We have identified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Certain assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the related reporting units based on methods that we believe are reasonable and supportable, and we apply that allocation method on a consistent basis from year to year. Other assets and liabilities, such as cash and cash equivalents and property, plant and equipment ("PP&E") associated with our corporate offices, and debt, we view as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired and liabilities assumed to a new or existing reporting unit as of the date of the acquisition.
In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the retained portion of the related reporting unit.
We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the first step of the quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities as if the reporting unit had been acquired in a business combination at the date of assessment, and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill. The fair value measurements of our reporting units are categorized in level 3 of the fair value hierarchy.
Indefinite-lived intangible assets: Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review that requires us to estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value. We estimate the fair value by using the relief-from-royalty method, which requires us to make assumptions about future conditions impacting the value of the indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
Definite-lived intangible assets: Acquisition-related definite-lived intangible assets are amortized on an economic-benefit basis according to the useful lives of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined. Capitalized software and capitalized software licenses are presented on the consolidated balance sheets as intangible assets. Capitalized software licenses are amortized on a straight-line basis over the lesser of the term of the license or the estimated useful life of the software. Capitalized software is amortized on a straight-line basis over its estimated useful life.
Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets are impaired. If we determine that such facts or circumstances exist, we estimate the recoverability of these assets by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash flows is less than the carrying value of an asset, the impairment charge is measured as the excess of the carrying value over the fair value of that asset. We determine fair value by using the appropriate income approach valuation methodology, depending on the nature of the definite-lived intangible asset.
Refer to Note 11, "Goodwill and Other Intangible Assets, Net," for additional information related to our goodwill and other intangible assets.
Income Taxes
We estimate our provision for income taxes in each of the jurisdictions in which we operate. The provision for income taxes includes both our current and deferred tax exposure. Our deferred tax exposure is measured using the asset and liability method, under which deferred income taxes are recognized to reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to reverse or settle. The effect on deferred tax assets and liabilities of a change in statutory tax rates is recognized in the consolidated statements of operations as an adjustment to income tax expense in the period that includes the enactment date.
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. If it is determined that it is more likely than not that future tax benefits associated with a deferred tax asset will not be realized, a valuation allowance is provided. As a result, we maintain valuation allowances against the deferred tax assets in jurisdictions that have incurred losses in recent periods and in which it is more likely than not that such deferred tax assets will not be utilized in the foreseeable future.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act") was signed into law. The Tax Reform Act introduced two new U.S. tax base erosion provisions: the global intangible low-taxed income ("GILTI") and the base erosion and anti-abuse tax ("BEAT"). We elected to account for GILTI in the period in which it is incurred rather than adjusting our deferred tax assets for any future impacts of this provision. Similarly, we account for BEAT tax in the year incurred as a period expense only, and have followed the guidance found in the FASB Staff Q&A, Topic 740, No. 4, Accounting for the Base Erosion Anti-Abuse Tax, which states that an entity does not need to evaluate the potential of paying BEAT in future years on the realization of its deferred tax assets and liabilities. We have followed this guidance in our current tax calculation and evaluation of the realizability of our deferred tax assets.
In accordance with FASB ASC Topic 740, Income Taxes, we record uncertain tax positions on the basis of a two-step process. First, we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position. Second, for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the relevant
tax authority. Significant judgment is required in evaluating whether our tax positions meet this two-step process. The more-likely-than-not recognition threshold must be met in each reporting period to support continued recognition of any tax benefits claimed, both in the current year, as well as any year which remains open for review by the relevant tax authority at the balance sheet date. Penalties and interest related to uncertain tax positions may be classified as either income taxes or another expense line item in the consolidated statements of operations. We classify interest and penalties related to uncertain tax positions within the provision for/(benefit from) income taxes line of the consolidated statements of operations.
Refer to Note 7, "Income Taxes," for additional information related to our income taxes.
Pension and Other Post-Retirement Benefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans, recognized on our consolidated balance sheets as an asset, current liability, or long-term liability, is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. In general, the measurement date coincides with our fiscal year end, however, certain significant events, such as (1) plan amendments, (2) business combinations, (3) settlements or curtailments, or (4) plan mergers, may trigger the need for an interim measurement of both the plan assets and benefit obligations.
Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date. The value of benefit obligations takes into consideration various financial assumptions, including assumed discount rate and the rate of increase in healthcare costs, and demographic assumptions, including compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. We review these assumptions annually.
Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Actuarial gains and losses are recorded directly to other comprehensive income or loss. If the total net actuarial gain or loss included in accumulated other comprehensive loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic benefit cost over the average remaining service lives of the employees participating in the pension or post-retirement benefit plan.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality, fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the effects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality, fixed-income investments does not exist, we estimate the discount rate using government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we use the fair value of plan assets and consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans’ funds.
Changes to benefit obligations may also be initiated by a settlement or curtailment. A settlement of a defined benefit obligation is an irrevocable transaction that relieves us (or the plan) of primary responsibility for the defined benefit obligation and eliminates significant risks related to the obligation and the assets used to effect the settlement. The settlement of all or more than a minor portion of the pension obligation constitutes an event that requires recognition of all or part of the net actuarial gains or losses deferred in accumulated other comprehensive loss. Our policy is to apply settlement accounting to the extent our year-to date settlements for a given plan exceed the sum of our forecasted full year service cost and interest cost for that particular plan.
A curtailment is an event that significantly reduces the expected years of service of active employees or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future service. The curtailment accounting provisions are applied on a plan-by-plan basis. The total gain or loss resulting from a curtailment is the sum of two distinct elements: (1) prior service cost write-off and (2) curtailment gain or loss. Our policy is that a curtailment event
represents one for which we expect a 10% (or greater) reduction in future years of service or an elimination of the accrual of defined benefits for some or all of the future services of 10% (or greater) of the plan's participants.
Contributions made to pension and other post-retirement benefit plans are presented as cash used in operations within the consolidated statements of cash flows.
We present the service cost component of net periodic benefit cost in the cost of revenue, research and development ("R&D"), and SG&A expense line items, and we present the non–service components of net periodic benefit cost in other, net.
Refer to Note 13, "Pension and Other Post-Retirement Benefits," for additional information related to our pension and other post-retirement benefit plans.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. The cost of raw materials, work-in-process, and finished goods is determined based on a first-in, first-out basis and includes material, labor, and applicable manufacturing overhead. We conduct quarterly inventory reviews for salability and obsolescence, and inventory considered unlikely to be sold is adjusted to net realizable value.
Refer to Note 9, "Inventories," for additional information related to our inventory balances.
Property, Plant and Equipment and Other Capitalized Costs
PP&E is stated at cost, and in the case of plant and equipment, is depreciated on a straight-line basis over its estimated economic useful life. The depreciable lives of plant and equipment are as follows:
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Buildings and improvements
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2 – 40 years
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Machinery and equipment
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2 – 15 years
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Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated economic useful lives of the improvements. Amortization of leasehold improvements is included in depreciation expense.
Assets held under finance leases are recognized at the lower of the present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Depreciation expense associated with finance leases is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease, unless ownership is transferred by the end of the lease or there is a bargain purchase option, in which case the asset is depreciated, normally on a straight-line basis, over the useful life that would be assigned if the asset were owned.
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major improvements that increase asset values and extend useful lives are capitalized.
Refer to Note 10, "Property, Plant and Equipment," for additional information related to our PP&E balances.
Foreign Currency
We derive a significant portion of our net revenue from markets outside of the U.S. For financial reporting purposes, the functional currency of all of our subsidiaries is the USD because of the significant influence of the USD on our operations. In certain instances, we enter into transactions that are denominated in a currency other than the USD. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in USD using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than USD are adjusted to USD using the exchange rate at the balance sheet date, with gains or losses recognized in other, net in the consolidated statements of operations.
Cash and Cash Equivalents
Cash comprises cash on hand. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of change in value, and have original maturities of three months or less.
Recently issued accounting standards adopted in the current period:
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. FASB ASC Topic 842, Leases, requires lessees to classify most leases as either finance or operating leases and to recognize a lease liability and right-of-use asset. For finance leases, the statements of operations include separate recognition of interest on the lease liability and amortization of the right-of-use asset. For operating leases, the statements of operations include a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis. We adopted the provisions of FASB ASU No. 2016-02 on January 1, 2019 using the modified retrospective transition method. Refer to Note 21, "Leases" for additional information related to this adoption.
No other recently issued accounting standards adopted in the current period had a material impact on our consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
There are no recently issued accounting standards to be adopted in future periods that are expected to have a material impact on our consolidated financial position or results of operations.
3. Revenue Recognition
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. The vast majority of our revenue is derived from the sale of tangible products whereby control of the product transfers to the customer at a point in time, we recognize revenue at a point in time, and the underlying contract is a PO that establishes a firm purchase commitment for a short period of time. Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials. We do not offer separately priced extended warranty or product maintenance contracts. Refer to Note 2, "Significant Accounting Policies" for additional information.
We have elected to apply certain practical expedients that allow for more limited disclosures than those that would otherwise be required by FASB ASC Topic 606, including (1) the disclosure of transaction price allocated to the remaining unsatisfied performance obligations at the end of the period and (2) an explanation of when we expect to recognize the related revenue.
We believe that our end markets are the categories that best depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents net revenue disaggregated by segment and end market for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Sensing
|
|
Sensing Solutions
|
|
Total
|
|
For the year ended December 31,
|
|
For the year ended December 31,
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
$
|
1,986,537
|
|
|
$
|
2,076,834
|
|
|
$
|
1,989,152
|
|
|
$
|
42,446
|
|
|
$
|
49,961
|
|
|
$
|
50,463
|
|
|
$
|
2,028,983
|
|
|
$
|
2,126,795
|
|
|
$
|
2,039,615
|
|
HVOR (1)
|
559,479
|
|
|
550,817
|
|
|
471,448
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
559,479
|
|
|
550,817
|
|
|
471,448
|
|
Industrial
|
—
|
|
|
—
|
|
|
—
|
|
|
351,942
|
|
|
336,617
|
|
|
312,137
|
|
|
351,942
|
|
|
336,617
|
|
|
312,137
|
|
Appliance and HVAC (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
201,745
|
|
|
208,482
|
|
|
209,958
|
|
|
201,745
|
|
|
208,482
|
|
|
209,958
|
|
Aerospace
|
—
|
|
|
—
|
|
|
—
|
|
|
176,505
|
|
|
164,294
|
|
|
150,782
|
|
|
176,505
|
|
|
164,294
|
|
|
150,782
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
131,977
|
|
|
134,622
|
|
|
122,793
|
|
|
131,977
|
|
|
134,622
|
|
|
122,793
|
|
Net revenue
|
$
|
2,546,016
|
|
|
$
|
2,627,651
|
|
|
$
|
2,460,600
|
|
|
$
|
904,615
|
|
|
$
|
893,976
|
|
|
$
|
846,133
|
|
|
$
|
3,450,631
|
|
|
$
|
3,521,627
|
|
|
$
|
3,306,733
|
|
__________________________________________
|
|
(1)
|
Heavy vehicle and off-road
|
|
|
(2)
|
Heating, ventilation and air conditioning
|
In addition, refer to Note 20, "Segment Reporting," for a presentation of net revenue disaggregated by product category and geographic region.
Contract Assets and Liabilities
Accounts receivable represent our only contract asset. Contract liabilities, whereby we receive payment from customers related to our promise to satisfy performance obligations in the future, are not material.
4. Share-Based Payment Plans
We issue share-based compensation awards under the Sensata Technologies Holding plc First Amended and Restated 2010 Equity Incentive Plan (the "2010 Equity Incentive Plan"). The purpose of the 2010 Equity Incentive Plan is to promote long-term growth and profitability by providing our present and future eligible directors, officers, and employees with incentives to contribute to, and participate in, our success. There are 10.0 million ordinary shares authorized for grants of awards under the 2010 Equity Incentive Plan, of which 2.5 million were available as of December 31, 2019.
Refer to Note 2, "Significant Accounting Policies," for additional information related to our to share-based compensation accounting policies.
Share-Based Compensation Awards
We grant option, restricted stock unit ("RSU"), and performance restricted stock unit ("PRSU") awards under the 2010 Equity Incentive Plan. For option and RSU awards vesting is typically subject only to continued employment and the passage of time. For PRSU awards vesting is also subject to continued employment and the passage of time, however the number of awarded units that ultimately vest also depends on the attainment of certain predefined performance criteria. Throughout this Annual Report on Form 10-K, RSU and PRSU awards are often referred to collectively as "restricted securities."
Options
A summary of stock option activity for the years ended December 31, 2019, 2018, and 2017 is presented in the table below (amounts have been calculated based on unrounded shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options (thousands)
|
|
Weighted-Average
Exercise Price Per Option
|
|
Weighted-Average
Remaining
Contractual Term
(years)
|
|
Aggregate
Intrinsic Value
|
Balance as of December 31, 2016
|
3,546
|
|
|
$
|
35.67
|
|
|
6.3
|
|
$
|
19,844
|
|
Granted
|
387
|
|
|
$
|
43.67
|
|
|
|
|
|
Forfeited or expired
|
(1
|
)
|
|
$
|
32.03
|
|
|
|
|
|
Exercised
|
(326
|
)
|
|
$
|
22.86
|
|
|
|
|
$
|
7,175
|
|
Balance as of December 31, 2017
|
3,606
|
|
|
$
|
37.69
|
|
|
6.0
|
|
$
|
50,130
|
|
Granted
|
307
|
|
|
$
|
51.83
|
|
|
|
|
|
Forfeited or expired
|
(39
|
)
|
|
$
|
45.59
|
|
|
|
|
|
Exercised
|
(172
|
)
|
|
$
|
35.31
|
|
|
|
|
$
|
3,143
|
|
Balance as of December 31, 2018
|
3,702
|
|
|
$
|
38.89
|
|
|
5.3
|
|
$
|
27,846
|
|
Granted
|
382
|
|
|
$
|
46.92
|
|
|
|
|
|
Forfeited or expired
|
(83
|
)
|
|
$
|
48.92
|
|
|
|
|
|
Exercised
|
(537
|
)
|
|
$
|
28.21
|
|
|
|
|
$
|
11,690
|
|
Balance as of December 31, 2019
|
3,464
|
|
|
$
|
41.19
|
|
|
5.0
|
|
$
|
44,696
|
|
Options vested and exercisable as of December 31, 2019
|
2,646
|
|
|
$
|
39.49
|
|
|
4.0
|
|
$
|
38,811
|
|
Vested and expected to vest as of December 31, 2019
|
3,385
|
|
|
$
|
41.05
|
|
|
4.9
|
|
$
|
44,145
|
|
A summary of the status of our unvested options as of December 31, 2019, and of the changes during the year then ended, is presented in the table below (amounts have been calculated based on unrounded shares):
|
|
|
|
|
|
|
|
|
Number of Options (thousands)
|
|
Weighted-Average Grant-Date Fair Value
|
Balance as of December 31, 2018
|
1,077
|
|
|
$
|
13.98
|
|
Granted during the year
|
382
|
|
|
$
|
13.90
|
|
Vested during the year
|
(579
|
)
|
|
$
|
13.41
|
|
Forfeited during the year
|
(62
|
)
|
|
$
|
14.39
|
|
Balance as of December 31, 2019
|
818
|
|
|
$
|
14.33
|
|
The fair value of stock options that vested during the years ended December 31, 2019, 2018, and 2017 was $7.8 million, $5.5 million, and $5.6 million, respectively.
Option awards granted to employees under the 2010 Equity Incentive Plan generally vest 25% per year over four years from the grant date.
We recognize compensation expense for options on a straight-line basis over the requisite service period, which is generally the same as the vesting period. The options generally expire ten years from the date of grant.
For options granted prior to April 2019, except as otherwise provided in specific option award agreements, if a participant ceases to be employed by us, options not yet vested generally expire and are forfeited at the termination date, and options that are fully vested generally expire 60 days after termination of the participant’s employment. Exclusions to the general policy for terminated employees include termination for cause (in which case the options expire on the participant’s termination date) and termination due to death or disability (in which case any unvested options shall immediately vest and expire six months after the participant’s termination date).
For options granted in or after April 2019, the same terms apply, except that fully vested options expire 90 days after termination of the participant's employment for any reason other than termination for cause (in which case the options expire on the participant's termination date), termination due to due to death or disability (in which case the options expire one year after the participant's termination date), and termination for a qualified retirement (in which case options will continue to vest and expire ten years from the grant date).
The weighted-average grant-date fair value per option granted during the years ended December 31, 2019, 2018, and 2017 was $13.90, $15.70, and $14.50, respectively. The fair value of options was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The weighted-average key assumptions used in estimating the grant-date fair value of options for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Expected dividend yield
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected volatility
|
25.00
|
%
|
|
25.00
|
%
|
|
30.00
|
%
|
Risk-free interest rate
|
2.35
|
%
|
|
2.62
|
%
|
|
2.08
|
%
|
Expected term (years)
|
6.0
|
|
|
6.0
|
|
|
6.0
|
|
Fair value per share of underlying ordinary shares
|
$
|
46.92
|
|
|
$
|
51.83
|
|
|
$
|
43.67
|
|
Restricted Securities
We grant RSU awards that cliff vest between one year and three years from the grant date, and we grant PRSU awards that cliff vest three years after the grant date. For PRSU awards, the number of units that ultimately vest depends on the extent to which certain performance criteria are met, as described in the table below. For restricted securities granted in or after April 2019, terms include provisions allowing continued or accelerated vesting for a qualified retirement.
A summary of restricted securities granted in the years ended December 31, 2019, 2018, and 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Range of Units That May Vest (1)
|
|
|
|
|
|
0.0% to 150.0%
|
|
0.0% to 172.5%
|
|
0.0% to 200.0%
|
(Awards in thousands)
|
RSU Awards Granted
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
PRSU Awards Granted
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
PRSU Awards Granted
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
PRSU Awards Granted
|
|
Weighted-Average
Grant-Date
Fair Value
|
2019
|
298
|
|
|
$
|
47.73
|
|
|
76
|
|
|
$
|
46.92
|
|
|
138
|
|
|
$
|
46.92
|
|
|
—
|
|
|
$
|
—
|
|
2018
|
218
|
|
|
$
|
51.05
|
|
|
63
|
|
|
$
|
51.83
|
|
|
118
|
|
|
$
|
51.83
|
|
|
—
|
|
|
$
|
—
|
|
2017
|
182
|
|
|
$
|
43.24
|
|
|
—
|
|
|
$
|
—
|
|
|
183
|
|
|
$
|
43.67
|
|
|
53
|
|
|
$
|
43.33
|
|
__________________________________________
|
|
(1)
|
Represents the percentage range of PRSU award units granted that may vest according to the terms of the awards. The amounts presented within this table do not reflect our current assessment of the probable outcome of vesting based on the achievement or expected achievement of performance conditions.
|
Compensation expense for the year ended December 31, 2019 reflects our estimate of the probable outcome of the performance conditions associated with the PRSU awards granted in fiscal years 2019, 2018, and 2017.
A summary of activity related to outstanding restricted securities for fiscal years 2019, 2018, and 2017 is presented in the table below (amounts have been calculated based on unrounded shares):
|
|
|
|
|
|
|
|
|
Restricted Securities (thousands)
|
|
Weighted-Average
Grant-Date
Fair Value
|
Balance as of December 31, 2016
|
920
|
|
|
$
|
44.35
|
|
Granted
|
418
|
|
|
$
|
43.44
|
|
Forfeited
|
(35
|
)
|
|
$
|
43.94
|
|
Vested
|
(222
|
)
|
|
$
|
42.24
|
|
Balance as of December 31, 2017
|
1,081
|
|
|
$
|
44.43
|
|
Granted
|
399
|
|
|
$
|
51.40
|
|
Forfeited
|
(121
|
)
|
|
$
|
48.28
|
|
Vested
|
(240
|
)
|
|
$
|
53.01
|
|
Balance as of December 31, 2018
|
1,119
|
|
|
$
|
44.66
|
|
Granted (1)
|
555
|
|
|
$
|
46.73
|
|
Forfeited
|
(115
|
)
|
|
$
|
47.07
|
|
Vested
|
(454
|
)
|
|
$
|
39.62
|
|
Balance as of December 31, 2019
|
1,105
|
|
|
$
|
47.51
|
|
__________________________________________
|
|
(1)
|
Includes 43 thousand PRSU awards granted due to greater than 100% vesting.
|
Aggregate intrinsic value information for restricted securities as of December 31, 2019, 2018, and 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
2017
|
Outstanding
|
$
|
59,526
|
|
|
$
|
50,161
|
|
|
$
|
55,271
|
|
Expected to vest
|
$
|
34,717
|
|
|
$
|
44,203
|
|
|
$
|
42,106
|
|
The weighted-average remaining periods over which the restrictions will lapse as of December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
2017
|
Outstanding
|
1.1
|
|
1.2
|
|
1.3
|
Expected to vest
|
1.0
|
|
1.2
|
|
1.4
|
The expected to vest restricted securities are calculated based on the application of a forfeiture rate assumption to all outstanding restricted securities as well as our assessment of the probability of meeting the required performance conditions that pertain to the PRSU awards.
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards, which is recognized within SG&A expense in the consolidated statements of operations, during the identified periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Stock options
|
$
|
6,552
|
|
|
$
|
5,739
|
|
|
$
|
6,046
|
|
Restricted securities
|
12,205
|
|
|
18,086
|
|
|
13,773
|
|
Share-based compensation expense
|
$
|
18,757
|
|
|
$
|
23,825
|
|
|
$
|
19,819
|
|
In fiscal years 2019 and 2018, we recognized $3.2 million and $3.0 million of income tax benefit associated with share-based compensation expense. We recognized no such tax benefit in fiscal year 2017.
The table below presents unrecognized compensation expense at December 31, 2019 for each class of award, and the remaining expected term for this expense to be recognized:
|
|
|
|
|
|
|
|
Unrecognized
Compensation Expense
|
|
Expected
Recognition (years)
|
Options
|
$
|
8,419
|
|
|
1.8
|
Restricted securities
|
14,789
|
|
|
1.5
|
Total unrecognized compensation expense
|
$
|
23,208
|
|
|
|
5. Restructuring and Other Charges, Net
Restructuring and other charges, net for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Severance costs, net (1)
|
|
$
|
29,240
|
|
|
$
|
7,566
|
|
|
$
|
11,125
|
|
Facility and other exit costs (2)
|
|
808
|
|
|
877
|
|
|
7,850
|
|
Gain on sale of Valves Business (3)(5)
|
|
—
|
|
|
(64,423
|
)
|
|
—
|
|
Other (4)(5)
|
|
23,512
|
|
|
8,162
|
|
|
—
|
|
Restructuring and other charges, net
|
|
$
|
53,560
|
|
|
$
|
(47,818
|
)
|
|
$
|
18,975
|
|
__________________________________________
|
|
(1)
|
Severance costs, net for the year ended December 31, 2019 included termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations, approximately $12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in the U.S, and $6.5 million of termination benefits provided under a one-time benefit arrangement related to the shutdown and relocation of an operating site in Germany. Severance costs, net for the year ended December 31, 2018 were primarily related to termination benefits provided in connection with limited workforce reductions of manufacturing, engineering, and administrative positions including the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST").
|
|
|
(2)
|
Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe.
|
|
|
(3)
|
In the year ended December 31, 2018, we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business").
|
|
|
(4)
|
In the year ended December 31, 2019, these amounts included a $17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal Precision, Ltd. ("Metal Seal") litigation and $6.1 million of expense related to the deferred compensation arrangement that we entered into in connection with the acquisition of GIGAVAC, LLC ("GIGAVAC"). Refer to Note 15, "Commitments and Contingencies," for additional information related to the supply agreement termination and litigation with Metal Seal. In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of expense related to the deferred compensation arrangement that we entered into connection with the acquisition of GIGAVAC.
|
|
|
(5)
|
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the acquisition of GIGAVAC and the divestiture of the Valves Business.
|
Changes to our severance liability during the years ended December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
Severance
|
Balance as of December 31, 2017
|
|
$
|
7,583
|
|
Charges, net of reversals
|
|
7,566
|
|
Payments
|
|
(8,341
|
)
|
Foreign currency remeasurement
|
|
(217
|
)
|
Balance as of December 31, 2018
|
|
6,591
|
|
Charges, net of reversals
|
|
29,240
|
|
Payments
|
|
(21,095
|
)
|
Foreign currency remeasurement
|
|
43
|
|
Balance as of December 31, 2019
|
|
$
|
14,779
|
|
The severance liability as of December 31, 2019 and 2018 was entirely recorded in accrued expenses and other current liabilities on our consolidated balance sheets. Refer to Note 12, "Accrued Expenses and Other Current Liabilities."
6. Other, Net
Other, net consisted of the following for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Currency remeasurement (loss)/gain on net monetary assets(1)
|
$
|
(6,802
|
)
|
|
$
|
(18,905
|
)
|
|
$
|
18,041
|
|
Gain/(loss) on foreign currency forward contracts(2)
|
2,225
|
|
|
2,070
|
|
|
(15,618
|
)
|
Gain/(loss) on commodity forward contracts(2)
|
4,888
|
|
|
(8,481
|
)
|
|
9,989
|
|
Loss on debt financing(3)
|
(4,364
|
)
|
|
(2,350
|
)
|
|
(2,670
|
)
|
Net periodic benefit cost, excluding service cost
|
(3,186
|
)
|
|
(3,585
|
)
|
|
(3,402
|
)
|
Other
|
(669
|
)
|
|
886
|
|
|
75
|
|
Other, net
|
$
|
(7,908
|
)
|
|
$
|
(30,365
|
)
|
|
$
|
6,415
|
|
__________________________________________
|
|
(1)
|
Relates to the remeasurement of non-USD denominated net monetary assets and liabilities into USD. Refer to the Foreign Currency section of Note 2, "Significant Accounting Policies," for additional information.
|
|
|
(2)
|
Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to gains and losses on our commodity and foreign currency exchange forward contracts.
|
|
|
(3)
|
Refer to Note 14, "Debt," for additional information related to our debt financing transactions.
|
7. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 28, 2018, the Company reincorporated its headquarters in the U.K. We file income tax returns in the countries in which our subsidiaries are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.S., and the U.K. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
The Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. In fiscal year 2017 we recognized a tax benefit related to the enactment-date effects of the Tax
Reform Act resulting from the adjustment of our deferred tax assets and liabilities, net of the impact from recognizing the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recognizing a tax benefit of $73.7 million, which was principally associated with indefinite-lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Tax Reform Act and refinement of our calculations during the year ended December 31, 2018, we determined that no further adjustment was necessary.
Global intangible low-taxed income
The Tax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
Total
|
2019
|
$
|
13,183
|
|
|
$
|
377,240
|
|
|
$
|
390,423
|
|
2018
|
$
|
68,027
|
|
|
$
|
458,348
|
|
|
$
|
526,375
|
|
2017
|
$
|
(11,425
|
)
|
|
$
|
413,866
|
|
|
$
|
402,441
|
|
Provision for/(benefit from) income taxes
Provision for/(benefit from) income taxes for the years ended December 31, 2019, 2018, and 2017 was categorized by jurisdiction as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
Non-U.S.
|
|
U.S. State
|
|
Total
|
2019
|
|
|
|
|
|
|
|
Current
|
$
|
5,643
|
|
|
$
|
73,947
|
|
|
$
|
496
|
|
|
$
|
80,086
|
|
Deferred
|
9,687
|
|
|
17,339
|
|
|
597
|
|
|
27,623
|
|
Total
|
$
|
15,330
|
|
|
$
|
91,286
|
|
|
$
|
1,093
|
|
|
$
|
107,709
|
|
2018
|
|
|
|
|
|
|
|
Current
|
$
|
5,700
|
|
|
$
|
64,666
|
|
|
$
|
1,082
|
|
|
$
|
71,448
|
|
Deferred
|
(109,663
|
)
|
|
(18,770
|
)
|
|
(15,635
|
)
|
|
(144,068
|
)
|
Total
|
$
|
(103,963
|
)
|
|
$
|
45,896
|
|
|
$
|
(14,553
|
)
|
|
$
|
(72,620
|
)
|
2017
|
|
|
|
|
|
|
|
Current
|
$
|
—
|
|
|
$
|
50,601
|
|
|
$
|
240
|
|
|
$
|
50,841
|
|
Deferred
|
(56,956
|
)
|
|
(1,104
|
)
|
|
1,303
|
|
|
(56,757
|
)
|
Total
|
$
|
(56,956
|
)
|
|
$
|
49,497
|
|
|
$
|
1,543
|
|
|
$
|
(5,916
|
)
|
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Tax computed at statutory rate of 21% in 2019 and 2018, and 35% in 2017
|
$
|
81,989
|
|
|
$
|
110,539
|
|
|
$
|
140,854
|
|
Reserve for tax exposure
|
20,079
|
|
|
10,775
|
|
|
38,013
|
|
Valuation allowances
|
19,640
|
|
|
(123,426
|
)
|
|
(3,368
|
)
|
Foreign tax rate differential
|
(19,107
|
)
|
|
(41,200
|
)
|
|
(111,990
|
)
|
Withholding taxes not creditable
|
9,509
|
|
|
8,734
|
|
|
3,896
|
|
Research and development incentives
|
(8,410
|
)
|
|
(19,475
|
)
|
|
(5,922
|
)
|
Change in tax laws or rates
|
5,121
|
|
|
(22,264
|
)
|
|
3,912
|
|
U.S. state taxes, net of federal benefit
|
863
|
|
|
(11,499
|
)
|
|
1,087
|
|
Unrealized foreign currency exchange losses, net
|
(43
|
)
|
|
11,346
|
|
|
830
|
|
U.S. Tax Reform Act impact
|
—
|
|
|
—
|
|
|
(73,668
|
)
|
Other
|
(1,932
|
)
|
|
3,850
|
|
|
440
|
|
Provision for/(benefit from) income taxes
|
$
|
107,709
|
|
|
$
|
(72,620
|
)
|
|
$
|
(5,916
|
)
|
Valuation allowance impact on tax expense
During the year ended December 31, 2018, we released a substantial portion of our valuation allowance against our deferred tax assets in the U.S. We continue to maintain a valuation allowance against certain of our interest, foreign tax, and state tax credit carryforwards. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Act Impact
As a result of the Tax Reform Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recognized $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory tax rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign tax rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates.
Our subsidiary in Changzhou, China is currently eligible for a reduced tax rate of 15%, which is effective through 2021. The impact on current tax expense of the tax holidays and exemptions is included in the foreign tax rate differential line in the reconciliation of the statutory tax rate to effective rate. The remeasurement of the deferred tax assets and liabilities is included in the change in tax laws or rates line.
Research and development incentives
Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In fiscal year 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recognized a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are deducted if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned. In certain jurisdictions we recognize a deferred tax liability on withholding and other taxes on intercompany payments including dividends.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Net operating loss, interest expense, and other carryforwards
|
$
|
283,094
|
|
|
$
|
305,277
|
|
Prepaid and accrued expenses
|
67,143
|
|
|
72,093
|
|
Intangible assets
|
20,457
|
|
|
27,122
|
|
Inventories and related reserves
|
16,712
|
|
|
14,171
|
|
Property, plant and equipment
|
14,749
|
|
|
14,571
|
|
Share-based compensation
|
10,288
|
|
|
11,332
|
|
Pension liability and other
|
7,158
|
|
|
8,741
|
|
Unrealized exchange loss
|
1,959
|
|
|
4,255
|
|
Total deferred tax assets
|
421,560
|
|
|
457,562
|
|
Valuation allowance
|
(146,775
|
)
|
|
(157,043
|
)
|
Net deferred tax asset
|
274,785
|
|
|
300,519
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets and goodwill
|
(440,009
|
)
|
|
(440,348
|
)
|
Tax on undistributed earnings of subsidiaries
|
(31,636
|
)
|
|
(35,187
|
)
|
Property, plant and equipment
|
(13,762
|
)
|
|
(15,795
|
)
|
Operating lease right of use assets
|
(12,522
|
)
|
|
—
|
|
Unrealized exchange gain
|
(6,739
|
)
|
|
(6,912
|
)
|
Total deferred tax liabilities
|
(504,668
|
)
|
|
(498,242
|
)
|
Net deferred tax liability
|
$
|
(229,883
|
)
|
|
$
|
(197,723
|
)
|
Valuation allowance and net operating loss carryforwards
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we determined that sufficient positive evidence existed as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million were realizable, and therefore, we reduced the valuation allowance accordingly.
One of the provisions of the Tax Reform Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards
may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not reverse unless the related book goodwill or indefinite-lived intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2019 and 2018 decreased $10.3 million and $120.3 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2019 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2019, we have U.S. federal net operating loss carryforwards of $472.0 million and suspended interest expense carryforwards of $511.4 million. Substantially all of our U.S. federal net operating loss carryforwards will expire from 2027 to 2037. Our state net operating loss carryforwards will expire from 2020 to 2037. Our interest carryovers have an unlimited life. We also have non-U.S. net operating loss carryforwards of $221.9 million, which will begin to expire in 2020.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
|
$
|
89,609
|
|
|
$
|
59,884
|
|
|
$
|
45,898
|
|
Increases related to current year tax positions
|
|
17,378
|
|
|
15,676
|
|
|
14,585
|
|
Increases related to prior year tax positions
|
|
15,356
|
|
|
14,609
|
|
|
7,968
|
|
Decreases related to settlements with tax authorities
|
|
(3,515
|
)
|
|
—
|
|
|
(7,211
|
)
|
Decreases related to prior year tax positions
|
|
(1,773
|
)
|
|
(1,144
|
)
|
|
—
|
|
Increases related to business combinations
|
|
450
|
|
|
1,000
|
|
|
—
|
|
Decreases related to lapse of applicable statute of limitations
|
|
(87
|
)
|
|
—
|
|
|
(1,356
|
)
|
Increases/(decreases) related to foreign currency exchange rate
|
|
173
|
|
|
(416
|
)
|
|
—
|
|
Balance at end of year
|
|
$
|
117,591
|
|
|
$
|
89,609
|
|
|
$
|
59,884
|
|
We recognize interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table that follows presents the expense/(income) related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 2019, 2018, and 2017, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
|
Balance Sheets
|
|
For the year ended December 31,
|
|
As of December 31,
|
(In millions)
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
Interest
|
$
|
0.9
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.2
|
|
|
$
|
1.3
|
|
|
$
|
0.4
|
|
Penalties
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
0.3
|
|
|
$
|
0.4
|
|
At December 31, 2019, we anticipate that the liability for unrecognized tax benefits could decrease by up to $6.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2019 that if recognized, would impact our effective tax rate is $67.8 million.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.K., and the U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2019.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2019, 2018, and 2017, the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
Basic weighted-average ordinary shares outstanding
|
160,946
|
|
|
168,570
|
|
|
171,165
|
|
Dilutive effect of stock options
|
600
|
|
|
822
|
|
|
616
|
|
Dilutive effect of unvested restricted securities
|
422
|
|
|
467
|
|
|
388
|
|
Diluted weighted-average ordinary shares outstanding
|
161,968
|
|
|
169,859
|
|
|
172,169
|
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for additional information related to our equity awards. These potential ordinary shares are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
Anti-dilutive shares excluded
|
1,170
|
|
|
930
|
|
|
1,410
|
|
Contingently issuable shares excluded
|
641
|
|
|
687
|
|
|
871
|
|
9. Inventories
The components of inventories as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Finished goods
|
$
|
197,531
|
|
|
$
|
187,095
|
|
Work-in-process
|
104,007
|
|
|
104,405
|
|
Raw materials
|
205,140
|
|
|
200,819
|
|
Inventories
|
$
|
506,678
|
|
|
$
|
492,319
|
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Land
|
|
$
|
17,880
|
|
|
$
|
22,021
|
|
Buildings and improvements
|
|
266,864
|
|
|
259,182
|
|
Machinery and equipment
|
|
1,367,293
|
|
|
1,220,285
|
|
Total property, plant and equipment
|
|
1,652,037
|
|
|
1,501,488
|
|
Accumulated depreciation
|
|
(821,039
|
)
|
|
(714,310
|
)
|
Property, plant and equipment, net
|
|
$
|
830,998
|
|
|
$
|
787,178
|
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under finance leases, totaled $115.9 million, $106.0 million, and $109.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
PP&E, net as of December 31, 2019 and 2018 included the following assets under finance leases:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets under finance leases in property, plant and equipment
|
$
|
49,714
|
|
|
$
|
49,714
|
|
Accumulated depreciation
|
(24,316
|
)
|
|
(22,508
|
)
|
Assets under finance leases in property, plant and equipment, net
|
$
|
25,398
|
|
|
$
|
27,206
|
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to PP&E, net.
11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in net goodwill by segment for the years ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Sensing
|
|
Sensing Solutions
|
|
Total
|
Balance as of December 31, 2017
|
$
|
2,148,135
|
|
|
$
|
857,329
|
|
|
$
|
3,005,464
|
|
Divestiture of Valves Business
|
(38,800
|
)
|
|
—
|
|
|
(38,800
|
)
|
Acquisition of GIGAVAC
|
46,298
|
|
|
68,340
|
|
|
114,638
|
|
Balance as of December 31, 2018
|
2,155,633
|
|
|
925,669
|
|
|
3,081,302
|
|
GIGAVAC purchase accounting adjustment
|
16,387
|
|
|
(16,564
|
)
|
|
(177
|
)
|
Other acquisition
|
—
|
|
|
12,473
|
|
|
12,473
|
|
Balance as of December 31, 2019
|
$
|
2,172,020
|
|
|
$
|
921,578
|
|
|
$
|
3,093,598
|
|
At each of December 31, 2019, 2018, and 2017, accumulated goodwill impairment was $0.0 million related to Performance Sensing and $18.5 million related to Sensing Solutions.
Goodwill attributed to acquisitions reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed, and has been assigned to our segments based on a methodology using anticipated future earnings of the components of business. Goodwill attributed to the divestiture of the Valves Business is based on the relative fair value of the Valves Business to the Performance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to our acquisition and divestiture transactions.
We own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2019 using quantitative analyses. Refer to Note 2, "Significant Accounting Policies," for additional information related to the methodology used. Based on these analyses, we have determined that as of October 1, 2019 the fair value of each of our reporting units and indefinite-lived intangible assets exceeded their carrying values.
The following tables outline the components of definite-lived intangible assets as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Weighted-
Average
Life (years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
|
|
Net
Carrying
Value
|
Completed technologies
|
14
|
|
$
|
770,608
|
|
|
$
|
(529,926
|
)
|
|
$
|
(2,430
|
)
|
|
$
|
238,252
|
|
Customer relationships
|
11
|
|
1,827,998
|
|
|
(1,430,515
|
)
|
|
(12,144
|
)
|
|
385,339
|
|
Non-compete agreements
|
8
|
|
23,400
|
|
|
(23,400
|
)
|
|
—
|
|
|
—
|
|
Tradenames
|
21
|
|
66,654
|
|
|
(16,598
|
)
|
|
—
|
|
|
50,056
|
|
Capitalized software and other(1)
|
7
|
|
67,784
|
|
|
(38,997
|
)
|
|
—
|
|
|
28,787
|
|
Total
|
12
|
|
$
|
2,756,444
|
|
|
$
|
(2,039,436
|
)
|
|
$
|
(14,574
|
)
|
|
$
|
702,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
Weighted-
Average
Life (years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
|
|
Net
Carrying
Value
|
Completed technologies
|
14
|
|
$
|
759,008
|
|
|
$
|
(475,295
|
)
|
|
$
|
(2,430
|
)
|
|
$
|
281,283
|
|
Customer relationships
|
11
|
|
1,825,698
|
|
|
(1,352,189
|
)
|
|
(12,144
|
)
|
|
461,365
|
|
Non-compete agreements
|
8
|
|
23,400
|
|
|
(23,400
|
)
|
|
—
|
|
|
—
|
|
Tradenames
|
21
|
|
66,154
|
|
|
(13,468
|
)
|
|
—
|
|
|
52,686
|
|
Capitalized software and other(1)
|
7
|
|
65,896
|
|
|
(32,509
|
)
|
|
—
|
|
|
33,387
|
|
Total
|
12
|
|
$
|
2,740,156
|
|
|
$
|
(1,896,861
|
)
|
|
$
|
(14,574
|
)
|
|
$
|
828,721
|
|
__________________________________________
|
|
(1)
|
During the years ended December 31, 2019 and 2018, we wrote-off approximately $0.3 million and $0.2 million, respectively, of fully-amortized capitalized software that was not in use.
|
Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the definite-lived intangible assets recognized as a result of the acquisition of GIGAVAC.
The following table outlines amortization of definite-lived intangible assets for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Acquisition-related definite-lived intangible assets
|
$
|
136,087
|
|
|
$
|
132,235
|
|
|
$
|
153,729
|
|
Capitalized software
|
6,799
|
|
|
7,091
|
|
|
7,321
|
|
Amortization of definite-lived intangible assets
|
$
|
142,886
|
|
|
$
|
139,326
|
|
|
$
|
161,050
|
|
The table below presents estimated amortization of definite-lived intangible assets for each of the next five years:
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
$
|
127,787
|
|
2021
|
$
|
111,177
|
|
2022
|
$
|
97,620
|
|
2023
|
$
|
83,802
|
|
2024
|
$
|
68,818
|
|
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Accrued compensation and benefits
|
$
|
52,394
|
|
|
$
|
68,936
|
|
Accrued interest
|
42,803
|
|
|
40,550
|
|
Accrued severance
|
14,779
|
|
|
6,591
|
|
Current portion of operating lease liabilities
|
11,543
|
|
|
—
|
|
Current portion of pension and post-retirement benefit obligations
|
3,220
|
|
|
3,176
|
|
Foreign currency and commodity forward contracts
|
1,925
|
|
|
7,710
|
|
Other accrued expenses and current liabilities
|
88,962
|
|
|
91,167
|
|
Accrued expenses and other current liabilities
|
$
|
215,626
|
|
|
$
|
218,130
|
|
13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2019, we contributed $3.3 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2020.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
We have one defined contribution plan for U.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the defined contribution plan was $5.5 million, $5.7 million, and $5.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2019, we did not and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2019 and 2018 did not include an assumption for a Federal subsidy.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the non-U.S. defined benefit plans during 2020.
Impact on Financial Statements
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
Service cost
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
2,836
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
3,122
|
|
|
$
|
—
|
|
|
$
|
74
|
|
|
$
|
2,582
|
|
Interest cost
|
1,483
|
|
|
203
|
|
|
1,344
|
|
|
1,473
|
|
|
272
|
|
|
1,310
|
|
|
1,604
|
|
|
325
|
|
|
1,053
|
|
Expected return on plan assets
|
(1,694
|
)
|
|
—
|
|
|
(702
|
)
|
|
(1,710
|
)
|
|
—
|
|
|
(929
|
)
|
|
(2,151
|
)
|
|
—
|
|
|
(905
|
)
|
Amortization of net loss
|
946
|
|
|
—
|
|
|
766
|
|
|
1,080
|
|
|
5
|
|
|
407
|
|
|
1,149
|
|
|
54
|
|
|
287
|
|
Amortization of net prior service (credit)/cost
|
—
|
|
|
(1,306
|
)
|
|
9
|
|
|
—
|
|
|
(1,728
|
)
|
|
6
|
|
|
—
|
|
|
(1,335
|
)
|
|
(4
|
)
|
Loss on settlement
|
565
|
|
|
—
|
|
|
1,572
|
|
|
1,047
|
|
|
—
|
|
|
1,461
|
|
|
3,225
|
|
|
—
|
|
|
100
|
|
Loss on curtailment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
891
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost/(credit)
|
$
|
1,300
|
|
|
$
|
(1,096
|
)
|
|
$
|
5,825
|
|
|
$
|
1,890
|
|
|
$
|
(1,401
|
)
|
|
$
|
6,268
|
|
|
$
|
3,827
|
|
|
$
|
(882
|
)
|
|
$
|
3,113
|
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
45,169
|
|
|
$
|
6,017
|
|
|
$
|
65,691
|
|
|
$
|
48,615
|
|
|
$
|
9,692
|
|
|
$
|
67,413
|
|
Service cost
|
—
|
|
|
7
|
|
|
2,836
|
|
|
—
|
|
|
50
|
|
|
3,122
|
|
Interest cost
|
1,483
|
|
|
203
|
|
|
1,344
|
|
|
1,473
|
|
|
272
|
|
|
1,310
|
|
Plan participants’ contributions
|
—
|
|
|
474
|
|
|
31
|
|
|
—
|
|
|
475
|
|
|
60
|
|
Plan amendment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,243
|
)
|
|
—
|
|
Actuarial loss/(gain)
|
1,711
|
|
|
(92
|
)
|
|
9,344
|
|
|
(519
|
)
|
|
(124
|
)
|
|
2,777
|
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
931
|
|
Benefits paid
|
(2,815
|
)
|
|
(1,021
|
)
|
|
(5,235
|
)
|
|
(4,400
|
)
|
|
(1,105
|
)
|
|
(6,262
|
)
|
Divestiture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,310
|
)
|
Foreign currency remeasurement
|
—
|
|
|
—
|
|
|
161
|
|
|
—
|
|
|
—
|
|
|
(350
|
)
|
Ending balance
|
$
|
45,548
|
|
|
$
|
5,588
|
|
|
$
|
74,172
|
|
|
$
|
45,169
|
|
|
$
|
6,017
|
|
|
$
|
65,691
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
39,875
|
|
|
$
|
—
|
|
|
$
|
39,868
|
|
|
$
|
41,101
|
|
|
$
|
—
|
|
|
$
|
41,222
|
|
Actual return on plan assets
|
4,484
|
|
|
—
|
|
|
4,125
|
|
|
(811
|
)
|
|
—
|
|
|
(1,308
|
)
|
Employer contributions
|
3,326
|
|
|
547
|
|
|
4,889
|
|
|
3,985
|
|
|
630
|
|
|
5,992
|
|
Plan participants’ contributions
|
—
|
|
|
474
|
|
|
31
|
|
|
—
|
|
|
475
|
|
|
60
|
|
Benefits paid
|
(2,815
|
)
|
|
(1,021
|
)
|
|
(5,235
|
)
|
|
(4,400
|
)
|
|
(1,105
|
)
|
|
(6,262
|
)
|
Foreign currency remeasurement
|
—
|
|
|
—
|
|
|
228
|
|
|
—
|
|
|
—
|
|
|
164
|
|
Ending balance
|
$
|
44,870
|
|
|
$
|
—
|
|
|
$
|
43,906
|
|
|
$
|
39,875
|
|
|
$
|
—
|
|
|
$
|
39,868
|
|
Funded status at end of year
|
$
|
(678
|
)
|
|
$
|
(5,588
|
)
|
|
$
|
(30,266
|
)
|
|
$
|
(5,294
|
)
|
|
$
|
(6,017
|
)
|
|
$
|
(25,823
|
)
|
Accumulated benefit obligation at end of year
|
$
|
45,548
|
|
|
NA
|
|
|
$
|
65,633
|
|
|
$
|
45,169
|
|
|
NA
|
|
|
$
|
59,948
|
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
Noncurrent assets
|
$
|
2,788
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(952
|
)
|
|
(717
|
)
|
|
(1,551
|
)
|
|
(595
|
)
|
|
(1,116
|
)
|
|
(1,465
|
)
|
Noncurrent liabilities
|
(2,514
|
)
|
|
(4,871
|
)
|
|
(28,715
|
)
|
|
(4,699
|
)
|
|
(4,901
|
)
|
|
(24,358
|
)
|
Funded status
|
$
|
(678
|
)
|
|
$
|
(5,588
|
)
|
|
$
|
(30,266
|
)
|
|
$
|
(5,294
|
)
|
|
$
|
(6,017
|
)
|
|
$
|
(25,823
|
)
|
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
Net prior service cost/(credit)
|
$
|
—
|
|
|
$
|
306
|
|
|
$
|
(16
|
)
|
|
$
|
—
|
|
|
$
|
(692
|
)
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
823
|
|
|
$
|
(220
|
)
|
Net loss
|
$
|
18,780
|
|
|
$
|
809
|
|
|
$
|
17,151
|
|
|
$
|
20,759
|
|
|
$
|
880
|
|
|
$
|
14,425
|
|
|
$
|
20,884
|
|
|
$
|
1,009
|
|
|
$
|
12,489
|
|
We expect to amortize a loss of $1.4 million from accumulated other comprehensive loss to net periodic benefit cost during fiscal year 2020.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
Projected benefit obligation
|
$
|
3,465
|
|
|
$
|
74,020
|
|
|
$
|
45,169
|
|
|
$
|
65,691
|
|
Accumulated benefit obligation
|
$
|
3,465
|
|
|
$
|
65,633
|
|
|
$
|
45,169
|
|
|
$
|
59,948
|
|
Plan assets
|
$
|
—
|
|
|
$
|
43,754
|
|
|
$
|
39,875
|
|
|
$
|
39,868
|
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
Projected benefit obligation
|
$
|
9,053
|
|
|
$
|
74,020
|
|
|
$
|
51,186
|
|
|
$
|
65,691
|
|
Plan assets
|
$
|
—
|
|
|
$
|
43,754
|
|
|
$
|
39,875
|
|
|
$
|
39,868
|
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
Net (gain)/loss
|
$
|
(824
|
)
|
|
$
|
(71
|
)
|
|
$
|
4,365
|
|
|
$
|
2,002
|
|
|
$
|
(124
|
)
|
|
$
|
3,669
|
|
|
$
|
2,768
|
|
|
$
|
(197
|
)
|
|
$
|
1,618
|
|
Amortization of net loss
|
(723
|
)
|
|
—
|
|
|
(539
|
)
|
|
(1,080
|
)
|
|
(5
|
)
|
|
(298
|
)
|
|
(1,149
|
)
|
|
(54
|
)
|
|
(130
|
)
|
Amortization of net prior service credit/(cost)
|
—
|
|
|
998
|
|
|
(6
|
)
|
|
—
|
|
|
1,728
|
|
|
(4
|
)
|
|
—
|
|
|
1,335
|
|
|
3
|
|
Divestiture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(228
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,243
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Settlement effect
|
(432
|
)
|
|
—
|
|
|
(1,100
|
)
|
|
(1,047
|
)
|
|
—
|
|
|
(1,023
|
)
|
|
(3,225
|
)
|
|
—
|
|
|
(69
|
)
|
Curtailment effect
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total in other comprehensive (income)/loss
|
$
|
(1,979
|
)
|
|
$
|
927
|
|
|
$
|
2,720
|
|
|
$
|
(125
|
)
|
|
$
|
(1,644
|
)
|
|
$
|
2,146
|
|
|
$
|
(1,606
|
)
|
|
$
|
1,084
|
|
|
$
|
1,417
|
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Retiree Healthcare
|
U.S. assumed discount rate
|
2.60
|
%
|
|
2.80
|
%
|
|
3.79
|
%
|
|
3.90
|
%
|
Non-U.S. assumed discount rate
|
1.90
|
%
|
|
NA
|
|
|
2.17
|
%
|
|
NA
|
|
Non-U.S. average long-term pay progression
|
2.87
|
%
|
|
NA
|
|
|
2.66
|
%
|
|
NA
|
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Retiree Healthcare
|
|
Defined Benefit
|
|
Retiree Healthcare
|
U.S. assumed discount rate
|
3.79
|
%
|
|
3.90
|
%
|
|
3.45
|
%
|
|
3.10
|
%
|
|
3.20
|
%
|
|
3.30
|
%
|
Non-U.S. assumed discount rate
|
5.76
|
%
|
|
NA
|
|
|
5.87
|
%
|
|
NA
|
|
|
3.90
|
%
|
|
NA
|
|
U.S. average long-term rate of return on plan assets
|
4.53
|
%
|
|
NA
|
|
|
4.57
|
%
|
|
NA
|
|
|
4.50
|
%
|
|
NA
|
|
Non-U.S. average long-term rate of return on plan assets
|
1.77
|
%
|
|
NA
|
|
|
2.26
|
%
|
|
NA
|
|
|
2.29
|
%
|
|
NA
|
|
Non-U.S. average long-term pay progression
|
4.43
|
%
|
|
NA
|
|
|
4.82
|
%
|
|
NA
|
|
|
3.75
|
%
|
|
NA
|
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
2017
|
Assumed healthcare trend rate for next year:
|
|
|
|
|
|
Attributed to less than age 65
|
6.30
|
%
|
|
6.60
|
%
|
|
6.90
|
%
|
Attributed to age 65 or greater
|
6.70
|
%
|
|
7.10
|
%
|
|
7.50
|
%
|
Ultimate trend rate
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
Year in which ultimate trend rate is reached:
|
|
|
|
|
|
Attributed to less than age 65
|
2038
|
|
|
2038
|
|
|
2038
|
|
Attributed to age 65 or greater
|
2038
|
|
|
2038
|
|
|
2038
|
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2019 would have the following effect:
|
|
|
|
|
|
|
|
|
|
One Percentage Point:
|
|
Increase
|
|
Decrease
|
Effect on total service and interest cost components
|
$
|
8
|
|
|
$
|
(7
|
)
|
Effect on post-retirement benefit obligations
|
$
|
314
|
|
|
$
|
(287
|
)
|
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Benefit Payments
|
For the year ended December 31,
|
U.S. Defined Benefit
|
|
U.S. Retiree Healthcare
|
|
Non-U.S. Defined Benefit
|
2020
|
$
|
8,985
|
|
|
$
|
717
|
|
|
$
|
3,346
|
|
2021
|
$
|
7,868
|
|
|
$
|
653
|
|
|
$
|
3,299
|
|
2022
|
$
|
6,116
|
|
|
$
|
653
|
|
|
$
|
3,896
|
|
2023
|
$
|
5,219
|
|
|
$
|
534
|
|
|
$
|
3,499
|
|
2024
|
$
|
3,804
|
|
|
$
|
516
|
|
|
$
|
3,456
|
|
2025 - 2029
|
$
|
12,201
|
|
|
$
|
1,838
|
|
|
$
|
21,775
|
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for additional information related to the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser reviewed market opportunities using historical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2019:
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation as of December 31, 2019
|
U.S. large cap equity
|
7%
|
|
5%
|
U.S. small / mid cap equity
|
2%
|
|
1%
|
Globally managed volatility fund
|
3%
|
|
2%
|
International (non-U.S.) equity
|
4%
|
|
3%
|
Fixed income (U.S. investment grade) (1)
|
68%
|
|
42%
|
High-yield fixed income
|
2%
|
|
1%
|
International (non-U.S.) fixed income
|
1%
|
|
1%
|
Money market funds (1)
|
13%
|
|
45%
|
__________________________________________
|
|
(1)
|
As of December 31, 2019, our holdings in the Money market funds exceed the target allocation as we prepare to make payments resulting from the voluntary retirement incentive program. Refer to Note 5, "Restructuring and Other Charges, Net" for additional information about the voluntary retirement incentive program.
|
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
U.S. large cap equity
|
$
|
2,221
|
|
|
$
|
2,960
|
|
U.S. small / mid cap equity
|
637
|
|
|
833
|
|
Global managed volatility fund
|
849
|
|
|
1,214
|
|
International (non-U.S.) equity
|
1,195
|
|
|
1,493
|
|
Total equity mutual funds
|
4,902
|
|
|
6,500
|
|
Fixed income (U.S. investment grade)
|
18,830
|
|
|
26,884
|
|
High-yield fixed income
|
561
|
|
|
792
|
|
International (non-U.S.) fixed income
|
264
|
|
|
402
|
|
Total fixed income mutual funds
|
19,655
|
|
|
28,078
|
|
Money market funds
|
20,313
|
|
|
5,297
|
|
Total plan assets
|
$
|
44,870
|
|
|
$
|
39,875
|
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy. Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2019 and 2018.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% fixed income securities and 50% equity securities, cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2019:
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation as of December 31, 2019
|
Fixed income securities, cash, and cash equivalents
|
10%-90%
|
|
65%
|
Equity securities
|
10%-90%
|
|
35%
|
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
U.S. equity
|
$
|
2,413
|
|
|
$
|
2,212
|
|
International (non-U.S.) equity
|
6,343
|
|
|
5,158
|
|
Total equity securities
|
8,756
|
|
|
7,370
|
|
U.S. fixed income
|
3,835
|
|
|
3,345
|
|
International (non-U.S.) fixed income
|
9,716
|
|
|
8,811
|
|
Total fixed income securities
|
13,551
|
|
|
12,156
|
|
Cash and cash equivalents
|
9,726
|
|
|
10,339
|
|
Total plan assets
|
$
|
32,033
|
|
|
$
|
29,865
|
|
All fair value measures presented above are categorized in Level 1 of the fair value hierarchy, with the exception of U.S. fixed income securities of $0.3 million and $0.3 million as of December 31, 2019 and 2018, respectively, which are categorized as Level 2. The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the plan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the plan assets measured at fair value as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Insurance policies
|
$
|
10,472
|
|
|
$
|
8,897
|
|
All fair value measures presented above are categorized in Level 3 of the fair value hierarchy. The following table presents a rollforward of these assets for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
Insurance Policies
|
Balance as of December 31, 2017
|
$
|
9,059
|
|
Actual return on plan assets still held at reporting date
|
177
|
|
Purchases, sales, settlements, and exchange rate changes
|
(339
|
)
|
Balance as of December 31, 2018
|
8,897
|
|
Actual return on plan assets still held at reporting date
|
1,821
|
|
Purchases, sales, settlements, and exchange rate changes
|
(246
|
)
|
Balance as of December 31, 2019
|
$
|
10,472
|
|
The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are insurance policies. As of December 31, 2019 and 2018 the fair values of these assets were $1.3 million and $1.1 million, respectively. These fair value measurements are categorized in Level 3 of the fair value hierarchy.
14. Debt
Our long-term debt and finance lease and other financing obligations as of December 31, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Maturity Date
|
2019
|
|
2018
|
Term Loan
|
September 20, 2026
|
$
|
460,725
|
|
|
$
|
917,794
|
|
4.875% Senior Notes
|
October 15, 2023
|
500,000
|
|
|
500,000
|
|
5.625% Senior Notes
|
November 1, 2024
|
400,000
|
|
|
400,000
|
|
5.0% Senior Notes
|
October 1, 2025
|
700,000
|
|
|
700,000
|
|
6.25% Senior Notes
|
February 15, 2026
|
750,000
|
|
|
750,000
|
|
4.375% Senior Notes
|
February 15, 2030
|
450,000
|
|
|
—
|
|
Less: debt discount
|
|
(11,758
|
)
|
|
(15,169
|
)
|
Less: deferred financing costs
|
|
(24,452
|
)
|
|
(23,159
|
)
|
Less: current portion
|
|
(4,630
|
)
|
|
(9,704
|
)
|
Long-term debt, net
|
|
$
|
3,219,885
|
|
|
$
|
3,219,762
|
|
Finance lease and other financing obligations
|
|
$
|
31,098
|
|
|
$
|
35,475
|
|
Less: current portion
|
|
(2,288
|
)
|
|
(4,857
|
)
|
Finance lease and other financing obligations, less current portion
|
|
$
|
28,810
|
|
|
$
|
30,618
|
|
Secured Credit Facility
The credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of a term loan facility (the "Term Loan"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
On March 27, 2019 certain indirect, wholly-owned subsidiaries of Sensata plc, including Sensata Technologies B.V. ("STBV"), entered into the ninth amendment (the "Ninth Amendment") of the Credit Agreement. Among other changes to the Credit Agreement, the Ninth Amendment (i) extended the maturity date of the Revolving Credit Facility to March 27, 2024; (ii) added pounds sterling as an available currency for revolving credit loans and letters of credit under the Revolving Credit Facility; (iii) lowered the interest rate margins related to the Revolving Credit Facility (depending on our senior secured net leverage ratio); (iv) lowered our letter of credit fees (depending on our senior secured net leverage ratio); (v) reduced our revolving credit commitment fees (depending on our senior secured net leverage ratio); and (vi) modified the senior secured net leverage ratio financial covenant to increase the Revolving Credit Facility utilization threshold above which such financial covenant is tested from 10% to 20% and eliminated the requirement that such ratio be tested (regardless of utilization) for purposes of satisfying the conditions to any borrowing or other utilization under the Revolving Credit Facility.
On June 13, 2019, our subsidiaries that were at the time borrowers under the Credit Agreement entered into an amendment to the Credit Agreement with the administrative agent to correct certain technical and immaterial errors in the Credit Agreement.
On September 20, 2019 certain of our subsidiaries, including STBV and its indirect, wholly-owned subsidiary, Sensata Technologies Inc. ("STI"), entered into the tenth amendment of the Credit Agreement (the "Tenth Amendment"). Under the terms of the Tenth Amendment, among other changes to the Credit Agreement, (i) the final maturity date of the Term Loan was extended to September 20, 2026; (ii) STI became the sole borrower under the Credit Agreement and assumed substantially all of the obligations of STBV and Sensata Technologies Finance Company, LLC ("STFC") thereunder; (iii) STBV became a guarantor of STI’s obligations under the Credit Agreement, and STFC ceased to be a guarantor with respect to the Credit Agreement; (iv) certain subsidiaries of STBV that previously guaranteed STBV’s and/or STFC’s obligations under the Credit Agreement (the “Released Guarantors”) were released from their guarantees under the Credit Agreement, subject to the satisfaction of certain tests (the “Guarantees Release”); (v) the permission to incur incremental additional indebtedness under the Credit Agreement was increased; and (vi) certain of the operational and restrictive covenants and other terms and conditions of the Senior Secured Credit Facilities to which STBV and its restricted subsidiaries are subject were modified to provide us with increased flexibility and permissions thereunder (including permission, subject to no default or event of default, to make restricted payments (including dividends) in an amount equal to $50.0 million annually, which can be increased to an unlimited amount subject to compliance with a specified senior secured net leverage ratio).
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries and secured by substantially all present and future property and assets of STBV and its guarantor subsidiaries.
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 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 the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2019.
Term Loan
The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the Term Loan upon completion of the Tenth Amendment, with the balance due at maturity.
In accordance with the terms of the Credit Agreement, the Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The interest rate margins for the Term Loan are fixed at, and as of December 31, 2019 were, 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2019, we maintained the Term Loan as a Eurodollar Rate loan, which accrued interest at 3.59%.
Revolving Credit Facility
In accordance with the terms of the Credit Agreement, borrowings under the Revolving Credit Facility may, at our option, be maintained from time to time as Base Rate loans, Eurodollar Rate loans, or EURIBOR loans (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The interest rate margins and letter of credit fees under the Revolving Credit Facility are as follows (each depending on our senior secured net leverage ratio): (i) the interest rate margin for Eurodollar Rate loans ranges from 1.00% to 1.50%; (ii) the interest rate margin for Base Rate loans ranges from 0.00% to 0.50%; and (iii) the letter of credit fees range from 0.875% to 1.375%.
We are required to pay to our revolving credit lenders, on a quarterly basis, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.125% to 0.25%, depending on our senior secured net leverage ratios.
As of December 31, 2019, there was $416.1 million available under the Revolving Credit Facility, net of $3.9 million of obligations in respect of outstanding letters of credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2019, no amounts had been drawn against these outstanding letters of credit.
Availability under the Revolving Credit Facility may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general corporate purposes.
Senior Notes
We have various tranches of senior notes outstanding. These consisted of $500.0 million in aggregate principal amount of 4.875% senior notes due 2023 issued by STBV (the "4.875% Senior Notes"), $400.0 million in aggregate principal amount of 5.625% senior notes due 2024 issued by STBV (the "5.625% Senior Notes"), $700.0 million in aggregate principal amount of 5.0% senior notes due 2025 issued by STBV (the "5.0% Senior Notes"), $750.0 million in aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes") issued by our subsidiary Sensata Technologies UK Financing Co. plc ("STUK"), and $450.0 million in aggregate principal amount of 4.375% senior notes due 2030 issued by STI (the "4.375% Senior Notes" and together with the other senior notes referenced above, the "Senior Notes").
4.375% Senior Notes
On September 20, 2019, concurrently with the entry into the Tenth Amendment, we completed the issuance and sale of the 4.375% Senior Notes. The proceeds of the issuance of the 4.375% Senior Notes were used to partially repay the Term Loan. The 4.375% Senior Notes were issued under an indenture dated as of September 20, 2019 among STI, as issuer, The Bank of New York Mellon, as trustee, and our guarantor subsidiaries named therein. The 4.375% Senior Notes were offered at par, and interest is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2020.
4.875% Senior Notes
In April 2013 we completed the issuance and sale of the 4.875% Senior Notes, which were issued under an indenture dated as of April 17, 2013 among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 4.875% Senior Notes were offered at par. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014 we completed the issuance and sale of the 5.625% Senior Notes, which were issued under an indenture dated as of October 14, 2014, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 5.625% Senior Notes were offered at par. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015 we completed the issuance and sale of the 5.0% Senior Notes, which were issued under an indenture dated as of March 26, 2015, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 5.0% Senior Notes were offered at par. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were issued under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes Indenture" and, together with the indentures under which the other Senior Notes were issued, the "Senior Notes Indentures"), among STUK, as issuer, The Bank of New York Mellon, as trustee, and the guarantors named therein. The 6.25% Senior Notes were offered at par. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Redemption
Except as described below with respect to the 4.375% Senior Notes and the 6.25% Senior Notes, at any time, and from time to time, we may optionally redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption, plus a "make-whole premium" set forth in the relevant Senior Notes Indenture. The "make-whole" premium will not be payable with respect to any such redemption of the 4.375% Senior Notes on or after November 15, 2029. The "make-whole" premium will not be payable with respect to any such redemption of the 6.25% Senior Notes on or after February 15, 2021; on or after such date, we may optionally redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus accrued and unpaid interest to the date of redemption, if any) during the applicable period:
|
|
|
|
Period beginning February 15,
|
Price
|
|
2021
|
103.125
|
%
|
2022
|
102.083
|
%
|
2023
|
101.042
|
%
|
2024 and thereafter
|
100.000
|
%
|
Upon the occurrence of certain specific kinds of changes in control, the issuers of the Senior Notes will be required to offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
If changes in certain tax laws or treaties, or any change in the official application, administration, or interpretation thereof, of any relevant taxing jurisdiction become effective that would impose withholding taxes or other deductions on the payments of any of the Senior Notes or the guarantees thereof, we may, at our option, redeem the relevant Senior Notes in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, premium, if any, and all additional amounts (as described in the relevant Senior Notes Indenture), if any, then due and which will become due on the date of redemption.
Guarantees
The obligations of the issuers of the Senior Notes are guaranteed by STBV and all of its subsidiaries (excluding the company that is the issuer of the relevant Senior Notes) that guarantee the obligations of STI under Credit Agreement (after giving effect to the Guarantees Release pursuant to the Tenth Amendment). The Released Guarantors are not guarantors of the 4.375% Senior Notes, and upon consummation of the Tenth Amendment, the guarantees of the Released Guarantors with respect to the other Senior Notes were released.
Events of Default
The Senior Notes Indentures provide for events of default that include, among others, nonpayment of principal or interest when due, breach of covenants or other provisions in the relevant Senior Notes Indenture, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and the cessation of the full force and effect of the guarantees of significant subsidiaries. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes issued under the relevant Senior Notes Indenture may declare the principal of, and accrued but unpaid interest on, all of the relevant Senior Notes to be due and payable immediately. All provisions regarding remedies in an event of default are subject to the relevant Senior Notes Indenture.
Restrictions and Covenants
As of December 31, 2019, STBV and all of its subsidiaries were subject to certain restrictive covenants under the Credit Agreement and the Senior Notes Indentures. Under certain circumstances, STBV is permitted to designate a subsidiary as "unrestricted" for purposes of the Credit Agreement, in which case the restrictive covenants thereunder will not apply to that subsidiary; the Senior Notes Indentures do not contain such a permission. STBV has not designated any subsidiaries as unrestricted. The net assets of STBV subject to these restrictions totaled $2,555.0 million at December 31, 2019.
Credit Agreement
The Credit Agreement contains non-financial restrictive covenants (subject to important exceptions and qualifications set forth in the Credit Agreement) that limit our ability to, among other things:
|
|
•
|
incur indebtedness or liens, prepay subordinated debt, or amend the terms of our subordinated debt;
|
|
|
•
|
make loans and investments (including acquisitions) or sell assets;
|
|
|
•
|
change our business or accounting policies, merge, consolidate, dissolve or liquidate, or amend the terms of our organizational documents;
|
|
|
•
|
enter into affiliate transactions;
|
|
|
•
|
pay dividends and make other restricted payments; or
|
|
|
•
|
enter into certain burdensome contractual obligations.
|
In addition, under the Credit Agreement, STBV and its subsidiaries are required to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 20% of the commitments under the Revolving Credit Facility.
Senior Notes Indentures
The Senior Notes Indentures contain restrictive covenants (subject to important exceptions and qualifications set forth in the Senior Notes Indentures) that limit the ability of STBV and its subsidiaries to, among other things:
|
|
•
|
incur or guarantee indebtedness without guaranteeing the Senior Notes;
|
|
|
•
|
engage in sale and leaseback transactions; or
|
|
|
•
|
effect mergers or consolidations, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of the assets of STBV and its subsidiaries.
|
Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by Standard & Poor's Rating Services or Moody's Investors Service, Inc. and provided no default has occurred and is continuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer assigned an investment grade rating by either rating agency or an event of default has occurred and is continuing at such time. As of December 31, 2019, none of the Senior Notes were assigned an investment grade rating by either rating agency.
Restrictions on Payment of Dividends
STBV's subsidiaries are generally not restricted in their ability to pay dividends or otherwise distribute funds to STBV, except for restrictions imposed under applicable corporate law.
STBV, however, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to Sensata plc, under the Credit Agreement. Specifically, the Credit Agreement prohibits STBV from paying dividends or making distributions to its parent companies except for purposes that include, but are not limited to, the following:
|
|
•
|
customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurred in the ordinary course of business, provided that such amounts, in the aggregate, do not exceed $20.0 million in any fiscal year;
|
|
|
•
|
dividends and other distributions in an aggregate amount not to exceed $200.0 million plus certain amounts, including the retained portion of excess cash flow, but only insofar as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis;
|
|
|
•
|
so long as no default or an event of default exists, dividends and other distributions in an aggregate amount not to exceed $50.0 million in any calendar year (with the unused portion in any year being carried over to succeeding years) plus unlimited additional amounts but only insofar as the senior secured net leverage ratio is less than 2.5:1.0 calculated on a pro forma basis; and
|
|
|
•
|
other dividends and other distributions in an aggregate amount not to exceed $150.0 million, so long as no default or event of default exists.
|
The Senior Notes Indentures generally allow STBV to pay dividends and make other distributions to its parent companies.
Compliance with Financial and Non-Financial Covenants
We were in compliance with all of the financial and non–financial covenants and default provisions associated with our indebtedness as of December 31, 2019 and for the fiscal year then ended.
Accounting for Debt Financing Transactions
During the year ended December 31, 2019, in connection with the entry into the Ninth Amendment, we incurred $2.4 million of creditor fees and related third-party costs, which were recorded as an adjustment to the carrying amount of long-term debt.
During the year ended December 31, 2019, in connection with of the issuance of the 4.375% Senior Notes, the entry into the Tenth Amendment, and the subsequent partial repayment of the Term Loan, we recognized a loss of $4.4 million, presented in the other, net line of our consolidated statement of operations, as well as $5.0 million of deferred financing costs, which are presented as a reduction of long-term debt on our consolidated balance sheets.
During the year ended December 31, 2018, in connection with the Merger, we paid $5.8 million of creditor fees and related third-party costs in order to obtain consents to the transaction from our existing lenders. As a result, and based on application of the provisions in FASB ASC Subtopic 470-50, we recognized a $3.5 million adjustment to the carrying value of long-term debt, net and a $2.4 million loss in other, net.
During the year ended December 31, 2017, we recognized a $0.2 million adjustment to the carrying value of long-term debt, net and a $2.7 million loss in other, net, based on application of the provisions in FASB ASC Subtopic 470-50.
Refer to Note 2, "Significant Accounting Policies," for additional information related to our accounting policies regarding debt financing transactions.
Finance Lease and Other Financing Obligations
Refer to Note 21, "Leases," for additional information related to our finance leases.
Debt Maturities
The aggregate principal amount of each tranche of our Senior Notes is due in full at its maturity date. The Term Loan must be repaid in full on or prior to its final maturity date. Loans made pursuant to the Revolving Credit Facility must be repaid in full at its maturity date and can be repaid prior to then at par. All letters of credit issued thereunder will terminate at the final maturity of the Revolving Credit Facility unless cash collateralized prior to such time.
The following table presents the remaining mandatory principal repayments of long-term debt, excluding finance lease payments, other financing obligations, and discretionary repurchases of debt, in each of the years ended December 31, 2020 through 2024 and thereafter.
|
|
|
|
|
For the year ended December 31,
|
Aggregate Maturities
|
2020
|
$
|
4,630
|
|
2021
|
4,630
|
|
2022
|
4,630
|
|
2023
|
504,630
|
|
2024
|
404,630
|
|
Thereafter
|
2,337,575
|
|
Total long-term debt principal payments
|
$
|
3,260,725
|
|
15. Commitments and Contingencies
Non-cancelable purchase agreements exist with various suppliers, primarily for services such as information technology support. The terms of these agreements are fixed and determinable. As of December 31, 2019, we had the following purchase commitments:
|
|
|
|
|
For the year ending December 31,
|
|
2020
|
$
|
26,588
|
|
2021
|
19,726
|
|
2022
|
9,721
|
|
2023
|
5,060
|
|
2024
|
132
|
|
2025 and thereafter
|
272
|
|
Total purchase commitments
|
$
|
61,499
|
|
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the divestiture of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Indemnifications Provided As Part of Contracts and Agreements
We are party to the following types of agreements pursuant to which we may be obligated to indemnify a third party with respect to certain matters.
Officers and Directors: Our articles of association provide for indemnification of directors and officers by us to the fullest extent permitted by applicable law, as it now exists or may hereinafter be amended (but, in the case of an amendment, only to the extent such amendment permits broader indemnification rights than permitted prior thereto), against any and all liabilities, including all expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, provided he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful or outside of his or her mandate. The articles do not provide a limit to the maximum future payments, if any, under the indemnification. No indemnification is provided for in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for gross negligence or willful misconduct in the performance of his or her duty on our behalf.
In addition, we have a liability insurance policy that insures directors and officers against the cost of defense, settlement, or payment of claims and judgments under some circumstances. Certain indemnification payments may not be covered under our directors’ and officers’ insurance coverage.
Initial Purchasers of Senior Notes: Pursuant to the terms of the purchase agreements entered into in connection with our private placement senior note offerings, we are obligated to indemnify the initial purchasers of the Senior Notes against certain liabilities caused by any untrue statement or alleged untrue statement of a material fact in various documents relied upon by such initial purchasers, or to contribute to payments the initial purchasers may be required to make in respect thereof. The purchase agreements do not provide a limit to the maximum future payments, if any, under these indemnifications.
Intellectual Property and Product Liability Indemnification: We routinely sell products with a limited intellectual property and product liability indemnification included in the terms of sale. Historically, we have had only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities resulting from these indemnifications cannot reasonably be estimated or accrued.
Product Warranty Liabilities
Refer to Revenue Recognition in Note 2, "Significant Accounting Policies," for additional information related to the warranties we provide to customers.
In the event a warranty claim based on defective materials exists, we may be able to recover some of the cost of the claim from the vendor from whom the materials were purchased. Our ability to recover some of the costs will depend on the terms and conditions to which we agreed when the materials were purchased. When a warranty claim is made, the only collateral available to us is the return of the inventory from the customer making the warranty claim. Historically, when customers make a warranty claim, we either replace the product or provide the customer with a credit. We generally do not rework the returned product.
Our policy is to accrue for warranty claims when a loss is both probable and estimable. This is accomplished by accruing for estimated returns and estimated costs to replace the product at the time the related revenue is recognized. Liabilities for warranty claims have historically not been material. In some instances, customers may make claims for costs they incurred or other damages related to a claim.
Environmental Remediation Liabilities
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines, civil or criminal sanctions, or third-party property damage or personal injury claims, in the event of violations or liabilities under these laws and regulations, or non-compliance with the environmental permits required at our facilities. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations.
Legal Proceedings and Claims
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, and/or cash flows.
We account for litigation and claims losses in accordance with FASB ASC Topic 450, Contingencies. Under FASB ASC Topic 450, loss contingency provisions are recognized for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined each accounting period as
additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the minimum amount, which could be an immaterial amount, is recognized. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resulting in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.
Pending Litigation and Claims:
We are a defendant in a lawsuit, Wasica Finance Gmbh et al v. Schrader International Inc. et al, Case No. 13-1353-CPS, U.S.D.C., Delaware, in which the claimant alleges infringement of their patent (US 5,602,524) in connection with our tire pressure monitoring system ("TPMS") products. The patent in question has expired, and as a result, the claimant is seeking damages for past alleged infringement with interest and costs. Should the claimant prevail, these amounts could be material. We have denied liability and have been defending the litigation. Trial is currently expected in February 2020. We believe that a loss related to this matter is probable, but do not believe such loss will be material.
We were a defendant in a lawsuit, Metal Seal Precision, Ltd. v. Sensata Technologies Inc., Case No. 2017-0518-BCSI, MA Superior Court (Suffolk County), in which the claimant, a supplier of certain metal parts used in the manufacture of our products, alleged breach of contract, breach of covenant of good faith and fair dealing, and anticipatory repudiation. The dispute arose out of an agreement under which Metal Seal alleged that we did not meet certain purchase requirements, resulting in damages and lost profits. On November 26, 2019, the parties agreed to settle this lawsuit and terminate the underlying supply agreement through an asset purchase agreement (the “MS Purchase Agreement”), whereby Sensata would purchase certain equipment and assets from Metal Seal for $28.0 million (the “Purchase Price”). The parties executed and closed the MS Purchase Agreement on December 13, 2019, and the lawsuit was formally dismissed by the Superior Court on December 24, 2019. We intend to use the assets and equipment purchased in this transaction to expand our internal production of certain parts previously supplied by Metal Seal. As a result of the termination of the underlying supply agreement and execution of the MS Purchase Agreement, we recorded $10.2 million of the Purchase Price as a capital expense for the acquired assets, with the remaining $17.8 million, representing the amount by which the Purchase Price exceeded the fair value of the purchased equipment and assets, recorded in restructuring and other charges, net.
16. Shareholders’ Equity
Treasury Shares
Ordinary shares repurchased by us are recognized, measured at cost, and presented as treasury shares on our consolidated balance sheets, resulting in a reduction of shareholders' equity.
In connection with the Merger, all then outstanding treasury shares were canceled in accordance with U.K. law. Accordingly, we (1) derecognized the total purchase price of these treasury shares, (2) recognized a reduction to ordinary shares at an amount equal to the total par value of such shares, and (3) recognized a reduction to retained earnings at an amount equal to the excess of the total repurchase price over the total par value of the then outstanding treasury shares, or $286.1 million.
From time to time, our Board of Directors has authorized various share repurchase programs. Under these programs, we may repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our various share repurchase programs may be modified or terminated by our Board of Directors at any time.
During the year ended December 31, 2018, we repurchased ordinary shares under a $400.0 million share repurchase program authorized by our Board of Directors in May 2018. During the year ended December 31, 2019, we repurchased ordinary shares under a $250.0 million share repurchase program authorized by our Board of Directors in October 2018 (the "October 2018 Program") and a $500.0 million share repurchase program authorized by our Board of Directors in July 2019 (the "July 2019 Program"). The October 2018 Program was terminated upon commencement of the July 2019 Program.
As a result of certain aspects of U.K. law, we discontinued the practice of reissuing treasury shares as part of our share-based compensation programs upon completion of the Merger. The number of treasury shares reissued prior to completion of the Merger was not material.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
Defined Benefit and Retiree Healthcare Plans
|
|
Accumulated Other Comprehensive Loss
|
Balance as of December 31, 2016
|
$
|
23
|
|
|
$
|
(34,090
|
)
|
|
$
|
(34,067
|
)
|
Pre-tax current period change
|
(37,603
|
)
|
|
(1,445
|
)
|
|
(39,048
|
)
|
Tax effect
|
9,401
|
|
|
550
|
|
|
9,951
|
|
Balance as of December 31, 2017
|
(28,179
|
)
|
|
(34,985
|
)
|
|
(63,164
|
)
|
Pre-tax current period change
|
49,817
|
|
|
(1,183
|
)
|
|
48,634
|
|
Tax effect
|
(12,454
|
)
|
|
806
|
|
|
(11,648
|
)
|
Balance as of December 31, 2018
|
9,184
|
|
|
(35,362
|
)
|
|
(26,178
|
)
|
Pre-tax current period change
|
9,816
|
|
|
(2,198
|
)
|
|
7,618
|
|
Tax effect
|
(2,454
|
)
|
|
530
|
|
|
(1,924
|
)
|
Balance as of December 31, 2019
|
16,546
|
|
|
(37,030
|
)
|
|
(20,484
|
)
|
The details of the components of other comprehensive income/(loss), net of tax, for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Cash Flow Hedges
|
|
Defined Benefit and Retiree Healthcare Plans
|
|
Total
|
|
Cash Flow Hedges
|
|
Defined Benefit and Retiree Healthcare Plans
|
|
Total
|
|
Cash Flow Hedges
|
|
Defined Benefit and Retiree Healthcare Plans
|
|
Total
|
Other comprehensive income/(loss) before reclassifications
|
|
$
|
28,795
|
|
|
$
|
(3,470
|
)
|
|
$
|
25,325
|
|
|
$
|
26,859
|
|
|
$
|
(2,120
|
)
|
|
$
|
24,739
|
|
|
$
|
(39,387
|
)
|
|
$
|
(4,184
|
)
|
|
$
|
(43,571
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
(21,433
|
)
|
|
1,802
|
|
|
(19,631
|
)
|
|
10,504
|
|
|
1,743
|
|
|
12,247
|
|
|
11,185
|
|
|
3,289
|
|
|
14,474
|
|
Other comprehensive income/(loss)
|
|
$
|
7,362
|
|
|
$
|
(1,668
|
)
|
|
$
|
5,694
|
|
|
$
|
37,363
|
|
|
$
|
(377
|
)
|
|
$
|
36,986
|
|
|
$
|
(28,202
|
)
|
|
$
|
(895
|
)
|
|
$
|
(29,097
|
)
|
The details of the (gain)/loss reclassified from accumulated other comprehensive loss for the years ended December 31, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss Reclassified from Accumulated Other Comprehensive Loss
|
|
|
|
|
For the year ended December 31,
|
|
Affected Line in Consolidated Statements of Operations
|
|
|
2019
|
|
2018
|
|
2017
|
|
Derivative instruments designated and qualifying as cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(26,180
|
)
|
|
$
|
18,072
|
|
|
$
|
916
|
|
|
Net revenue (1)
|
Foreign currency forward contracts
|
|
(2,397
|
)
|
|
(5,442
|
)
|
|
13,997
|
|
|
Cost of revenue (1)
|
Foreign currency forward contracts
|
|
—
|
|
|
1,376
|
|
|
—
|
|
|
Other, net (1)
|
Total, before taxes
|
|
(28,577
|
)
|
|
14,006
|
|
|
14,913
|
|
|
Income before taxes
|
Income tax effect
|
|
7,144
|
|
|
(3,502
|
)
|
|
(3,728
|
)
|
|
Provision for/(benefit from) income taxes
|
Total, net of taxes
|
|
$
|
(21,433
|
)
|
|
$
|
10,504
|
|
|
$
|
11,185
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
Defined benefit and retiree healthcare plans
|
|
$
|
2,552
|
|
|
$
|
1,993
|
|
|
$
|
3,476
|
|
|
Other, net (2)
|
Defined benefit and retiree healthcare plans
|
|
—
|
|
|
228
|
|
|
—
|
|
|
Restructuring and other charges, net (3)
|
Total, before taxes
|
|
2,552
|
|
|
2,221
|
|
|
3,476
|
|
|
Income before taxes
|
Income tax effect
|
|
(750
|
)
|
|
(478
|
)
|
|
(187
|
)
|
|
Provision for/(benefit from) income taxes
|
Total, net of taxes
|
|
$
|
1,802
|
|
|
$
|
1,743
|
|
|
$
|
3,289
|
|
|
Net income
|
__________________________________________
|
|
(1)
|
Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to amounts to be reclassified from accumulated other comprehensive loss in future periods.
|
|
|
(2)
|
Refer to Note 13, "Pension and Other Post-Retirement Benefits," for additional information related to net periodic benefit cost.
|
|
|
(3)
|
Amount represents an equity component of the Valves Business, which was sold in fiscal year 2018. Refer to Note 5, "Restructuring and Other Charges, Net," and Note 17, "Acquisitions and Divestitures," for additional information related to the divestiture of the Valves Business.
|
17. Acquisitions and Divestitures
Other acquisition
On September 13, 2019 we completed one acquisition for approximately $30.8 million, net of cash acquired and subject to customary post-closing adjustments. This business is being integrated into our Sensing Solutions segment. The majority of the purchase price allocation, which is preliminary as of December 31, 2019, was to completed technologies, customer relationships, and goodwill. We are in the process of completing our assessment of the fair values of assets acquired and liabilities assumed.
GIGAVAC merger
On September 24, 2018, we entered into an agreement and plan of merger with GIGAVAC, whereby GIGAVAC would merge with one of our wholly-owned subsidiaries, thereby becoming a wholly-owned subsidiary of Sensata. On October 31, 2018, we completed the acquisition of GIGAVAC for cash consideration of approximately $231.1 million, net of cash received. In connection with the acquisition, an additional $12.0 million related to compensation arrangements entered into with certain GIGAVAC employees and shareholders will be paid on or before the second anniversary of the transaction.
Based in Carpinteria, California, GIGAVAC has more than 270 employees and is a leading producer of high voltage contactors and fuses that are mission-critical components for electric vehicles and equipment. It provides solutions that enable electrification in demanding environments within the automotive, battery storage, industrial, and HVOR end markets. We acquired GIGAVAC to increase our content and capabilities for electrification, including products such as cars, delivery trucks, buses, material handling equipment, and charging stations. Portions of GIGAVAC are being integrated into each of our operating segments.
The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed:
|
|
|
|
|
Net working capital, excluding cash
|
$
|
17,132
|
|
Property, plant and equipment
|
4,384
|
|
Goodwill
|
114,461
|
|
Other intangible assets
|
122,742
|
|
Other assets
|
63
|
|
Deferred income tax liabilities
|
(27,072
|
)
|
Other long-term liabilities
|
(602
|
)
|
Fair value of net assets acquired, excluding cash and cash equivalents
|
231,108
|
|
Cash and cash equivalents
|
359
|
|
Fair value of net assets acquired
|
$
|
231,467
|
|
The allocation of purchase price related to this merger was finalized in the fourth quarter of 2019 and was based on management’s judgments after evaluating several factors, including valuation assessments of tangible and intangible assets. The goodwill of $114.5 million represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. The amount of goodwill recognized that is expected to be deductible for tax purposes is not material.
In connection with the allocation of purchase price to the assets acquired and liabilities assumed, we identified certain definite-lived intangible assets. The following table presents the acquired definite-lived intangible assets, their estimated fair values, and weighted average lives:
|
|
|
|
|
|
|
|
Acquisition Date Fair Value
|
|
Weighted-Average Lives (years)
|
Acquired definite-lived intangible assets:
|
|
|
|
Customer relationships
|
$
|
74,500
|
|
|
10
|
Completed technologies
|
31,040
|
|
|
13
|
Tradenames
|
15,400
|
|
|
15
|
Other
|
1,802
|
|
|
6
|
Total definite-lived intangible assets acquired
|
$
|
122,742
|
|
|
12
|
The definite-lived intangible assets were valued using the income approach. We used the relief-from-royalty method to value completed technologies and tradenames, and we used the multi-period excess earnings method to value customer relationships. These valuation methods incorporate assumptions including expected discounted future cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies or the future earnings related to existing customer relationships.
Valves Business Divestiture
In August 2018 we completed the divestiture of the Valves Business to Pacific Industrial Co. Ltd. (together with its affiliates, "Pacific"). Contemporaneous with the closing of the sale, Sensata and Pacific entered into a long-term supply agreement, which imposes an obligation on us to purchase minimum quantities of product from Pacific over a period of nearly five years.
In exchange for selling the Valves Business and entering into the long-term supply agreement, we received cash consideration from Pacific of approximately $165.5 million, net of $11.8 million of cash and cash equivalents sold. We recognized a (pre-tax) gain on sale of $64.4 million, which is presented in restructuring and other charges, net. In addition, we recognized $5.9 million of costs to sell the Valves Business, which are also presented in restructuring and other charges, net. Refer to Note 5, "Restructuring and Other Charges, Net," for additional information.
We determined that the terms of the long-term supply agreement entered into concurrent with the divestiture of the Valves Business were not at market. Accordingly, we recognized a liability of $16.4 million, measured at fair value, which represented the fair value of the off-market component of the supply agreement.
The Valves Business, which we acquired in fiscal year 2014 as part of our acquisition of Schrader, manufactured mechanical valves for pressure applications in tires and fluid controls and assembled tire hardware aftermarket products with
manufacturing locations in the U.S. and Europe. The sale did not include our TPMS business and the Global TPMS Aftermarket business.
The Valves Business was included in our Performance Sensing segment (and reporting unit). We allocated goodwill to the Valves Business based on its fair value relative to the fair value of the retained Performance Sensing reporting unit.
18. Fair Value Measures
Our assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC Topic 820. The levels of the fair value hierarchy are described below:
|
|
•
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date.
|
|
|
•
|
Level 2 inputs utilize inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability, allowing for situations where there is little, if any, market activity for the asset or liability.
|
Measured on a Recurring Basis
The fair values of our assets and liabilities measured at fair value on a recurring basis as of as of December 31, 2019 and 2018 are as shown in the below table. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets measured at fair value:
|
|
|
|
Foreign currency forward contracts
|
$
|
23,561
|
|
|
17,871
|
|
Commodity forward contracts
|
3,623
|
|
|
831
|
|
Total assets measured at fair value
|
$
|
27,184
|
|
|
18,702
|
|
Liabilities measured at fair value:
|
|
|
|
Foreign currency forward contracts
|
$
|
1,959
|
|
|
5,165
|
|
Commodity forward contracts
|
462
|
|
|
4,137
|
|
Total liabilities measured at fair value
|
$
|
2,421
|
|
|
9,302
|
|
Refer to Note 2, "Significant Accounting Policies," for additional information related to the methods used to estimate the fair value of our financial instruments, and refer Note 19, "Derivative Instruments and Hedging Activities," for additional information related to the inputs used to determine these fair value measurements and the nature of the risks that these derivative instruments are intended to mitigate.
Although we have determined that the majority of the inputs used to value our derivative instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own non-performance risk and the respective counterparties' non-performance risk in the fair value measurement. As of December 31, 2019 and 2018, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivatives in their entirety are classified in Level 2 in the fair value hierarchy.
Measured on a Nonrecurring Basis
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2019. Refer to Note 11, "Goodwill and Other Intangible Assets, Net" for additional information. Based on these analyses, we determined that no impairments were required. As of December 31, 2019, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of goodwill or other indefinite-lived intangible assets.
Financial Instruments Not Recorded at Fair Value
The following table presents the carrying values and fair values of financial instruments not recorded at fair value in the consolidated balance sheets as of December 31, 2019 and 2018. All fair value measures presented are categorized within Level 2 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
Carrying Value (1)
|
|
Fair Value
|
|
Carrying Value (1)
|
|
Fair Value
|
Term Loan
|
$
|
460,725
|
|
|
$
|
464,181
|
|
|
$
|
917,794
|
|
|
$
|
904,027
|
|
4.875% Senior Notes
|
$
|
500,000
|
|
|
$
|
532,500
|
|
|
$
|
500,000
|
|
|
$
|
491,875
|
|
5.625% Senior Notes
|
$
|
400,000
|
|
|
$
|
444,000
|
|
|
$
|
400,000
|
|
|
$
|
400,500
|
|
5.0% Senior Notes
|
$
|
700,000
|
|
|
$
|
759,500
|
|
|
$
|
700,000
|
|
|
$
|
660,625
|
|
6.25% Senior Notes
|
$
|
750,000
|
|
|
$
|
808,125
|
|
|
$
|
750,000
|
|
|
$
|
751,875
|
|
4.375% Senior Notes
|
$
|
450,000
|
|
|
$
|
457,875
|
|
|
$
|
—
|
|
|
$
|
—
|
|
__________________________________________
|
|
(1)
|
Excluding any related debt discounts and deferred financing costs.
|
In addition to the above, we hold certain equity investments that do not have readily determinable fair values for which we use the measurement alternative prescribed in FASB ASC Topic 321. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. There were no impairments or changes resulting from observable transactions for any of these investments, and no adjustments have been made to their carrying values.
Refer to the table below for a detail of the carrying values of these investments, each of which are included in other assets.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Quanergy Systems, Inc
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Lithium Balance (1)
|
3,700
|
|
|
—
|
|
Total
|
$
|
53,700
|
|
|
$
|
50,000
|
|
___________________________________
|
|
(1)
|
Our investment in Lithium Balance A/S ("Lithium Balance") was purchased in July 2019.
|
19. Derivative Instruments and Hedging Activities
We utilize derivative instruments that are designated and qualify as hedges of the exposure to variability in expected future cash flows. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on these hedging instruments with the earnings effect of the hedged forecasted transactions. We may enter into other derivative contracts that are intended to economically hedge certain risks, even though we elect not to apply hedge accounting under FASB ASC Topic 815. Derivative financial instruments not designated as hedges are used to manage our exposure to certain risks, not for trading or speculative purposes. Refer to Note 2, "Significant Accounting Policies," for additional information related to the valuation techniques and accounting policies regarding derivative instruments and hedging activities.
Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our functional currency, the USD. We enter into forward contracts for certain of these foreign currencies to manage this exposure. We currently have outstanding foreign currency forward contracts that qualify as cash flow hedges intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also have outstanding foreign currency forward contracts that are intended to preserve the economic value of foreign currency denominated monetary assets and liabilities, which are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815.
For each of the years ended December 31, 2019, 2018, and 2017, amounts excluded from the assessment of effectiveness of our foreign currency forward agreements that are designated as cash flow hedges were not material. As of December 31, 2019, we estimate that $20.1 million of net gains will be reclassified from accumulated other comprehensive loss to earnings during the twelve month period ending December 31, 2020.
As of December 31, 2019, we had the following outstanding foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Notional
(in millions)
|
|
Effective Date(s)
|
|
Maturity Date(s)
|
|
Index (Exchange Rates)
|
|
Weighted- Average Strike Rate
|
|
Hedge Designation (1)
|
22.0 EUR
|
|
December 27, 2019
|
|
January 31, 2020
|
|
Euro ("EUR") to USD
|
|
1.12 USD
|
|
Not designated
|
340.3 EUR
|
|
Various from March 2018 to December 2019
|
|
Various from January 2020 to November 2021
|
|
EUR to USD
|
|
1.17 USD
|
|
Cash flow hedge
|
425.0 CNY
|
|
December 23, 2019
|
|
January 31, 2020
|
|
USD to Chinese Renminbi ("CNY")
|
|
7.04 CNY
|
|
Not designated
|
326.0 CNY
|
|
December 13, 2019
|
|
Various from January to December 2020
|
|
USD to CNY
|
|
7.07 CNY
|
|
Cash flow hedge
|
594.0 JPY
|
|
December 23, 2019
|
|
January 31, 2020
|
|
USD to Japanese Yen ("JPY")
|
|
109.07 JPY
|
|
Not designated
|
24,046.6 KRW
|
|
Various from February 2018 to December 2019
|
|
Various from January 2020 to November 2021
|
|
USD to Korean Won ("KRW")
|
|
1,135.19 KRW
|
|
Cash flow hedge
|
22.0 MYR
|
|
December 23, 2019
|
|
January 31, 2020
|
|
USD to Malaysian Ringgit ("MYR")
|
|
4.12 MYR
|
|
Not designated
|
150.0 MXN
|
|
December 27, 2019
|
|
January 31, 2020
|
|
USD to Mexican Peso ("MXN")
|
|
19.00 MXN
|
|
Not designated
|
2,871.0 MXN
|
|
Various from February 2018 to December 2019
|
|
Various from January 2020 to November 2021
|
|
USD to MXN
|
|
20.81 MXN
|
|
Cash flow hedge
|
50.8 GBP
|
|
Various from March 2018 to December 2019
|
|
Various from January 2020 to November 2021
|
|
British Pound Sterling ("GBP") to USD
|
|
1.31 USD
|
|
Cash flow hedge
|
______________________________________
|
|
(1)
|
Derivative financial instruments not designated as hedges are used to manage our exposure to currency exchange rate risk. They are intended to preserve the economic value, and they are not used for trading or speculative purposes.
|
Hedges of Commodity Risk
We enter into commodity forward contracts in order to limit our exposure to variability in raw material costs that is caused by movements in the price of underlying metals. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. These instruments are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815.
As of December 31, 2019, we had the following outstanding commodity forward contracts:
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
Notional
|
|
Remaining Contracted Periods
|
|
Weighted-Average
Strike Price Per Unit
|
Silver
|
|
855,297 troy oz.
|
|
January 2020-November 2021
|
|
$
|
16.68
|
|
Gold
|
|
7,851 troy oz.
|
|
January 2020-November 2021
|
|
$
|
1,402.78
|
|
Nickel
|
|
225,599 pounds
|
|
January 2020-November 2021
|
|
$
|
6.25
|
|
Aluminum
|
|
3,054,791 pounds
|
|
January 2020-November 2021
|
|
$
|
0.89
|
|
Copper
|
|
2,336,790 pounds
|
|
January 2020-November 2021
|
|
$
|
2.81
|
|
Platinum
|
|
7,340 troy oz.
|
|
January 2020-November 2021
|
|
$
|
905.29
|
|
Palladium
|
|
892 troy oz.
|
|
January 2020-November 2021
|
|
$
|
1,441.81
|
|
Financial Instrument Presentation
The following table presents the fair values of our derivative financial instruments and their classification in the consolidated balance sheets as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet
Location
|
|
As of December 31,
|
|
Balance Sheet
Location
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
20,957
|
|
|
$
|
14,608
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
1,055
|
|
|
$
|
3,615
|
|
Foreign currency forward contracts
|
|
Other assets
|
|
2,530
|
|
|
3,168
|
|
|
Other long-term liabilities
|
|
428
|
|
|
1,134
|
|
Total
|
|
|
|
$
|
23,487
|
|
|
$
|
17,776
|
|
|
|
|
$
|
1,483
|
|
|
$
|
4,749
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
3,069
|
|
|
$
|
524
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
394
|
|
|
$
|
3,679
|
|
Commodity forward contracts
|
|
Other assets
|
|
554
|
|
|
307
|
|
|
Other long-term liabilities
|
|
68
|
|
|
458
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
74
|
|
|
95
|
|
|
Accrued expenses and other current liabilities
|
|
476
|
|
|
416
|
|
Total
|
|
|
|
$
|
3,697
|
|
|
$
|
926
|
|
|
|
|
$
|
938
|
|
|
$
|
4,553
|
|
These fair value measurements are all categorized within Level 2 of the fair value hierarchy. Refer to Note 18, "Fair Value Measures," for additional information related to the categorization of these fair value measurements within the fair value hierarchy.
The following tables present the effect of our derivative financial instruments on the consolidated statements of operations and the consolidated statements of comprehensive income for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
Amount of Deferred Gain Recognized in Other Comprehensive Income
|
|
Location of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income
|
|
Amount of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income
|
|
For the year ended December 31,
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
Foreign currency forward contracts
|
|
$
|
23,881
|
|
|
$
|
30,752
|
|
|
Net revenue
|
|
$
|
26,180
|
|
|
$
|
(18,072
|
)
|
Foreign currency forward contracts
|
|
$
|
14,512
|
|
|
$
|
5,059
|
|
|
Cost of revenue
|
|
$
|
2,397
|
|
|
$
|
5,442
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other, net
|
|
$
|
—
|
|
|
$
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
Amount of Gain/(Loss) Recognized in Net Income
|
|
Location of Gain/(Loss)
|
|
For the year ended December 31,
|
|
|
2019
|
|
2018
|
|
Commodity forward contracts
|
|
$
|
4,888
|
|
|
$
|
(8,481
|
)
|
|
Other, net
|
Foreign currency forward contracts
|
|
$
|
2,225
|
|
|
$
|
3,446
|
|
|
Other, net
|
Credit risk related contingent features
We have agreements with certain of our derivative counterparties that contain a provision whereby if we default on our indebtedness and repayment of the indebtedness has been accelerated by the lender, then we could also be declared in default on our derivative obligations.
As of December 31, 2019, the termination value of outstanding derivatives in a liability position, excluding any adjustment for non-performance risk, was $2.4 million. As of December 31, 2019, we have not posted any cash collateral related to these agreements. If we breach any of the default provisions on any of our indebtedness as described above, we could be required to settle our obligations under the derivative agreements at their termination values.
20. Segment Reporting
We operate in, and report financial information for, the following two reportable segments: Performance Sensing and Sensing Solutions, each of which is also an operating segment. Our operating segments are businesses that we manage as components of an enterprise, for which separate financial information is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance.
An operating segment’s performance is primarily evaluated based on segment operating income, which excludes amortization of intangible assets, restructuring and other charges, net, and certain corporate costs/credits not associated with the operations of the segment, including share-based compensation expense and a portion of depreciation expense associated with assets recorded in connection with acquisitions. Corporate and other costs excluded from an operating segment’s performance are separately stated below and also include costs that are related to functional areas such as finance, information technology, legal, and human resources. We believe that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, and not as a substitute for, or superior to, operating income or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of each of our reportable segments are materially consistent with those described in Note 2, "Significant Accounting Policies."
Performance Sensing primarily serves the automotive and HVOR industries through development and manufacture of sensors, high-voltage contactors, and other products used in mission-critical systems and applications such as those in subsystems of automobiles, on-road trucks, and off-road equipment (e.g., tire pressure monitoring, thermal management, air conditioning, and regenerative braking). Our products are used in subsystems that, among other things, improve operating performance and efficiency as well as address environmental or safety concerns.
Sensing Solutions primarily serves the industrial and aerospace industries through development and manufacture of a broad portfolio of application-specific sensor and control products used in the aerospace market and a diverse range of industrial markets, including the small appliance, HVAC, semiconductor, material handling, factory automation, and water management markets. Some of the products the segment sells include pressure, temperature, and position sensors, motor and compressor protectors, solid state relays, bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, power inverters, and charge controllers.
The following table presents net revenue and segment operating income for the reported segments and other operating results not allocated to the reported segments for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
Performance Sensing
|
$
|
2,546,016
|
|
|
$
|
2,627,651
|
|
|
$
|
2,460,600
|
|
Sensing Solutions
|
904,615
|
|
|
893,976
|
|
|
846,133
|
|
Total net revenue
|
$
|
3,450,631
|
|
|
$
|
3,521,627
|
|
|
$
|
3,306,733
|
|
Segment operating income (as defined above):
|
|
|
|
|
|
Performance Sensing
|
$
|
648,744
|
|
|
$
|
712,682
|
|
|
$
|
664,186
|
|
Sensing Solutions
|
291,261
|
|
|
293,009
|
|
|
277,450
|
|
Total segment operating income
|
940,005
|
|
|
1,005,691
|
|
|
941,636
|
|
Corporate and other
|
(186,674
|
)
|
|
(203,764
|
)
|
|
(205,824
|
)
|
Amortization of intangible assets
|
(142,886
|
)
|
|
(139,326
|
)
|
|
(161,050
|
)
|
Restructuring and other charges, net
|
(53,560
|
)
|
|
47,818
|
|
|
(18,975
|
)
|
Operating income
|
556,885
|
|
|
710,419
|
|
|
555,787
|
|
Interest expense, net
|
(158,554
|
)
|
|
(153,679
|
)
|
|
(159,761
|
)
|
Other, net
|
(7,908
|
)
|
|
(30,365
|
)
|
|
6,415
|
|
Income before taxes
|
$
|
390,423
|
|
|
$
|
526,375
|
|
|
$
|
402,441
|
|
No customer exceeded 10% of our net revenue in any of the periods presented.
The following table presents net revenue by product category for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Sensing
|
|
Sensing Solutions
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
Sensors
|
X
|
|
X
|
|
$
|
2,712,926
|
|
|
$
|
2,755,280
|
|
|
$
|
2,542,863
|
|
Controls
|
|
|
X
|
|
481,720
|
|
|
508,745
|
|
|
497,853
|
|
Other
|
X
|
|
X
|
|
255,985
|
|
|
257,602
|
|
|
266,017
|
|
Net revenue
|
|
|
|
|
$
|
3,450,631
|
|
|
$
|
3,521,627
|
|
|
$
|
3,306,733
|
|
The following table presents depreciation and amortization expense for our reportable segments for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Depreciation and amortization:
|
|
|
|
|
|
Performance Sensing
|
$
|
85,511
|
|
|
$
|
72,067
|
|
|
$
|
68,910
|
|
Sensing Solutions
|
16,678
|
|
|
16,798
|
|
|
17,179
|
|
Corporate and other (1)
|
156,559
|
|
|
156,475
|
|
|
184,282
|
|
Total depreciation and amortization
|
$
|
258,748
|
|
|
$
|
245,340
|
|
|
$
|
270,371
|
|
__________________________________________
|
|
(1)
|
Included within Corporate and other is depreciation and amortization expense associated with the fair value step-up recognized in prior acquisitions and accelerated depreciation recognized in connection with restructuring actions. We do not allocate the additional depreciation and amortization expense associated with the step-up in the fair value of the PP&E and intangible assets associated with these acquisitions or accelerated depreciation related to restructuring actions to our segments. This treatment is consistent with the financial information reviewed by our chief operating decision maker.
|
The following table presents total assets for our reportable segments as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets:
|
|
|
|
Performance Sensing
|
$
|
1,515,396
|
|
|
$
|
1,490,310
|
|
Sensing Solutions
|
479,455
|
|
|
468,131
|
|
Corporate and other(1)
|
4,839,668
|
|
|
4,839,246
|
|
Total assets
|
$
|
6,834,519
|
|
|
$
|
6,797,687
|
|
__________________________________________
|
|
(1)
|
The following is included within corporate and other as of December 31, 2019 and 2018: goodwill of $3,093.6 million and $3,081.3 million, respectively; other intangible assets, net of $770.9 million and $897.2 million, respectively; cash and cash equivalents of $774.1 million and $729.8 million, respectively; and PP&E, net of $41.2 million and $36.5 million, respectively. This treatment is consistent with the financial information reviewed by our chief operating decision maker.
|
The following table presents additions to PP&E and capitalized software for our reportable segments for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Additions to property, plant and equipment and capitalized software:
|
|
|
|
|
|
Performance Sensing
|
$
|
125,412
|
|
|
$
|
130,234
|
|
|
$
|
106,520
|
|
Sensing Solutions
|
19,520
|
|
|
12,492
|
|
|
13,980
|
|
Corporate and other
|
16,327
|
|
|
17,061
|
|
|
24,084
|
|
Total additions to property, plant and equipment and capitalized software
|
$
|
161,259
|
|
|
$
|
159,787
|
|
|
$
|
144,584
|
|
Geographic Area Information
The following tables present net revenue by geographic area and by significant country for the years ended December 31, 2019, 2018, and 2017. In these tables, net revenue is aggregated according to the location of our subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
Americas
|
$
|
1,460,101
|
|
|
$
|
1,480,567
|
|
|
$
|
1,367,113
|
|
Europe
|
969,470
|
|
|
1,028,534
|
|
|
1,036,502
|
|
Asia and rest of world
|
1,021,060
|
|
|
1,012,526
|
|
|
903,118
|
|
Net revenue
|
$
|
3,450,631
|
|
|
$
|
3,521,627
|
|
|
$
|
3,306,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
United States
|
$
|
1,333,532
|
|
|
$
|
1,360,590
|
|
|
$
|
1,276,304
|
|
Netherlands
|
576,804
|
|
|
585,036
|
|
|
571,735
|
|
China
|
575,211
|
|
|
560,938
|
|
|
478,713
|
|
Korea
|
188,226
|
|
|
188,114
|
|
|
184,101
|
|
United Kingdom
|
151,674
|
|
|
163,963
|
|
|
174,376
|
|
All other
|
625,184
|
|
|
662,986
|
|
|
621,504
|
|
Net revenue
|
$
|
3,450,631
|
|
|
$
|
3,521,627
|
|
|
$
|
3,306,733
|
|
The following tables present PP&E, net, by geographic area and by significant country as of December 31, 2019 and 2018. In these tables, PP&E, net is aggregated based on the location of our subsidiaries.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Property, plant and equipment, net:
|
|
|
|
Americas
|
$
|
289,300
|
|
|
$
|
292,625
|
|
Europe
|
192,772
|
|
|
185,011
|
|
Asia and rest of world
|
348,926
|
|
|
309,542
|
|
Property, plant and equipment, net
|
$
|
830,998
|
|
|
$
|
787,178
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Property, plant and equipment, net:
|
|
|
|
United States
|
$
|
97,226
|
|
|
$
|
83,664
|
|
China
|
266,161
|
|
|
239,315
|
|
Mexico
|
191,861
|
|
|
204,552
|
|
Bulgaria
|
138,644
|
|
|
119,477
|
|
United Kingdom
|
40,003
|
|
|
51,404
|
|
Malaysia
|
78,310
|
|
|
65,688
|
|
All other
|
18,793
|
|
|
23,078
|
|
Property, plant and equipment, net
|
$
|
830,998
|
|
|
$
|
787,178
|
|
21. Leases
We occupy leased facilities with initial terms ranging up to 20 years. The lease agreements frequently include options to renew for additional periods or to purchase the leased assets and generally require that we pay taxes, insurance, and maintenance costs. We also lease certain vehicles and equipment. Depending on the specific terms of the leases, our obligations are in two forms: finance leases and operating leases.
As discussed in Note 2, "Significant Accounting Policies," we adopted FASB ASC Topic 842 on January 1, 2019, using the modified retrospective transition method. We have elected to apply the package of practical expedients and the land easement practical expedient. We have not elected to apply the hindsight practical expedient.
As a result of this adoption, we classify most leases as either finance or operating leases and recognize a related lease liability and right-of-use asset on our consolidated balance sheets. Our accounting for finance leases remains unchanged after the adoption of FASB ASC Topic 842. We have elected to account for leases with a term of one year or less (short-term leases) using a method similar to the operating lease model under FASB ASC Topic 840, Leases (i.e. they are not recorded on the consolidated balance sheets).
We elected to apply the transition provisions of this guidance, including its disclosure requirements, at its date of adoption instead of at the beginning of the earliest comparative period presented. Accordingly, we have not restated our consolidated balance sheet as of December 31, 2018. There was no cumulative effect of adoption on our retained earnings or any other components of equity. The below adjustments were made to our consolidated balance sheet on January 1, 2019 to reflect the new guidance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Adjustment
|
|
January 1, 2019
|
Prepaid expenses and other current assets
|
$
|
113,234
|
|
|
$
|
(253
|
)
|
|
$
|
112,981
|
|
Other intangible assets, net
|
$
|
897,191
|
|
|
$
|
(1,510
|
)
|
|
$
|
895,681
|
|
Other assets
|
$
|
86,890
|
|
|
$
|
58,496
|
|
|
$
|
145,386
|
|
Accrued expenses and other current liabilities
|
$
|
218,130
|
|
|
$
|
12,119
|
|
|
$
|
230,249
|
|
Other long-term liabilities
|
$
|
39,277
|
|
|
$
|
44,614
|
|
|
$
|
83,891
|
|
The table below presents the amounts recognized and location of recognition in our consolidated balance sheet as of December 31, 2019 related to our operating and finance leases:
|
|
|
|
|
|
December 31, 2019
|
Operating lease right-of-use assets:
|
|
Other assets
|
$
|
55,333
|
|
Total operating lease right-of-use assets
|
$
|
55,333
|
|
Operating lease liabilities:
|
|
Accrued expenses and other current liabilities
|
$
|
11,543
|
|
Other long-term liabilities
|
45,457
|
|
Total operating lease liabilities
|
$
|
57,000
|
|
Finance lease right-of-use assets:
|
|
Property, plant and equipment, at cost
|
$
|
49,714
|
|
Accumulated depreciation
|
(24,316
|
)
|
Property, plant and equipment, net
|
$
|
25,398
|
|
Finance lease liabilities:
|
|
Current portion of long-term debt, finance lease and other financing obligations
|
$
|
1,974
|
|
Finance lease and other financing obligations, less current portion
|
28,669
|
|
Total finance lease liabilities
|
$
|
30,643
|
|
We have material finance leases for facilities in Baoying, China and Attleboro, Massachusetts. As of December 31, 2019 and 2018, the combined finance lease obligation outstanding for these facilities was $29.4 million and $30.4 million, respectively.
The table below presents the lease liabilities arising from obtaining right-of-use assets in the year ended December 31, 2019:
|
|
|
|
|
|
For the year ended
|
|
December 31, 2019
|
Operating leases
|
$
|
5,423
|
|
Finance leases
|
$
|
—
|
|
For finance leases, the consolidated statements of operations include separate recognition of interest on the lease liability and amortization of the right-of-use asset. For operating leases, the consolidated statements of operations include a single lease
cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis. The table below presents our total lease cost for the year ended December 31, 2019 (short-term lease cost was not material for the year ended December 31, 2019):
|
|
|
|
|
|
For the year ended
|
|
December 31, 2019
|
Operating lease cost
|
$
|
16,124
|
|
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
$
|
1,808
|
|
Interest on lease liabilities
|
2,695
|
|
Total finance lease cost
|
$
|
4,503
|
|
Rent expense for the years ended December 31, 2018 and 2017 (prior to the adoption of FASB ASC Topic 842) was $21.0 million and $19.7 million, respectively.
Cash flows from operating activities include (1) interest on finance lease liabilities and (2) payments arising from operating leases. Cash flows from financing activities include repayments of the principal portion of finance lease liabilities. The table below presents the cash paid related to our operating and finance leases for the year ended December 31, 2019:
|
|
|
|
|
|
For the year ended
|
|
December 31, 2019
|
Operating cash flows from operating leases
|
$
|
15,911
|
|
Operating cash flows from finance leases
|
$
|
2,731
|
|
Financing cash flows from finance leases
|
$
|
1,933
|
|
The table below presents the weighted-average remaining lease term of our operating and finance leases (in years):
|
|
|
|
December 31, 2019
|
Operating leases
|
8.1
|
Finance leases
|
12.6
|
Our lease liabilities are initially measured at the present value of the lease payments not yet paid, discounted using our incremental borrowing rate for a period that is comparable to the remaining lease term. Upon adoption of FASB ASC Topic 842, we initially measured our operating lease liabilities using this methodology, while our accounting for finance leases remained unchanged. We use our incremental borrowing rate, adjusted for collateralization, because the discount rate implicit in our leases are generally not readily determinable. The table below presents our weighted-average discount rate as of December 31, 2019:
|
|
|
|
|
December 31, 2019
|
Operating leases
|
5.6
|
%
|
Finance leases
|
8.6
|
%
|
The table below presents a maturity analysis of the obligations related to our operating lease liabilities and finance lease liabilities in effect as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
Year ending December 31,
|
|
|
|
2020
|
$
|
14,818
|
|
|
$
|
4,528
|
|
2021
|
11,199
|
|
|
4,050
|
|
2022
|
8,946
|
|
|
3,700
|
|
2023
|
7,470
|
|
|
3,759
|
|
2024
|
7,055
|
|
|
3,819
|
|
Thereafter
|
24,467
|
|
|
32,464
|
|
Total undiscounted cash flows related to lease liabilities
|
73,955
|
|
|
52,320
|
|
Less imputed interest
|
(16,955
|
)
|
|
(21,677
|
)
|
Total lease liabilities
|
$
|
57,000
|
|
|
$
|
30,643
|
|
22. Unaudited Quarterly Data
A summary of the unaudited quarterly results of operations for the years ended December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
December 31, 2019
|
|
September 30, 2019
|
|
June 30, 2019
|
|
March 31, 2019
|
Net revenue
|
$
|
846,691
|
|
|
$
|
849,715
|
|
|
$
|
883,726
|
|
|
$
|
870,499
|
|
Gross profit
|
$
|
290,209
|
|
|
$
|
294,805
|
|
|
$
|
308,491
|
|
|
$
|
289,693
|
|
Net income
|
$
|
53,538
|
|
|
$
|
70,675
|
|
|
$
|
73,436
|
|
|
$
|
85,065
|
|
Basic net income per share (1)
|
$
|
0.34
|
|
|
$
|
0.44
|
|
|
$
|
0.45
|
|
|
$
|
0.52
|
|
Diluted net income per share
|
$
|
0.34
|
|
|
$
|
0.44
|
|
|
$
|
0.45
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
Net revenue
|
$
|
847,922
|
|
|
$
|
873,552
|
|
|
$
|
913,860
|
|
|
$
|
886,293
|
|
Gross profit
|
$
|
304,359
|
|
|
$
|
315,218
|
|
|
$
|
331,351
|
|
|
$
|
303,836
|
|
Net income
|
$
|
254,099
|
|
|
$
|
149,118
|
|
|
$
|
105,288
|
|
|
$
|
90,490
|
|
Basic net income per share (1)
|
$
|
1.55
|
|
|
$
|
0.89
|
|
|
$
|
0.61
|
|
|
$
|
0.53
|
|
Diluted net income per share (1)
|
$
|
1.54
|
|
|
$
|
0.88
|
|
|
$
|
0.61
|
|
|
$
|
0.52
|
|
__________________________________________
|
|
(1)
|
The sum of net income per share for the four quarters does not equal the full year net income per share due to rounding.
|
Acquisitions and Divestitures
In August 2018 we completed the divestiture of the Valves Business. As a result, in the third quarter of 2018, we recognized a (pre-tax) gain of $64.4 million and costs of $5.9 million in restructuring and other charges, net in our consolidated statement of operations. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to the divestiture of the Valves Business. Our consolidated results presented above only include the results of this business before August 31, 2018.
In October 2018 we completed the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for additional information related to this merger. Net revenue of GIGAVAC included in our consolidated statement of operations in the fourth quarter of 2018 was $12.6 million. In the fourth quarter of 2018, we recorded related transaction costs of $2.5 million, which are included in SG&A expense in the consolidated statements of operations.
Income taxes
In the fourth quarter of 2018, we recorded an income tax benefit of $122.1 million related to the realization of U.S. deferred tax assets previously offset by a valuation allowance. Refer to Note 7, "Income Taxes," for additional information related to our accounting for income taxes.
Commodity forward contracts
Gains and losses related to our commodity forward contracts, which are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815, are recorded in other, net in the consolidated statements of operations. Refer to Note 19, "Derivative Instruments and Hedging Activities," for additional information related to our commodity forward contracts, and Note 6, "Other, Net," for a detail of other, net for the years ended December 31, 2019 and 2018. The below table presents gains/(losses) recognized related to these contracts in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
2019
|
$
|
2,081
|
|
|
$
|
1,786
|
|
|
$
|
(102
|
)
|
|
$
|
1,123
|
|
2018
|
$
|
373
|
|
|
$
|
(4,233
|
)
|
|
$
|
(1,426
|
)
|
|
$
|
(3,195
|
)
|
Restructuring and other charges
The below table presents charges/(gains) recorded to restructuring and other charges, net in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
2019
|
$
|
25,520
|
|
|
$
|
6,421
|
|
|
$
|
16,310
|
|
|
$
|
5,309
|
|
2018
|
$
|
870
|
|
|
$
|
(52,698
|
)
|
|
$
|
244
|
|
|
$
|
3,766
|
|
In fiscal year 2019, restructuring and other charges net includes a loss related to the termination of a supply agreement in connection with the Metal Seal litigation in the fourth quarter, termination benefits provided under a one-time benefit arrangement related to the shutdown and relocation of an operating site in Germany in the third quarter, and a charge provided under a voluntary retirement incentive program in the second quarter.
In fiscal year 2018, restructuring and other charges, net includes the gain on sale of the Valves Business, net of transaction costs, in the third quarter.
Refer to Note 5, "Restructuring and Other Charges, Net," for additional information related to our restructuring charges.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
SENSATA TECHNOLOGIES HOLDING PLC
(Parent Company Only)
Balance Sheets
(In thousands)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
238
|
|
|
$
|
1,089
|
|
Intercompany notes receivable from subsidiaries
|
43,673
|
|
|
—
|
|
Prepaid expenses and other current assets
|
1,246
|
|
|
528
|
|
Total current assets
|
45,157
|
|
|
1,617
|
|
Deferred income tax assets
|
570
|
|
|
—
|
|
Investment in subsidiaries
|
2,554,954
|
|
|
2,932,218
|
|
Total assets
|
$
|
2,600,681
|
|
|
$
|
2,933,835
|
|
Liabilities and shareholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
572
|
|
|
$
|
58
|
|
Intercompany accounts payable to subsidiaries
|
1,909
|
|
|
12,552
|
|
Intercompany notes payable to subsidiaries
|
23,216
|
|
|
311,009
|
|
Accrued expenses and other current liabilities
|
1,229
|
|
|
1,782
|
|
Total current liabilities
|
26,926
|
|
|
325,401
|
|
Total liabilities
|
26,926
|
|
|
325,401
|
|
Total shareholders’ equity
|
2,573,755
|
|
|
2,608,434
|
|
Total liabilities and shareholders’ equity
|
$
|
2,600,681
|
|
|
$
|
2,933,835
|
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
(Parent Company Only)
Statements of Operations
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating costs and expenses:
|
|
|
|
|
|
Selling, general and administrative
|
8,860
|
|
|
10,153
|
|
|
6,894
|
|
Total operating costs and expenses
|
8,860
|
|
|
10,153
|
|
|
6,894
|
|
Loss from operations
|
(8,860
|
)
|
|
(10,153
|
)
|
|
(6,894
|
)
|
Intercompany dividend income
|
700,000
|
|
|
—
|
|
|
—
|
|
Intercompany interest (expense)/income, net
|
(23,294
|
)
|
|
(4,709
|
)
|
|
8
|
|
Other, net
|
(21
|
)
|
|
474
|
|
|
(169
|
)
|
Income/(loss) before income taxes and equity in net income of subsidiaries
|
667,825
|
|
|
(14,388
|
)
|
|
(7,055
|
)
|
Equity in net (loss)/income of subsidiaries
|
(401,715
|
)
|
|
613,383
|
|
|
415,412
|
|
Benefit from income taxes
|
16,604
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
282,714
|
|
|
$
|
598,995
|
|
|
$
|
408,357
|
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
(Parent Company Only)
Statements of Comprehensive Income
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
$
|
282,714
|
|
|
$
|
598,995
|
|
|
$
|
408,357
|
|
Other comprehensive income/(loss), net of tax:
|
|
|
|
|
|
Defined benefit plan
|
—
|
|
|
535
|
|
|
77
|
|
Subsidiaries' other comprehensive income/(loss)
|
5,694
|
|
|
36,451
|
|
|
(29,174
|
)
|
Other comprehensive income/(loss)
|
5,694
|
|
|
36,986
|
|
|
(29,097
|
)
|
Comprehensive income
|
$
|
288,408
|
|
|
$
|
635,981
|
|
|
$
|
379,260
|
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
(Parent Company Only)
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net cash used in operating activities
|
$
|
(14,989
|
)
|
|
$
|
(14,253
|
)
|
|
$
|
(9,109
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
Return of capital from subsidiaries
|
—
|
|
|
—
|
|
|
5,000
|
|
Dividends received from subsidiary
|
700,000
|
|
|
—
|
|
|
—
|
|
Net cash provided by investing activities
|
700,000
|
|
|
—
|
|
|
5,000
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from exercise of stock options and issuance of ordinary shares
|
15,150
|
|
|
6,093
|
|
|
7,450
|
|
(Payments on)/proceeds from intercompany borrowings
|
(344,018
|
)
|
|
410,190
|
|
|
—
|
|
Payments to repurchase ordinary shares
|
(350,004
|
)
|
|
(399,417
|
)
|
|
—
|
|
Payments of employee restricted stock tax withholdings
|
(6,990
|
)
|
|
(3,674
|
)
|
|
(2,910
|
)
|
Net cash (used in)/provided by financing activities
|
(685,862
|
)
|
|
13,192
|
|
|
4,540
|
|
Net change in cash and cash equivalents
|
(851
|
)
|
|
(1,061
|
)
|
|
431
|
|
Cash and cash equivalents, beginning of year
|
1,089
|
|
|
2,150
|
|
|
1,719
|
|
Cash and cash equivalents, end of year
|
$
|
238
|
|
|
$
|
1,089
|
|
|
$
|
2,150
|
|
The accompanying notes are an integral part of these condensed financial statements.
1. Basis of Presentation and Description of Business
Sensata Technologies Holding plc (Parent Company)—Schedule I—Condensed Financial Information of Sensata Technologies Holding plc ("Sensata plc"), included in this Annual Report on Form 10-K (this "Report"), provides all parent company information that is required to be presented in accordance with the United States (the "U.S.") Securities and Exchange Commission ("SEC") rules and regulations for financial statement schedules. The accompanying condensed financial statements have been prepared in accordance with the reduced disclosure requirements permitted by the SEC. Sensata plc and subsidiaries' audited consolidated financial statements are included elsewhere in this Report.
On September 28, 2017, the Board of Directors of Sensata Technologies Holding N.V. ("Sensata N.V.") unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the surviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and the Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata plc conducts limited separate operations and acts primarily as a holding company. Sensata plc has no direct outstanding debt obligations. However, Sensata Technologies B.V., an indirect, wholly-owned subsidiary of Sensata plc, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to Sensata plc, under its senior secured credit facilities and the indentures governing its senior notes. For a discussion of the debt obligations of the subsidiaries of Sensata plc, refer to Note 14, "Debt," of Sensata plc and subsidiaries' audited consolidated financial statements included elsewhere in this Report (the "Consolidated Financial Statements").
All U.S. dollar amounts presented except per share amounts are stated in thousands, unless otherwise indicated.
2. Commitments and Contingencies
For a discussion of the commitments and contingencies of the subsidiaries of Sensata plc, refer to Note 15, "Commitments and Contingencies," of the Consolidated Financial Statements.