2017 ANNUAL REPORT
Enabling solutions that lead to a cleaner,
more efficient, electrified, and autonomous world.
Sensata is a leading industrial technology company with a range of high-value,
differentiated sensors that allow engineers to redefine what’s possible.
17,000+
unique products
with operations in 12
countries around the world
1.4+ billion
units shipped yearly
under 13 brand names we
own, manufacture, and sell
$3.3 billion
total 2017 revenue
with a diverse mix by
geography, customer,
and end-market
A balanced portfolio
mitigates industry or geographic-specific risk
REGIONS
Americas
42%
KEY MARKETS
Automotive
~60%
Europe
31%
Asia Pacific
27%
HVOR,
Industrial,
Aerospace
~40%
2017 Performance
Sensata delivered strong results in 2017, accelerating its revenue growth,
expanding margins, and delivering double-digit organic earnings per
share growth. The company’s strong free cash flow will provide additional
opportunities for value-creating capital deployment.
Driving above-market
revenue growth
Achieving robust
margin expansion
REVENUE ($ MILLIONS)
ADJUSTED EBIT MARGIN
$3,202
$3,307
21.7%
22.7%
2016
2017
2016
2017
4.0% FY-17
organic growth
100 basis
points
“
We are an industry leader. We have significant global scale,
a highly efficient operation, a strong balance sheet, and great
people. We have industry-leading margins and significant cash
generation – and there’s room for that to expand. ”
– Paul Vasington
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Delivering double-digit
EPS growth
Generating strong
free cash flow
ADJUSTED EARNINGS PER SHARE
FREE CASH FLOW ($ MILLIONS)
$3.19
$2.89
$391
$413
2016
2017
2016
2017
10.4% FY-17
organic growth
5.6% FY-17
reported growth
Letter to our Shareholders
Sensata delivered strong financial performance in 2017. We accelerated our
organic revenue growth rate, generated robust margin expansion, and delivered
attractive double-digit earnings growth. During the past few years, we have
been executing a strategy to extend our growth opportunities beyond the light
passenger vehicle market. The success of this effort is reflected in the strong
content growth of our HVOR and industrial businesses, which generated 7%
organic revenue growth in 2017 and now represent nearly 40% of our portfolio.
We have also made significant progress in positioning the company for future
growth from emerging trends, including clean & efficient, electrification,
autonomy, and smart & connected products.
ATTRACTIVE SECULAR GROWTH OPPORTUNITIES
Sensors are fundamental building blocks that
enable a cleaner and more efficient world.
The growing, secular demand for sensors is
creating an opportunity-rich environment for
Sensata to expand and grow our business. Our
singular focus on mission-critical, complex
sensor applications makes us unique. One
of Sensata’s key competitive advantages is
our ability to develop deep relationships with
our customers and then use our world-class
engineering and technical expertise to develop
customized sensing solutions that truly address
their needs.
Today, we are helping customers face
specific challenges associated with new
energy demands, increased efficiency and
regulation, and consumer demand for
constant connectivity. As we look to the
future, sensors are essential to four key
drivers that are shaping our markets: Clean
& Efficient; Electrification; Autonomy; and
Smart & Connected. Each of these trends will
SENSATA PRESIDENT & CEO
MARTHA SULLIVAN
have a significant effect on our industries and
customer base and we believe we are well-
positioned to capitalize on these opportunities.
Sensata has strong leadership positions in
markets that are poised to drive secular growth
through the next decade. As the need for
sensors rises, we expect to outgrow many of
our end markets, just as we did in 2017.
2017 FINANCIAL PERFORMANCE
For the full year 2017, Sensata’s organic
revenue growth accelerated to 4 percent
as a result of double-digit organic growth
in our HVOR business and strong demand
from both our automotive and industrial
customers in China. M&A cost synergies
and net productivity gains enabled us to
increase our adjusted EBIT margins by 100
basis points and report 10 percent organic
growth in adjusted earnings per share, despite
incurring $20 million of integration costs.
We closed approximately $530 million of new
business wins, up significantly from $422
million in 2016. These wins establish a strong
foundation for growth that will materialize
over the next three to five years and include
wins such as sensors required for energy
regeneration in electrified vehicles, tire
pressure systems to meet mandates in China,
and new exhaust content on gasoline engines
in Europe.
Finally, we strengthened our balance sheet
and reduced our net leverage ratio to 3.0x at
the end of 2017, down from 4.6x at the start of
2016. An important part of Sensata’s strategy is
to leverage our balance sheet to create value
for shareholders. During the past three years,
we used our balance sheet to finance two
large acquisitions, Schrader and CST, that we
believe will deliver attractive long-term returns
for shareholders. In less than two years, our
strong free cash flow has enabled us to return
to a normalized net leverage ratio, while we
WHY WE WIN: We focus on high-value segments of the market where we have significant
differentiation and industry-leading margins
Advanced engineering skills in
Flexible and adaptable technology
sensors, software, ASIC, wireless,
building blocks configured for
sub-systems, etc.
customized solutions
Trusted brands in mission-critical
Business and industry-specific
complex applications
knowledge
Low cost manufacturing model
Deep understanding of product
with significant operating leverage
design cycles and launch execution
have captured synergies and generated solid
returns from these investments.
DRIVING RETURNS FROM M&A
Our acquisitions of Schrader and CST brought
important new capabilities into Sensata. We
recently increased our M&A cost synergy
expectations for Schrader and CST from
$35 million to $55 million, representing
approximately 7% of our acquired revenue.
Both businesses are driving higher growth and
profitability within Sensata and this is reflected
in the margin expansion we generated in 2017.
We expect Schrader to generate an unlevered
internal rate of return of greater than 20
percent and for CST to generate an unlevered
internal rate of return between 13 and 15
percent. We continue to believe that delivering
attractive returns from M&A is a core capability
for Sensata and a critical part of our approach
to creating long-term shareholder value.
INCREASING OPTIONALITY FOR
CAPITAL DEPLOYMENT
Late in the year, we announced our plans
to change the domicile of Sensata from the
Netherlands to the United Kingdom. This move
will allow for a more flexible and effective
capital allocation strategy. We do not expect
the re-domicile to impact our tax rate, as our
global territorial tax structure will remain in
place. We will continue to maintain a balanced,
returns-driven approach to capital deployment.
We will assess the best opportunities for risk-
adjusted returns between M&A, investing in
our business and buying back shares. That said,
we expect share repurchases will be a critical
part of our capital deployment strategy in 2018.
LONG-TERM GROWTH FROM MEGATRENDS
Four key drivers will shape our markets
through the next decade: Clean & Efficient;
Electrification; Autonomy; and Smart &
Connected. While we expect the first two
trends to help to drive revenue for Sensata
over the next three years, Autonomy and Smart
& Connected are longer-term opportunities that
have the potential to drive significant revenue
growth.
We are particularly excited about the potential
for Electrification to drive growth within our
automotive business. As newer generations
FOUR KEY DRIVERS ARE SHAPING OUR MARKETS THROUGH THE NEXT DECADE
CLEAN & EFFICIENT
Secular need
for clean, more
efficient products
ELECTRIFICATION
Mandates for
electrified products
AUTONOMY
Enabling autonomy
and operational
efficiencies
SMART &
CONNECTED
Connected
equipment with
actionable insights
“
We expect electrification to be a positive tailwind for our business and
we are excited to partner with both blue-chip customers and market
disruptors to help drive higher performance of electric vehicles. ”
of electric vehicles are being developed,
they need additional sensors to improve the
performance of the vehicle. These subsystems
require additional sensors to monitor
performance and extend the range of the
battery. The growing presence of electrified
vehicles, such as hybrids, battery-electric
vehicles, and plug-in hybrids, drive additional
content growth and are a positive tailwind
for our business. We are excited to partner
with both blue-chip customers and market
disruptors to help drive higher performance of
electric vehicles.
SENSATA FOUNDATION
During 2017, we established the Sensata
Technologies Foundation. The objective of
the Foundation is twofold: to benefit the
communities where Sensata operates and
to foster a passion about STEM (Science,
Technology, Engineering and Mathematics)
subjects and all that they can make possible
in the 21st century. We believe corporate
responsibility is an important part of our
mandate as a leader in our industry. We expect
the Sensata Technologies Foundation to make a
positive impact on our world through financial
grants and employee-volunteer programs,
particularly for STEM-related initiatives.
LONG-TERM FINANCIAL TARGETS
In December 2017, we established new
three-year financial targets at our Investor
Day. Our outlook reflects a strong balance
of growth, profitability improvement, and
robust free cash flow generation. Through
2020E, we expect to generate between 4 and 6
percent organic revenue growth, increase our
adjusted EBIT margins by 250 basis points,
and generate organic adjusted EPS growth
of 10 to 13 percent. As a long-cycle business,
I would also note that nearly 90% of our
2020E revenues have already been secured,
which provides us confidence in the outlook.
Importantly, this financial outlook does not
factor in any meaningful impact from future
M&A or share repurchases. Over the next
three years, we expect to generate $1.8 billion
of free cash flow, which translates into a 19%
compound annual growth rate. This strong free
cash flow generation will provide significant
opportunities for new, value-creating capital
deployment initiatives.
Overall, we believe our three-year financial
outlook is attractive relative to our peers and
provides investors with a clear sense of the
compelling opportunities we have to drive
growth in our revenue, earnings, and free cash
flow.
“
Overall, we believe our three-year financial outlook is
attractive relative to our peers and provides investors with a
clear sense of the compelling opportunities we have to drive
growth in our revenue, earnings, and free cash flow. ”
2018 will be another year of strong operational
execution for Sensata, with a healthy balance
of top-line growth, margin expansion, and
improvement in bottom-line profitability and
free cash flow.
I want to thank our valued customers, my
Sensata colleagues, our shareholders, the
members of our Board, and our business
partners for their support over the past year.
I look forward to reporting on our progress in
the future.
Martha Sullivan
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LOOKING AHEAD TO 2018
As we look ahead to 2018, we will continue
to capitalize on attractive secular growth
opportunities, while driving robust EBIT margin
expansion and double-digit EPS growth. We
expect our HVOR and industrial businesses
to remain strong, while our automotive
business will deliver increased growth as a
result of higher content per vehicle in China
and increasing sensor content on gasoline
vehicles in Europe due to stringent emissions
regulations.
At the midpoint of our FY18E guidance, we
expect to deliver 110 basis points of year-
over-year improvement in our adjusted EBIT
margins. This strong operational improvement
will be driven by M&A cost synergies, lower
integration costs, and higher productivity on
increasing volume.
In addition, we expect to deliver our fourth
straight year of double-digit organic earnings
per share growth. Our FY18E guidance for
adjusted EPS of $3.57 to $3.73 assumes 11
percent organic growth at the midpoint of
the range. Finally, we expect to grow our free
cash flow by nearly 30 percent in 2018. We are
forecasting free cash flow to be in the range of
$519 million to $547 million.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
__________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34652
__________________________________________
SENSATA TECHNOLOGIES HOLDING N.V.
(Exact Name of Registrant as Specified in Its Charter)
__________________________________________
THE NETHERLANDS
(State or other jurisdiction of
incorporation or organization)
Jan Tinbergenstraat 80, 7559 SP Hengelo
The Netherlands
98-0641254
(I.R.S. Employer
Identification No.)
31-74-357-8000
(Address of Principal Executive Offices, including Zip Code)
(Registrant’s Telephone Number, Including Area Code)
__________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares—nominal value €0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
__________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the registrant’s ordinary shares held by non-affiliates at June 30, 2017 was approximately $7.3 billion based on the New York
Stock Exchange closing price for such shares on that date.
As of January 12, 2018, 171,393,403 ordinary shares were outstanding.
Part III of this Report incorporates information from certain portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Business ..............................................................................................................................................
4
Item 1.
Item 1A. Risk Factors ........................................................................................................................................ 13
Item 1B. Unresolved Staff Comments ............................................................................................................... 23
Properties ............................................................................................................................................ 24
Item 2.
Legal Proceedings .............................................................................................................................. 25
Item 3.
Mine Safety Disclosures ..................................................................................................................... 25
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities .................................................................................................................................
Selected Financial Data ...................................................................................................................... 28
Item 6.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............. 30
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................ 57
Financial Statements and Supplementary Data .................................................................................. 62
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............. 126
Item 9.
Item 9A. Controls and Procedures ..................................................................................................................... 126
Item 9B. Other Information ............................................................................................................................... 129
26
PART III
Item 10. Directors, Executive Officers and Corporate Governance ................................................................. 129
Executive Compensation .................................................................................................................... 129
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.
129
Matters ................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .................................... 129
Principal Accountant Fees and Services ............................................................................................. 129
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedules ...................................................................................... 130
Signatures ........................................................................................................................................... 134
Cautionary Statements Concerning Forward-Looking Statements
This Annual Report on Form 10-K, including any documents incorporated by reference herein, includes “forward-
looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not
yet determinable. These forward-looking statements also relate to our future prospects, developments, and business strategies.
These forward-looking statements may be identified by terminology such as “may,” “will,” “could,” “should,” “expect,”
“anticipate,” “believe,” “estimate,” “predict,” “project,” “forecast,” “continue,” “intend,” “plan,” and similar terms or
phrases, or the negative of such terminology, including references to assumptions. However, these terms are not the exclusive
means of identifying such statements.
Forward-looking statements contained herein, or in other statements made by us, are made based on management’s
expectations and beliefs concerning future events impacting us. These statements are subject to uncertainties and other
important factors relating to our operations and business environment, all of which are difficult to predict, and many of which
are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by
forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in, or suggested by,
such forward-looking statements are reasonable, we can give no assurances that any of the events anticipated by these
forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and
financial condition.
We believe that the following important factors, among others (including those described in Item 1A, “Risk Factors,”
included elsewhere in this Annual Report on Form 10-K), could affect our future performance and the liquidity and value of
our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements
made by us or on our behalf:
•
•
•
•
•
•
•
•
•
•
instability and changes in the global markets, including regulatory, political, economic, and military matters;
changes to current policies by the U.S. government;
adverse conditions in the automotive industry;
competition in our industry;
pressure from customers to reduce prices;
supplier interruption or non-performance limiting our access to manufactured components or raw materials;
business disruptions due to natural disasters or other disasters outside our control;
labor disruptions or increased labor costs;
difficulties or failures to integrate businesses we acquire;
disruptions from any future acquisitions and joint ventures or dispositions that require significant resources and/or
result in significant unanticipated losses, costs, or liabilities;
• market acceptance of new product introductions and product innovations;
•
changes in, or inability to comply with, various regulations, including tax laws, import/export regulations, anti-
bribery laws, environmental and safety laws, and other governmental regulations;
foreign currency risks and changes in socio-economic conditions and/or monetary and fiscal policies, including as
a result of the impending exit of the U.K. from the European Union;
losses and costs as a result of intellectual property, product liability, warranty, and recall claims that may be
brought against us;
taxing authorities challenging our historical and future tax positions or our allocation of taxable income among
our subsidiaries;
our level of indebtedness or inability to meet our debt service obligations or comply with the covenants contained
in the credit agreements;
security breaches and other disruptions to our information technology infrastructure; and
other risks set forth in Item 1A, “Risk Factors,” included elsewhere in this Annual Report on Form 10-K.
•
•
•
•
•
•
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this
Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements contained in this
Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements that may be made
to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. We urge
readers to review carefully the risk factors described in this Annual Report on Form 10-K and in the other documents that we
file with the U.S. Securities and Exchange Commission. You can read these documents at www.sec.gov or on our website at
www.sensata.com.
3
PART I
ITEM 1. BUSINESS
The Company
The reporting company is Sensata Technologies Holding N.V. (“Sensata N.V.”) and its wholly-owned subsidiaries,
collectively referred to as the “Company,” “Sensata,” “we,” “our,” and “us.”
Sensata N.V. is incorporated under the laws of the Netherlands and conducts its operations through subsidiary
companies that operate business and product development centers primarily in the United States (the "U.S."), the
Netherlands, Belgium, Bulgaria, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and
manufacturing operations primarily in China, Malaysia, Mexico, Bulgaria, France, Germany, the U.K., and the U.S. We
organize our operations into two businesses, Performance Sensing and Sensing Solutions.
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent
company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V.
are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata
U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being
the surviving entity (the “Merger”).
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed
cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general
meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on
the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High
Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will
become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
Overview
Sensata, a global industrial technology company, engages in the development, manufacture, and sale of sensors and
controls. We produce a wide range of sensors and controls for applications such as pressure, temperature, and speed and
position sensors in automotive systems, thermal circuit breakers in aircraft, and bimetal current and temperature control
devices in electric motors. We can trace our origins back to entities that have been engaged in the sensors and controls
business since 1916.
Our sensors are customized devices that translate a physical phenomenon, such as pressure, temperature, or position,
into electronic signals that microprocessors or computer-based control systems can act upon. Our controls are customized
devices embedded within systems to protect them from excessive heat or current. Underlying these sensors and controls are
core technology platforms—thermal and magnetic-hydraulic circuit protection, micro electromechanical systems, ceramic
capacitance, Microfused Silicon Strain Gage, and wireless communication protocol—that we leverage across multiple
products and applications, enabling us to optimize our research, development, and engineering investments and achieve
economies of scale.
Our primary products include low-, medium-, and high-pressure sensors, speed and position sensors, bimetal
electromechanical controls, temperature sensors, power conversion and control products, thermal and magnetic-hydraulic
circuit breakers, pressure switches, and interconnection products. We develop customized, innovative solutions for specific
customer requirements or applications across a variety of end markets, including automotive, heavy vehicle off-road
("HVOR"), appliance and heating, ventilation, and air conditioning (“HVAC”), industrial, and aerospace, among others.
Our Performance Sensing business supplies automotive and HVOR sensors, including pressure sensors, speed and
position sensors, temperature sensors, and pressure switches. Our Sensing Solutions business supplies bimetal
electromechanical controls, industrial and aerospace sensors, power conversion and control products, thermal and magnetic-
hydraulic circuit breakers, and interconnection products.
We have long-standing relationships with a geographically diverse base of leading global original equipment
manufacturers (“OEMs”) and other multinational companies.
4
We develop products that address increasingly complex engineering requirements by investing substantially in
research, development, and application engineering. By locating our global engineering teams in close proximity to key
customers in regional business centers, we are exposed to many development opportunities at an early stage and work closely
with our customers to deliver solutions that meet their needs. As a result of the long development lead times and embedded
nature of our products, we collaborate closely with our customers throughout the design and development phase of their
products. Systems development by our customers typically requires significant multi-year investment for certification and
qualification, which are often government or customer mandated. We believe the capital commitment and time required for
this process significantly increases the switching costs once a customer has designed and installed a particular sensor or
control into a system.
We are a global business, with significant operations around the world. As of December 31, 2017, 39.6%, 35.5%, and
24.9% of our fixed assets were located in the Americas, Asia, and Europe, respectively. We have a diverse revenue mix by
geography, customer, and end market. We generated 41.3%, 27.3%, and 31.4% of our net revenue in the Americas, Asia, and
Europe, respectively, for the year ended December 31, 2017. Our largest customer accounted for approximately 8% of our net
revenue for the year ended December 31, 2017. Our net revenue for the year ended December 31, 2017 was derived from the
following end markets: 24.0% from European automotive, 18.6% from North American automotive, 19.1% from Asia and
rest of world automotive, 14.3% from HVOR, 9.4% from industrial, 6.3% from appliance and HVAC, 4.6% from aerospace,
and 3.7% from all other end markets. Within many of our end markets, we are a significant supplier to multiple OEMs,
reducing our exposure to global fluctuations in market share within individual end markets.
Acquisition History
Since our inception in 2006, we have completed the following significant acquisitions:
Date
Acquired Entity
December 19, 2006
First Technology Automotive and Special Products ("FTAS")
July 27, 2007
Airpax Holdings, Inc. ("Airpax")
January 28, 2011
Automotive on Board ("MSP")
August 1, 2011
Sensor-NITE Group Companies ("HTS")
January 2, 2014
Wabash Worldwide Holding Corp. ("Wabash")
May 29, 2014
Magnum Energy Incorporated ("Magnum")
August 4, 2014
CoActive U.S. Holdings Inc. ("DeltaTech Controls")
October 14, 2014
December 1, 2015
August Cayman Company, Inc. ("Schrader")
Custom Sensors & Technologies ("CST") (1)
Segment
Performance
Sensing
Sensing
Solutions
Purchase
Price
(in Millions)
X
X
X
X
X
X
X
X
X
X
X
$
$
$
$
$
$
$
$
$
88.5
277.3
152.5
324.0
59.6
60.6
177.8
1,004.7
1,000.8
(1) Included the acquisition of all of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies Ltd. in
the U.S., the U.K., and France, as well as certain assets in China.
Performance Sensing Business
Overview
Our Performance Sensing business accounted for approximately 74% of our net revenue in fiscal year 2017, and is a
leading supplier of automotive and HVOR sensors, including pressure sensors, speed and position sensors, temperature
sensors, and pressure switches. These products are used in a wide variety of automotive and HVOR applications, including
air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission. We believe that we are one of the largest
suppliers of pressure and high temperature sensors in the majority of the key applications in which we compete.
Our customers consist primarily of leading global automotive and HVOR OEMs and their Tier 1 suppliers. Our
products are ultimately used by the majority of global automotive OEMs, providing us with a balanced customer portfolio,
which, we believe, helps to protect us against global shifts in market share between different OEMs.
Refer to Note 18, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for details of the Performance Sensing segment profit for the years ended December 31, 2017,
2016, and 2015 and total assets as of December 31, 2017 and 2016.
5
Performance Sensing Business Markets
Sensors are customized devices that translate a physical phenomenon, such as pressure, temperature, or position, into
electronic signals that microprocessors or computer-based control systems can act upon. The market is characterized by a
broad range of products and applications across a diverse set of end markets. We believe large OEMs and other multinational
companies are increasingly demanding a global presence to supply sensors for their key global platforms.
As automobiles and heavy vehicles evolve, we believe the need for cleaner, high-efficiency powertrains will help drive
our growth for the foreseeable future. We expect this growth to include content growth in both pure gasoline and hybrid-
electric powertrains. These vehicles require systems and sensors to drive high efficiency across the powertrain, managing
better diagnostics, more efficient combustion, and reduced emissions.
As new alternative powertrain technologies develop, opportunities are emerging to make electrified powertrains more
efficient, robust, cost effective, and safe, which we believe has the potential to positively impact our business in the future.
Sensor content on vehicle climate control systems, where we enjoy high market share, is increasing as electrified vehicles
require greater efficiency. Other new emerging opportunities to improve on-vehicle energy density and battery life could also
provide the potential for additional content per vehicle.
With our increasing presence in China, we believe that our automotive and HVOR businesses are well positioned to
grow. With sustained vehicle modernization in China, we expect our content per vehicle in China will mirror our global
content in efficient powertrains and electrification, as well as content in tire pressure monitoring.
In addition, we are taking steps and making investments with the intent of positioning ourselves to capitalize on what
we believe will be a large, attractive market for autonomous vehicles. We continue to engage with customers who are seeking
enabling sensor technology for autonomous driving.
Moreover, we believe our broad customer base, global diversification, and evolving portfolio provide the foundation
that will allow us to grow with these megatrends across a diverse set of end markets.
Automotive and HVOR sensors are included in the Performance Sensing business results, while industrial and
aerospace sensors are included in the Sensing Solutions business results. Refer to the Sensing Solutions Business Markets
section for discussion of industrial and aerospace sensors.
Automotive and HVOR Sensors
Net revenue growth from the global automotive and HVOR sensor end markets, which include applications in
powertrain, tire, air conditioning, and chassis control, among others, is driven, we believe, by three principal trends. First,
global production of light vehicles has consistently demonstrated annual growth since the global recession in 2008 and 2009
and are expected to continue to increase over the long-term due to population growth and increased usage of cars in emerging
markets. Second, the number of sensors used per vehicle has expanded, driven by a combination of factors including
government regulation of emissions, greater efficiency, and safety, consumer demand for new applications including electric
and hybrid-electric vehicles as well as trends toward autonomous vehicles and productivity and enhanced user interfaces in
HVOR applications. For example, fuel economy standards such as the Corporate Average Fuel Economy ("CAFE")
requirements in the U.S. and emissions requirements such as "Euro 6d" in Europe and "China National 6" in China lead to
sensor-rich automobile powertrain strategies. Finally, revenue growth has been augmented by a continuing shift away from
legacy electromechanical products towards higher-value electronic solid-state sensors.
According to the fourth quarter 2017 LMC Automotive "Global Car & Truck Forecast," the production of global light
vehicles in 2017 was approximately 95.2 million units, an increase of 2.3% from 2016.
The automotive and HVOR sensor markets are characterized by high switching costs and barriers to entry, benefiting
incumbent market leaders. Sensors are critical components that enable a wide variety of applications, many of which are
essential to the proper functioning of the product in which they are incorporated. Sensor application-specific products require
close engineering collaboration between the sensor supplier and the OEM or the Tier 1 supplier. As a result, OEMs and Tier 1
suppliers make significant investments in selecting, integrating, and testing sensors as part of their product development.
Switching to a different sensor results in considerable additional work, both in terms of sensor customization and extensive
platform/product retesting and certification. This results in high switching costs for automotive and HVOR manufacturers
once a sensor is designed-in. We believe the foregoing is one of the reasons that sensors are rarely changed during a platform
life-cycle, which in the case of the automotive end market typically lasts five to seven years. Given the importance of
6
reliability and the fact that the sensors must be supported through the length of a product life, our experience has been that
OEMs and Tier 1 suppliers tend to work with suppliers that have a long track record of quality and on-time delivery and the
scale and resources to meet their needs as the automobile platform evolves and grows. In addition, the automotive segment is
one of the largest markets for sensors, giving participants with a presence in this end market significant scale advantages over
those participating only in smaller, more niche industrial and medical markets.
According to an October 2017 report prepared by Strategy Analytics, Inc., the global automotive sensor market was
$22.4 billion in 2017, compared to $21.5 billion in 2016. We believe the increase in the number of sensors per vehicle and the
level of global vehicle sales are the primary drivers of the increase in the global automotive sensor market. We believe that
the increasing installation in vehicles of emissions, efficiency, safety, and comfort-related features that depend on sensors for
proper functioning, such as electronic stability control, tire pressure monitoring, advanced driver assistance, transmission,
and advanced combustion and exhaust after-treatment, will continue to drive increased sensor usage and content growth.
Performance Sensing Products
We offer the following significant products in the Performance Sensing business:
Product Categories
Pressure sensors
Speed and position sensors
Temperature sensors
Pressure switches
Key Applications/Solutions
Air conditioning systems
Transmission
Engine oil
Suspension
Fuel rail
Braking
Tire pressure monitoring
Exhaust after-treatment
Transmission
Braking
Engine
Exhaust after-treatment
Air conditioning systems
Power steering
Transmission
Key End-Markets
Automotive
HVOR
Motorcycle
Automotive
HVOR
Automotive
HVOR
Automotive
HVOR
The table below sets forth the amount of net revenue we generated from each of these product categories in each of the
last three fiscal years:
Product Category
(Amounts in thousands)
Pressure sensors (1)
Speed and position sensors
Temperature sensors
Pressure switches
Other
Total
For the year ended December 31,
2017
1,773,401 $
2016
1,696,215 $
2015
1,631,678
$
309,135
186,793
61,997
129,274
305,287
185,289
56,005
142,584
328,102
191,369
55,607
139,470
$
2,460,600 $
2,385,380 $
2,346,226
(1) Certain products, totaling $28.5 million, that were categorized as pressure sensors in 2016 have been recast to other.
Sensing Solutions Business
Overview
Our Sensing Solutions business accounted for approximately 26% of our net revenue in fiscal year 2017, and is a
leading provider of bimetal electromechanical controls, industrial and aerospace sensors, power conversion and control
products, thermal and magnetic-hydraulic circuit breakers, and interconnection products. We market and manufacture a broad
portfolio of application-specific products, including motor and compressor protectors, motor starters, temperature sensors and
switches/thermostats, pressure sensors and switches, electronic HVAC sensors and controls, linear and rotary position
sensors, charge controllers, solid state relays, circuit breakers, semiconductor burn-in test sockets, and power inverters. Our
control products are sold into industrial, aerospace, military, commercial, medical device, and residential end markets. We
7
derive most of our Sensing Solutions business revenue from sales of products that prevent damage from excess heat or
electrical current in a variety of applications within these end markets, such as internal and external motor and compressor
protectors, circuit protection, motor starters, thermostats, switches, semiconductor testing, and light industrial systems. Our
industrial and aerospace sensors, including pressure sensors, temperature sensors, and linear and rotary position sensors,
provide real time information about the state of a specific system or subsystem, so control adjustments can be made to
optimize system performance. We believe that we are one of the largest suppliers of controls in the majority of the key
applications in which we compete.
Our Sensing Solutions business benefits from strong agency relationships. For example, a number of electrical
standards for motor control products, including portions of the Underwriters’ Laboratories ("UL") Standards for Safety, have
been written based on the performance and specifications of our control products. We also have U.S. and Canadian
Component Recognitions from UL, a U.S.-based organization that issues safety standards for many electrical products in the
U.S., for many of our control products, so that customers can use Klixon® and Airpax® products throughout North America.
Where our component parts are detailed in our customers' certifications from UL, changes to their certifications may be
necessary in order for them to incorporate competitors' motor protection offerings. Similarly, our aerospace products undergo
exhaustive qualification procedures to customer or military performance standards; requiring a significant investment in a re-
qualification effort to incorporate competitors’ offerings.
We continue to focus our efforts on expanding our presence in all global geographies, both emerging and mature. Our
customers include established multinationals, as well as local producers in emerging markets such as China, India, Eastern
Europe, and Turkey. China continues to remain a priority for us because of its export focus and domestic consumption of
products that use our devices. In addition, we continue to focus on managing our costs and increasing our productivity in
these lower-cost manufacturing regions.
Refer to Note 18, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for details of the Sensing Solutions segment profit for the years ended December 31, 2017,
2016, and 2015 and total assets as of December 31, 2017 and 2016.
Sensing Solutions Business Markets
Sensing Solutions products include controls, which are customized devices that protect equipment and electrical
architecture from excessive heat or current, and sensors, which measure specific fluid- or air-based system parameters,
including pressure and temperature, as well as measure position. Our products help our customers' systems run safely and in
an efficient and environmentally-friendly manner. Our product lines encompass bimetal electromechanical controls, industrial
and aerospace sensors, power conversion and control products, thermal and magnetic-hydraulic circuit breakers, and
interconnection products, each of which serves a highly diversified base of customers, end markets, applications, and
geographies.
Bimetal Electromechanical Controls
Bimetal electromechanical controls include motor protectors, motor starters, thermostats, and switches, each of which
helps prevent damage from excessive heat or current. Our bimetal electromechanical controls business serves a diverse group
of end markets, including commercial and residential HVAC and refrigeration systems, lighting, industrial motors, household
appliances, and commercial and military aircraft. The demand for many of these products tends to follow the general
economic environment and is affected by the increasing significance of new electronically-controlled applications.
Industrial and Aerospace Sensors
Industrial and aerospace sensors employ similar technology to automotive and HVOR sensors discussed in the
Performance Sensing Business section above, but often require different customization in terms of packaging, calibration,
and electrical output. Applications in which these sensors are used include fluid- and air-based system measurement, motion
control systems, pumps and storage tanks, where measurement of pressure and temperature is required for optimum
performance, and commercial and military aircraft controls, where high reliability is required. End markets served by this
business include: commercial and residential HVAC and refrigeration systems, where refrigerant, water, or air is the sensed
media used to optimize performance of the heating and cooling application; discrete industrial equipment where fluid- or air-
based subsystems are used (e.g., air compressors and hydraulic machinery such as molding and metal machining); and
commercial and military aircraft.
8
Linear and rotary position sensors translate linear or angular mechanical position to an electrical signal, and are
typically used in systems where high reliability is desired, such as commercial and military aircraft controls. The primary
uses for our linear and rotary position sensors are in harsh environments in the aerospace and energy and infrastructure end
markets.
We believe that sensor usage in industrial and commercial applications is driven by many of the same factors as in the
automotive sensor market: regulation of emissions, greater energy efficiency, and safety, as well as consumer demand for new
features. For example, many HVAC/Refrigeration ("HVAC/R") and industrial systems are converting to more efficient
variable speed control, which inherently requires more sensor feedback than traditional fixed speed control systems. Global
trends towards environmentally friendly refrigerants also require more sensors to deliver the desired system performance.
Power Conversion and Control
Power conversion and control products include power inverters, charge controllers, and solid state relays.
Our power inverter products enable conversion of electric power from direct current ("DC") power to alternating
current ("AC") power, or AC power to DC power. Power inverters are used mainly in applications where DC power, such as
that stored in a battery, must be converted for use in an electrical device that runs on AC power, or in applications where AC
power is converted to DC power to charge batteries or power DC loads. Typically, converting AC power to DC power also
uses a charge controller.
Specific uses for power inverters and charge controllers include powering applications in utility/service trucks or
recreational vehicles and providing power conversion and charge control for off-grid and grid-tie battery back-up systems.
Demand for these products is driven by economic development, the need to meet new energy efficiency standards,
electrification of auxiliary loads on work trucks, emerging opportunities for residential energy storage and off-grid power
systems, and a growing interest in clean energy to replace generators, which increases demand for both mobile and stationary
power.
Solid state relays are used where it is necessary to control a circuit by a low-power signal, or where several circuits
must also be controlled by one signal. Solid state relays have certain advantages over mechanical relays, including long
operation life, silent operation, low power, and low electrical interference. Applications for solid state relays primarily
include those in the industrial and commercial equipment end markets.
Thermal and Magnetic-Hydraulic Circuit Breakers
Our circuit breaker portfolio includes thermal circuit breakers and customized magnetic-hydraulic circuit breakers,
which help prevent damage from thermal or electrical overload. We provide thermal circuit breakers to the commercial and
military aircraft markets as well as the industrial and agricultural markets. Our magnetic-hydraulic circuit breaker business
serves a broad spectrum of OEMs and other multinational companies in the aerospace, telecommunication, industrial,
recreational vehicle, HVAC, refrigeration, marine, medical, information processing, electronic power supply, power
generation, over-the-road trucking, construction, agricultural, and alternative energy markets. Demand for these products
tends to follow the general economic environment.
Interconnection
Our interconnection products consist of semiconductor burn-in test sockets used by semiconductor manufacturers to
verify packaged semiconductor reliability. Demand in the semiconductor market is driven by consumer and business
computational, entertainment, transportation, and communication needs. These needs are driven by the desire to have smaller,
lighter, faster, more functional, and energy conscious devices that make users more productive and interconnected to society.
9
Sensing Solutions Products
We offer the following significant products in the Sensing Solutions business:
Product Categories
Key Applications/Solutions
Key End-Markets
Bimetal electromechanical controls
Industrial and aerospace sensors
Power conversion and control
Motor and compressor protectors
Motor starters
Thermostats
Switches
Fluid- or air-based system measurement
Motion control systems
Pumps and storage tanks
Linear and rotary position sensors
DC/AC inverters
Charge controllers
Solid state relays
Thermal and magnetic-hydraulic circuit
breakers
Thermal circuit breakers
Magnetic-hydraulic circuit breakers
HVAC/R
Small/large appliances
Lighting
Industrial and auxiliary DC motors
Commercial and military aircraft
Marine/industrial
HVAC/R
Industrial equipment
Commercial and military aircraft
Utility work vehicles
Recreational vehicles
Solar power
Industrial and commercial equipment
Commercial and military aircraft
Data and telecommunications
Industrial/medical/alternative energy
Recreational/marine/industrial
HVAC/R
Power supply/generation
HVOR
Interconnection
Semiconductor testing
Semiconductor manufacturing
The table below sets forth the amount of net revenue we generated from each of these product categories in each of the
last three fiscal years:
Product Category
(Amounts in thousands)
Bimetal electromechanical controls
Industrial and aerospace sensors
Power conversion and control
Thermal and magnetic-hydraulic circuit breakers
Interconnection
Other
Total
Technology and Intellectual Property
For the year ended December 31,
2017
2016
2015
$
333,907 $
321,202 $
318,721
201,835
127,348
107,097
59,725
16,221
193,843
120,357
109,719
57,518
14,269
69,102
58,180
110,980
61,738
10,014
$
846,133 $
816,908 $
628,735
We rely primarily on patents and trade secret laws, confidentiality procedures, and licensing arrangements to protect
our intellectual property rights. While we consider our patents to be valuable assets, we do not believe that our overall
competitive position is dependent on patent protection or that our overall operations are dependent upon any single patent or
group of related patents. Many of our patents protect specific functionality in our products, and others consist of processes or
techniques that result in reduced manufacturing costs. Our patents generally relate to improvements on earlier filed Sensata,
acquired, or competitor patents. As of December 31, 2017, we had approximately 315 U.S. and 370 non-U.S. patents and
approximately 41 U.S. and 227 non-U.S. pending patent applications that were filed within the last five years. We do not
know whether any of our pending patent applications will result in the issuance of patents or whether the examination process
will require us to narrow our claims. Our patents have expiration dates ranging from 2018 to 2042. We incurred Research and
Development expense of $130.2 million, $126.7 million, and $123.7 million for the years ended December 31, 2017, 2016,
and 2015, respectively.
We use licensing arrangements with respect to certain technology provided in our sensor products and, to a lesser
extent, our control products. In 2006, we entered into a perpetual, royalty-free cross-license agreement with our former
owner, Texas Instruments Incorporated ("TI"), which permits each party to use specified technology owned by the other party
in its business. No license may be terminated under the agreement, even in the event of a material breach.
10
We purchase sense element assemblies, which are components used primarily in our monosilicon strain gage pressure
sensors, from Measurement Specialties, Inc. and its affiliates ("MEAS") and also manufacture them internally as a second
source. In March 2013, we entered into an intellectual property licensing arrangement (the "License Agreement") with MEAS
that provides for an indefinite duration license and is subject to royalties through 2019 and thereafter is royalty-free. Pursuant
to the terms of the License Agreement, we are authorized to produce our entire need for these sense elements within the
passenger vehicle and heavy duty truck fields of use. The License Agreement can be terminated by either party in the event of
an uncured material breach. The sense element assemblies subject to the License Agreement accounted for $413.2 million,
$397.7 million, and $386.3 million in net revenue for the years ended December 31, 2017, 2016, and 2015, of which $64.8
million, $150.6 million, and $206.7 million, respectively, was related to products that were manufactured by MEAS, and
$348.4 million, $247.1 million, and $179.6 million, respectively, was related to products that were manufactured by us.
Seasonality
Because of the diverse global nature of the markets in which we operate, our revenue is only moderately impacted by
seasonality. However, our Sensing Solutions business has some seasonal elements, specifically in its air conditioning and
refrigeration products, which tend to peak in the first two quarters of the year as end market inventory is built up for spring
and summer sales. In addition, our Performance Sensing business tends to be weaker in the third quarter of the year as
automotive OEMs retool production lines for the coming model year.
Sales and Marketing
The sales and marketing function within our business is organized into regions—the Americas, Asia, and Europe—but
also organizes globally across all geographies according to market segments, so as to facilitate knowledge sharing and
coordinate activities involving our larger customers through global account managers.
Customers
Our customer base in the Performance Sensing business includes a wide range of OEMs and Tier 1 suppliers in the
automotive and HVOR end markets. Our customers in the Sensing Solutions business include a wide range of industrial and
commercial manufacturers and suppliers across multiple end markets, primarily OEMs in the climate control, appliance,
semiconductor, medical, energy and infrastructure, data/telecom, and aerospace industries, as well as Tier 1 aerospace and
motor and compressor suppliers. In geographic and product markets where we lack an established base of customers, we rely
on third-party distributors to sell our sensor and control products. We have had relationships with our top ten customers for an
average of 28 years. Our largest customer accounted for approximately 8% of our net revenue for the year ended
December 31, 2017.
Selected Geographic Information
Refer to Note 18, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for details of our net revenue by selected geographic areas for the years ended December 31,
2017, 2016, and 2015 and PP&E, net by selected geographic area as of December 31, 2017 and 2016.
Competition
Within each of the principal product categories in our Performance Sensing business, we compete with a variety of
independent suppliers as well as the in-house operations of Tier 1 systems suppliers. We believe that the key competitive
factors in this market are product performance, quality, and reliability, the ability to produce customized solutions on a global
basis, technical expertise and development capability, breadth and scale of product offerings, product service and
responsiveness, and price.
Within each of the principal product categories in our Sensing Solutions business, we compete with divisions of large
multinational industrial corporations and companies with smaller market share, which compete primarily in specific end
markets or applications. We believe that the key competitive factors in these markets are product performance, quality, and
reliability, although manufacturers in certain markets also compete based on price. Physical proximity to the facilities of the
OEM/Tier 1 manufacturer customer has, in our experience, also increasingly become a basis for competition. We have
additionally found that certain of the product categories have specific competitive factors. For example, for thermal circuit
breaker, thermostat, and switch products, strength of technology, quality, and the ability to provide custom solutions are
particularly important. With hydraulic-magnetic circuit breakers, as another example, we have encountered heightened
competition on price and a greater emphasis on agency approvals, including approvals by UL and military agencies, and
11
similar organizations outside of the U.S., such as Verband der Elektrotechnik, Elektronik und Informationstechnik, and TÜV
Rheinland in Europe, China Compulsory Certification in China, and Canadian Standards Association in Canada.
Employees
As of December 31, 2017, we had approximately 22,100 employees, of whom approximately 8% were located in the
U.S. As of December 31, 2017, approximately 530 of our employees were covered by collective bargaining agreements. In
addition, in various countries, local law requires our participation in works councils. We also engage contract workers in
multiple locations, primarily to cost-effectively manage variations in manufacturing volume, but also to perform engineering
and other general services. As of December 31, 2017, we had approximately 2,030 contract workers on a worldwide basis.
We believe that our relations with our employees are good.
Environmental Matters and Governmental Regulation
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 are, however, not aware of any threatened or
pending material environmental investigations, lawsuits, or claims involving us or our operations. As of December 31, 2017,
compliance with federal, state, and local provisions that have been enacted or adopted regulating the discharge of materials
into the environment, or otherwise relating to the protection of the environment, has not had a material effect on our capital
expenditures, earnings, or competitive position. We have not budgeted any material capital expenditures for environmental
control facilities during 2018.
Our products are governed by material content restrictions and reporting requirements, examples of which include:
European Union regulations, such as REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals), RoHS
(Restriction of Hazardous Substances), and ELV (End of Life Vehicles); U.S. regulations, such as the conflict minerals
requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and similar regulations in other countries.
Numerous customers, across all end markets, are requiring us to provide declarations of compliance or, in some cases, full
material content disclosure as a requirement of doing business with them.
We are subject to compliance with laws and regulations controlling the export of goods and services. Certain of our
products are subject to International Traffic in Arms Regulation (“ITAR”). The export of many such ITAR-controlled
products requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls.
The State Department makes licensing decisions based on type of product, destination of end use, end user, national security,
and foreign policy. The length of time involved in the licensing process varies but currently averages approximately six to
eight weeks. The license processing time could result in delays in the shipping of products. These laws and regulations are
subject to change, and any such change may require us to change technology or incur expenditures to comply with such laws
and regulations.
Available Information
We make available free of charge on our Internet website (www.sensata.com) our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). Our website and the
information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.
The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F
Street, NE., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-202-551-8300. The SEC maintains an Internet site that contains reports, proxy, and
information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The
contents on, or accessible through, this website are not incorporated into this filing. Further, our references to the URLs for
the SEC's website and our website are intended to be inactive textual references only.
12
ITEM 1A.
RISK FACTORS
Risks Related to our Industry and Business Operations
Our business is subject to numerous global risks, including regulatory, political, economic, and military concerns and
instability.
Our business, including our employees, customers, and suppliers, are located throughout the world. As a result, we are
exposed to numerous global and local risks that could decrease revenue and/or increase expenses and therefore, decrease our
profitability, including, without limitation:
•
•
•
trade regulations, including customs, import, and export matters;
tariffs, trade barriers and disputes;
local employment costs, regulations, and conditions;
• difficulties with, and costs for, protecting our intellectual property;
•
•
challenges in collecting accounts receivable;
tax law and regulatory changes, including examinations by taxing authorities, variations in tax laws from country to
country, changes to the terms of income tax treaties, and difficulties in the tax-efficient repatriation of cash
generated or held in a number of jurisdictions;
• natural disasters;
•
instability in economic or political conditions, inflation, recession, actual or anticipated military or political
conflicts, and potential impact due to the upcoming exit of the United Kingdom (the "U.K.") from the European
Union (the "E.U."); and
•
impact of each of the foregoing on our outsourcing and procurement arrangements.
We have sizeable operations in China, including two principal manufacturing sites. In addition, approximately 15% of
our net revenue in fiscal year 2017 was derived from sales to customers in China. Economic conditions in China have been
and may continue to be volatile and uncertain. In addition, the legal and regulatory system in China is still developing and
subject to change. Accordingly, our operations and transactions with customers in China could be adversely affected by
changes to market conditions, changes to the regulatory environment, or interpretation of Chinese law.
Adverse conditions in the industries upon which we are dependent, including the automotive industry, have had, and
may in the future have, adverse effects on our business.
We are dependent on end market dynamics to sell our products, and our operating results could be adversely affected by
cyclical and reduced demand in these markets. Periodic downturns in our customers’ industries could significantly reduce
demand for certain of our products, which could have a material adverse effect on our results of operations, financial
position, and cash flows.
Much of our business depends on, and is directly affected by, the global automobile industry. Sales in our automotive
end markets accounted for approximately 62% of our total net revenue in fiscal year 2017. Adverse developments like those
we have seen in past years in the automotive industry, including but not limited to declines in demand, customer
bankruptcies, and increased demands on us for pricing decreases, could have adverse effects on our results of operations and
could impact our liquidity and our ability to meet restrictive debt covenants. In addition, these same conditions could
adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure
uninterrupted supply to our customers.
Continued pricing and other pressures from our customers may adversely affect our business.
Many of our customers, including automotive manufacturers and other industrial and commercial original equipment
manufacturers ("OEMs"), have policies that require annual price reductions. If we are not able to offset continued price
reductions through improved operating efficiencies and reduced expenditures, the required price reductions will impact, and
may have a material adverse effect on, our results of operations and cash flows. In addition, our customers occasionally
13
require engineering, design, or production changes. In some circumstances, we may be unable to cover the costs of these
changes with price increases. Further, as our customers grow larger, they may increasingly require us to provide them with
our products on an exclusive basis, which could limit sales, cause an increase in the number of products we must carry and,
consequently, increase our inventory levels and working capital requirements. Certain of our customers, particularly in the
automotive industry, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as
a condition to engage in future business transactions. As a result, we may find it difficult to enter into agreements with such
customers on terms that are commercially reasonable to us.
We operate in markets that are highly competitive, and competitive pressures could require us to lower our prices or
result in reduced demand for our products.
We operate in markets that are highly competitive, and we compete on the basis of product performance, quality,
service, and/or price across the industries and markets we serve. A significant element of our competitive strategy is to
manufacture high-quality products at best cost, particularly in markets where low-cost country-based suppliers, primarily in
China with respect to the Sensing Solutions business, have entered the markets or increased their per-unit sales in these
markets by delivering products at low costs to local OEMs. In addition, certain of our competitors in the automotive sensor
market are influenced or controlled by major OEMs or suppliers, thereby limiting our access to these customers. Many of our
customers also rely on us as their sole source of supply for many of the products that we have historically sold to them. These
customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products
internally, primarily to reduce risk of delivery interruptions or as a means of extracting price reductions from us. Certain of
our customers currently have, or may develop in the future, the capability to internally produce the products that we sell to
them and may compete with us with respect to those and other products and with respect to other customers. Competitive
pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit
margins and/or resulting in a loss of market share.
Increasing costs for, or limitations on the supply of or access to, manufactured components and raw materials may
adversely affect our business and results of operations.
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our
products, including those containing silver, gold, platinum, palladium, copper, aluminum, nickel, zinc, resins, and certain rare
earth metals, which may experience significant volatility in their price and availability. We have entered into hedge
arrangements in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the
future. Such hedges might not be economically successful. In addition, these hedges do not qualify as accounting hedges in
accordance with United States ("U.S.") generally accepted accounting principles. Accordingly, the change in fair value of
these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to
quarter. Refer to Note 16, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements,
and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," each included elsewhere in this Annual Report
on Form 10-K for further discussion of accounting for hedges of commodity prices, and an analysis of the sensitivity on
pretax earnings of changes in the forward prices on these hedges, respectively.
The availability and price of raw materials and manufactured components may be subject to change due to, among
other things, new laws or regulations, global economic or political events including strikes, suppliers' allocations to other
purchasers, interruptions in production by suppliers, changes in exchange rates, and prevailing price levels. It is generally
difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of
price increases. Therefore, a significant increase in the price or a decrease in the availability of these items could materially
increase our operating costs and materially and adversely affect our business and results of operations.
Natural disasters or other disasters outside of our control could cause significant business interruptions resulting in
harm to our business operations and financial condition.
Our operations and those of our suppliers and customers, and the supply chains that support their operations, may
potentially suffer interruptions caused by natural disasters such as earthquakes, tsunamis, hurricanes, typhoons, or floods; or
other disasters such as fires, explosions, disease, acts of terrorism or war that are outside of our control. If a business
interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business,
results of operations, financial position, and/or cash flows could be materially adversely affected.
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Labor disruptions or increased labor costs could adversely affect our business.
As of December 31, 2017, we had approximately 22,100 employees, of whom approximately 8% were located in the
U.S. As of December 31, 2017, approximately 530 of our employees were covered by collective bargaining agreements. In
addition, in various countries, local law requires our participation in works councils.
A material labor disruption or work stoppage at one or more of our manufacturing facilities could have a material
adverse effect on our business. In addition, work stoppages occur relatively frequently in the industries in which many of our
customers operate, such as the automotive industry. If one or more of our larger customers were to experience a material
work stoppage for any reason, that customer may halt or limit the purchase of our products. This could cause us to shut down
production facilities relating to those products, which could have a material adverse effect on our business, results of
operations, and/or financial condition.
We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase
orders or for which we are currently engaged in development.
Our ability to generate revenue from products pending customer awards is subject to a number of important risks and
uncertainties, many of which are beyond our control, including the number of products our customers will actually produce,
as well as the timing of such production. Many of our customer agreements provide for supplying a certain share of the
customer’s requirements for a particular application or platform, rather than for manufacturing a specific quantity of
products. In some cases, we have no remedy if a customer chooses to purchase less than we expect. In cases where customers
do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes is limited to
increased pricing on those products that the customer does purchase from us or renegotiating other contract terms. There is no
assurance that such price increases or new terms will offset a shortfall in expected revenue. In addition, some of our
customers may have the right to discontinue a program or replace us with another supplier under certain circumstances. As a
result, products for which we are currently incurring development expenses may not be manufactured by customers at all, or
may be manufactured in smaller amounts than currently anticipated. Therefore, our anticipated future revenue from products
relating to existing customer awards or product development relationships may not result in firm orders from customers for
the originally contracted amount. We also incur capital expenditures and other costs, and price our products, based on
estimated production volumes. If actual production volumes were significantly lower than estimated, our anticipated revenue
and gross margin from those new products would be adversely affected. We cannot predict the ultimate demand for our
customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost
increases to our customers.
We are dependent on market acceptance of our new product introductions and product innovations for future
revenue.
Substantially all markets in which we operate are impacted by technological change or change in consumer tastes and
preferences, which are rapid in certain end markets. Our operating results depend substantially upon our ability to continually
design, develop, introduce, and sell new and innovative products; to modify existing products; and to customize products to
meet customer requirements driven by such change. There are numerous risks inherent in these processes, including the risk
that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market
profitable new products and applications before our competitors or in time to satisfy customer demands.
Security breaches and other disruptions to our information technology infrastructure could interfere with our
operations, compromise confidential information, and expose us to liability which could materially adversely impact
our business and reputation.
Security breaches and other disruptions to our information technology infrastructure could interfere with our
operations; compromise information belonging to us, our employees, customers, and suppliers; and expose us to liability that
could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology
networks and systems, some of which are managed by third parties, to process, transmit, and store electronic information, and
to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including
proprietary business information and customer and employee data, and may have access to confidential or personal
information that is subject to privacy and security laws, regulations, and customer-imposed controls. We also face the
challenge of supporting our older systems and implementing necessary upgrades. Despite our cybersecurity measures
(including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective
systems) that are continuously reviewed and upgraded, our information technology networks and infrastructure may still be
vulnerable to damage, disruptions, or shutdowns due to attacks by hackers, breaches, employee error or malfeasance, power
15
outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic
events. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in
operations, and damage to our reputation, which could materially adversely affect our business. Further, to the extent that any
disruption or security breach results in a loss of, or damage to, our data, or an inappropriate disclosure of confidential
information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims
against the Company, and ultimately harm our business, financial condition, and/or results of operations.
Our level of indebtedness could adversely affect our financial condition and our ability to operate our business.
As of December 31, 2017, we had $3,312.5 million of gross outstanding indebtedness, including $927.8 million of
indebtedness under the term loan (the "Term Loan") provided by the eighth amendment to the credit agreement dated as of
May 12, 2011 (as amended, the "Credit Agreement"), $500.0 million aggregate principal amount of 4.875% senior notes due
2023 issued under an indenture dated as of April 17, 2013 (the "4.875% Senior Notes"), $400.0 million aggregate principal
amount of 5.625% senior notes due 2024 issued under an indenture dated as of October 14, 2014 (the "5.625% Senior
Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 issued under an indenture dated as of
March 26, 2015 (the "5.0% Senior Notes"), $750.0 million aggregate principal amount of 6.25% senior notes due 2026 issued
under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes", and together with the 4.875% Senior Notes,
the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes"), and $34.7 million of capital lease and other
financing obligations. We may incur additional indebtedness in the future. Our substantial indebtedness could have important
consequences. For example, it could:
• make it more difficult for us to satisfy our debt obligations;
•
•
•
•
restrict us from making strategic acquisitions;
limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities,
thereby placing us at a competitive disadvantage if our competitors are not as highly-leveraged;
increase our vulnerability to general adverse economic and industry conditions; or
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness if
we do not maintain specified financial ratios or are not able to refinance our indebtedness as it comes due, thereby
reducing the availability of our cash flows for other purposes.
In addition, the senior secured credit facilities provided for under the Credit Agreement (the "Senior Secured Credit
Facilities"), permit us to incur additional indebtedness in the future, including borrowings under the Revolving Credit Facility
and $1.0 billion in incremental facilities (the "Accordion") under which additional term loans may be issued or the capacity
of the Revolving Credit Facility may be increased. As of December 31, 2017, we had $415.3 million available to us under the
Revolving Credit Facility.
If we increase our indebtedness by borrowing under the Revolving Credit Facility or incur other new indebtedness
under the Accordion, the risks described above would increase. Refer to Note 8, "Debt," of our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for further discussion of our outstanding indebtedness.
Our business may not generate sufficient cash flows from operations, or future borrowings under the Senior Secured
Credit Facilities or from other sources may not be available to us in an amount sufficient to enable us to service and/or
repay our indebtedness when it becomes due, or to fund our other liquidity needs, including capital expenditures.
We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital
expenditures and business plan. If we complete additional acquisitions, our debt service requirements could also increase. If
we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity
investments, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances, any of which
could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary,
on commercially reasonable terms, or at all.
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Our failure to comply with the covenants contained in our credit arrangements, including non-compliance
attributable to events beyond our control, could result in an event of default, which could materially and adversely
affect our operating results and our financial condition.
The Revolving Credit Facility requires us 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 10% of the commitments under the Revolving Credit Facility. In addition, Sensata Technologies B.V.
and its Restricted Subsidiaries (as defined in the Credit Agreement) are required to satisfy this covenant, on a pro forma basis,
in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the
time of such borrowings. Additionally, the Revolving Credit Facility and the indentures governing the Senior Notes require us
to comply with various operational and other covenants.
If we experienced an event of default under any of our debt instruments that was not cured or waived, the holders of the
defaulted debt could cause all amounts outstanding with respect to the debt to become due and payable immediately, which,
in turn, would result in cross defaults under our other debt instruments. Our assets and cash flows may not be sufficient to
fully repay borrowings if accelerated upon an event of default.
If, when required, we are unable to repay, refinance, or restructure our indebtedness under, or amend the covenants
contained in, the Credit Agreement, or if a default otherwise occurs, the lenders under the Senior Secured Credit Facilities
could: elect to terminate their commitments thereunder; cease making further loans; declare all borrowings outstanding,
together with accrued interest and other fees, to be immediately due and payable; institute foreclosure proceedings against
those assets that secure the borrowings under the Senior Secured Credit Facilities; and prevent us from making payments on
the Senior Notes. Any such actions could force us into bankruptcy or liquidation, and we might not be able to repay our
obligations in such an event.
Risks Related to Prior and Future Acquisitions and Divestitures
Integration of acquired companies, and any future acquisitions, joint ventures, and/or dispositions, may require
significant resources and/or result in significant unanticipated losses, costs, or liabilities, and we may not realize all of
the anticipated operating synergies and cost savings from acquisitions.
We have grown, and in the future we intend to continue to grow, by making acquisitions or entering into joint ventures
or similar arrangements. There can be no assurance that our acquisitions will perform as expected in the future. Any future
acquisitions will depend on our ability to identify suitable acquisition candidates, to negotiate acceptable terms for their
acquisition, and to finance those acquisitions. We also will face competition for suitable acquisition candidates, which may
increase our costs. In addition, acquisitions or investments require significant managerial attention, which may be diverted
from our other operations. Furthermore, acquisitions of businesses or facilities entail a number of additional risks, including:
• problems with effective integration of operations;
•
•
the inability to maintain key pre-acquisition customer, supplier, and employee relationships;
increased operating costs; and
• exposure to unanticipated liabilities.
Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional
indebtedness, and/or by issuing additional equity securities. In addition, we could face financial risks associated with
incurring additional indebtedness such as reducing our liquidity, limiting our access to financing markets, and increasing the
amount of service on our debt. The availability of debt to finance future acquisitions may be restricted, and our ability to
make future acquisitions may be limited.
There can be no assurance that any anticipated synergies or cost savings generated through acquisitions will be
achieved or that they will be achieved in our estimated time frame. We may not be able to successfully integrate and
streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect.
In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.
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Restructuring our business or divesting some of our businesses or product lines in the future may have a material
adverse effect on our results of operations, financial position, and cash flows.
We continue to evaluate the strategic fit of specific businesses and products that may result in additional divestitures.
Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which
could have a material adverse effect on our results of operations and financial position. Divestitures could involve additional
risks, including difficulties in the separation of operations, services, products, and personnel; the diversion of management's
attention from other business concerns; the disruption of our business; and the potential loss of key employees. There can be
no assurance that we will be successful in addressing these or any other significant risks encountered.
We also may seek to restructure our business in the future by disposing of certain assets or by consolidating operations.
There can be no assurance that any restructuring of our business will not adversely affect our financial position, leverage, or
results of operations. In addition, any significant restructuring of our business will require significant managerial attention,
which may be diverted from our other operations.
If the acquisitions of August Cayman Company, Inc. (“Schrader”) and the acquired assets and subsidiaries of Custom
Sensors & Technologies Ltd. ("CST") do not achieve their intended results, our business, financial condition, and
results of operations could be materially and adversely affected.
The integrations of Schrader and CST into our operations are significant undertakings and continue to require attention
from our management team. Actual synergies and the expenses required to realize these synergies could differ materially
from our expectations, and we cannot assure you that these synergies will not have other adverse effects on our business.
Failure to achieve the anticipated benefits of these acquisitions could result in increased costs or decreased revenue and could
materially adversely affect our business, financial condition, and/or results of operations.
Risks Related to Legal and Regulatory Matters
We are subject to risks associated with our non-U.S. operations, including changes in local government regulations
and policies, exchange controls, and foreign exchange exposure, which could adversely impact the reported results of
operations from our international businesses.
Our subsidiaries located outside of the U.S. generated approximately 65% of our net revenue in fiscal year 2017, and
we expect sales from non-U.S. markets to continue to represent a significant portion of our total net revenue. International
sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and
trade barriers, investments, taxation, exchange controls, and repatriation of earnings.
A portion of our net revenue, expenses, receivables, and payables are denominated in currencies other than the U.S.
dollar ("USD"). We are, therefore, subject to foreign currency risks and foreign exchange exposure. Changes in the relative
values of currencies occur from time to time and could affect our operating results. For financial reporting purposes, we, and
each of our subsidiaries, operate under a USD functional currency because of the significant influence of USD on our
operations. In certain instances, we enter into transactions that are denominated in a currency other than 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 recorded in Other, net in the consolidated statements of operations. During times of a weakening USD, our reported
international sales and earnings may increase because the non-U.S. currency will translate into more USD. Conversely,
during times of a strengthening USD, our reported international sales and earnings may decrease because the local currency
will translate into fewer USD.
There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic
conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of
legal disputes through certain foreign legal systems, the collection of receivables, exposure to possible expropriation or other
government actions, unsettled political conditions, and possible terrorist attacks. These and other factors may have a material
adverse effect on our non-U.S. operations and, therefore, on our business and results of operations.
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We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (the "FCPA"), the United
Kingdom's Bribery Act, and similar worldwide anti-bribery laws.
The U.S. FCPA, the United Kingdom's Bribery Act, and similar worldwide anti-bribery laws generally prohibit
companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or
retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that
have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-bribery
laws may conflict with local customs and practices. Despite our training and compliance program, we cannot provide
assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our
employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a
material adverse effect on our results of operations, financial position, and/or cash flows.
Export of our products is subject to various export control regulations and may require a license from either the U.S.
Department of State, the U.S. Department of Commerce, or the U.S. Department of the Treasury. Any failure to
comply with such regulations could result in governmental enforcement actions, fines, penalties, or other remedies,
which could have a material adverse effect on our business, results of operations, and financial condition.
We must comply with the U.S. Export Administration Regulations, International Traffic in Arms Regulation ("ITAR"),
and the sanctions, regulations, and embargoes administered by the Office of Foreign Assets Control (“OFAC”). Certain of our
products that have military applications are on the munitions list of ITAR and require an individual validated license in order
to be exported to certain jurisdictions. These restrictions also apply to technical data for design, development, production,
use, repair, and maintenance of such ITAR-controlled products. The export of ITAR-controlled products or technical data
requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. Any delays
in obtaining, or our inability to obtain, such licenses could result in a material reduction in revenue.
We export products that are subject to other export regulations. Any changes in these export regulations may further
restrict the export of our products, and we may cease to be able to procure export licenses for our products under existing
regulations. This area remains fluid in terms of regulatory developments. Should we need an export license under existing
regulations, the length of time required by the licensing process can vary, potentially delaying the shipment of products and
the recognition of the corresponding revenue. We have no control over the time it takes to process an export license. Any
restriction on the export of a significant product line or a significant amount of our products could cause a significant
reduction in revenue.
We have discovered in the past, and may discover in the future, deficiencies in our OFAC and ITAR compliance
programs. Although we continue to enhance these compliance programs, we cannot assure you that any such enhancements
will ensure that we are in compliance with applicable laws and regulations at all times, or that applicable authorities will not
raise compliance concerns or perform audits to confirm our compliance with applicable laws and regulations. Any failure by
us to comply with applicable laws and regulations could result in governmental enforcement actions, fines or penalties,
criminal and/or civil proceedings, or other remedies, any of which could have a material adverse effect on our business,
results of operations, and/or financial condition.
Changes in existing environmental and/or safety laws, regulations, and programs could reduce demand for
environmental and/or safety-related products, which could cause our revenue to decline.
A significant amount of our business is generated either directly or indirectly as a result of existing laws, regulations,
and programs related to environmental protection, fuel economy, energy efficiency, and safety regulation. Accordingly, a
relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding,
implementation, or enforcement of these programs, could result in a decline in demand for environmental and/or safety
products, which may have a material adverse effect on our revenue.
Our operations expose us to the risk of material environmental liabilities, litigation, government enforcement actions,
and reputational risk.
We are subject to numerous federal, state, and local environmental protection and health and safety laws and regulations
in the various countries where we operate and where our products are sold. These laws and regulations govern, among other
things:
•
the generation, storage, use, and transportation of hazardous materials;
19
•
•
emissions or discharges of substances into the environment;
investigation and remediation of hazardous substances or materials at various sites;
• greenhouse gas emissions;
• product hazardous material content; and
•
the health and safety of our employees.
We may not have been, or we may not always be, in compliance with all environmental and health and safety laws and
regulations. If we violate these laws, we could be fined, criminally charged, or otherwise sanctioned by regulators. In
addition, environmental and health and safety laws are becoming more stringent, resulting in increased costs and compliance
burdens.
Certain environmental laws assess liability on current or previous owners or operators of real property for the costs of
investigation, removal, and remediation of hazardous substances or materials at their properties or properties at which they
have disposed of hazardous substances. Liability for investigation, removal, and remediation costs under certain federal and
state laws is retroactive, strict, and joint and several. In addition to cleanup actions brought by governmental authorities,
private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.
We cannot provide assurance that our costs of complying with current or future environmental protection and health and
safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our
estimates or adversely affect our results of operations, financial position, and cash flows, or that we will not be subject to
additional environmental claims for personal injury, property damage, and/or cleanup in the future based on our past, present,
or future business activities.
We may be adversely affected by environmental, safety, and governmental regulations or concerns.
We are subject to the requirements of environmental and occupational safety and health laws and regulations in the U.S.
and other countries, as well as product performance standards established by quasi-governmental and industrial standards
organizations. We cannot assure you that we have been, and will continue to be, in compliance with all of these requirements
on account of circumstances or events that have occurred or exist but that we are unaware of, or that we will not incur
material costs or liabilities in connection with these requirements in excess of amounts we have accrued. In addition, these
requirements are complex, change frequently, and have tended to become more stringent over time. These requirements may
change in the future in a manner that could have a material adverse effect on our business, results of operations, and financial
condition. We have made, and may be required in the future to make, capital and other expenditures to comply with
environmental requirements. In addition, certain of our subsidiaries are subject to pending litigation raising various
environmental and human health and safety claims. We cannot assure you that our costs to defend and/or settle these claims
will not be material.
Our products are subject to various requirements related to chemical usage, hazardous material content, and
recycling.
The E.U., China, and other jurisdictions in which our products are sold have enacted or are proposing to enact laws
addressing environmental and other impacts from product disposal, use of hazardous materials in products, use of chemicals
in manufacturing, recycling of products at the end of their useful life, and other related matters. These laws include but are
not limited to the E.U. Restriction of Hazardous Substances ("RoHS"), End of Life Vehicle ("ELV"), and Waste Electrical and
Electronic Equipment Directives; the E.U. Registration, Evaluation, Authorization, and Restriction of Chemicals ("REACH")
regulation; and the China law on Management Methods for Controlling Pollution by Electronic Information Products. These
laws prohibit the use of certain substances in the manufacture of our products and directly and indirectly impose a variety of
requirements for modification of manufacturing processes, registration, chemical testing, labeling, and other matters. These
laws continue to proliferate and expand in these and other jurisdictions to address other materials and other aspects of our
product manufacturing and sale. These laws could make the manufacture or sale of our products more expensive or
impossible, could limit our ability to sell our products in certain jurisdictions, and could result in liability for product recalls,
penalties, or other claims.
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Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our products
and technology.
The electronics industry is characterized by litigation regarding patent and other intellectual property rights. Within this
industry, companies have become more aggressive in asserting and defending patent claims against competitors. There can be
no assurance that we will not be subject to future litigation alleging infringement or invalidity of certain of our intellectual
property rights, or that we will not have to pursue litigation to protect our property rights. Depending on the importance of
the technology, product, patent, trademark, or trade secret in question, an unfavorable outcome regarding one of these matters
may have a material adverse effect on our results of operations, financial position, and/or cash flows.
We may be subject to claims that our products or processes infringe on the intellectual property rights of others,
which may cause us to pay unexpected litigation costs or damages, modify our products or processes, or prevent us
from selling our products.
Third parties may claim that our processes and products infringe on their intellectual property rights. Whether or not
these claims have merit, we may be subject to costly and time consuming legal proceedings, and this could divert
management’s attention from operating our business. If these claims are successfully asserted against us, we could be
required to pay substantial damages, make future royalty payments, and/or could be prevented from selling some or all of our
products. We also may be obligated to indemnify our business partners or customers in any such litigation. Furthermore, we
may need to obtain licenses from these third parties or substantially re-engineer or rename our products in order to avoid
infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-
engineer or rename our products successfully. If we are prevented from selling some or all of our products, our sales could be
materially adversely affected.
We may incur material losses and costs as a result of product liability, warranty, and recall claims that may be
brought against us.
We have been, and may continue to be, exposed to product liability and warranty claims in the event that our products
actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in death, bodily
injury, and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future
and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we
may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates
to product safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all
of the repair or replacement costs of these products under warranty when the product supplied did not perform as represented.
In addition, a product recall could generate substantial negative publicity about our business and interfere with our
manufacturing plans and product delivery obligations as we seek to repair affected products. Our costs associated with
product liability, warranty, and recall claims could be material.
We are a defendant to a variety of litigation in the course of our business that could cause a material adverse effect on
our results of operations, financial position, and/or cash flows.
In the normal course of business, we are, from time to time, a defendant in litigation, including litigation alleging the
infringement of intellectual property rights, anti-competitive behavior, product liability, breach of contract, and employment-
related claims. In certain circumstances, patent infringement and antitrust laws permit successful plaintiffs to recover treble
damages. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in
defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to
injunctions or other equitable remedies, that could cause a material adverse effect on our results of operations, financial
position, and/or cash flows.
We have recorded a significant amount of goodwill and other identifiable intangible assets, and we may be required to
recognize goodwill or intangible asset impairments, which would reduce our earnings.
We have recorded a significant amount of goodwill and other identifiable intangible assets. Goodwill and other
intangible assets, net totaled approximately $3.9 billion as of December 31, 2017, or 59% of our total assets. Goodwill, which
represents the future economic benefits arising from other assets acquired in a business combination that are not individually
identified and separately recognized, was approximately $3.0 billion as of December 31, 2017, or 45% of our total assets.
Goodwill and other identifiable intangible assets were recognized at fair value as of the corresponding acquisition date.
Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our
performance, adverse market conditions, adverse changes in laws or regulations, significant unexpected or planned changes
21
in the use of assets, and a variety of other factors. The amount of any quantified impairment must be expensed immediately
as a charge that is included in operating income, which may impact our ability to raise capital. Although no impairment
charges have been recorded during the past three fiscal years, should certain assumptions used in the development of the fair
value of our reporting units change, we may be required to recognize goodwill or other intangible asset impairments. Refer to
Note 5, "Goodwill and Other Intangible Assets," of our audited consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for more details on our goodwill and other identifiable intangible assets. Refer to Critical
Accounting Policies and Estimates, included in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Annual Report on Form 10-K for further discussion of the assumptions
used in the development of the fair value of our reporting units.
New legislation on tax reform could have a material impact on the Company's financial position and/or results of
operations.
On December 22, 2017, President Donald Trump signed into U.S. law the Tax Cuts and Jobs Act of 2017 (“Tax
Reform”). The exact ramifications of the legislation is subject to interpretation and could have a material impact on our
financial position and/or results of operations. We continue to analyze the full impact of enacted legislation and additional
guidance as provided. Refer to Note 9, "Income Taxes," of our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for further discussion of the Tax Reform.
Taxing authorities could challenge our historical and future tax positions or our allocation of taxable income among
our subsidiaries, or tax laws to which we are subject could change in a manner adverse to us.
Sensata Technologies Holding N.V. is a Dutch public limited liability company that operates through various
subsidiaries in a number of countries throughout the world. Consequently, we are subject to tax laws, treaties, and regulations
in the countries in which we operate, and these laws and treaties are subject to interpretation. We have taken, and will
continue to take, tax positions based on our interpretation of such tax laws. There can be no assurance that a taxing authority
will not have a different interpretation of applicable law and assess us with additional taxes. Should we be assessed with
additional taxes, this may result in a material adverse effect on our results of operations, financial condition, and/or cash
flows.
We conduct operations through manufacturing and distribution subsidiaries in numerous tax jurisdictions around the
world. Our transfer pricing arrangements are not generally binding on applicable tax authorities. Our transfer pricing
methodology is based on economic studies. The prices charged for products, services, and financing among our companies,
or the royalty rates and other amounts paid for intellectual property rights, could be challenged by the various tax authorities,
resulting in additional tax liabilities, interest, and penalties.
Tax laws are subject to change in the various countries in which we operate. Such future changes could be unfavorable
and result in an increased tax burden to us. Refer to Note 9, "Income Taxes," of our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for further discussion related to income taxes.
Changes to current policies by the U.S. government could adversely affect our business.
Possible changes to current policies by the U.S. government could affect our business, including potentially through
increased import tariffs and other influences on U.S. trade relations with other countries (e.g., Mexico and China). The
imposition of tariffs or other trade barriers could increase our costs in certain markets, and may cause our customers to find
alternative sourcing. In addition, other countries may change their own policies on business and foreign investment in
companies in their respective countries. Additionally, it is possible that U.S. policy changes and uncertainty about such
changes could increase market volatility and currency exchange rate fluctuations. Market volatility and currency exchange
rate fluctuations could impact our results of operations and/or financial condition.
The vote by the United Kingdom to leave the European Union could adversely affect us.
The U.K. held a referendum on June 23, 2016 on its membership in the E.U., in which a majority of voters in the U.K.
voted to exit the E.U. (commonly referred to as "Brexit"). The U.K.'s departure from the E.U. is currently scheduled to take
place on Friday, March 29, 2019. The U.K. and the E.U. continue to have negotiations regarding various transition issues and
are in the process of creating a plan for a two-year transition period following the scheduled exit. Brexit could lead to legal
uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or
replicate. The referendum also has given rise to calls for the governments of other E.U. member states to consider withdrawal
from the E.U.
22
The effects of Brexit will depend on the negotiations between the U.K. and the E.U. and any agreements the U.K.
makes to retain access to E.U. markets either during a transitional period or more permanently. Brexit could adversely affect
European or worldwide economic or market conditions and contribute to instability in global financial markets. We have
substantial sales and operations in both the E.U. and the U.K. Any of these effects of Brexit, and others we cannot anticipate,
could adversely affect our business, business opportunities, results of operations, and/or financial condition.
Risks Related to our Domicile in the Netherlands
We are a Dutch public limited liability company, and it may be difficult for shareholders to obtain or enforce
judgments against us in the U.S.
Sensata Technologies Holding, N.V. is incorporated under the laws of the Netherlands, and a substantial portion of our
assets are located outside of the U.S. As a result, although we have appointed an agent for service of process in the U.S., it
may be difficult or impossible for U.S. investors to effect service of process upon us within the U.S. or to realize any
judgment against us in the U.S., including for civil liabilities under U.S. securities laws. Therefore, any judgment obtained
against us in any U.S. federal or state court may have to be enforced in the courts of the Netherlands, or such other foreign
jurisdiction, as applicable. Because there is no treaty or other applicable convention between the U.S. and the Netherlands
with respect to the recognition and enforcement of legal judgments regarding civil or commercial matters, a judgment
rendered by any U.S. federal or state court will not be enforced by the courts of the Netherlands unless the underlying claim
is relitigated before a Dutch court. Under current practice, however, a Dutch court will generally grant the same judgment
without a review of the merits of the underlying claim (i) if that judgment resulted from legal proceedings compatible with
Dutch notions of due process, (ii) if that judgment does not contravene public policy of the Netherlands, and (iii) if the
jurisdiction of the U.S. federal or state court has been based on internationally accepted principles of private international
law.
To date, we are aware of only limited published case law in which Dutch courts have considered whether such a
judgment rendered by a U.S. federal or state court would be enforceable in the Netherlands. In all of these cases, Dutch lower
courts applied the aforementioned criteria with respect to the U.S. judgment. If all three criteria noted above were satisfied,
the Dutch courts granted the same judgment without a review of the merits of the underlying claim.
Investors should not assume, however, that the courts of the Netherlands, or such other foreign jurisdiction, would
enforce judgments of U.S. courts obtained against us predicated upon the civil liability provisions of the U.S. securities laws,
or that such courts would enforce, in original actions, liabilities against us predicated solely upon such laws.
Our shareholders’ rights and responsibilities are governed by Dutch law and differ in some respects from the rights
and responsibilities of shareholders under U.S. law, and shareholder rights under Dutch law may not be as clearly
established as shareholder rights are established under the laws of some U.S. jurisdictions.
Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in
the Netherlands. The rights of our shareholders and the responsibilities of members of our Board of Directors under Dutch
law may not be as clearly established as under the laws of some U.S. jurisdictions. In the performance of its duties, our Board
of Directors is required by Dutch law to consider the interests of our company and our business, including our shareholders,
our employees, and other stakeholders, in all cases with reasonableness and fairness. It is possible that some of these parties
will have interests that are different from, or in addition to, the interests of our shareholders.
In addition, the rights of holders of ordinary shares, and many of the rights of shareholders as they relate to, for
example, the exercise of shareholder rights, are governed by Dutch law and our articles of association and differ from the
rights of shareholders under U.S. law. For example, Dutch law does not grant appraisal rights to a company’s shareholders
who wish to challenge the consideration to be paid upon a merger or consolidation of the company.
The provisions of Dutch corporate law and our articles of association have the effect of concentrating control over
certain corporate decisions and transactions in the hands of our Board of Directors. As a result, holders of our shares may
have more difficulty in protecting their interests in the face of actions by members of our Board of Directors than if we were
incorporated in the U.S.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
23
ITEM 2.
PROPERTIES
As of December 31, 2017, we occupied 19 principal manufacturing facilities and business centers totaling
approximately 3,577 thousand square feet, with the majority devoted to research, development, engineering, manufacturing,
and assembly. We lease approximately 433 thousand square feet for our United States headquarters in Attleboro,
Massachusetts. Of our principal facilities, approximately 1,483 thousand square feet are owned and approximately 2,094
thousand square feet are leased. A significant portion of our owned properties and equipment is subject to a lien under the
Senior Secured Credit Facilities. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for additional information on the Senior Secured Credit Facilities. We consider our
manufacturing facilities sufficient to meet our current operational requirements. The table below lists the location of our
principal executive and operating facilities:
Country
Bulgaria
Bulgaria
Bulgaria
China
China
China
France
Germany
Malaysia
Mexico
Mexico
Netherlands
United Kingdom
United Kingdom
United Kingdom
United States
United States
United States
Location
Botevgrad
Plovdiv
Sofia
Baoying
Baoying
Changzhou
Pontarlier
Berlin
Subang Jaya
Aguascalientes
Tijuana (1)
Hengelo
Antrim
Carrickfergus
Swindon
Attleboro, MA
Altavista, VA
Thousand Oaks, CA
Operating Segment
Performance
Sensing
Sensing
Solutions
Owned or Leased
Approximate
Square Footage (in
thousands)
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Owned
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
137
125
108
296
385
488
178
33
123
411
287
94
117
63
34
433
150
115
X
X
X
X
X
X
X
X
(1) This location includes two principal manufacturing facilities.
Leases covering our currently occupied principal leased facilities expire at varying dates within the next 19 years. We
do not anticipate difficulty in retaining occupancy through lease renewals, month-to-month occupancy, or by replacing the
leased facilities with equivalent facilities. An increase in demand for our products may require us to expand our production
capacity, which could require us to identify and acquire or lease additional manufacturing facilities. We believe that suitable
additional or substitute facilities will be available as required; however, if we are unable to acquire, integrate, and move into
production the facilities, equipment, and personnel necessary to meet such an increase in demand, our customer relationships,
results of operations, and/or financial condition may suffer materially.
24
ITEM 3. LEGAL PROCEEDINGS
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. From time to time, we are also involved in
disagreements with vendors and customers. 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 result of operations, financial position, or cash flows.
The Internal Revenue Code requires that companies disclose in their Annual Report on Form 10-K whether they have
been required to pay penalties to the Internal Revenue Service (“IRS”) for certain transactions that have been identified by
the IRS as abusive or that have a significant tax avoidance purpose. We have not been required to pay any such penalties.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
25
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our ordinary shares trade on the New York Stock Exchange (“NYSE”) under the symbol “ST.” The following table sets
forth the high and low intraday sales prices per share of our ordinary shares, as reported by the NYSE, for the periods
indicated:
2016
2017
Quarter ended March 31, 2016
Quarter ended June 30, 2016
Quarter ended September 30, 2016
Quarter ended December 31, 2016
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Quarter ended December 31, 2017
Performance Graph
Price Range
High
Low
$
$
$
$
$
$
$
$
45.60 $
39.89 $
40.69 $
41.43 $
45.30 $
43.93 $
48.52 $
53.30 $
29.92
32.07
33.81
35.10
39.19
38.71
42.80
46.90
The following graph compares the total shareholder return of our ordinary shares since December 31, 2012, to the total
shareholder return since that date on the Standard & Poor’s ("S&P") 500 Stock Index and the S&P 500 Industrial Index. The
graph assumes that the value of the investment in our ordinary shares and each index was $100.00 on December 31, 2012.
Total Shareholder Return of $100.00 Investment from December 31, 2012
Sensata
S&P 500
S&P 500 Industrial
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
$
$
$
100.00 $
119.37 $
161.36 $
141.81 $
119.92 $
100.00 $
129.60 $
144.36 $
143.31 $
156.98 $
100.00 $
137.63 $
147.98 $
141.00 $
163.67 $
157.36
187.47
194.01
26
The information in the graph and table above is not “soliciting material,” is not deemed “filed” with the United States
("U.S.") Securities and Exchange Commission, and is not to be incorporated by reference in any of our filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference.
The total shareholder return shown on the graph represents past performance and should not be considered an indication of
future price performance.
Stockholders
As of January 12, 2018, there was one primary holder of record of our ordinary shares, Cede & Co. (which acts as
nominee shareholder for the Depository Trust Company), and approximately 43,900 beneficial owners, including beneficial
owners whose shares are held in "street name" by banks, brokers, and other financial institutions.
Dividends
We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare any such
dividends in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary
shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries,
including restrictions under the terms of the agreements governing our indebtedness. In that regard, our indirect, wholly-
owned subsidiary, Sensata Technologies B.V. ("STBV"), is limited in its ability to pay dividends or otherwise make
distributions to its immediate parent company and, ultimately, to us. Refer to Note 8, "Debt," of our audited consolidated
financial statements included elsewhere in this Annual Report on Form 10-K for additional information on our dividend
restrictions.
In addition, under Dutch law, STBV, Sensata Technologies Intermediate Holding B.V., and certain of our other
subsidiaries that are Dutch private limited liability companies may only pay dividends or make other distributions to the
extent that the shareholders' equity of such subsidiary exceeds the reserves required to be maintained by law or under its
articles of association.
Under Dutch law, we may only pay dividends out of profits as shown in our adopted annual accounts prepared in
accordance with International Financial Reporting Standards. Should we wish to do so, we would only be able to declare and
pay dividends to the extent our equity exceeds the sum of the paid and called up portion of our ordinary share capital and the
reserves that must be maintained in accordance with the provisions of Dutch law and our articles of association. Subject to
these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital
requirements, contractual restrictions, our overall financial condition, and any other factors deemed relevant by our
shareholders and Board of Directors.
U.S. holders of our ordinary shares are generally not subject to any Dutch taxes on income or capital gains derived
from ownership or disposal of such ordinary shares. However, we are generally required to withhold Dutch income tax (at a
rate of 15%) on actual or deemed dividend distributions. There is no reciprocal tax treaty between the U.S. and the
Netherlands regarding withholding.
Issuer Purchases of Equity Securities
Period
October 1 through October 31, 2017
November 1 through November 30, 2017
December 1 through December 31, 2017
Total
__________________
Total Number
of Shares
Purchased
Weighted-
Average
Price
Paid per
Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan or
Programs
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plan
or Programs
(in millions)
—
$
—
$
1,827 (1) $
1,827
$
—
—
51.28
51.28
— $
— $
— $
— $
250.0
250.0
250.0
250.0
(1) Pursuant to the “withhold to cover” method for collecting and paying withholding taxes for our employees upon the vesting of restricted
securities, we withheld from certain employees the ordinary shares noted in the table above to cover such tax withholdings. These
transactions took place outside of a publicly-announced repurchase plan. The weighted-average price per ordinary share listed in the above
table is the weighted-average of the fair market prices at which we calculated the number of ordinary shares withheld to cover tax for the
employees.
27
ITEM 6.
SELECTED FINANCIAL DATA
We have derived the selected consolidated statement of operations and other financial data for the years ended
December 31, 2017, 2016, and 2015, and the selected consolidated balance sheet data as of December 31, 2017 and 2016,
from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We have derived
the selected consolidated statement of operations and other financial data for the years ended December 31, 2014 and 2013,
and the selected consolidated balance sheet data as of December 31, 2015, 2014, and 2013, from audited consolidated
financial statements not included in this Annual Report on Form 10-K.
You should read the following information in conjunction with Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and our audited consolidated financial statements and accompanying notes
thereto included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the
results to be expected in any future period.
(Amounts in thousands, except per share data)
Statement of Operations Data(a):
Net revenue
Operating costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Amortization of intangible assets
Restructuring and special charges
Sensata Technologies Holding N.V. (consolidated)
For the year ended December 31,
2017
2016
2015
2014
2013
$
3,306,733 $
3,202,288 $
2,974,961 $ 2,409,803 $
1,980,732
2,141,308
2,084,261
1,977,799
1,567,334
1,256,249
130,204
302,811
161,050
18,975
126,665
293,587
201,498
4,113
123,666
271,361
186,632
21,919
82,178
220,105
146,704
21,893
57,950
163,145
134,387
5,520
Total operating costs and expenses
2,754,348
2,710,124
2,581,377
2,038,214
1,617,251
Profit from operations
Interest expense, net
Other, net(b)
Income before taxes
(Benefit from)/provision for income taxes (c)
Net income
Basic net income per share
Diluted net income per share
552,385
492,164
393,584
371,589
(159,761)
(165,818)
(137,626)
(106,104)
9,817
402,441
(5,916)
(4,901)
321,445
59,011
(50,329)
205,629
(142,067)
(12,059)
253,426
(30,323)
363,481
(93,915)
(35,629)
233,937
45,812
$
$
$
408,357 $
262,434 $
347,696 $
283,749 $
188,125
2.39 $
2.37 $
1.54 $
1.53 $
2.05 $
2.03 $
1.67 $
1.65 $
1.07
1.05
Weighted-average ordinary shares outstanding—
basic
Weighted-average ordinary shares outstanding—
diluted
171,165
170,709
169,977
170,113
176,091
172,169
171,460
171,513
172,217
179,024
Other Financial Data(a):
Net cash provided by/(used in):
Operating activities
Investing activities
Financing activities
Capital expenditures
$
557,646 $
521,525 $
533,131 $
382,568 $
395,838
(140,722)
(174,778)
(1,166,369)
(1,430,065)
(15,263)
(144,584)
(337,582)
(130,217)
764,172
940,930
(177,196)
(144,211)
(87,650)
(403,831)
(82,784)
28
Balance Sheet Data (as of December 31)(a):
Cash and cash equivalents
Working capital(d)
Total assets
Total debt, net including capital lease and other financing
obligations
Total shareholders’ equity
__________________
2017
2016
2015
2014
2013
$
753,089 $
351,428 $
342,263 $
211,329 $
1,218,796
6,641,525
3,270,269
2,345,626
758,189
412,748
441,258
6,240,976
6,298,910
5,087,507
3,479,692
3,273,594
1,942,007
3,600,991
1,668,576
2,812,734
1,302,892
1,704,834
1,141,588
317,896
537,139
(a) Amounts shown reflect the acquisitions of Wabash Worldwide Holding Corp. ("Wabash"), Magnum Energy Incorporated
("Magnum"), CoActive US Holdings, Inc. ("DeltaTech Controls"), and August Cayman Company, Inc. ("Schrader") in
2014 and certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in 2015.
(b) Other, net for the years ended December 31, 2017, 2016, 2015, 2014, and 2013 primarily includes: (losses) recognized
on debt financing transactions of $(2.7) million, $0.0 million, $(25.5) million, $(1.9) million, and $(9.0) million,
respectively; gains/(losses) on commodity forward contracts of $10.0 million, $7.4 million, $(18.5) million, $(9.0)
million, and $(23.2) million, respectively; and gains/(losses) related to foreign currency exchange rates (including gains
and losses related to currency remeasurement of net monetary assets and gains and losses on foreign currency forward
contracts) of $2.4 million, $(12.5) million, $(6.0) million, $(1.4) million, and $(2.4) million, respectively. Refer to Note
2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for further details of amounts included in Other, net.
(c) For the year ended December 31, 2017, the benefit from income taxes includes a net benefit of approximately $73.7
million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. For the year ended December 31,
2015, the benefit from income taxes includes a net benefit of approximately $180.0 million, primarily related to the
release of a portion of our United States ("U.S.") valuation allowance in connection with the acquisition of CST. For the
year ended December 31, 2014, the benefit from income taxes includes a net benefit of approximately $71.1 million
related to the release of a portion of our U.S. valuation allowance in connection with certain 2014 acquisitions. Refer to
Note 9, "Income Taxes," of our audited consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for additional information.
(d) We define working capital as current assets less current liabilities. Working capital amounts for prior years have not been
recast to include assets designated as held for sale in any year.
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is intended to help the reader understand our business, financial condition,
results of operations, liquidity, and capital resources. You should read the following discussion in conjunction with Item 1,
“Business,” Item 6, “Selected Financial Data,” and our audited consolidated financial statements and the accompanying
notes thereto included elsewhere in this Annual Report on Form 10-K.
The statements in this discussion regarding industry outlook, our expectations regarding our future performance,
liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described
in Item 1A, “Risk Factors,” included elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially
from those contained in or implied by any forward-looking statements.
Overview
Sensata Technologies Holding N.V. ("Sensata N.V.") and its wholly-owned subsidiaries, collectively referred to as the
"Company," "Sensata," "we," "our," and "us," is a global industrial technology company engaged in the development,
manufacture, and sale of sensors and controls. We can trace our origins back to entities that have been engaged in the sensors
and controls business since 1916.
We conduct our operations through subsidiary companies that operate business and product development centers
primarily in the United States (the "U.S."), the Netherlands, Belgium, Bulgaria, China, Germany, Japan, South Korea, and the
United Kingdom (the "U.K."); and manufacturing operations primarily in China, Malaysia, Mexico, Bulgaria, France,
Germany, the U.K., and the U.S. We organize our operations into two businesses, Performance Sensing and Sensing
Solutions.
We generated 41.3%, 27.3%, and 31.4% of our net revenue in the Americas, Asia, and Europe, respectively, for the year
ended December 31, 2017. Our largest customer accounted for approximately 8% of our net revenue for the year ended
December 31, 2017. Our net revenue for the year ended December 31, 2017 was derived from the following end markets:
24.0% from European automotive, 18.6% from North American automotive, 19.1% from Asia and rest of world automotive,
14.3% from heavy vehicle off-road ("HVOR"), 9.4% from industrial, 6.3% from appliance and heating, ventilation, and air
conditioning ("HVAC"), 4.6% from aerospace, and 3.7% from all other end markets. Within many of our end markets, we are
a significant supplier to multiple original equipment manufacturers, reducing our exposure to global fluctuations in market
share within individual end markets.
We produce a wide range of sensors and controls for applications such as pressure, temperature, and speed and position
sensors in automotive systems, thermal circuit breakers in aircraft, and bimetal current and temperature control devices in
electric motors. We compete in growing global market segments driven by demand for products that are safe, efficient,
environmentally friendly, and also influenced by the emerging trends in electrification and autonomy. We have a long-
standing position in emerging markets, including a presence in China for more than 20 years.
Refer to Item 1, "Business," included elsewhere in this Annual Report on Form 10-K for a more detailed discussion of
our business, including our Performance Sensing and Sensing Solutions segments, and information about our acquisition
history.
Selected Segment Information
We manage our Performance Sensing and Sensing Solutions businesses separately and report their results of operations
as two segments. Set forth below is selected information for each of these segments for each of the periods presented.
Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add
due to the effect of rounding.
30
The following table presents net revenue by segment and as a percentage of total net revenue for the identified periods:
(Dollars in millions)
Net revenue
Performance Sensing
Sensing Solutions
Total
For the year ended December 31,
2017
2016
2015
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
$
2,460.6
74.4% $
2,385.4
74.5% $
2,346.2
846.1
25.6
816.9
25.5
628.7
$
3,306.7
100.0% $
3,202.3
100.0% $
2,975.0
78.9%
21.1
100.0%
The following table presents segment profit and segment profit as a percentage of segment net revenue for the
identified periods:
(Dollars in millions)
Segment profit
Performance Sensing
Sensing Solutions
Total
For the year ended December 31,
2017
2016
2015
Percent of
Segment
Net Revenue
Percent of
Segment
Net Revenue
Amount
Percent of
Segment
Net Revenue
Amount
Amount
$
$
664.2
277.5
941.6
27.0% $
32.8%
$
615.5
261.9
877.4
25.8% $
32.1%
$
598.5
199.7
798.3
25.5%
31.8%
For a reconciliation of total segment profit to profit from operations, refer to Note 18, "Segment Reporting," of our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Factors Affecting Our Operating Results
The following discussion describes components of the consolidated statements of operations, as well as factors that
impact those components. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K, and Critical Accounting Policies and Estimates included
elsewhere in this Management's Discussion and Analysis for further discussion of the accounting policies and estimates made
related to these components.
Net revenue
We generate revenue from the sale of sensor and control products across all major geographic areas. We believe
regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the Corporate Average Fuel
Economy ("CAFE") requirements in the U.S., "Euro 6d" requirements in Europe, and "China National 6" requirements in
China, as well as customer demand for operator productivity and convenience, drive the need for advancements in engine
management, efficiency, safety features, and operator controls. These advancements lead to sensor growth rates that exceed
underlying end market demand in many of our key markets that we expect will continue to offer us significant growth
opportunities. The technology-driven, highly-customized, and integrated nature of our products requires customers to invest
heavily in certification and qualification to ensure proper functioning of the system in which our products are embedded. We
believe the capital commitment and time required for this process significantly increases the switching costs for customers
once a particular sensor or control has been designed and installed in a system. As a result, our sensors and controls are rarely
substituted during a product lifecycle, which in the case of the automotive end market typically lasts five to seven years. We
focus on new applications that will help us secure new business and drive long-term growth. New applications for sensors
typically provide an opportunity to define a leading application technology in collaboration with our customers.
Because we derive a significant portion of our net revenue from sales in our automotive end markets (62% in 2017),
demand for our products is driven in large part by conditions in this industry. However, outside of the automotive industry,
we sell our products to end-users in a wide range of industries, end markets, and geographies. As a result, the drivers of
demand for these products vary considerably and are influenced by the conditions in these industries, end markets, or
geographic regions. Our overall net revenue is generally impacted by the following factors:
•
fluctuations in overall economic activity within the geographic regions in which we operate;
31
•
•
•
•
•
•
•
•
underlying growth in one or more of our core end markets, either worldwide or in particular geographies in which
we operate;
the number of sensors and/or controls used within existing applications, or the development of new applications
requiring sensors and/or controls, due to regulations or other factors;
the “mix” of products sold, including the proportion of new or upgraded products and their pricing relative to
existing products;
changes in product sales prices (including quantity discounts, rebates, and cash discounts for prompt payment);
changes in the level of competition faced by our products, including the launch of new products by competitors;
our ability to successfully develop, launch, and sell new products and applications;
fluctuations in exchange rates; and
acquisitions.
While the factors described above impact net revenue in each of our operating segments, the impact of these factors on
our operating segments can differ. For more information about revenue risks relating to our business, refer to Item 1A, “Risk
Factors,” included elsewhere in this Annual Report on Form 10-K.
Cost of revenue
Our strategy of leveraging core technology platforms and focusing on high-volume applications enables us to provide
our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our
products are embedded. We have achieved our current cost position through a continuous process of migration to best-cost
manufacturing locations, transformation of our supply chain to best-cost sourcing, product design improvements, and
ongoing productivity-enhancing initiatives.
We manufacture the majority of our products and subcontract only a limited number of products to third parties. As
such, our cost of revenue consists principally of the following:
•
•
•
•
Production Materials Costs. We purchase much of the materials used in production on a global best-cost basis, but
we are still impacted by global and local market conditions. A portion of our production materials contains resins
and metals, such as copper, nickel, zinc, aluminum, gold, silver, platinum, and palladium, and the cost of these
materials may vary with underlying commodities pricing. However, we enter into forward contracts to
economically hedge a portion of our exposure to the potential change in prices associated with certain of these
commodities. The terms of these contracts fix the price at a future date for various notional amounts associated
with these commodities. Gains and losses recognized on these non-designated derivatives are included in Other,
net.
Employee Costs. Employee costs include wages and benefits for employees involved in our manufacturing
operations. These costs generally fluctuate on an aggregate basis in direct correlation with changes in production
volumes. As a percentage of revenue, these costs may decline as a result of economies of scale associated with
higher production volumes, and conversely, may increase with lower production volumes. These costs also will
fluctuate based on local market conditions. We rely on contract workers for direct labor in certain geographies. As
of December 31, 2017, we had approximately 1,780 direct labor contract workers on a worldwide basis.
Sustaining Engineering Activity Costs. These costs relate to modifications of existing products for use by new and
existing customers in familiar applications.
Other. Our remaining cost of revenue primarily consists of:
•
•
•
gains and losses on certain foreign currency forward contracts that are designated as cash flow hedges;
depreciation of fixed assets;
freight costs;
32
•
warehousing expenses;
• maintenance and repair expenses;
•
•
operating supplies; and
other general manufacturing expenses, such as expenses for energy consumption and operating lease expense.
The main factors that influence our cost of revenue as a percent of net revenue include:
•
•
•
•
•
•
•
•
•
•
changes in the price of raw materials, including certain metals;
implementation of cost improvement measures aimed at increasing productivity, including reduction of fixed
production costs, refinements in inventory management, design and process driven changes, and the coordination
of procurement within each subsidiary and at the business level;
changes in production volumes - production costs are capitalized in inventory based on normal production
volumes, as revenue increases, the fixed portion of these costs does not;
transfer of production to our lower cost manufacturing facilities;
product lifecycles, as we typically incur higher cost of revenue associated with excess manufacturing capacity
during the initial stages of product launches and during the phase-out of discontinued products;
the increase in the carrying value of inventory that is adjusted to fair value as a result of the application of
purchase accounting associated with acquisitions;
depreciation expense, including amounts arising from the adjustment of Property, Plant & Equipment ("PP&E") to
fair value associated with acquisitions;
fluctuations in foreign currency exchange rates;
product mix; and
acquisitions, as acquired businesses may generate higher or lower cost of revenue as a percentage of revenue than
our historical rates.
Research and development (“R&D”) expense
We develop products that address increasingly complex engineering requirements. We believe that continued focused
investment in R&D activities is critical to our future growth and maintaining our leadership position. Our R&D efforts are
directly related to timely development of new and enhanced products that are central to our core business strategy. We
develop our technologies to meet an evolving set of customer requirements and new product introductions.
R&D expense consists of costs related to direct product design, development, and process engineering. The level of
R&D expense in any period is related to the number of products in development, the stage of the development process, the
complexity of the underlying technology, the potential scale of the product upon successful commercialization, and the level
of our exploratory research. We conduct such activities in areas that we believe will increase our longer-term net revenue
growth. Our development expense is typically associated with engineering core technology platforms to specific applications
and engineering major upgrades that improve the functionality or reduce the cost of existing products.
Costs related to modifications of existing products for use by new and existing customers in familiar applications are
recorded in cost of revenue and not included in R&D expense.
Selling, general and administrative (“SG&A”) expense
SG&A expense consists of all expenditures incurred in connection with the sale and marketing of our products, as well
as administrative overhead costs, including:
•
salary and benefit costs for sales personnel and administrative staff, including cash and share-based incentive
compensation expense (expenses relating to our sales personnel can fluctuate due to prolonged trends in sales
33
volume, while expenses relating to administrative personnel generally do not increase or decrease directly with
changes in sales volume);
charges related to the use and maintenance of administrative offices, including depreciation expense;
other administrative costs, including expenses relating to information systems, human resources, and legal and
accounting services;
other selling and marketing related costs, such as expenses incurred in connection with travel and
communications; and
transaction costs associated with acquisitions.
•
•
•
•
Changes in SG&A expense as a percent of net revenue have historically been impacted by a number of factors,
including:
•
•
•
•
•
•
•
•
changes in sales volume, as higher volumes enable us to spread the fixed portion of our selling, marketing, and
administrative expense over higher revenue;
changes in the mix of products we sell, as some products may require more customer support and sales effort than
others;
changes in our customer base, as new customers may require different levels of sales and marketing attention;
new product launches in existing and new markets, as these launches typically involve a more intense sales and
marketing activity before they are integrated into customer applications;
customer credit issues requiring increases to the allowance for doubtful accounts;
pricing changes;
volume and timing of acquisitions; and
fluctuations in exchange rates.
Depreciation expense
Depreciation expense includes depreciation of PP&E, amortization of leasehold improvements, and amortization of
assets held under capital leases. Depreciation expense is included in either cost of revenue or SG&A expense depending on
the use of the asset as a manufacturing or administrative asset.
Depreciation expense will change depending on the age of existing PP&E and the level of capital expenditures.
Depreciation expense is computed using the straight-line method. Refer to Note 2, "Significant Accounting Policies," of our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on
methods for calculating depreciation expense.
Amortization expense
We have recognized a significant amount of identifiable definite-lived intangible assets, which are recorded at fair
value on the date of the related acquisition. Definite-lived, acquisition-related 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. The amount of amortization expense related to definite-lived intangible assets depends on the
amount of intangible assets acquired and where previously acquired intangible assets are in their estimated life-cycle. In
general, the economic benefit of an intangible asset is concentrated towards the beginning of that intangible asset's useful life.
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.
34
Restructuring and special charges
Restructuring and special charges consist of severance, outplacement, other separation benefits, certain pension
settlement and curtailment gains or losses, and facility exit and other costs. Restructuring charges may be incurred as part of
an announced restructuring plan, or may be individual charges recorded related to acquired businesses or the termination of a
limited number of employees that do not represent the initiation of a larger restructuring plan. Refer to Note 17,
“Restructuring and Special Charges,” of our audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for discussion of our restructuring and special charges.
Interest expense
We are a highly leveraged company, and interest expense is a significant portion of our results of operations. As of
December 31, 2017 and 2016, we had gross outstanding indebtedness of $3,312.5 million and $3,324.9 million, respectively.
Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form
10-K for details of this indebtedness.
The term loan (the "Term Loan") provided by the eighth amendment (the "Eighth Amendment") to the credit agreement
dated as of May 12, 2011 (as amended, the "Credit Agreement") and the $420.0 million revolving credit facility (the
"Revolving Credit Facility") accrue interest at variable interest rates. Refer to Item 7A, “Quantitative and Qualitative
Disclosures About Market Risk—Interest Rate Risk,” included elsewhere in this Annual Report on Form 10-K for more
information regarding our exposure to potential changes in variable interest rates.
Refer to Debt Instruments included elsewhere in this Management's Discussion and Analysis, and Note 8, "Debt," of
our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information
regarding our debt transactions, including the Eighth Amendment.
Other, net
Other, net primarily includes gains and losses associated with the remeasurement of non-U.S. dollar denominated net
monetary assets and liabilities into U.S. dollars, changes in the fair value of non-designated derivative financial instruments,
and debt financing transactions.
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 our subsidiaries is the U.S. dollar ("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 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 within Other, net in the consolidated statements of operations.
To mitigate the potential exposure to variability in cash flows and earnings related to changes in foreign currency
exchange rates, we enter into foreign currency exchange rate forward contracts that may or may not be designated as cash
flow hedges. The change in fair value of foreign currency forward contracts that are not designated for hedge accounting
purposes is recognized in Other, net, and is driven by changes in the forward prices for the foreign exchange rates that we
hedge. We cannot predict the future trends in foreign exchange rates, and there can be no assurance that gains or losses
experienced in past periods will not recur in future periods.
We enter into forward contracts with third parties to offset a portion of our exposure to the potential change in prices
associated with certain commodities, including silver, gold, platinum, palladium, copper, aluminum, and nickel, used in the
manufacturing of our products. The terms of these forward contracts fix the price at a future date for various notional
amounts associated with these commodities. These derivatives are not designated as accounting hedges. Changes in the fair
value of these forward contracts are recognized within Other, net, and are driven by changes in the forward prices for the
commodities that we hedge. We cannot predict the future trends in commodity prices, and there can be no assurance that
commodity gains or losses experienced in past periods will not recur in future periods.
We periodically enter into debt financing transactions. In accounting for these transactions, costs may be recorded as a
reduction of debt on the consolidated balance sheets, or they may be recorded in the consolidated statements of operations as
Other, net or Interest expense, net, depending on the type of transaction and the nature of the costs. Refer to Note 8, "Debt,"
35
of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further
discussion of our debt financing transactions.
Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for further discussion of the amounts recorded in Other, net. Refer to Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-K for
further discussion of the sensitivity of amounts recorded in Other, net to movements in commodity prices and foreign
exchange rates.
Provision for income taxes
We are subject to income tax in the various jurisdictions in which we operate. We have a low effective cash tax rate due
to the amortization of intangible assets and other tax benefits derived from our operating and capital structure, including tax
incentives in both the U.K. and China and favorable tax status in Mexico. In addition, the Dutch participation exemption
permits the payment of intercompany dividends without incurring taxable income in the Netherlands.
While the extent of our future tax liability is uncertain, the impact of purchase accounting for past and future
acquisitions, changes to debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and
risks assumed by our various subsidiaries are among the factors that will determine the future book and taxable income of
each respective subsidiary and Sensata as a whole.
Our effective tax rate will generally not equal the U.S. statutory rate due to various factors, the most significant of
which are described below. As these factors fluctuate from year to year, our effective tax rate will change. The factors
include, but are not limited to, the following:
•
•
•
•
•
•
•
•
changes in tax law, including the recently enacted U.S. Tax Cuts and Jobs Act;
establishing or releasing the valuation allowance related to our gross deferred tax assets;
because we operate in locations outside the U.S., including China, the Netherlands, South Korea, Malaysia, the
U.K., and Bulgaria, that have statutory tax rates lower than the historical U.S. statutory rate, we generally have
seen an effective rate benefit, which changes from year to year based upon the mix of earnings;
tax holidays and favorable tax regimes available to certain of our foreign subsidiaries;
as income tax audits related to our subsidiaries are closed, either as a result of negotiated settlements or final
assessments, we may recognize a tax expense or benefit;
due to lapses of the applicable statute of limitations related to unrecognized tax benefits, we may recognize a tax
benefit, including a benefit from the reversal of interest and penalties;
in certain jurisdictions, we record withholding and other taxes on intercompany payments, including dividends;
and
losses incurred in certain jurisdictions, predominantly the U.S., are not currently benefited, as it is not more likely
than not that the associated deferred tax asset will be realized in the foreseeable future.
Results of Operations
Our discussion and analysis of results of operations and financial condition are based upon our audited consolidated
financial statements. These financial statements have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect
the amounts reported in the financial statements. We base our estimates on historical experiences and assumptions believed to
be reasonable under the circumstances, and we re-evaluate such estimates on an ongoing basis. These estimates form the
basis for our judgments that affect the amounts reported in the financial statements. Actual results could differ from our
estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully
described in Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in
this Annual Report on Form 10-K, and Critical Accounting Policies and Estimates included elsewhere in this Management's
Discussion and Analysis.
36
The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue.
We have derived these results of operations for the years ended December 31, 2017, 2016, and 2015 from our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Amounts and percentages in the
table and discussion below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add
due to the effect of rounding.
(Dollars in millions)
Net revenue
Performance Sensing
Sensing Solutions
Net revenue
Operating costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Amortization of intangible assets
Restructuring and special charges
Total operating costs and expenses
Profit from operations
Interest expense, net
Other, net
Income before taxes
(Benefit from)/provision for income taxes
For the year ended December 31,
2017
2016
2015
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
$
2,460.6
74.4% $
2,385.4
74.5% $
2,346.2
846.1
3,306.7
25.6
100.0%
816.9
3,202.3
25.5
100.0%
628.7
2,975.0
78.9%
21.1
100.0%
2,141.3
64.8
2,084.3
65.1
1,977.8
66.5
130.2
302.8
161.1
19.0
2,754.3
552.4
(159.8)
9.8
402.4
(5.9)
3.9
9.2
4.9
0.6
83.3
16.7
(4.8)
0.3
12.2
(0.2)
126.7
293.6
201.5
4.1
2,710.1
492.2
(165.8)
(4.9)
321.4
59.0
262.4
4.0
9.2
6.3
0.1
84.6
15.4
(5.2)
(0.2)
10.0
1.8
8.2% $
123.7
271.4
186.6
21.9
2,581.4
393.6
(137.6)
(50.3)
205.6
(142.1)
347.7
4.2
9.1
6.3
0.7
86.8
13.2
(4.6)
(1.7)
6.9
(4.8)
11.7%
Net income
$
408.4
12.3% $
Net revenue - Overall
Net revenue for fiscal year 2017 increased $104.4 million, or 3.3%, to $3,306.7 million from $3,202.3 million for fiscal
year 2016. The increase in net revenue was composed of a 3.2% increase in Performance Sensing and a 3.6% increase in
Sensing Solutions. Excluding a 0.7% decline due to changes in foreign currency exchange rates, particularly related to the
Euro and Chinese Renminbi, organic revenue growth was 4.0% when compared to fiscal year 2016. Organic revenue growth
is a non-GAAP financial measure. Refer to the section entitled Non-GAAP Financial Measures for further information on our
use of this measure.
Net revenue for fiscal year 2016 increased $227.3 million, or 7.6%, to $3,202.3 million from $2,975.0 million for fiscal
year 2015. The increase in net revenue was composed of a 1.7% increase in Performance Sensing and a 29.9% increase in
Sensing Solutions. Excluding 7.9% growth due to the net impact of an acquisition and exited businesses and a 1.9% decline
due to changes in foreign currency rates, particularly the Euro to U.S. dollar, organic revenue growth was 1.6% when
compared to fiscal year 2015.
Net revenue - Performance Sensing
Performance Sensing net revenue for fiscal year 2017 increased $75.2 million, or 3.2%, to $2,460.6 million from
$2,385.4 million for fiscal year 2016. Excluding a 0.7% decline due to changes in foreign currency exchange rates,
particularly related to the Euro and Chinese Renminbi, organic revenue growth was 3.9% when compared to fiscal year 2016.
Organic revenue growth is a non-GAAP financial measure. Refer to the section entitled Non-GAAP Financial Measures for
further information on our use of this measure.
Performance Sensing organic revenue growth in 2017 was driven primarily by our heavy vehicle off road ("HVOR")
business, mainly as a result of the combination of stronger markets and content growth in the construction, agriculture, and
on-road truck markets in North America, and content growth in our automotive business, primarily in China, partially offset
by price reductions of 1.9%, primarily related to automotive customers. In addition, we believe that the major markets within
37
HVOR have been recovering, including the North American Class 8 truck market, which had been particularly weak in fiscal
year 2016 and represents a significant part of our HVOR business. The price reductions referenced above were consistent
with our expectations for future pricing pressures.
Performance Sensing net revenue for fiscal year 2016 increased $39.2 million, or 1.7%, to $2,385.4 million from
$2,346.2 million for fiscal year 2015. Excluding 1.9% growth due to the net impact of an acquisition and exited businesses
and a 2.1% decline due to changes in foreign currency exchange rates, particularly the Euro to U.S. dollar, organic revenue
growth was 1.9% when compared to fiscal year 2015.
We acquired CST (as defined in Note 6, "Acquisitions," of our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K) in the fourth quarter of 2015. A portion of CST is being integrated into the
Performance Sensing segment. The increase in revenue related to this acquisition in fiscal year 2016 was partially offset by
the decrease in revenue related to the exit from unprofitable businesses during fiscal year 2016.
Performance Sensing organic revenue growth in 2016 was primarily driven by content and market growth, particularly
in our automotive end markets in China and North America. This growth was partially offset by a decline in our HVOR
business as a result of weakness in the North American Class 8 truck and global construction markets, which was partially
offset by content growth in this business. In addition, price reductions of 1.8%, primarily related to automotive customers,
further reduced organic revenue growth.
Net revenue - Sensing Solutions
Sensing Solutions net revenue for fiscal year 2017 increased $29.2 million, or 3.6%, to $846.1 million from $816.9
million for fiscal year 2016. Excluding a 0.5% decline due to changes in foreign currency exchange rates, particularly related
to the Chinese Renminbi, organic revenue growth was 4.1% when compared to fiscal year 2016. Organic revenue growth is a
non-GAAP financial measure. Refer to the section entitled Non-GAAP Financial Measures for further information on our use
of this measure. The organic revenue growth was primarily due to market strength across all of our key end markets,
particularly in China, as well as content growth in our HVAC and industrial markets.
Sensing Solutions net revenue for fiscal year 2016 increased $188.2 million, or 29.9%, to $816.9 million from $628.7
million for fiscal year 2015. Excluding 30.5% growth due to the impact of the acquisition of CST in the fourth quarter of
2015 and a 1.2% decline due to changes in foreign currency exchange rates, organic revenue growth was 0.6% when
compared to fiscal year 2015. After experiencing an organic revenue decline in the first half of 2016, Sensing Solutions
organic revenue grew in the second half of 2016 primarily due to a stabilizing market in China and broadly stronger demand
for our electromechanical control and pressure sensor products.
Cost of revenue
Cost of revenue for fiscal years 2017, 2016, and 2015 was $2,141.3 million (64.8% of net revenue), $2,084.3 million
(65.1% of net revenue), and $1,977.8 million (66.5% of net revenue), respectively.
Cost of revenue decreased as a percentage of net revenue in fiscal year 2017 primarily due to improved operating
efficiencies and synergies from the continued integration of acquired businesses, partially offset by the negative impact of
price reductions.
We anticipate that cost of revenue as a percentage of net revenue will further decline as we continue to create new
product designs and drive operational efficiencies and improvements in productivity, including lowering material costs, and
as we integrate recently acquired businesses. We generally complete integration activities within 18 to 24 months after the
related acquisition. However, the integrations of certain acquisitions, for example Schrader and CST, are anticipated to take
three to four years due to their size and scope.
Cost of revenue decreased as a percentage of net revenue in fiscal year 2016 primarily due to lower material and
logistics costs and improved operating efficiencies, partially offset by the negative effect of changes in foreign currency
exchange rates and amounts accrued in 2016 related to the Automotive customer claim (as described in Note 14,
"Commitments and Contingencies," of our audited consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2016). In addition, there were certain charges recorded in cost of revenue in fiscal year
2015 that did not recur in fiscal year 2016, including a $6.0 million charge related to the settlement in the third quarter of
2015 of litigation brought by Bridgestone, a $5.0 million charge related to the write-down of certain assets associated with
38
the announcement in the second quarter of 2015 of the shutdown of our Schrader Brazil manufacturing facility, and a $4.0
million charge taken in the second quarter of 2015 related to a warranty claim by a U.S. automaker.
Refer to Note 14, "Commitments and Contingencies," of the audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2015 for discussion of the settlement of the Bridgestone
litigation and the charge taken related to the U.S. automaker warranty claim. Refer to Note 17, "Restructuring and Special
Charges," of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for
discussion of the charge related to the announcement of the shutdown of the Schrader Brazil manufacturing facility.
Research and development expense
R&D expense for fiscal years 2017, 2016, and 2015 was $130.2 million, $126.7 million, and $123.7 million,
respectively.
R&D expense has increased over the last three years due to continued investment to support new platform and
technology developments primarily related to new business wins, both in our recently acquired and existing businesses, in
order to drive future revenue growth.
Selling, general and administrative expense
SG&A expense for fiscal years 2017, 2016, and 2015 was $302.8 million, $293.6 million, and $271.4 million,
respectively.
SG&A expense increased in 2017 primarily due to $6.6 million in costs associated with the proposed cross-border
merger between Sensata N.V. and Sensata Technologies Holding plc, as discussed in Note 1, "Business Description and Basis
of Presentation," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
SG&A expense was also impacted by higher variable compensation costs (including share-based compensation), partially
offset by lower integration costs.
SG&A expense increased in 2016 primarily due to the acquisition of CST, which added $35.6 million in SG&A
expense (excluding integration costs), and increased compensation costs, partially offset by lower acquisition related
transaction costs, the impact of the write-off in 2015 of a $5.0 million tax indemnification asset related to a pre-acquisition
tax liability that was favorably resolved, and the positive effect of changes in foreign currency exchange rates.
Amortization of intangible assets
Amortization expense associated with definite-lived intangible assets for fiscal years 2017, 2016, and 2015 was $161.1
million, $201.5 million, and $186.6 million, respectively.
Amortization expense has decreased in fiscal year 2017 as certain intangible assets, primarily related to the Sensors &
Controls and High Temperature Sensing acquisitions in 2006 and 2011, respectively, are at, or are nearing, the end of their
useful lives. We expect amortization expense to decrease to approximately $137.7 million in fiscal year 2018 for these same
reasons.
Amortization expense increased in 2016 primarily due to amortization of intangible assets recognized as a result of
acquisitions, partially offset by a difference in the pattern of economic benefits over which intangible assets were amortized
(i.e. as intangible assets age, there is generally less economic benefit associated with them, and accordingly less amortization
expense as compared to previous years).
Refer to Note 5, "Goodwill and Other Intangible Assets," of our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for additional information regarding intangible assets and the related
amortization.
Restructuring and special charges
Restructuring and special charges for fiscal years 2017, 2016, and 2015 were $19.0 million, $4.1 million, and $21.9
million, respectively.
Restructuring and special charges for fiscal year 2017 consisted primarily of severance charges of $11.1 million and
facility exit costs of $7.9 million, each of which related primarily to the closing of our facility in Minden, Germany that was
part of the acquisition of CST and the closing of our manufacturing facility in Bydgoszcz, Poland. Charges related to the
39
closing of our facility in Minden, Germany for the year ended December 31, 2017 consisted of severance charges of $8.4
million and facility exit costs of $3.2 million. Charges related to the closing of our facility in Bydgoszcz, Poland for the year
ended December 31, 2017 consisted of severance charges of $0.8 million and facility exit costs of $2.3 million.
Restructuring and special charges for fiscal year 2016 primarily included facility exit costs related to the relocation of
manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico and severance charges
recorded in connection with acquired businesses and the termination of a limited number of employees in various locations
throughout the world. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of
2016.
Restructuring and special charges for fiscal year 2015 included $7.6 million of severance charges incurred in order to
integrate acquired businesses with ours, $4.0 million of severance charges incurred in the second quarter of 2015 related to
the announced closing of our Schrader Brazil manufacturing facility, with the remainder primarily associated with the
termination of a limited number of employees in various locations throughout the world.
Interest expense, net
Interest expense, net for fiscal years 2017, 2016, and 2015 was $159.8 million, $165.8 million, and $137.6 million,
respectively.
Interest expense, net decreased in fiscal year 2017 primarily as a result of higher interest income due to increasing cash
balances and rising interest rates.
Interest expense, net increased in fiscal year 2016 primarily as a result of the issuance of new debt related to the
acquisition of CST in the fourth quarter of 2015, partially offset by lower interest rates due to the refinancing of certain debt
instruments in 2015. In addition, 2015 included approximately $8.8 million in fees associated with bridge financing obtained
for the acquisition of CST that was not ultimately utilized.
Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for more details on our financing transactions. Refer to Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk," included elsewhere in this Annual Report on Form 10-K for an analysis of the sensitivity of our interest
expense to changes in interest rates.
Other, net
Other, net for fiscal years 2017, 2016, and 2015 consisted of net gains/(losses) of $9.8 million, $(4.9) million, and
$(50.3) million, respectively.
The change in Other, net in fiscal year 2017 compared to fiscal year 2016 relates primarily to fluctuations in foreign
currency exchange rates, net of any offsetting hedge gain or loss.
The change in Other, net in fiscal year 2016 compared to fiscal year 2015 relates primarily to commodity forward
contracts and losses on debt financing transactions incurred during fiscal year 2015 that did not recur in fiscal year 2016.
Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for more details on the gains and losses included within Other, net. Refer to Note 8,
"Debt," and Note 16, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for more details on losses related to our debt financing transactions
and gains and losses related to commodity and foreign exchange forward contracts, respectively. Refer to Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-K for
an analysis of the sensitivity of Other, net to changes in foreign currency exchange rates and commodity prices.
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for fiscal years 2017, 2016, and 2015 was $(5.9) million, $59.0 million, and
$(142.1) million, respectively. The change in the (benefit from)/provision for income taxes in fiscal year 2017 is primarily
due to the enactment of U.S. tax legislation during the fourth quarter of 2017, which required us to remeasure our U.S.
deferred tax liabilities associated with indefinite lived intangible assets, including goodwill, from a rate of 35 percent to 21
percent.
40
(Benefit from)/provision for income taxes consists of current tax expense, which relates primarily to our profitable
operations in non-U.S. tax jurisdictions and withholding taxes on interest and royalty income, and deferred tax expense (or
benefit), which relates to adjustments in book-to-tax basis differences, mainly the step-up in fair value of fixed and intangible
assets, including goodwill, acquired in connection with business combination transactions, utilization of net operating losses,
prospective changes in U.S. tax rates due to newly enacted legislation, and adjustments to our U.S. valuation allowance in
connection with acquisitions made by our U.S. subsidiaries.
Our income tax expense for fiscal years 2017, 2016, and 2015 was less than the amounts computed at the U.S. statutory
rate by $146.8 million, $53.5 million, and $214.0 million, respectively. The most significant reconciling items are noted
below.
Foreign tax rate differential. We operate in locations outside the U.S., including China, the U.K., the Netherlands,
South Korea, Malaysia, Bermuda, and Bulgaria, that have statutory tax rates lower than the historical U.S. statutory rate,
resulting in an effective rate benefit. This benefit can change from year to year based upon the jurisdictional mix of earnings.
In fiscal years 2017, 2016, and 2015, this benefit was $112.0 million, $86.3 million, and $66.4 million, respectively.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their
respective jurisdictions. From 2016 through 2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of
15%. The impact of the tax holidays and exemptions on our effective rate is included in the foreign tax rate differential line in
the reconciliation of the statutory rate to effective rate.
Certain income of our U.K. subsidiaries are 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.
Release of valuation allowances. During the years ended December 31, 2017, 2016, and 2015, we released a portion of
our valuation allowance and recognized a deferred tax benefit of $12.2 million, $1.9 million, and $180.0 million,
respectively. The deferred tax benefits in fiscal years 2016 and 2015 arose primarily in connection with the 2015 acquisition
of CST and the 2014 acquisitions of Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities
were established and related primarily to the step-up of intangible assets for book purposes.
Losses not tax benefited. Losses incurred in certain jurisdictions, predominantly the U.S., are not currently benefited, as
it is not more likely than not that the associated deferred tax asset will be realized in the foreseeable future. For the years
ended December 31, 2017, 2016, and 2015, this resulted in a deferred tax expense of $8.8 million, $32.5 million, and $56.8
million, respectively.
Withholding taxes not creditable. Withholding taxes may apply to intercompany interest, royalty, management fees, and
certain payments to third parties. Such taxes are expensed 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 the remittance of
presently 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.
Refer to Note 9, “Income Taxes,” of our audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for more details on the tax rate reconciliation. We do not believe that there are any known trends
related to the reconciling items noted above that are reasonably likely to result in our liquidity increasing or decreasing in any
material way.
The valuation allowance as of December 31, 2017 and 2016 was $277.3 million and $299.7 million, respectively. It is
more likely than not that the related net operating losses will not be utilized in the foreseeable future. However, any future
release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future
(benefit from)/provision for income taxes.
41
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including adjusted net
income and organic revenue growth, which are used by our management, Board of Directors, and investors, as further
discussed below. Adjusted net income and organic revenue growth should be considered as supplemental in nature and are
not intended to be viewed in isolation or as a substitute for net income or net revenue growth prepared in accordance with
U.S. GAAP. In addition, our measures of adjusted net income and organic revenue growth may not be the same as, or
comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue calculated in accordance with U.S.
GAAP, excluding the impact of acquisitions, net of exited businesses that occurred within the previous 12 months, and the
effect of changes in foreign currency exchange rates between the current year and prior year periods.
We believe that organic revenue growth provides investors with helpful information with respect to our operating
performance, and we use organic revenue growth to evaluate our ongoing operations and for internal planning and
forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our
business because it excludes items that we believe are not indicative of ongoing performance, or that we believe impact
comparability with the prior year period.
Adjusted net income
We define adjusted net income as follows: net income before certain restructuring and special charges, financing and
other transaction costs, deferred (gain)/loss on other hedges, depreciation and amortization expense related to the step-up in
fair value of fixed and intangible assets and inventory, deferred income tax and other tax (benefit)/expense, amortization of
deferred financing costs, and other amounts as outlined in the reconciliation below.
Management uses adjusted net income as a measure of operating performance, for planning purposes (including the
preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to
evaluate the effectiveness of our business strategies, and in communications with our Board of Directors and investors
concerning our financial performance. We believe investors and securities analysts also use adjusted net income in their
evaluation of our performance and the performance of other similar companies. Adjusted net income is not a measure of
liquidity. The use of adjusted net income has limitations, and this performance measure should not be considered in isolation
from, or as an alternative to, U.S. GAAP measures such as net income.
Our definition of adjusted net income excludes the deferred (benefit from)/provision for income taxes and other tax
(benefit)/expense. Our deferred (benefit from)/provision for income taxes includes adjustments for book-to-tax basis
differences primarily related to the step-up in fair value of fixed and intangible assets and goodwill, utilization of net
operating losses, and adjustments to our U.S. valuation allowance in connection with certain acquisitions. Other tax
(benefit)/expense includes certain adjustments to unrecognized tax positions. As we treat deferred income tax and other tax
(benefit)/expense as an adjustment to compute adjusted net income, the deferred income tax effect associated with the
reconciling items presented below would not change adjusted net income for any period presented. Refer to note (g) to the
table below for the theoretical current income tax expense/(benefit) associated with the reconciling items indicated, which
relate to jurisdictions where such items would provide tax expense/(benefit).
Many of these adjustments to net income relate to a series of strategic initiatives developed by our management aimed
at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from
time to time to reflect changes in overall market conditions and the competitive environment facing our business. These
initiatives include, among other items, acquisitions, divestitures, restructurings of certain operations, and various financing
transactions. We describe these adjustments in more detail below.
42
The following unaudited table provides a reconciliation of adjusted net income to net income, the most directly
comparable financial measure presented in accordance with U.S. GAAP:
(Amounts in thousands)
Net income
Non-GAAP adjustments
Restructuring and special charges(a)(g)
Financing and other transaction costs(b)
Deferred (gain)/loss on other hedges(c)
Depreciation and amortization expense related to the step-up in fair value of
fixed and intangible assets and inventory(d)(g)
Deferred income tax and other tax (benefit)/expense(e)
Amortization of deferred financing costs(f)
Total adjustments
Adjusted net income
For the year ended December 31,
2017
2016
2015
$
408,357 $
262,434 $
347,696
21,331
9,267
(7,365)
165,040
(55,156)
7,241
140,358
14,982
1,508
(19,347)
210,847
17,086
7,334
232,410
$
548,715 $
494,844 $
42,332
43,850
11,864
193,370
(173,550)
6,456
124,322
472,018
(a) The following unaudited table provides a detail of the components of our restructuring and special charges non-GAAP
adjustment for fiscal years 2017, 2016, and 2015 as shown in the above table:
(Amounts in thousands)
Severance costs(i)
Facility related costs(ii)
Special charges and other(iii)
Total restructuring and special charges
__________________
For the year ended December 31,
2017
2016
2015
$
$
3,026 $
21 $
13,962
4,343
10,945
4,016
21,331 $
14,982 $
15,560
11,353
15,419
42,332
i. Consists primarily of severance charges incurred and accounted for as part of ongoing benefit arrangements,
excluding those costs recorded in connection with the integration of acquired businesses. Fiscal year 2015 also
includes $4.0 million in severance charges associated with our decision to close our Schrader Brazil
manufacturing facility and exit that business (refer also to Note 17, "Restructuring and Special Charges" of our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
ii. Consists primarily of costs associated with line moves and the closing or relocation of various facilities
throughout the world. In fiscal year 2017, these costs include $6.0 million related to transitioning certain of our
distribution centers within Europe, $3.7 million of costs related to the closing of our facility in Bydgoszcz,
Poland, and $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. In
fiscal year 2016, these costs include $3.7 million of costs associated with the relocation of manufacturing lines
from our facility in the Dominican Republic to a manufacturing facility in Mexico, $1.1 million in non-
severance related costs associated with the closing of our Schrader Brazil manufacturing facility, and $3.8
million of costs associated with other exited product lines. In fiscal year 2015, these costs include non-
severance related costs associated with our decision to close our Schrader Brazil manufacturing facility,
including a $5.0 million charge to write-down certain assets (refer to Note 17, "Restructuring and Special
Charges," of our audited consolidated financial statements included elsewhere in this Annual Report on Form
10-K for additional information).
iii. Consists of other amounts that do not fall within one of the other specific categories, including, in fiscal year
2015, losses associated with the settlement of certain preacquisition loss contingencies, including the U.S.
automaker warranty claim ($4.0 million) and the Bridgestone intellectual property litigation ($6.0 million).
Refer to Note 14, "Commitments and Contingencies," of our audited consolidated financial statements included
in the Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.
(b) Includes losses related to debt financing transactions, costs incurred in connection with secondary offering or other
equity transactions, and costs associated with acquisition activity. Costs associated with debt financing transactions,
43
which include losses of $2.7 million in fiscal year 2017 and $34.3 million in fiscal year 2015, are generally recorded in
either Other, net or Interest expense, net. Costs associated with equity transactions, which include $6.6 million of
expenses incurred in fiscal year 2017 in connection with the proposed cross-border merger, are generally recorded in
SG&A expense. Costs associated with acquisition activity, which include $9.4 million in fiscal year 2015, are generally
recorded in SG&A expense.
(c) Reflects primarily unrealized and deferred losses/(gains), net on commodity and other hedges.
(d) Represents depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and
inventory related to acquisitions.
(e) Represents deferred income tax and other tax expense/(benefit), including provisions for, and interest expense and
penalties related to, certain unrecognized tax benefits (or benefits from their release). Our deferred income tax includes
adjustments for measuring book-to-tax basis differences primarily related to the step-up in fair value of fixed and
intangible assets and goodwill, utilization of net operating losses and adjustments to our U.S. valuation allowance in
connection with certain acquisitions. Other tax expense/(benefit) includes certain adjustments to unrecognized tax
positions. Fiscal year 2017 includes $73.7 million of income tax benefits related to the remeasurement of the deferred tax
liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate
from 35 percent to 21 percent in the Tax Cuts and Jobs Act of 2017. Fiscal years 2016 and 2015 include $1.9 million and
$180.0 million, respectively, of deferred income tax benefits related to the release of portions of our U.S. valuation
allowance in connection with our 2015 acquisition of CST and our 2014 acquisitions of Wabash, DeltaTech, and
Schrader. For each of these acquisitions, deferred tax liabilities were established related primarily to the step-up of
intangible assets for book purposes. Refer to Note 9, “Income Taxes,” of our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for more details.
(f) Represents amortization expense related to deferred financing costs and debt discounts.
(g) The theoretical current income tax expense/(benefit) associated with the reconciling items presented above is shown
below for each period presented. The theoretical current income tax (benefit)/expense was calculated by multiplying the
reconciling items, which relate to jurisdictions where such items would provide current tax (benefit)/expense, by the
applicable tax rates.
(Amounts in thousands)
Restructuring and special charges
Depreciation and amortization expense related to the step-up in fair value of fixed and
intangible assets and inventory
For the year ended December 31,
2017
2016
2015
(456) $
(1,001) $
(2,119)
(22) $
(149) $
(595)
$
$
Liquidity and Capital Resources
We held cash and cash equivalents of $753.1 million and $351.4 million at December 31, 2017 and 2016, respectively,
of which $260.9 million and $37.8 million, respectively, was held in the Netherlands, $9.0 million and $5.7 million,
respectively, was held by U.S. subsidiaries, and $483.2 million and $307.9 million, respectively, was held by other foreign
subsidiaries. The amount of cash and cash equivalents held in the Netherlands and in our U.S. and other foreign subsidiaries
fluctuates throughout the year due to a variety of factors, including the timing of cash receipts and disbursements in the
normal course of business, and, if applicable, the timing of debt issuances and payments, repurchases of ordinary shares, and
other financing transactions.
44
Cash Flows
The table below summarizes our primary sources and uses of cash for the years ended December 31, 2017, 2016, and
2015. We have derived these summarized statements of cash flows from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. Amounts in the table below have been calculated based on
unrounded numbers. Accordingly, certain amounts may not add due to the effect of rounding.
(Amounts in millions)
Net cash provided by/(used in):
Operating activities:
Net income adjusted for non-cash items
Changes in operating assets and liabilities, net of effects of acquisitions
Operating activities
Investing activities
Financing activities
Net change
Operating Activities
For the year ended December 31,
2017
2016
2015
$
$
652.5 $
615.5 $
(94.8)
557.6
(140.7)
(15.3)
(93.9)
521.5
(174.8)
(337.6)
401.7 $
9.2 $
508.7
24.4
533.1
(1,166.4)
764.2
130.9
Net cash provided by operating activities during the years ended December 31, 2017, 2016, and 2015 was $557.6
million, $521.5 million, and $533.1 million, respectively.
The increase in cash provided by operating activities in fiscal year 2017 compared to fiscal year 2016 relates primarily
to improved operating profitability, partially offset by a build up of inventory to support anticipated line moves, higher cash
paid for interest, and higher cash paid related to severance obligations. The higher cash paid for interest relates to the $750.0
million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes"), for which interest payments
are due semi-annually on February 15 and August 15 of each year. The payment made on February 15, 2016 did not represent
payment for a full six-month period, as the 6.25% Senior Notes were issued on November 27, 2015.
The decrease in net cash provided by operating activities in fiscal year 2016 compared to fiscal year 2015 is primarily
due to a build up of inventory to support anticipated line moves and timing of supplier payments and customer receipts,
partially offset by higher net income (after adjusting for non-cash items).
Investing Activities
Net cash used in investing activities during the years ended December 31, 2017, 2016, and 2015 was $140.7 million,
$174.8 million, and $1,166.4 million, respectively, which included $144.6 million, $130.2 million, and $177.2 million,
respectively, in capital expenditures. Capital expenditures primarily relate to investments associated with increasing our
manufacturing capacity. In fiscal year 2018, we anticipate capital expenditures of approximately $150.0 million to $160.0
million, which we expect to be funded with cash flows from operations.
In addition, in 2016, net cash used in investing activities included an investment of $50.0 million in preferred stock of
Quanergy Systems, Inc. Refer to Note 15, "Fair Value Measures," for further discussion of this investment.
In 2015, we used $996.9 million, net of cash received, to acquire CST.
Financing Activities
Net cash (used in)/provided by financing activities during the years ended December 31, 2017, 2016, and 2015 was
$(15.3) million, $(337.6) million, and $764.2 million, respectively.
Net cash used in financing activities in fiscal year 2017 consisted primarily of $943.6 million in payments on debt,
partially offset by $927.8 million of proceeds from the issuance of debt. These cash flows result from the repricing of the
term loan provided pursuant to the sixth amendment (the “Sixth Amendment”) of the Credit Agreement, and the resulting
issuance of the Term Loan pursuant to the Eighth Amendment. Refer to Debt Instruments below and Note 8, "Debt," of our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of
the terms of these amendments.
45
Net cash used in financing activities in fiscal year 2016 consisted primarily of $336.3 million in payments on debt,
including $280.0 million in payments on the Revolving Credit Facility and $44.9 million in payments on the term loan issued
pursuant to the Sixth Amendment.
Net cash provided by financing activities in fiscal year 2015 consisted primarily of $2,795.1 million of proceeds from
the issuance of debt, partially offset by $2,000.3 million in payments on debt. These issuances and payments include amounts
related to certain debt instruments that were refinanced in 2015, including $700.0 million aggregate principal amount of 6.5%
senior notes due 2019 that were tendered and redeemed in March and April 2015 using the proceeds from the issuance and
sale of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and $990.1 million of previously existing term loans that were
prepaid in May 2015 with the proceeds from the entry into the term loan issued pursuant to the Sixth Amendment.
In addition, proceeds from the issuance of debt in fiscal year 2015 include $750.0 million of proceeds from the issuance
and sale of the 6.25% Senior Notes in November 2015, and $355.0 million in total aggregate borrowings on the Revolving
Credit Facility in 2015. Cash payments on debt also include $205.0 million in total aggregate payments on the Revolving
Credit Facility in 2015, and $75.0 million of payments on our then-existing term loan prior to its refinancing.
Indebtedness and Liquidity
Our liquidity requirements are significant due to the highly leveraged nature of our company. The following table
details our gross outstanding indebtedness as of December 31, 2017, and the associated interest expense for fiscal year 2017:
Description
(Amounts in thousands)
Term loan
4.875% Senior Notes
5.625% Senior Notes
5.0% Senior Notes
6.25% Senior Notes
Capital lease and other financing obligations
Total
Other interest expense, net (1)
Total interest expense, net
Balance at
December 31, 2017
Interest expense, net
for fiscal year 2017
$
927,794 $
500,000
400,000
700,000
750,000
34,657
$
3,312,451
$
30,692
24,375
22,500
35,000
46,875
3,155
162,597
(2,836)
159,761
(1) Other interest expense, net includes interest income, amortization of deferred financing costs and discounts, and interest
costs capitalized in accordance with ASC Subtopic 835-20, Capitalization of Interest.
Debt Instruments
Summarized information regarding our debt instruments is described below. Refer to Note 8, “Debt,” of our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details of the terms of
the $500 million 4.875% senior notes due 2023 (the "4.875% Senior Notes"), the $400 million 5.625% senior notes due 2024
(the "5.625% Senior Notes"), the 5.0% Senior Notes, and the 6.25% Senior Notes (collectively, the "Senior Notes"), the
Senior Secured Credit Facilities (as defined below), and the term loans.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These
transactions included the execution of the Credit Agreement which provided for senior secured credit facilities (the "Senior
Secured Credit Facilities") consisting of a $1,100.0 million term loan facility and the Revolving Credit Facility. The Senior
Secured Credit Facilities also allowed for future additional borrowings under certain circumstances.
Term Loan
In May 2015, we entered into the Sixth Amendment, pursuant to which all term loans outstanding on that date were
prepaid in full, and a new term loan was entered into in an aggregate principal amount of $990.1 million, equal to the sum of
the outstanding balances of the term loans that were prepaid. The term loan was offered at 99.75% of par with a maturity date
46
of October 14, 2021. The principal amount of the term loan amortized in equal quarterly installments in an aggregate annual
amount equal to 1.0% of the original principal amount, with the balance due at maturity.
On November 7, 2017, we entered into the Eighth Amendment, which resulted in a newly issued term loan (the “Term
Loan”) with interest rates that differed from those under the Sixth Amendment. Pursuant to the Eighth Amendment, the
applicable margins for the Term Loan as of December 31, 2017 were 0.75% and 1.75% for Base Rate loans and Eurodollar
Rate loans, respectively, (a decrease from 1.25% and 2.25%, respectively, pursuant to the Sixth Amendment) subject to floors
of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively (a decrease from 1.75% and 0.75%,
respectively, pursuant to the Sixth Amendment).
As a result of the Eighth Amendment, a prepayment premium of 1.0% was added with respect to any Term Loan
repricing event that occurs within six months after the effective date of the Eighth Amendment. Refer to Note 8, “Debt,” of
our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details of
the terms of the Eighth Amendment.
At December 31, 2017, the Term Loan accrued interest at a rate of 3.21%.
4.875% Senior Notes
In April 2013, we completed the issuance and sale of the 4.875% Senior Notes, which were offered at par, and mature
on October 15, 2023. 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 offered at par, and
mature on November 1, 2024. 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 offered at par, and mature on
October 1, 2025. 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 offered at par, and
mature on February 15, 2026. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of
each year.
Revolving Credit Facility
As of December 31, 2017, there was $415.3 million of availability under the Revolving Credit Facility (net of $4.7
million of letters of credit). Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As
of December 31, 2017, no amounts had been drawn against these outstanding letters of credit.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving
Credit Facility. In addition, the Senior Secured Credit Facilities provide for incremental facilities (the “Accordion”), under
which additional term loans may be issued or the capacity of the Revolving Credit Facility may be increased. Pursuant to the
Eighth Amendment, the Accordion was increased from $230.0 million to $1,000.0 million, all of which remained available
for issuance as of December 31, 2017.
We believe, based on our current level of operations as reflected in our results of operations for the year ended
December 31, 2017, and taking into consideration the restrictions and covenants discussed below, that these sources of
liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at
least the next twelve months.
However, we cannot make assurances that our business will generate sufficient cash flows from operations or that
future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other
liquidity needs. Further, our highly leveraged nature may limit our ability to procure additional financing in the future.
47
The Credit Agreement stipulates certain events and conditions that may require us to use excess cash flow, as defined
by the terms of the Credit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the
outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory
prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and
casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any
permitted indebtedness). These provisions were not triggered during the year ended December 31, 2017.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short-term and long-term debt
ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by
certain credit metrics such as interest coverage and leverage ratios. As of January 26, 2018, Moody’s Investors Service’s
corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was
BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our borrowing costs, but will not
reduce availability under the Credit Agreement.
We have a $250.0 million share repurchase program in place. Under this program, we may repurchase ordinary shares
from time to time, 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. We expect that
any future repurchases of ordinary shares will be funded by cash from operations. The share repurchase program may be
modified or terminated by our Board of Directors at any time. We did not repurchase any ordinary shares under this program
in fiscal years 2017, 2016, or 2015. At December 31, 2017, $250.0 million remained available for share repurchase under this
program.
The Credit Agreement and the indentures under which the Senior Notes were issued (the "Senior Notes Indentures")
contain restrictions and covenants that limit the ability of STBV and its subsidiaries to, among other things, incur subsequent
indebtedness, sell assets, make capital expenditures, pay dividends, and make other restricted payments. These restrictions
and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior
Notes Indentures, and which are described in more detail below and in Note 8, "Debt," of our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K, were taken into consideration in establishing our share
repurchase program, and are evaluated periodically with respect to future potential funding. We do not believe that these
restrictions and covenants will prevent us from funding share repurchases under our share repurchase program with available
cash and cash flows from operations, should we decide to do so.
STBV is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and,
ultimately, to us, under the Credit Agreement and the Senior Notes Indentures. Specifically, the Credit Agreement prohibits
STBV from paying dividends or making any distributions to its parent companies except for limited purposes, including, but
not limited to: (i) customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of
such parent companies incurred in the ordinary course of business in the aggregate not to exceed $20.0 million in any fiscal
year, plus reasonable and customary indemnification claims made by our directors or officers attributable to the ownership of
STBV and its subsidiaries; (ii) franchise taxes, certain advisory fees, and customary compensation of officers and employees
of such parent companies to the extent such compensation is attributable to the ownership or operations of STBV and its
subsidiaries; (iii) repurchase, retirement, or other acquisition of equity interest of the parent from certain present, future, and
former employees, directors, managers, consultants of the parent companies, STBV, or its subsidiaries in an aggregate
amount not to exceed $20.0 million in any fiscal year, plus the amount of cash proceeds from certain equity issuances to such
persons, the amount of equity interests subject to a certain deferred compensation plan, and the amount of certain key-man
life insurance proceeds; (iv) so long 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, dividends and other distributions in an aggregate amount not to exceed $100.0
million, plus certain amounts, including the retained portion of excess cash flow; (v) dividends and other distributions in an
aggregate amount not to exceed $50.0 million in any calendar year (subject to increase upon the achievement of certain
ratios); and (vi) so long as no default or event of default exists, dividends and other distributions in an aggregate amount not
to exceed $150.0 million.
As of December 31, 2017, we were in compliance with all the covenants and default provisions under the Credit
Agreement. For more information on our indebtedness and related covenants and default provisions, refer to Note 8, "Debt,"
of our audited consolidated financial statements, and Item 1A, “Risk Factors,” each included elsewhere in this Annual Report
on Form 10-K.
48
Contractual Obligations and Commercial Commitments
The table below reflects our contractual obligations as of December 31, 2017. Amounts we pay in future periods may
vary from those reflected in the table. Amounts in the table below have been calculated based on unrounded numbers.
Accordingly, certain amounts may not add due to the effect of rounding.
(Amounts in millions)
Debt obligations principal(1)
Debt obligations interest(2)
Capital lease obligations principal(3)
Capital lease obligations interest(3)
Other financing obligations principal(4)
Other financing obligations interest(4)
Operating lease obligations(5)
Non-cancelable purchase obligations(6)
Total(7)(8)
Payments Due by Period
Total
1 Year
or Less
1-3 Years
3-5 Years
More than
5 Years
$
3,277.8 $
9.8 $
19.8 $
898.2 $
2,350.0
1,096.0
158.8
314.2
284.4
29.3
11.8
5.4
0.9
68.6
44.9
3.1
2.3
2.8
0.4
12.9
17.3
6.8
4.1
2.5
0.5
15.8
19.4
6.5
3.0
0.1
0.0
9.4
8.1
338.6
12.9
2.4
—
—
30.6
0.1
$
4,534.7 $
207.4 $
383.1 $
1,209.7 $
2,734.6
__________________
(1) Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt
obligations in existence as of December 31, 2017.
(2) Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt
obligations in existence as of December 31, 2017. Cash flows associated with the next interest payment to be made on
our variable rate debt subsequent to December 31, 2017 were calculated using the interest rates in effect as of the latest
interest rate reset date prior to December 31, 2017, plus the applicable spread.
(3) Represents the contractually required payments, in accordance with the required payment schedule, under our capital
lease obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the lease
term at its expiration date.
(4) Represents the contractually required payments, in accordance with the required payment schedule, under our financing
obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the financing
arrangements at their expiration dates.
(5) Represents the contractually required payments, in accordance with the required payment schedule, under our operating
lease obligations in existence as of December 31, 2017. No assumptions were made with respect to renewing the lease
obligations at the expiration date of their initial terms.
(6) Represents the contractually required payments under our various purchase obligations in existence as of December 31,
2017. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial
terms, and no amounts were assumed to be prepaid.
(7) Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency
exchange rates in effect as of December 31, 2017.
(8) This table does not include the contractual obligations associated with our defined benefit and other post-retirement
benefit plans. As of December 31, 2017, we had recognized a net benefit liability of $43.4 million, representing the net
unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 10, "Pension and Other
Post-Retirement Benefits," of our audited consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for additional information on pension and other post-retirement benefits, including expected benefit
payments for the next 10 years. This table also does not include $5.4 million of unrecognized tax benefits as of
December 31, 2017, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur
with a tax authority, as the timing of the examination and the ultimate resolution of the examination is uncertain. Refer to
Note 9, "Income Taxes," of our audited consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for additional information on income taxes.
Legal Proceedings
We account for litigation and claims losses in accordance with Accounting Standards Codification ("ASC") Topic 450,
Contingencies (“ASC 450”). Under ASC 450, loss contingency provisions are recorded 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
49
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 recorded. 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. There can be no assurances that our recorded provisions
will be sufficient to cover the extent of our costs and potential liability.
Inflation
We do not believe that inflation has had a material effect on our financial condition or results of operations in recent
years.
Seasonality
Because of the diverse global nature of the markets in which we operate, our revenue is only moderately impacted by
seasonality. However, our Sensing Solutions business has some seasonal elements, specifically in its air conditioning and
refrigeration products, which tend to peak in the first two quarters of the year as end market inventory is built up for spring
and summer sales. In addition, our Performance Sensing business tends to be weaker in the third quarter of the year as
automotive original equipment manufacturers retool production lines for the coming model year.
Critical Accounting Policies and Estimates
To prepare our financial statements in conformity with generally accepted accounting principles, we must make
complex and subjective judgments in the selection and application of accounting policies. The accounting policies and
estimates that we believe are most critical to the portrayal of our financial position and results of operations are listed below.
We believe these policies require our most difficult, subjective, and complex judgments in estimating the effect of inherent
uncertainties. This section should be read in conjunction with Note 2, "Significant Accounting Policies," of our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which includes other significant
accounting policies.
Revenue Recognition
The following discussion of our revenue recognition accounting policies is based on the accounting principles that were
used to prepare the fiscal year 2017 consolidated financial statements included in this Annual Report on Form 10-K. On
January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). This standard replaces
existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded
disclosure requirements. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for discussion of recently issued accounting standards.
We recognize revenue in accordance with ASC Topic 605, Revenue Recognition ("ASC 605"). Revenue and related cost
of revenue from product sales are recognized when the significant risks and rewards of ownership have been transferred, title
to the product and risk of loss transfers to our customer, and collection of sales proceeds is reasonably assured. Based on
these criteria, revenue is generally recognized when the product is shipped from our warehouse or, in limited instances, when
it is received by the customer, depending on the specific terms of the arrangement. Product sales are recorded net of trade
discounts (including volume and early payment incentives), sales returns, value-added tax, and similar taxes. Sales to
customers generally include a right of return for defective or non-conforming product. Sales returns have not historically
been significant in relation to our net revenue and have been within our estimates.
Goodwill, Intangible Assets, and Long-Lived Assets
Businesses acquired are recorded 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. Assets acquired may include
either definite-lived or indefinite-lived intangible assets, or both. As of December 31, 2017, goodwill and other intangible
assets, net totaled $3,005.5 million and $920.1 million, respectively, or approximately 45% and 14%, respectively, of our
total assets.
Identification of reporting units
Historically we identified five reporting units: Performance Sensing, Electrical Protection, Power Management,
Industrial Sensing, and Interconnection. In connection with our 2017 review of these reporting units, and considering the
50
continued integration of the CST acquisition, we determined that the portion of the Power Management reporting unit that
serves the aerospace end market should be reallocated into a separate reporting unit. As a result, a new reporting unit,
Aerospace, was identified.
These reporting units have been identified based on the definitions and guidance provided in ASC Topic 350,
Intangibles—Goodwill and Other (“ASC 350”). Identification of reporting units includes an analysis of the components that
comprise each of our operating segments, which considers, among other things, the manner in which we operate our business
and the availability of discrete financial information. Components of an operating segment are aggregated to form one
reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure
that they continue to reflect the manner in which the business is operated.
Assignment of assets, liabilities, and goodwill to reporting units
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected
reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired
(including goodwill) and liabilities assumed to an existing reporting unit or create a new reporting unit. Some assets and
liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units
based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from
year to year. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipment associated
with our corporate offices, and debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to
our reporting units.
Evaluation of goodwill for impairment
In accordance with the requirements of ASC 350, 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. Our judgments regarding the existence of impairment
indicators are based on several factors, including the performance of the end markets served by our customers, as well as the
actual financial performance of our reporting units and their respective financial forecasts over the long-term. 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.
We have the option to first assess qualitative factors 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 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 two-step goodwill impairment test.
In the first step of the two-step goodwill impairment test, 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 for that excess amount. 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 (including any unrecognized intangible assets) 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.
2017 assessment of goodwill. We evaluated our goodwill for impairment as of October 1, 2017. In connection with this
evaluation, we used the qualitative method of assessing goodwill for those reporting units that were not reorganized, and
determined that it was not more likely than not that the fair values of each of our Performance Sensing, Electrical Protection,
Industrial Sensing, and Interconnection reporting units were less than their net book values. In making this determination, we
considered several factors, including the following:
•
the amount by which the fair values of the Performance Sensing, Electrical Protection, and Interconnection
reporting units exceeded their carrying values (301%, 273%, and 328%, respectively) as of October 1, 2013, and
the amount by which the Industrial Sensing reporting unit exceeded its carrying value (340%) as of December 1,
2014, indicating that there would need to be substantial negative developments in the markets in which these
reporting units operate in order for there to be a potential impairment;
51
•
•
•
•
•
•
the carrying values of these reporting units as of October 1, 2017 compared to the previously calculated fair
values as of October 1, 2013 (or December 1, 2014 in the case of Industrial Sensing);
public information from competitors and other industry information to determine if there were any significant
adverse trends in our competitors' businesses, such as significant declines in market capitalization or significant
goodwill impairment charges that could be an indication that the goodwill of our reporting units was potentially
impaired;
demand in the debt markets for our senior notes, the strength of which indicates a view by investors of our
strength as a company;
changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could
impact the valuation of our reporting units;
changes in our market capitalization and overall enterprise valuation to determine if there were any significant
decreases that could be an indication that the valuation of our reporting units had significantly decreased; and
whether there had been any significant increases to the weighted-average cost of capital ("WACC") rates for each
reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow
approach.
Changes to the factors considered above could affect the estimated fair value of one or more of our reporting units and
could result in a goodwill impairment charge in a future period. We may be unaware of one or more significant factors that, if
we had been aware of, would cause our conclusion that it is not more likely than not that the fair values of our reporting units
are less than their carrying values to change, which could result in a goodwill impairment charge in a future period.
For the Power Management and Aerospace reporting units, which were reorganized in 2017, we estimated the fair
values of these reporting units using the discounted cash flow method. For this method, we prepared detailed annual
projections of future cash flows for each reporting unit for the subsequent five fiscal years (the “Discrete Projection Period”).
We estimated the value of the cash flows beyond the fifth fiscal year (the “Terminal Year”), by applying a multiple to the
projected Terminal Year net earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The cash flows from
the Discrete Projection Period and the Terminal Year were discounted at an estimated WACC appropriate for each reporting
unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe
that our procedures for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and
consistent with accepted valuation practices.
The preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the
discount rates, and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes
to these assumptions could affect the estimated fair value of one or more of our reporting units and could result in a goodwill
impairment charge in a future period.
The estimated relative fair values of the Power Management and Aerospace reporting units, as identified in connection
with our 2017 annual impairment analysis, exceeded their carrying values by 63% and 37%, respectively. The carrying value
of goodwill associated with the Power Management reporting unit, prior to reorganization, was assigned to each of the
reorganized reporting units based on their estimated relative fair values.
We did not prepare updated goodwill impairment analyses as of December 31, 2017 for any reporting unit, as we did
not become aware of any indicators after October 1, 2017 that would have required such analysis.
Assessment of fair value in prior years. In 2013 (and in 2014 for Industrial Sensing), we estimated the fair value of our
reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future
cash flows for each reporting unit for the Discrete Projection Period. We estimated the value of the cash flows beyond the
Terminal Year, by applying a multiple to the projected Terminal Year EBITDA. The cash flows from the Discrete Projection
Period and the Terminal Year were discounted at an estimated WACC appropriate for each reporting unit. The estimated
WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures
for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and consistent with
accepted valuation practices.
We also estimated the fair value of our reporting units using the guideline company method. Under this method, we
performed an analysis to identify a group of publicly-traded companies that were comparable to each reporting unit. We
52
calculated an implied EBITDA multiple (e.g., invested capital/EBITDA) for each of the guideline companies and selected
either the high, low, or average multiple, depending on various facts and circumstances surrounding the reporting unit, and
applied it to that reporting unit's trailing twelve month EBITDA. Although we estimated the fair value of our reporting units
using the guideline method, we did so for corroborative purposes and placed primary weight on the discounted cash flow
method.
Types of events that could result in a goodwill impairment. As noted above, the assumptions used in the quantitative
calculation of fair value of our reporting units in prior years, including the long-range forecasts, the selection of the discount
rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant
judgments. Changes to these assumptions could affect the estimated fair values of our reporting units calculated in prior years
and could result in a goodwill impairment charge in a future period. We believe that certain factors, such as a future
recession, any material adverse conditions in the automotive industry and other industries in which we operate, and other
factors identified in Item 1A, "Risk Factors," included elsewhere in this Annual Report on Form 10-K could require us to
revise our long-term projections and could reduce the multiples used to determine Terminal Year value. Such revisions could
result in a goodwill impairment charge in the future.
Evaluation of other intangible assets for impairment
2017 assessment of 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.
We evaluated our indefinite-lived intangible assets for impairment as of October 1, 2017 (using the quantitative
method) and determined that the estimated fair values of these assets exceeded their carrying values at that date. Should
certain assumptions used in the development of the fair values of our indefinite-lived intangible assets change, we may be
required to recognize impairments of these intangible assets.
Impairment of definite-lived intangible assets. Reviews are regularly performed to determine whether facts or
circumstances exist that indicate that the carrying values of our definite-lived intangible assets to be held and used are
impaired. If we determine 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 the 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 intangible asset.
Evaluation of long-lived assets for impairment
We periodically re-evaluate the carrying values and estimated useful lives of long-lived assets whenever events or
changes in circumstances indicate that the carrying values of these assets may not be recoverable. We use estimates of
undiscounted cash flows from long-lived assets to determine whether the carrying values of such assets are recoverable over
the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of
the markets we serve. If an asset is determined to be impaired, the impairment is the amount by which its carrying value
exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an
individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes
in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing
the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of
items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We assess the likelihood
that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce the
deferred tax assets to an amount that, in our judgment, is more likely than not to be recovered.
53
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities,
and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of
future taxable income and the period over which we expect the deferred tax assets to be recovered. Our assessment of future
taxable income is based on historical experience and current and anticipated market and economic conditions and trends. In
the event that actual results differ from these estimates, or we adjust our estimates in the future, we may need to adjust our
valuation allowance, which could materially impact our consolidated financial position and results of operations.
Pension and Other Post-Retirement Benefit Plans
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in
several countries. The estimates of the obligations and related expense of these plans recorded in the financial statements are
based on certain assumptions. The most significant assumptions relate to discount rate, expected return on plan assets, and
rate of increase in healthcare costs. Other assumptions used include employee demographic factors such as 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 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 pension 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 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.
The rate of increase of healthcare costs directly impacts the estimate of our future obligations in connection with our
post-retirement medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs
under similarly designed plans, the level of increase in healthcare costs expected in the future, and the design features of the
underlying plan.
We have adopted use of the Retirement Plan ("RP") 2014 mortality tables with the updated Mortality Projection ("MP")
2017 mortality improvement scale as issued by the Society of Actuaries in 2017 for our U.S. defined benefit plans. The
updated MP 2017 mortality improvement scale reflects improvements in longevity as compared to the MP 2016 mortality
improvement scale the Society of Actuaries issued in 2016, primarily because it includes actual Social Security mortality data
through 2015. The MP projection scale is used to factor in projected mortality improvements over time, based on age and
date of birth (i.e., two-dimension generational).
Future changes to assumptions, or differences between actual and expected outcomes, can significantly affect our future
net periodic pension cost, projected benefit obligations, and accumulated other comprehensive loss.
Share-Based Compensation
ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), requires that a company measure at fair value any
new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units,
and recognize as compensation expense that fair value over the requisite service period.
We estimate the fair value of options on the date of grant using the Black-Scholes-Merton option-pricing model. Key
assumptions used in estimating the grant-date fair value of these options are as follows: the fair value of the ordinary shares,
54
expected term, expected volatility, risk-free interest rate, and expected dividend yield. Material changes to any of these
assumptions may have a significant effect on our valuation of options, and, ultimately, the share-based compensation expense
recorded in the consolidated statements of operations. Significant factors used in determining these assumptions are detailed
below.
We use the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the date of the grant
as the fair value of ordinary shares in the Black-Scholes-Merton option-pricing model.
The expected term, which is a key factor in measuring the fair value and related compensation cost of share-based
payments, has been determined by comparing the terms of our options granted against those of publicly-traded companies
within our industry.
We consider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies
within our industry, in estimating expected volatility for options. Implied volatility provides a forward-looking indication and
may offer insight into expected industry volatility.
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.
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. See Item 5, "Market for
Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in
this Annual Report on Form 10-K for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the date of the grant.
Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the
performance condition. This assessment is based on management's judgment using internally developed forecasts and is
assessed at each reporting period. Compensation cost is recorded if it is probable that the performance condition will be
achieved.
Under the fair value recognition provisions of ASC 718, we recognize share-based compensation net of estimated
forfeitures and, therefore, only recognize compensation cost for those awards expected to vest over the requisite service
period. The forfeiture rate is based on our estimate of forfeitures by plan participants after consideration of historical
forfeiture rates. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
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 sale 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. Refer to Note 14, "Commitments and Contingencies," of
our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion
of specific indemnifications.
55
Recent Accounting Pronouncements
Recently issued accounting standards to be adopted in a future period:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2014-09, Revenue from Contracts with Customers (Topic 606), which modifies how all entities recognize revenue, and
consolidates into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in
ASC Topic 605 and various other revenue accounting standards for specialized transactions and industries. FASB ASU No.
2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. FASB ASU No. 2014-09 may be applied using
either a full retrospective approach, under which all years included in the financial statements will be presented under the
revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised
guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-
up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by
the entity.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of
Effective Date, which defers the effective date of FASB ASU No. 2014-09 by one year. FASB ASU No. 2014-09 is now
effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual
reporting periods. We have developed an implementation plan to adopt this new guidance, which included an assessment of
the impact of the new guidance on our financial position and results of operations. This implementation plan is substantially
complete. We have determined that this standard will not have a material impact on our financial position or results of
operations. We adopted FASB ASU No. 2014-09 on January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes new accounting and
disclosure requirements for leases. FASB ASU No. 2016-02 requires lessees to classify most leases as either finance or
operating leases and to initially recognize a lease liability and right-of-use asset. Entities may elect to account for certain
short-term leases (with a term of 12 months or less) using a method similar to the current operating lease model. The
statements of operations will include, for finance leases, separate recognition of interest on the lease liability and amortization
of the right-of-use asset and for operating leases, a single lease cost, calculated so that the cost of the lease is allocated over
the lease term on a straight-line basis. At December 31, 2017, we are contractually obligated to make future payments of
$68.6 million under our operating lease obligations in existence as of that date, primarily related to long-term leases. While
we are in the early stages of our implementation process for FASB ASU No. 2016-02, and have not yet determined its impact
on our financial position or results of operations, these leases would potentially be required to be presented on the balance
sheet in accordance with the requirements of FASB ASU No. 2016-02. FASB ASU No. 2016-02 is effective for annual
reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with
early adoption permitted. FASB ASU No. 2016-02 must be applied using a modified retrospective approach, which requires
recognition and measurement of leases at the beginning of the earliest period presented, with certain practical expedients
available.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which changes both the
designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to
better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand
and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of
the effects of the hedging instrument and the hedged item in the financial statements. FASB ASU No. 2017-12 is effective for
annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods,
with early adoption permitted. We are still evaluating the impact that this guidance will have on our financial position or
results of operations, and we have not yet determined whether we will early adopt FASB ASU No. 2017-12.
56
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations
through fixed and variable rate debt instruments and transact in a variety of foreign currencies. We are also exposed to
changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these rates and
commodity prices may have an impact on future cash flows and earnings. We generally manage these risks through the use of
derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative
instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign
currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each
reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a
receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by
counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major
financial institutions of investment grade credit rating.
Interest Rate Risk
Given the leveraged nature of our company, we have exposure to changes in interest rates. From time to time, we may
execute a variety of interest rate derivative instruments to manage interest rate risk. For example, in the past, we have entered
into interest rate collars and interest rate caps to reduce exposure to variability in cash flows relating to interest payments on
our outstanding debt. These derivatives are accounted for in accordance with Accounting Standards Codification ("ASC")
Topic 815, Derivatives and Hedging (“ASC 815”).
The significant components of our debt as of December 31, 2017 and 2016 are shown in the following tables
(definitions and descriptions of all components of our debt can be found in Note 8, "Debt," of our audited consolidated
financial statements included elsewhere in this Annual Report on Form 10-K):
(Dollars in millions)
Term Loan (3)
4.875% Senior Notes
5.625% Senior Notes
5.0% Senior Notes
6.25% Senior Notes
Total(2)(4)
Maturity date
October 14, 2021
October 15, 2023
November 1, 2024
October 1, 2025
February 15, 2026
Interest rate
as of
December
31, 2017
Outstanding
balance as of
December
31, 2017 (1)
Fair value as
of December
31, 2017
3.21% $
927.8 $
4.875%
5.625%
5.00%
6.25%
500.0
400.0
700.0
750.0
930.1
521.9
439.0
741.1
813.8
$
3,277.8 $
3,445.9
_________________
(1) Outstanding balance is presented excluding discount and deferred financing costs.
(2) Total outstanding balance excludes capital leases and other financing obligations of $34.7 million.
(3) This component of our debt accrues interest at a variable rate calculated on the basis of a three hundred and sixty day
year and actual days elapsed (which results in more interest, as applicable, being paid than if computed on the basis of a
three hundred and sixty-five day year).
(4) Total has been calculated based on unrounded amounts, and may not equal the sum of the rounded balances in this table.
57
(Dollars in millions)
Term loan(3)
4.875% Senior Notes
5.625% Senior Notes
5.0% Senior Notes
6.25% Senior Notes
Total(2)(4)
Interest rate as
of December 31,
2016
Outstanding
balance as of
December 31,
2016 (1)
Fair value as of
December 31,
2016
3.02% $
937.8 $
4.875%
5.625%
5.00%
6.25%
500.0
400.0
700.0
750.0
942.5
514.4
417.8
686.0
786.1
$
3,287.8 $
3,346.7
_________________
(1) Outstanding balance is presented excluding discount and deferred financing costs.
(2) Total outstanding balance excludes capital leases and other financing obligations of $37.1 million.
(3) This component of our debt accrues interest at a variable rate.
(4) Total has been calculated based on unrounded amounts, and may not equal the sum of the rounded balances in this table.
Sensitivity Analysis
As of December 31, 2017, we had total variable rate debt with an outstanding balance of $927.8 million issued under
the term loan (the “Term Loan”) provided pursuant to the eighth amendment to the credit agreement dated as of May 12,
2011 (as amended, the "Credit Agreement"). An increase of 100 basis points in the applicable interest rate would result in
additional annual interest expense of $9.4 million in 2018. The next 100 basis point increase in the applicable interest rate
would result in incremental annual interest expense of $9.4 million in 2018.
As of December 31, 2016, we had total variable rate debt with an outstanding balance of $937.8 million issued under
the term loan provided pursuant to the sixth amendment to the Credit Agreement. Considering the impact of our interest rate
floor, an increase of 100 basis points in the applicable interest rate would have resulted in additional annual interest expense
of $9.3 million. The next 100 basis point increase in the applicable interest rate would have resulted in incremental annual
interest expense of $9.3 million.
Foreign Currency Risks
We are exposed to market risk from changes in foreign currency exchange rates, which could affect operating results as
well as our financial position and cash flows. We monitor our exposures to these market risks and may employ derivative
financial instruments, such as swaps, collars, forwards, options, or other instruments, to limit the volatility to earnings and
cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge
accounting treatment under ASC 815, which can result in volatility to earnings depending upon fluctuations in the underlying
markets. Derivative financial instruments are executed solely as risk management tools and not for trading or speculative
purposes.
Our significant foreign currency exposures include the Euro, Japanese yen, Mexican peso, Chinese renminbi, Korean
won, Malaysian ringgit, British pound sterling, and Bulgarian lev.
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows and
variability in earnings, we entered into foreign currency exchange rate derivatives during the year ended December 31, 2017
that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales
and certain manufacturing costs. The effective portion of changes in the fair value of derivatives designated and qualifying as
cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the
period in which the hedged forecasted transaction affects earnings. During 2017 we also entered into foreign currency
forward contracts that were not designated for hedge accounting purposes. In accordance with ASC 815, we recognized the
change in the fair value of these non-designated derivatives in the consolidated statement of operations.
58
The following foreign currency forward contracts were outstanding as of December 31, 2017:
Notional
(in millions)
Effective Date
Maturity Date
Index
61.0 EUR
December 27, 2017
January 31, 2018
443.0 EUR
Various from March
2016 to December 2017
Various from January
2018 to December 2019
640.0 CNY
December 26, 2017
January 31, 2018
Euro to U.S. Dollar
Exchange Rate
Euro to U.S. Dollar
Exchange Rate
U.S. Dollar to Chinese
Renminbi Exchange Rate
Weighted-
Average Strike
Rate
Cash Flow Hedge
Designation
1.19 USD
Non-designated
1.15 USD
Designated
6.57 CNY
Non-designated
960.0 CNY
Various from October to
December 2017
Various from January to
December 2018
U.S. Dollar to Chinese
Renminbi Exchange Rate
6.72 CNY
Designated
200.0 JPY
December 27, 2017
January 31, 2018
U.S. Dollar to Japanese
Yen Exchange Rate
112.83 JPY
Non-designated
40,954.5 KRW
Various from March
2016 to December 2017
Various from January
2018 to November 2019
U.S. Dollar to Korean
Won Exchange Rate
1,130.61 KRW
Designated
19.5 MYR
Various from March to
November 2016
Various from January to
October 2018
U.S. Dollar to Malaysian
Ringgit Exchange Rate
4.21 MYR
Designated
215.0 MXN
December 27, 2017
January 31, 2018
U.S. Dollar to Mexican
Peso Exchange Rate
19.83 MXN
Non-designated
2,541.0 MXN
Various from March
2016 to December 2017
Various from January
2018 to November 2019
U.S. Dollar to Mexican
Peso Exchange Rate
20.25 MXN
Designated
35.5 GBP
Various from March
2016 to December 2017
Various from January
2018 to November 2019
British Pound Sterling to
U.S. Dollar Exchange
Rate
1.31 USD
Designated
The following foreign currency forward contracts were outstanding as of December 31, 2016:
Notional
(in millions)
97.7 EUR
444.9 EUR
Effective Date
Maturity Date
Index
Various from February
2015 to December 2016
January 31, 2017
Various from March
2015 to December 2016
Various from February
2017 to December 2018
Euro to U.S. Dollar
Exchange Rate
Euro to U.S. Dollar
Exchange Rate
545.0 CNY
December 22, 2016
January 26, 2017
720.0 JPY
December 22, 2016
January 31, 2017
3,321.6 KRW
Various from February
2015 to August 2016
January 31, 2017
U.S. Dollar to Chinese
Renminbi Exchange Rate
U.S. Dollar to Japanese
Yen Exchange Rate
U.S. Dollar to Korean
Won Exchange Rate
Weighted-
Average Strike
Rate
Cash Flow Hedge
Designation
1.07 USD
Non-designated
1.13 USD
Designated
7.01 CNY
Non-designated
117.20 JPY
Non-designated
1,158.87 KRW
Non-designated
50,239.2 KRW
Various from March
2015 to December 2016
Various from February
2017 to November 2018
U.S. Dollar to Korean
Won Exchange Rate
1,157.71 KRW
Designated
5.7 MYR
81.8 MYR
204.0 MXN
2,072.7 MXN
Various from February
2015 to April 2016
January 31, 2017
U.S. Dollar to Malaysian
Ringgit Exchange Rate
4.02 MYR
Non-designated
Various from March
2015 to November 2016
Various from February
2017 to October 2018
U.S. Dollar to Malaysian
Ringgit Exchange Rate
4.17 MYR
Designated
Various from February
2015 to December 2016
January 31, 2017
U.S. Dollar to Mexican
Peso Exchange Rate
18.62 MXN
Non-designated
Various from March
2015 to December 2016
Various from February
2017 to December 2018
U.S. Dollar to Mexican
Peso Exchange Rate
19.00 MXN
Designated
21.5 GBP
Various from February
2015 to December 2016
January 31, 2017
56.2 GBP
Various from March
2015 to December 2016
Various from February
2017 to December 2018
British Pound Sterling to
U.S. Dollar Exchange
Rate
British Pound Sterling to
U.S. Dollar Exchange
Rate
1.27 USD
Non-designated
1.40 USD
Designated
59
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2017 and 2016 and the estimated
impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
(Amounts in millions)
Euro
Chinese Renminbi
British Pound Sterling
Japanese Yen
Korean Won
Malaysian Ringgit
Mexican Peso
(Amounts in millions)
Euro
Chinese Renminbi
British Pound Sterling
Japanese Yen
Korean Won
Malaysian Ringgit
Mexican Peso
Net asset (liability)
balance as of
December 31, 2017
(Decrease)/increase to future pre-tax earnings due to:
10% strengthening of the
value of the
foreign currency relative
to the U.S. dollar
10% weakening of the
value of the
foreign currency relative
to the U.S. dollar
(30.6) $
(3.6) $
2.0 $
0.0 $
(2.3) $
0.2 $
(2.6) $
(61.5) $
(24.4) $
4.8 $
0.2 $
(3.9) $
0.5 $
13.4 $
61.5
24.4
(4.8)
(0.2)
3.9
(0.5)
(13.4)
Net asset (liability)
balance as of
December 31, 2016
(Decrease)/increase to future pre-tax earnings due to:
10% strengthening of the
value of the
foreign currency relative
to the U.S. dollar
10% weakening of the
value of the
foreign currency relative
to the U.S. dollar
30.3 $
0.1 $
(10.1) $
0.0 $
1.9 $
(1.8) $
(14.8) $
(57.6) $
(7.8) $
9.6 $
0.6 $
(4.4) $
1.9 $
10.6 $
57.6
7.8
(9.6)
(0.6)
4.4
(1.9)
(10.6)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
60
Commodity Risk
We enter into forward contracts with third parties to offset a portion of our exposure to the potential change in prices
associated with certain commodities, including silver, gold, platinum, palladium, copper, aluminum, and nickel, used in the
manufacturing of our products. The terms of these forward contracts fix the price at a future date for various notional
amounts associated with these commodities. These derivatives are not designated as accounting hedges. In accordance with
ASC 815, we recognize the change in fair value of these derivatives in the consolidated statements of operations.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 2017 and 2016 and the estimated
impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
(Amounts in millions, except price per unit and notional amounts)
Net
(liability)/
asset
balance
as of
December
31, 2017
Commodity
Weighted-
Average
Strike
Price Per Unit
Average
Forward Price
Per Unit as of
December 31,
2017
Notional
Silver
$(0.6)
1,117,049 troy oz.
$17.75
$17.20
Gold
Nickel
Aluminum
Copper
$0.4
$0.3
$0.9
$4.4
12,200 troy oz.
$1,288.85
$1,322.24
275,490 pounds
$4.84
5,592,797 pounds
$0.88
7,413,661 pounds
$2.71
$5.83
$1.04
$3.30
Platinum
$(0.3)
8,029 troy oz.
$987.12
$943.94
Palladium
$0.4
1,935 troy oz.
$819.85
$1,022.19
(Amounts in millions, except price per unit and notional amounts)
Net
(liability)/
asset
balance
as of
December
31, 2016
Commodity
Weighted-
Average
Strike
Price Per Unit
Average
Forward Price
Per Unit as of
December 31,
2016
Notional
Silver
$(0.8)
1,069,914 troy oz.
$17.09
$16.32
Gold
$(0.9)
14,113 troy oz.
$1,233.30
$1,167.90
Nickel
$(0.1)
339,402 pounds
$4.98
Aluminum
Copper
$0.1
$1.4
5,807,659 pounds
$0.76
7,707,228 pounds
$2.32
$4.58
$0.77
$2.51
Platinum
$(0.9)
8,719 troy oz.
$1,017.41
$911.87
Palladium
$0.1
1,923 troy oz.
$641.43
$685.73
Increase/(decrease)
to pre-tax earnings due to
10% increase
in the forward
price
10% decrease
in the forward
price
$1.9
$1.6
$0.2
$0.6
$2.4
$0.8
$0.2
$(1.9)
$(1.6)
$(0.2)
$(0.6)
$(2.4)
$(0.8)
$(0.2)
Increase/(decrease)
to pre-tax earnings due to
10% increase
in the forward
price
10% decrease
in the forward
price
$1.7
$1.6
$0.2
$0.4
$1.9
$0.8
$0.1
$(1.7)
$(1.6)
$(0.2)
$(0.4)
$(1.9)
$(0.8)
$(0.1)
Expiration
Various dates during
2018 and 2019
Various dates during
2018 and 2019
Various dates during
2018 and 2019
Various dates during
2018 and 2019
Various dates during
2018 and 2019
Various dates during
2018 and 2019
Various dates during
2018 and 2019
Expiration
Various dates during
2017 and 2018
Various dates during
2017 and 2018
Various dates during
2017 and 2018
Various dates during
2017 and 2018
Various dates during
2017 and 2018
Various dates during
2017 and 2018
Various dates during
2017 and 2018
61
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1.
Financial Statements
The following audited consolidated financial statements of Sensata Technologies Holding N.V. are included in this
Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm .................................................................................
Consolidated Balance Sheets ................................................................................................................................
Consolidated Statements of Operations ................................................................................................................
Consolidated Statements of Comprehensive Income ...........................................................................................
Consolidated Statements of Cash Flows ..............................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity .............................................................................
Notes to Consolidated Financial Statements ........................................................................................................
63
64
65
66
67
68
69
2.
Financial Statement Schedules
The following schedules are included elsewhere in this Annual Report on Form 10-K:
Schedule I — Condensed Financial Information of the Registrant
Schedule II — Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since the required information is not present, or not present
in amounts sufficient to require submission of the schedule, or because the information required is included in the audited
consolidated financial statements or the notes thereto.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Sensata Technologies Holding N.V.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding N.V. as of December 31, 2017
and 2016, and the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’
equity for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules
listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), and our report dated February 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company's auditor since 2005
Boston, Massachusetts
February 1, 2018
63
SENSATA TECHNOLOGIES HOLDING N.V.
Consolidated Balance Sheets
(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $12,947 and $11,811 as of December 31, 2017 and
2016, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Deferred income tax assets
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt, capital lease and other financing obligations
Accounts payable
Income taxes payable
Accrued expenses and other current liabilities
Total current liabilities
Deferred income tax liabilities
Pension and other post-retirement benefit obligations
Capital lease and other financing obligations, less current portion
Long-term debt, net
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity:
Ordinary shares, €0.01 nominal value per share, 400,000 shares authorized; 178,437 shares
issued
Treasury shares, at cost, 7,076 and 7,557 shares as of December 31, 2017 and 2016,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2017
December 31,
2016
$
753,089 $
351,428
$
$
556,541
446,129
92,532
1,848,291
750,049
3,005,464
920,124
33,003
84,594
500,211
389,844
100,002
1,341,485
724,046
3,005,464
1,075,431
20,695
73,855
6,641,525 $
6,240,976
15,720 $
322,671
31,544
259,560
629,495
338,228
40,055
28,739
3,225,810
33,572
4,295,899
14,643
299,198
23,889
245,566
583,296
392,628
34,878
32,369
3,226,582
29,216
4,298,969
2,289
2,289
(288,478)
(306,505)
1,663,367
1,031,612
(63,164)
2,345,626
$
6,641,525 $
1,643,449
636,841
(34,067)
1,942,007
6,240,976
The accompanying notes are an integral part of these financial statements.
64
SENSATA TECHNOLOGIES HOLDING N.V.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Net revenue
Operating costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Amortization of intangible assets
Restructuring and special charges
Total operating costs and expenses
Profit from operations
Interest expense, net
Other, net
Income before taxes
(Benefit from)/provision for income taxes
Net income
Basic net income per share
Diluted net income per share
For the year ended December 31,
2017
2016
2015
$
3,306,733 $
3,202,288 $
2,974,961
2,141,308
2,084,261
1,977,799
130,204
302,811
161,050
18,975
2,754,348
552,385
(159,761)
9,817
402,441
(5,916)
126,665
293,587
201,498
4,113
2,710,124
492,164
(165,818)
(4,901)
321,445
59,011
$
$
$
408,357 $
262,434 $
2.39 $
2.37 $
1.54 $
1.53 $
123,666
271,361
186,632
21,919
2,581,377
393,584
(137,626)
(50,329)
205,629
(142,067)
347,696
2.05
2.03
The accompanying notes are an integral part of these financial statements.
65
SENSATA TECHNOLOGIES HOLDING N.V.
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive loss, net of tax:
Deferred loss on derivative instruments, net of reclassifications
Defined benefit and retiree healthcare plans
Other comprehensive loss
Comprehensive income
For the year ended December 31,
2017
2016
2015
$
408,357 $
262,434 $
347,696
(28,202)
(895)
(29,097)
(3,829)
(4,248)
(8,077)
$
379,260 $
254,357 $
(13,726)
(516)
(14,242)
333,454
The accompanying notes are an integral part of these financial statements.
66
SENSATA TECHNOLOGIES HOLDING N.V.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
For the year ended December 31,
2017
2016
2015
$
408,357 $
262,434 $
347,696
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
109,321
106,903
Amortization of deferred financing costs and debt discounts
Gain on sale of assets
Share-based compensation
Loss on debt financing
Amortization of inventory step-up to fair value
Amortization of intangible assets
Deferred income taxes
Unrealized loss/(gain) on hedges and other non-cash items
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Income taxes payable
Other
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of CST, net of cash received
Acquisition of Schrader, net of cash received
Other acquisitions, net of cash received
Additions to property, plant and equipment and capitalized software
Investment in equity securities
Proceeds from sale of assets
Other
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of ordinary shares
Proceeds from issuance of debt
Payments on debt
Payments to repurchase ordinary shares
Payments of debt issuance cost
Other
Net cash (used in)/provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow items:
Cash paid for interest
Cash paid for income taxes
7,241
(1,180)
19,819
2,670
—
161,050
(56,757)
1,961
(56,330)
(57,119)
(12,412)
23,841
7,655
(471)
557,646
—
—
—
(144,584)
—
8,862
(5,000)
7,334
—
17,425
—
2,319
201,498
8,344
9,198
(33,013)
(37,500)
6,956
(21,432)
(1,938)
(7,003)
521,525
4,688
—
—
(130,217)
(50,000)
751
—
96,051
6,456
—
15,326
34,335
1,820
186,632
(179,009)
(590)
18,618
40,526
(9,857)
(38,034)
14,452
(1,291)
533,131
(996,871)
(958)
3,881
(177,196)
—
4,775
—
(140,722)
(174,778)
(1,166,369)
7,450
927,794
(943,554)
(2,910)
(919)
(3,124)
(15,263)
401,661
351,428
3,944
—
(336,256)
(4,752)
(518)
—
(337,582)
9,165
342,263
$
$
$
753,089 $
351,428 $
164,370 $
48,482 $
155,925 $
43,152 $
19,411
2,795,120
(2,000,257)
(50)
(50,052)
—
764,172
130,934
211,329
342,263
125,370
41,301
The accompanying notes are an integral part of these financial statements.
67
SENSATA TECHNOLOGIES HOLDING N.V.
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
Ordinary Shares
Treasury Shares
Number
Amount
Number
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
(11,748) $ 1,302,892
Total
Shareholders’
Equity
Balance as of December 31, 2014
178,437 $
2,289
(9,120) $
(365,272) $ 1,610,390 $
67,233 $
Issuance of ordinary shares for
employee stock plans
Surrender of shares for tax
withholding
Stock options exercised
Vesting of restricted securities
Share-based compensation
Net income
Other comprehensive loss
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
195
(54)
1,016
115
—
—
—
(2,507)
38,199
4,391
—
—
—
72
—
236
—
15,326
—
—
—
—
(19,291)
(4,391)
—
347,696
—
—
—
—
—
—
267
(2,507)
19,144
—
15,326
347,696
—
(14,242)
(14,242)
Balance as of December 31, 2015
178,437 $
2,289
(8,038) $
(324,994) $ 1,626,024 $
391,247 $
(25,990) $ 1,668,576
Surrender of shares for tax
withholding
Stock options exercised
Vesting of restricted securities
Share-based compensation
Net income
Other comprehensive loss
Balance as of December 31, 2016
Surrender of shares for tax
withholding
Stock options exercised
Vesting of restricted securities
Share-based compensation
Net income
Other comprehensive loss
—
—
—
—
—
—
—
—
—
—
—
—
(62)
358
185
—
—
—
(2,295)
13,698
7,086
—
—
—
—
—
—
17,425
—
—
—
(9,754)
(7,086)
—
262,434
—
—
—
—
—
(2,295)
3,944
—
17,425
262,434
—
(8,077)
(8,077)
178,437 $
2,289
(7,557) $
(306,505) $ 1,643,449 $
636,841 $
(34,067) $ 1,942,007
—
—
—
—
—
—
—
—
—
—
—
—
(67)
326
222
—
—
—
(2,910)
12,465
8,472
—
—
—
—
99
—
19,819
—
—
—
(5,114)
(8,472)
—
408,357
—
—
—
—
—
(2,910)
7,450
—
19,819
408,357
—
(29,097)
(29,097)
Balance as of December 31, 2017
178,437 $
2,289
(7,076) $
(288,478) $ 1,663,367 $ 1,031,612 $
(63,164) $ 2,345,626
The accompanying notes are an integral part of these financial statements.
68
SENSATA TECHNOLOGIES HOLDING N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts, or unless otherwise noted)
1. Business Description and Basis of Presentation
Description of Business
The accompanying consolidated financial statements reflect the financial position, results of operations, comprehensive
income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding N.V. ("Sensata N.V.") and its
wholly-owned subsidiaries, collectively referred to as the “Company,” “Sensata,” “we,” “our,” or “us.”
Sensata N.V. is incorporated under the laws of the Netherlands and conducts its operations through subsidiary
companies that operate business and product development centers primarily in the United States (the "U.S."), the
Netherlands, Belgium, Bulgaria, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and
manufacturing operations primarily in China, Malaysia, Mexico, Bulgaria, France, Germany, the U.K., and the U.S. We
organize our operations into two businesses, Performance Sensing and Sensing Solutions.
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent
company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V.
are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata
U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being
the surviving entity (the “Merger”).
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed
cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general
meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on
the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High
Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will
become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
Our Performance Sensing business is a manufacturer of pressure sensors, speed and position sensors, temperature
sensors, and pressure switches used in subsystems of automobiles (e.g., powertrain, air conditioning, tire pressure monitoring,
and ride stabilization) and heavy vehicle off-road ("HVOR"). These products help improve operating performance, for
example, by making an automobile's heating and air conditioning systems work more efficiently, thereby improving gas
mileage. These products are also used in systems that address environmental or safety concerns, for example, by reducing
vehicle emissions or improving the stability control of the vehicle.
Our Sensing Solutions business is a manufacturer of various control products used in industrial, aerospace, military,
commercial, medical device, and residential markets, and sensor products used in aerospace and industrial applications such
as heating, ventilation, and air conditioning ("HVAC") systems and military and commercial aircraft. These products include
motor and compressor protectors, motor starters, temperature sensors and switches/thermostats, pressure sensors and
switches, electronic HVAC sensors and controls, charge controllers, solid state relays, linear and rotary position sensors,
circuit breakers, and semiconductor burn-in test sockets. These products help prevent damage from overheating and fires in a
wide variety of applications, including commercial HVAC systems, refrigerators, aircraft, lighting, and other industrial
applications, and help optimize performance by using sensors which provide feedback to control systems. The Sensing
Solutions business also manufactures direct current ("DC") to alternating current ("AC") power inverters, which enable the
operation of electronic equipment when grid power is not available.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”). The accompanying consolidated financial statements 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.
69
All U.S. dollar 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 revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowances for doubtful accounts and sales returns,
depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets),
contingencies, the value of share-based compensation, the determination of accrued expenses, certain asset valuations
including deferred tax asset valuations, the useful lives of plant and equipment, post-retirement obligations, and the
accounting for business combinations. The accounting estimates used in the preparation of the consolidated financial
statements will change as new events occur, as more experience is acquired, as additional information is obtained, and/or as
the operating environment changes. Actual results could differ from those estimates.
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.
Revenue Recognition
The following discussion of our revenue recognition accounting policies is based on the accounting principles that were
used to prepare the fiscal year 2017 consolidated financial statements included in this Annual Report on Form 10-K. On
January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). This standard replaces
existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded
disclosure requirements.
We recognize revenue in accordance with Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition
("ASC 605"). Revenue and related cost of revenue from product sales are recognized when the significant risks and rewards
of ownership have been transferred, title to the product and risk of loss transfers to our customer, and collection of sales
proceeds is reasonably assured. Based on these criteria, revenue is generally recognized when the product is shipped from our
warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement.
Product sales are recorded net of trade discounts (including volume and early payment incentives), sales returns, value-added
tax, and similar taxes. Amounts billed to our customers for shipping and handling are recorded in revenue. Shipping and
handling costs are included in cost of revenue. Sales to customers generally include a right of return for defective or non-
conforming product. Sales returns have not historically been significant in relation to our net revenue and have been within
our estimates.
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. Customer arrangements do not involve post-installation or post-sale testing and
acceptance.
Share-Based Compensation
ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), requires that a company measure at fair value any
new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units,
and recognize as compensation expense that fair value over the requisite service period.
We estimate the fair value of options on the date of grant using the Black-Scholes-Merton option-pricing model. Key
assumptions used in estimating the grant-date fair value of these options are as follows: the fair value of the ordinary shares,
70
expected term, expected volatility, risk-free interest rate, and expected dividend yield. Significant factors used in determining
these assumptions are detailed below.
We use the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the date of the grant
as the fair value of ordinary shares in the Black-Scholes-Merton option-pricing model.
The expected term is determined by comparing the terms of our options granted against those of publicly-traded
companies within our industry.
We consider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies
within our industry, in estimating expected volatility for options. Implied volatility provides a forward-looking indication and
may offer insight into expected industry volatility.
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.
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. See Item 5, "Market for
Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in
this Annual Report on Form 10-K for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the date of the grant.
Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the
performance condition. This assessment is based on management's judgment using internally developed forecasts and is
assessed at each reporting period. Compensation cost is recorded if it is probable that the performance condition will be
achieved.
Under the fair value recognition provisions of ASC 718, we recognize share-based compensation net of estimated
forfeitures and, therefore, only recognize compensation cost 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.
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 recorded. Refer to further discussion of
share-based payments in Note 11, "Share-Based Payment Plans."
Financial Instruments
Derivative financial instruments: We maintain derivative financial 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 financial instruments.
We account for our derivative financial instruments in accordance with ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC 820”) and with ASC Topic 815, Derivatives and Hedging (“ASC 815”). In accordance with ASC 815, we
record all derivatives on the balance sheet at fair value. The accounting for the change in the fair value of derivatives depends
on the intended use of the derivative, whether we have elected to designate a derivative as a hedging instrument for
accounting purposes, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In
addition, ASC 815 provides that, for derivative instruments that qualify for hedge accounting, changes in the fair value are
either (a) offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or
(b) recognized in equity until the hedged item is recognized in earnings, depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The ineffective portion of a derivative’s change in fair value is immediately
recognized in earnings. We do not use derivative financial instruments for trading or speculative purposes.
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar. We enter
into forward contracts for certain foreign currencies, including the Euro, Japanese yen, Mexican peso, Chinese renminbi,
Korean won, Malaysian ringgit, and British pound sterling. The fair value of foreign currency forward contracts 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
reflect the contractual terms of these instruments, including the period to maturity. Certain of these contracts have not been
designated as accounting hedges, and in accordance with ASC 815, we recognize the changes in the fair value of these
contracts in the consolidated statements of operations. The specific contractual terms utilized as inputs in determining fair
71
value, and a discussion of the nature of the risks being mitigated by these instruments, are detailed in Note 16, “Derivative
Instruments and Hedging Activities,” under the caption Hedges of Foreign Currency Risk.
We enter into forward contracts for certain commodities, including silver, gold, nickel, aluminum, copper, platinum,
and palladium used in the manufacturing of our products. The terms of these forward contracts fix the price at a future date
for various notional amounts associated with these commodities. The fair value of our commodity forward contracts 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 commodity forward curves, and reflect
the contractual terms of these instruments, including the period to maturity. These contracts have not been designated as
accounting hedges. In accordance with ASC 815, we recognize changes in the fair values of these contracts in the
consolidated statements of operations. The specific contractual terms utilized as inputs in determining fair value, and a
discussion of the nature of the risks being mitigated by these instruments, are detailed in Note 16, “Derivative Instruments
and Hedging Activities,” under the caption Hedges of Commodity Risk.
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 report cash flows arising from our derivative financial instruments consistent with the classification of cash flows
from the underlying hedged items.
Refer to Note 16, "Derivative Instruments and Hedging Activities," for further discussion on derivative instruments.
Trade accounts receivable: Trade accounts receivable are recorded 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.
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 8% of our Net revenue for the year ended
December 31, 2017.
Goodwill and Other Intangible Assets
Businesses acquired are recorded 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. In accordance with the
requirements of ASC Topic 350, Intangibles—Goodwill and Other ("ASC 350"), 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: Historically, we had identified five reporting units. In connection with the 2017 review of those reporting
units, we determined that the portion of the Power Management reporting unit that serves the aerospace end market should be
reallocated into a separate reporting unit. As a result, we now have six reporting units: Performance Sensing, Electrical
Protection, Aerospace, Power Management, Industrial Sensing, and Interconnection. These reporting units have been
identified based on the definitions and guidance provided in ASC 350. We periodically review these reporting units to ensure
that they continue to reflect the manner in which the business is operated. As businesses are acquired, we assign them to an
existing reporting unit or create a new reporting unit. Goodwill is assigned to reporting units as of the date of the related
acquisition. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipment associated
with our corporate offices, and debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to
our reporting units.
We have the option to first assess qualitative factors 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 two-step goodwill impairment
test.
72
In the first step of the two-step goodwill impairment test, 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 (including any unrecognized intangible assets) 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. 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 calculation of the fair value of our reporting units is considered
a level 3 fair value measurement.
We used a combination of the qualitative and quantitative methods to assess goodwill for impairment as of October 1,
2017.
Indefinite-lived intangible assets: 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: Definite-lived intangible assets are amortized over the estimated useful life of the
asset, using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are
consumed. If that pattern cannot be reliably determined, then we amortize the intangible asset using the straight-line method.
Capitalized software is amortized on a straight-line basis over its estimated useful life. 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.
Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values
of our definite-lived intangible assets to be held and used are impaired. If we determine these 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 falls below the carrying
value of the assets, the impairment charge is based on the excess of the carrying value over the fair value of those assets. We
determine fair value by using the appropriate income approach valuation methodology, depending on the nature of the
intangible asset.
Refer to Note 5, "Goodwill and Other Intangible Assets," for further details of our goodwill and other intangible assets.
Debt Instruments
A premium or discount on a debt instrument is recorded 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 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 ASC Subtopic 470-50, Modifications and
Extinguishments (“ASC 470-50”). Our evaluation of the accounting under ASC 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
73
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 8, "Debt," for further details of our debt instruments and transactions.
Income Taxes
We provide for income taxes utilizing the asset and liability method. Under this method, deferred income taxes are
recorded to reflect the tax consequences in future years 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. 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. 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 accordance with ASC Topic 740, Income Taxes ("ASC 740"), penalties and interest related to unrecognized tax
benefits 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 unrecognized tax benefits within the (Benefit from)/provision for income taxes
line of the consolidated statements of operations.
Refer to Note 9, "Income Taxes," for further details on our income taxes.
Pension and Other Post-Retirement Benefit Plans
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in
several countries. The estimates of the obligations and related expense of these plans recorded in the financial statements are
based on certain assumptions. The most significant assumptions relate to discount rate, expected return on plan assets, and
rate of increase in healthcare costs. Other assumptions used include employee demographic factors such as 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 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 pension 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.
To determine the expected return on plan assets, we 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.
The rate of increase of healthcare costs directly impacts the estimate of our future obligations in connection with our
post-retirement medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs
under similarly designed plans, the level of increase in healthcare costs expected in the future, and the design features of the
underlying plan.
We have adopted use of the Retirement Plan ("RP") 2014 mortality tables with the updated Mortality Projection ("MP")
2017 mortality improvement scale as issued by the Society of Actuaries in 2017 for our U.S. defined benefit plans. The
updated MP 2017 mortality improvement scale reflects improvements in longevity as compared to the MP 2016 mortality
improvement scale the Society of Actuaries issued in 2016, primarily because it includes actual Social Security mortality data
74
through 2015. The MP projection scale is used to factor in projected mortality improvements over time, based on age and
date of birth (i.e., two-dimension generational).
Refer to Note 10, "Pension and Other Post-Retirement Benefits," for further information on our pension and other post-
retirement benefit plans.
Allowance for Losses on Receivables
The allowance for losses on receivables is used to provide for potential impairment of receivables. 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.
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.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. Cost for raw materials, work-in-process,
and finished goods is determined based on a first-in, first-out ("FIFO") 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 4, "Inventories," for details of our inventory balances.
Property, Plant and Equipment (“PP&E”) 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:
Buildings and improvements
Machinery and equipment
2 – 40 years
2 – 15 years
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.
Assets held under capital leases are recorded 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. Amortization expense associated with capital leases, which is
included within depreciation expense, 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 amortized, 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 3, "Property, Plant and Equipment," for details of our PP&E balances.
Foreign Currency
For financial reporting purposes, the functional currency of all of our subsidiaries is the U.S. dollar because of the
significant influence of the U.S. dollar on our operations. In certain instances, we enter into transactions that are denominated
in a currency other than the U.S. dollar. 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 U.S. dollars using the exchange rate in effect at that
date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are
adjusted to the U.S. dollar using the exchange rate at the balance sheet date, with gains or losses recognized in Other, net in
the consolidated statements of operations.
75
Other, net
Other, net for the years ended December 31, 2017, 2016, and 2015 consisted of the following:
Currency remeasurement gain/(loss) on net monetary assets
(Loss)/gain on foreign currency forward contracts
Gain/(loss) on commodity forward contracts
Loss on debt financing
Other
Total
For the year ended December 31,
2017
2016
2015
$
$
18,041 $
(10,621) $
(15,618)
9,989
(2,670)
75
(1,850)
7,399
—
171
9,817 $
(4,901) $
(9,613)
3,606
(18,468)
(25,538)
(316)
(50,329)
Recently issued accounting standards to be adopted in a future period:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2014-09, Revenue from Contracts with Customers (Topic 606), which modifies how all entities recognize revenue, and
consolidates into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in
ASC Topic 605 and various other revenue accounting standards for specialized transactions and industries. FASB ASU No.
2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. FASB ASU No. 2014-09 may be applied using
either a full retrospective approach, under which all years included in the financial statements will be presented under the
revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised
guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-
up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by
the entity.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of
Effective Date, which defers the effective date of FASB ASU No. 2014-09 by one year. FASB ASU No. 2014-09 is now
effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual
reporting periods. We have developed an implementation plan to adopt this new guidance, which included an assessment of
the impact of the new guidance on our financial position and results of operations. This implementation plan is substantially
complete. We have determined that this standard will not have a material impact on our financial position or results of
operations. We adopted FASB ASU No. 2014-09 on January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes new accounting and
disclosure requirements for leases. FASB ASU No. 2016-02 requires lessees to classify most leases as either finance or
operating leases and to initially recognize a lease liability and right-of-use asset. Entities may elect to account for certain
short-term leases (with a term of 12 months or less) using a method similar to the current operating lease model. The
statements of operations will include, for finance leases, separate recognition of interest on the lease liability and amortization
of the right-of-use asset and for operating leases, a single lease cost, calculated so that the cost of the lease is allocated over
the lease term on a straight-line basis. At December 31, 2017, we are contractually obligated to make future payments of
$68.6 million under our operating lease obligations in existence as of that date, primarily related to long-term leases. While
we are in the early stages of our implementation process for FASB ASU No. 2016-02, and have not yet determined its impact
on our consolidated financial position or results of operations, these leases would potentially be required to be presented on
the balance sheet in accordance with the requirements of FASB ASU No. 2016-02. FASB ASU No. 2016-02 is effective for
annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods,
with early adoption permitted. FASB ASU No. 2016-02 must be applied using a modified retrospective approach, which
requires recognition and measurement of leases at the beginning of the earliest period presented, with certain practical
expedients available.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which changes both the
designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to
better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand
and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of
the effects of the hedging instrument and the hedged item in the financial statements. FASB ASU No. 2017-12 is effective for
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annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods,
with early adoption permitted. We are still evaluating the impact that this guidance will have on our financial position and
results of operations, and we have not yet determined whether we will early adopt FASB ASU No. 2017-12.
3. Property, Plant and Equipment
PP&E, net as of December 31, 2017 and 2016 consisted of the following:
Land
Buildings and improvements
Machinery and equipment
PP&E, gross
Accumulated depreciation
Total
December 31,
2017
December 31,
2016
$
23,077 $
250,475
1,132,461
1,406,013
(655,964)
$
750,049 $
23,077
234,846
1,025,900
1,283,823
(559,777)
724,046
Depreciation expense for PP&E, including amortization of leasehold improvements and assets under capital leases,
totaled $109.3 million, $106.9 million, and $96.1 million for the years ended December 31, 2017, 2016, and 2015,
respectively.
PP&E, net as of December 31, 2017 and 2016 included the following assets under capital leases:
PP&E recognized under capital leases
Accumulated amortization
Total
4. Inventories
The components of inventories as of December 31, 2017 and 2016 were as follows:
Finished goods
Work-in-process
Raw materials
Total
December 31,
2017
December 31,
2016
45,249 $
(20,631)
24,618 $
44,637
(18,410)
26,227
December 31,
2017
December 31,
2016
195,089 $
92,678
158,362
446,129 $
169,304
74,810
145,730
389,844
$
$
$
$
As of December 31, 2017 and 2016, inventories totaling $11.2 million and $10.3 million, respectively, had been
consigned to customers.
77
5. Goodwill and Other Intangible Assets
The following table outlines the changes in goodwill by segment for the year ended December 31, 2016. There were no
acquisitions or other changes to goodwill during the year ended December 31, 2017.
Performance Sensing
Sensing Solutions
Total
Gross
Goodwill
Accumulated
Impairment
Net
Goodwill
Gross
Goodwill
Accumulated
Impairment
Net
Goodwill
Gross
Goodwill
Accumulated
Impairment
Net
Goodwill
Balance as of
December 31,
2015
CST - purchase
accounting
adjustment
$ 2,149,627 $
— $ 2,149,627 $
888,582 $
(18,466) $
870,116 $ 3,038,209 $
(18,466) $ 3,019,743
(1,492)
—
(1,492)
(12,787)
—
(12,787)
(14,279)
—
(14,279)
Balance as of
December 31,
2016 and 2017 $ 2,148,135 $
— $ 2,148,135 $
875,795 $
(18,466) $
857,329 $ 3,023,930 $
(18,466) $ 3,005,464
Goodwill attributed to acquisitions reflects our allocation of purchase price to the estimated fair value of certain assets
acquired and liabilities assumed. The purchase accounting adjustments above generally reflect revisions in fair value
estimates of liabilities assumed and tangible and intangible assets acquired as well as an adjustment to arrive at the final
allocation of goodwill to our segments, which is based on a methodology that utilizes anticipated future earnings of the
components of the business.
We evaluated our goodwill for impairment as of October 1, 2017 using a combination of the qualitative and quantitative
methods. Based on these analyses, we have determined that, for each of the reporting units subject to the qualitative method,
it was more likely than not that their fair values were greater than their carrying values at that date, and for each of the
reporting units subject to the quantitative method, that their fair values exceeded their carrying values at that date. We
evaluated our other indefinite-lived intangible assets for impairment as of October 1, 2017 using the quantitative method, and
we determined that the fair values of these indefinite-lived intangible assets exceeded their carrying values on that date.
Should certain assumptions change that were used in the qualitative and quantitative analyses of goodwill, or in the
development of the fair value of our indefinite-lived intangible assets, we may be required to recognize goodwill or other
intangible asset impairments.
The following table outlines the components of definite-lived intangible assets, excluding goodwill, as of December 31,
2017 and 2016:
Weighted-
Average
Life
(Years)
Gross
Carrying
Amount
December 31, 2017
December 31, 2016
Accumulated
Amortization
Accumulated
Impairment
Net
Carrying
Value
Gross
Carrying
Amount
Accumulated
Amortization
Accumulated
Impairment
Net
Carrying
Value
Completed
technologies
Customer
relationships
Non-compete
agreements
Tradenames
Capitalized
software (1)
Total
14 $
727,968 $
(418,987) $
(2,430) $ 306,551 $
729,168 $
(358,500) $
(2,430) $
368,238
11
1,771,198
(1,287,581)
(12,144)
471,473
1,771,198
(1,196,961)
(12,144)
562,093
8
22
7
23,400
50,754
(23,400)
(11,094)
59,909
(25,939)
—
—
—
—
39,660
23,400
50,754
(23,400)
(8,672)
33,970
54,284
(19,736)
—
—
—
—
42,082
34,548
12 $ 2,633,229 $
(1,767,001) $
(14,574) $ 851,654 $ 2,628,804 $
(1,607,269) $
(14,574) $ 1,006,961
(1) During the years ended December 31, 2017 and 2016, we wrote-off approximately $1.1 million and $7.2 million,
respectively, of fully-amortized capitalized software that was not in use.
78
The following table outlines Amortization of intangible assets for the years ended December 31, 2017, 2016, and 2015:
December 31, 2017
December 31, 2016
December 31, 2015
Acquisition-related definite-lived intangible assets
$
Capitalized software
Total
$
153,729 $
7,321
161,050 $
194,208 $
7,290
201,498 $
The table below presents estimated Amortization of intangible assets for the following future periods:
2018
2019
2020
2021
2022
179,785
6,847
186,632
$ 137,707
$ 128,594
$ 112,141
$ 95,960
$ 81,816
In addition to the above, 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.
6. Acquisitions
CST
On December 1, 2015, we completed the acquisition of all of the outstanding shares of certain subsidiaries of Custom
Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China (collectively, "CST"), for an
aggregate purchase price of $1,000.8 million. The acquisition included the Kavlico, BEI, Crydom, and Newall product lines
and brands, and encompassed sales, engineering, and manufacturing sites in the U.S., the U.K., Germany, France, and Mexico.
We acquired CST to further extend our sensing content beyond automotive markets and build scale in pressure sensing.
Portions of CST are being integrated into each of our segments. The allocation of the purchase price related to this acquisition
was finalized in the fourth quarter of 2016.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 2017 and 2016 consisted of the following:
Accrued compensation and benefits
Accrued interest
Foreign currency and commodity forward contracts
Accrued severance
Current portion of pension and post-retirement benefit obligations
Other accrued expenses and current liabilities
December 31,
2017
December 31,
2016
$
89,816 $
36,919
35,094
4,184
3,342
90,205
83,008
36,805
26,151
14,268
2,750
82,584
Total
$
259,560 $
245,566
79
8. Debt
Our long-term debt and capital lease and other financing obligations as of December 31, 2017 and 2016 consisted of
the following:
Term loans
4.875% Senior Notes
5.625% Senior Notes
5.0% Senior Notes
6.25% Senior Notes
Less: discount
Less: deferred financing costs
Less: current portion
Long-term debt, net
Capital lease and other financing obligations
Less: current portion
Capital lease and other financing obligations, less current portion
Senior Secured Credit Facilities
December 31,
2017
December 31,
2016
$
927,794 $
500,000
400,000
700,000
750,000
(14,424)
(27,758)
(9,802)
937,794
500,000
400,000
700,000
750,000
(17,655)
(33,656)
(9,901)
$
$
$
3,225,810 $
3,226,582
34,657 $
(5,918)
28,739 $
37,111
(4,742)
32,369
In May 2011, we entered into a series of financing transactions designed to refinance our then existing indebtedness.
These transactions included the execution of a credit agreement (as amended, the “Credit Agreement”) providing for senior
secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a term loan facility, a revolving credit facility,
and incremental availability under which additional secured credit facilities can be issued. Currently outstanding under the
Senior Secured Credit Facilities are a term loan facility (the "Term Loan") provided under the eighth amendment (the "Eighth
Amendment") of the Credit Agreement, a $420.0 million revolving credit facility (the “Revolving Credit Facility”), and $1.0
billion incremental facilities under which additional term loans may be issued or the capacity of the Revolving Credit Facility
may be increased (the “Accordion”). The terms of the Eighth Amendment are described in more detail below.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries
in the U.S., the Netherlands, Mexico, Japan, Belgium, Bulgaria, Malaysia, Bermuda, Luxembourg, France, Ireland, and the
U.K. (collectively, the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists
of substantially all present and future property and assets of STBV, Sensata Technologies Finance Company, LLC, and the
Guarantors.
The Credit Agreement stipulates certain events and conditions that may require us to use excess cash flow, as defined by
the terms of the Credit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the
outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory
prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and
casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any
permitted indebtedness). These provisions were not triggered during the year ended December 31, 2017.
On November 7, 2017, we entered into the Eighth Amendment, which resulted in a “Repricing Transaction” per the
terms of the Credit Agreement. As a result, the Term Loan replaced the term loan provided under the Sixth Amendment.
Pursuant to the Eighth Amendment, changes from the previously issued term loan included the following: (i) the applicable
interest rate margins were reduced to 0.75% for Base Rate loans and 1.75% for Eurodollar Rate loans, the Base Rate floor
was reduced to 1.00%, and the Eurodollar Rate floor was reduced to 0.00%; (ii) a prepayment premium of 1.0% was added
with respect to any repricing event that occurs with respect to the Term Loan prior to the date that is six months after the
effective date of the Eighth Amendment; (iii) the senior secured net leverage ratio threshold that triggers the excess cash flow
mandatory prepayment requirement was increased; (iv) the Accordion was re-set to $1.0 billion as of the effective date of the
Eighth Amendment; (v) various baskets, permissions and other provisions under certain of the affirmative and negative
covenants were increased or otherwise amended for our benefit; and (vi) certain other changes were made to the Credit
Agreement that are not considered material. The Term Loan retains all other provisions of the Sixth Amendment, including
original principal amount and maturity, amongst others.
80
The terms presented herein reflect the current terms as a result of all Credit Agreement amendments.
Term Loan
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), each with a different determination of interest rates. The principal amount of the Term
Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount
of the term loan provided under the Sixth Amendment, with the balance due at maturity. The applicable margins for the Term
Loan as of December 31, 2017 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, (a
decrease from 1.25% and 2.25%, respectively, pursuant to the Sixth Amendment) subject to floors of 1.00% and 0.00% for
Base Rate loans and Eurodollar Rate loans, respectively (a decrease from 1.75% and 0.75%, respectively, pursuant to the
Sixth Amendment).
As of December 31, 2017, we maintained the Term Loan as a Eurodollar Rate loan, which accrued interest at a rate of
3.21%.
Revolving Credit Facility
At our option, the Revolving Credit Facility may be maintained from time to time as a Base Rate loan or a Eurodollar
Rate loan (each as defined in the Credit Agreement), each with a different determination of interest rates. Interest rates and
fees on the Revolving Credit Facility are as follows (each depending on the achievement of certain senior secured net
leverage ratios) (i) the index rate spread for Eurodollar Rate loans is 1.75% or 1.50%; (ii) the index rate spread for Base Rate
loans is 0.75% or 0.50%; and (iii) the letter of credit fees are 1.625% or 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 is subject to a pricing grid based on our leverage ratio. The spreads on the
commitment fee currently range from 0.25% to 0.375%.
As of December 31, 2017, there was $415.3 million of availability under the Revolving Credit Facility (net of $4.7
million in letters of credit). Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As
of December 31, 2017, no amounts had been drawn against these outstanding letters of credit.
Revolving loans may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general
corporate purposes.
Senior Notes
At December 31, 2017, we had various tranches of senior notes outstanding, including the 4.875% Senior Notes, the
5.625% Senior Notes, the 5.0% Senior Notes, and the 6.25% Senior Notes (each as defined below, and collectively, the
“Senior Notes”).
At any time, we may redeem the Senior Notes (with the exception of the 6.25% Senior Notes, the redemption terms of
which are discussed in more detail below), in whole or in part, at a redemption price equal to 100% of the principal amount
of the Senior Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption, plus the Applicable
Premium (also known as the "make-whole premium") set forth in the indentures under which the Senior Notes were issued
(the “Senior Notes Indentures”). Upon the occurrence of certain change in control events, we will be required to make an
offer to purchase the Senior Notes then outstanding at a purchase price equal to 101% of their principal amount, plus accrued
and unpaid interest, if any, to the date of repurchase. In addition, if certain changes in the law of any relevant taxing
jurisdiction become effective that would impose withholding taxes or other deductions on the payments of the Senior Notes
or the guarantees, we may redeem the Senior Notes in whole, but not in part, at any time, at a redemption price of 100% of
the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption.
The Senior Notes Indentures provide for events of default (subject in certain cases to customary grace and cure periods)
that include, among others, nonpayment of principal or interest when due, breach of covenants or other agreements in the
Senior Notes Indentures, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure
to pay certain judgments, and when the guarantees of significant subsidiaries cease to be in full force and effect. 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
may declare the principal of, and accrued but unpaid interest on, all of the Senior Notes to be due and payable immediately.
All provisions regarding remedies in an event of default are subject to the Senior Notes Indentures.
81
4.875% Senior Notes
In April 2013, we completed the issuance and sale of $500.0 million aggregate principal amount of 4.875% senior notes
due 2023 (the "4.875% Senior Notes"), which were issued under an indenture dated April 17, 2013 (the "4.875% Senior
Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. 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.
Our obligations under the 4.875% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned
subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 4.875% Senior Notes and the
related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 4.875% Senior Notes
and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the
Guarantors.
5.625% Senior Notes
In October 2014, we completed the issuance and sale of $400.0 million aggregate principal amount of 5.625% senior
notes due 2024 (the "5.625% Senior Notes"), which were issued under an indenture dated October 14, 2014 (the "5.625%
Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. 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.
Our obligations under the 5.625% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned
subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 5.625% Senior Notes and the
related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 5.625% Senior Notes
and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the
Guarantors.
5.0% Senior Notes
In March 2015, we completed the issuance and sale of $700.0 million aggregate principal amount of 5.0% senior notes
due 2025 (the "5.0% Senior Notes"), which were issued under an indenture dated March 26, 2015 (the "5.0% Senior Notes
Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. 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.
Our obligations under the 5.0% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned
subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 5.0% Senior Notes and the related
guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 5.0% Senior Notes and the
guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the
Guarantors.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of $750.0 million aggregate principal amount of 6.25% senior
notes due 2026 (the "6.25% Senior Notes"), which were issued by Sensata Technologies UK Financing Co. plc ("STUK")
under an indenture dated November 27, 2015 (the "6.25% Senior Notes Indenture") among STUK, as issuer, The Bank of
New York Mellon, as trustee, and the Guarantors. 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.
82
We may redeem the 6.25% Senior Notes, in whole or in part, at any time prior to February 15, 2021, at a redemption
price equal to 100% of the principal amount of the 6.25% Senior Notes redeemed, plus accrued and unpaid interest, if any, to
the date of redemption, plus the Applicable Premium (also known as the “make-whole” premium) set forth in the 6.25%
Senior Notes Indenture. Thereafter, we may redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus
accrued and unpaid interest, if any, to the date of redemption):
Period beginning February 15,
2021
2022
2023
2024 and thereafter
Price
103.125%
102.083%
101.042%
100.000%
In addition, at any time prior to November 15, 2018, we may redeem up to 40% of the aggregate principal amount of
the 6.25% Senior Notes with the net cash proceeds from certain equity offerings at the redemption price of 106.25% plus
accrued and unpaid interest, if any, to the date of redemption, provided that at least 60% of the aggregate principal amount of
the 6.25% Senior Notes remains outstanding immediately after each such redemption.
Our obligations under the 6.25% Senior Notes are guaranteed by STBV and certain of STBV’s existing and future
wholly-owned subsidiaries (other than STUK) that guarantee our obligations under the Senior Secured Credit Facilities. The
6.25% Senior Notes and the related guarantees are the senior unsecured obligations of STUK and the Guarantors,
respectively. The 6.25% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior
unsecured indebtedness of STUK, STBV, or the Guarantors.
Restrictions
As of December 31, 2017, all of the subsidiaries of STBV were subject to certain restrictive covenants. Under certain
circumstances, STBV will be permitted to designate a subsidiary as "unrestricted," in which case the restrictive covenants
will not apply to that subsidiary. STBV has not designated any subsidiaries as unrestricted.
Under the Revolving Credit Facility, 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 10% of the commitments under the Revolving Credit Facility. In
addition, STBV and its subsidiaries are required to satisfy this covenant, on a pro forma basis, in connection with any new
borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings.
The Credit Agreement also contains non-financial covenants that limit our ability to incur subsequent indebtedness,
incur liens, prepay subordinated debt, make loans and investments (including acquisitions), merge, consolidate, dissolve or
liquidate, sell assets, enter into affiliate transactions, change our business, change our accounting policies, make capital
expenditures, amend the terms of our subordinated debt and our organizational documents, pay dividends and make other
restricted payments, and enter into certain burdensome contractual obligations. These covenants are subject to important
exceptions and qualifications set forth in the Credit Agreement.
The Senior Notes Indentures contain restrictive covenants that limit the ability of STBV and its subsidiaries to, among
other things: incur additional debt or issue preferred stock; create liens; create restrictions on STBV's subsidiaries' ability to
make payments to STBV; pay dividends and make other distributions in respect of STBV's and its subsidiaries' capital stock;
redeem or repurchase STBV's capital stock, our capital stock, or the capital stock of any other direct or indirect parent
company of STBV or prepay subordinated indebtedness; make certain investments or certain other restricted payments;
guarantee indebtedness; designate unrestricted subsidiaries; sell certain kinds of assets; enter into certain types of transactions
with affiliates; and effect mergers or consolidations. These covenants are subject to important exceptions and qualifications
set forth in the Senior Notes Indentures. 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 no default has occurred
and is continuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer rated investment
grade by either rating agency and an event of default has occurred and is continuing at such time. As of December 31, 2017,
the Senior Notes were not rated investment grade by either rating agency.
83
The Guarantors under the Credit Agreement and the Senior Notes Indentures 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 us, under the Credit Agreement and the Senior Notes Indentures. Specifically, the Credit
Agreement prohibits STBV from paying dividends or making any distributions to its parent companies except for limited
purposes, including, but not limited to: (i) customary and reasonable operating expenses, legal and accounting fees and
expenses, and overhead of such parent companies incurred in the ordinary course of business in the aggregate not to exceed
$20.0 million in any fiscal year, plus reasonable and customary indemnification claims made by our directors or officers
attributable to the ownership of STBV and its subsidiaries; (ii) franchise taxes, certain advisory fees, and customary
compensation of officers and employees of such parent companies to the extent such compensation is attributable to the
ownership or operations of STBV and its subsidiaries; (iii) repurchase, retirement, or other acquisition of equity interest of
the parent from certain present, future, and former employees, directors, managers, consultants of the parent companies,
STBV, or its subsidiaries in an aggregate amount not to exceed $20.0 million in any fiscal year, plus the amount of cash
proceeds from certain equity issuances to such persons, the amount of equity interests subject to a certain deferred
compensation plan, and the amount of certain key-man life insurance proceeds; (iv) so long 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, dividends and other
distributions in an aggregate amount not to exceed $100.0 million, plus certain amounts, including the retained portion of
excess cash flow; (v) dividends and other distributions in an aggregate amount not to exceed $50.0 million in any calendar
year (subject to increase upon the achievement of certain ratios); and (vi) so long as no default or event of default exists,
dividends and other distributions in an aggregate amount not to exceed $150.0 million.
The Senior Notes Indentures generally provide that STBV can pay dividends and make other distributions to its parent
companies upon the achievement of certain conditions and in an amount as determined in accordance with the Senior Notes
Indentures.
The net assets of STBV subject to these restrictions totaled $2,258.6 million at December 31, 2017.
Accounting for Debt Financing Transactions
Refer to Note 2, "Significant Accounting Policies," under the heading Debt Instruments for discussion of our accounting
policies regarding debt financing transactions.
During the years ended December 31, 2017 and 2015, we recorded losses of $2.7 million and $25.5 million,
respectively, in Other, net related to our debt financing transactions of which $0.6 million and $19.2 million, respectively,
related to transaction costs. The remaining losses recorded to Other, net primarily relate to the write-off of unamortized
deferred financing costs and debt discounts.
During the year ended December 31, 2017, $0.2 million was accounted for as debt issuance costs related to the Eighth
Amendment and were recorded on the balance sheet as an adjustment to the carrying amount of the debt liability.
During the year ended December 31, 2015, $12.5 million was accounted for as as debt issuance costs related to the
issuance and sale of the 6.25% Senior Notes and were recorded on the balance sheet as an adjustment to the carrying amount
of the debt liability. In addition, $8.8 million was recorded in Interest expense, net, which relates to fees associated with
bridge financing that was not utilized.
During the year ended December 31, 2016 we did not enter into any debt financing transactions.
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. Depending on the specific terms of the leases, our obligations are in two forms: capital leases and
operating leases. Rent expense for the years ended December 31, 2017, 2016, and 2015 was $19.7 million, $18.1 million, and
$14.1 million, respectively.
We have capital leases for facilities in Baoying, China and Attleboro, Massachusetts. As of December 31, 2017 and
2016, the combined capital lease obligations outstanding for these facilities were $26.2 million and $27.8 million,
respectively.
84
Other Financing Obligations
In 2013, we entered into an agreement with one of our suppliers, Measurement Specialties, Inc., under which we
acquired the rights to certain intellectual property in exchange for quarterly royalty payments through the fourth quarter of
2019. As of December 31, 2017 and 2016, we had recognized a liability related to this agreement of $3.5 million and $5.2
million, respectively.
Debt Maturities
The final maturity of the Term Loan is October 14, 2021. The Term Loan must be repaid in full on or prior to this date.
The 4.875% Senior Notes, the 5.625% Senior Notes, the 5.0% Senior Notes, and the 6.25% Senior Notes mature on October
15, 2023, November 1, 2024, October 1, 2025, and February 15, 2026, respectively. The final maturity of the Revolving
Credit Facility is March 26, 2020. Loans made pursuant to the Revolving Credit Facility must be repaid in full on or prior to
such date and are pre-payable at our option 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 capital lease
payments, other financing obligations, and discretionary repurchases of debt, in each of the years ended December 31, 2018
through 2022 and thereafter.
For the year ended December 31,
Aggregate Maturities
2018
2019
2020
2021
2022
Thereafter
Total long-term debt principal payments
Compliance with Financial and Non-Financial Covenants
$
$
9,802
9,901
9,901
898,190
—
2,350,000
3,277,794
As of, and for the year ended, December 31, 2017, we were in compliance with all of the covenants and default
provisions associated with our indebtedness.
9. 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. Several of our Dutch resident subsidiaries are taxable entities in the Netherlands and file
tax returns under Dutch fiscal unity (i.e., consolidation). Prior to April 30, 2008, we filed one consolidated tax return in the
U.S. On April 30, 2008, our U.S. subsidiaries executed a separation and distribution agreement that divided our U.S.
businesses, resulting in two separate U.S. consolidated federal income tax returns. On January 1, 2016, our U.S. subsidiaries
resumed filing one consolidated tax return. Our remaining subsidiaries will file income tax returns in the countries in which
they are incorporated and/or operate, including the Netherlands, Japan, China, Germany, Belgium, Bulgaria, South Korea,
Malaysia, the U.K., France, and Mexico. 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.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017 President Donald Trump signed into U.S. law the Tax Cuts and Jobs Act of 2017 (“Tax
Reform”). ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the
period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or
in the case of certain other provisions of the law, January 1, 2018.
85
Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff
Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year
“measurement period” similar to that used when accounting for business combinations. However, the measurement period is
deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize
its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable
estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as
information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively
disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to
provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been
determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior
to the enactment of the Tax Cuts and Jobs Act.
Amounts recorded where we consider accounting to be complete for the year ended December 31, 2017 principally
relate to the reduction in the U.S. corporate income tax rate to 21 percent, which resulted in the recording of an income tax
benefit of $73.7 million to remeasure deferred taxes liabilities associated with indefinite-lived intangible assets that are
deemed to reverse at the new 21 percent tax rate. Absent this deferred tax liability, we are in a net deferred tax asset position
that is offset by a full valuation allowance.
The Tax Reform includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits
of a U.S. taxpayer’s foreign subsidiaries. We have performed an earnings and profits analysis, and as a result of foreign tax
credits available to fully offset the anticipated transition tax, there will be no income tax effect in the current period.
Therefore, the preliminary accounting for this matter is generally complete.
However, several provisions, including the repatriation provisions, of the Tax Reform have significant impact on our
U.S. tax attributes, generally consisting of credits, loss carry-forwards, and deferred interest deductions. Our tax attributes are
generally subject to a full valuation allowance in the U.S. and thus, any adjustments to the attributes will not impact the tax
provision. Although we have made a reasonable estimate of the gross amounts of the attributes disclosed, a final
determination of the Tax Reform’s impact on the attributes and related valuation allowance requirements remain incomplete
pending a full analysis of the provisions and their interpretations.
Other significant provisions that are not yet effective but may impact income taxes in future years include: an
exemption from U.S. tax on dividends of future foreign earnings, limitation on the current deductibility of net interest
expense in excess of 30 percent of adjusted taxable income, a limitation of net operating losses generated after fiscal 2018 to
80 percent of taxable income, an incremental tax (base erosion anti-abuse tax or “BEAT”) on excessive amounts paid to
foreign related parties, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries
tangible assets (i.e., global intangible low-taxed income or “GILTI”). We are still evaluating whether to make a policy
election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are
expected to generate GILTI income when they reverse in future years.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2017, 2016, and 2015 was categorized by jurisdiction as
follows:
For the year ended December 31,
2017
2016
2015
U.S.
Non-U.S.
Total
$
$
$
(11,425) $
(43,842) $
(60,707) $
413,866 $
365,287 $
266,336 $
402,441
321,445
205,629
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(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for the years ended December 31, 2017, 2016, and 2015 was categorized by
jurisdiction as follows:
For the year ended December 31,
2017
2016
Current
Deferred
Total
Current
Deferred
Total
2015:
Current
Deferred
Total
U.S. Federal
Non-U.S.
U.S. State
Total
$
$
$
$
$
$
— $
(56,956)
(56,956) $
50,601 $
(1,104)
49,497 $
464 $
49,977 $
10,036
2,010
10,500 $
51,987 $
(8,187) $
45,326 $
(168,855)
(361)
(177,042) $
44,965 $
240 $
1,303
1,543 $
226 $
(3,702)
(3,476) $
(197) $
(9,793)
(9,990) $
50,841
(56,757)
(5,916)
50,667
8,344
59,011
36,942
(179,009)
(142,067)
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, 2017, 2016, and 2015 were as follows:
Tax computed at statutory rate of 35%
Foreign tax rate differential
U.S. Tax Reform Impact
Reserve for tax exposure
Release of valuation allowances
Losses not tax benefited
Patent box
Change in tax law or rates
Withholding taxes not creditable
Unrealized foreign exchange (gains)/losses, net
Other
For the year ended December 31,
2017
2016
2015
$
140,854 $
112,506 $
(111,990)
(86,339)
(73,668)
38,013
(12,209)
8,841
(5,922)
3,912
3,896
830
1,527
—
11,227
(1,925)
32,490
(10,961)
2,542
6,014
3,829
(10,372)
71,970
(66,367)
—
(2,949)
(180,001)
56,778
(3,714)
(10,290)
4,346
(12,120)
280
(Benefit from)/provision for income taxes
$
(5,916) $
59,011 $
(142,067)
U.S. Tax Reform Impact
As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35 percent to 21 percent, effective on January
1, 2018. We are required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. We recorded $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 percent rate. Absent this deferred tax liability, the U.S. operation is in a net deferred tax
asset position, offset by a full valuation allowance. We reduced our net deferred tax assets excluding the indefinite-lived
intangible assets and the corresponding valuation allowance by $120.0 million.
87
Foreign tax rate differential
We operate in locations outside the U.S., including China, the U.K., the Netherlands, South Korea, Malaysia, Bermuda,
and Bulgaria, that have statutory tax rates lower than the historical U.S. statutory rate, resulting in an effective rate benefit.
This benefit can change from year to year based upon the jurisdictional mix of earnings. For the years ended December 31,
2017, 2016, and 2015, this benefit was $112.0 million, $86.3 million, and $66.4 million, respectively.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their
respective jurisdictions. From 2016 through 2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of
15%. The impact of the tax holidays and exemptions on our effective rate is included in the foreign tax rate differential line in
the reconciliation of the statutory rate to effective rate.
Patent box
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. For the years ended
December 31, 2017, 2016, and 2015, this benefit was $5.9 million, $11.0 million, and $3.7 million, respectively.
Release of valuation allowances
During the years ended December 31, 2017, 2016, and 2015, we released a portion of our valuation allowance and
recognized a deferred tax benefit of $12.2 million, $1.9 million, and $180.0 million, respectively. The deferred tax benefits in
fiscal years 2016 and 2015 arose primarily in connection with the 2015 acquisition of CST and the 2014 acquisitions of
Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities were established and related
primarily to the step-up of intangible assets for book purposes.
Losses not tax benefited
Losses incurred in certain jurisdictions, predominantly the U.S., are not currently benefited, as it is not more likely than
not that the associated deferred tax asset will be realized in foreseeable future. For the years ended December 31, 2017, 2016,
and 2015, this resulted in a deferred tax expense of $8.8 million, $32.5 million, and $56.8 million, respectively.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties.
Such taxes are expensed 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 the remittance of presently 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 record withholding and other taxes on intercompany payments including dividends. During
the years ended December 31, 2017, 2016, and 2015, this amount totaled $3.9 million, $6.0 million, and $4.3 million.
88
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as
follows:
Deferred tax assets:
Inventories and related reserves
Accrued expenses
Property, plant and equipment
Intangible assets
Unrealized Exchange Loss
Net operating loss, interest expense, and other carryforwards
Pension liability and other
Share-based compensation
Other
Total deferred tax assets
Valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Property, plant and equipment
Intangible assets and goodwill
Unrealized exchange gain
Tax on undistributed earnings of subsidiaries
Other
Total deferred tax liabilities
Net deferred tax liability
December 31,
2017
December 31,
2016
$
17,287 $
25,920
13,396
22,050
12,265
349,244
8,880
12,195
7,028
468,265
(277,315)
190,950
(23,222)
(428,028)
(6,031)
(38,894)
—
(496,175)
$
(305,225) $
17,616
32,703
11,297
32,282
—
446,946
10,545
15,341
3,398
570,128
(299,746)
270,382
(25,195)
(556,089)
(11,547)
(48,493)
(991)
(642,315)
(371,933)
Valuation allowance and net operating loss carryforwards
Since our inception, we have incurred tax losses in the U.S., resulting in allowable tax net operating loss carryforwards.
In measuring the related deferred tax assets, we considered 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. Judgment is required in considering the relative impact of negative and positive evidence. The weight given to the
potential effect of negative and positive 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
ASC 740 to determine whether the future benefit from the deferred tax assets should be recognized. As a result, we have
established a full valuation allowance 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.
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 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, 2017 and 2016 (decreased)/increased $(22.4) million
and $2.8 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets
as of December 31, 2017 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2017, we have U.S. federal net operating loss carryforwards of $724.9 million and interest expense
carryforwards of $472.0 million. U.S. federal net operating loss carryforwards will expire from 2026 to 2037, state net
89
operating loss carryforwards will expire from 2018 to 2037, and the interest carryovers have an unlimited life. It is more
likely than not that these net operating losses will not be utilized in the foreseeable future. We also have non-U.S. net
operating loss carryforwards of $262.6 million, which will begin to expire in 2018.
We believe a change of ownership within the meaning of Section 382 of the Internal Revenue Code occurred in the
fourth quarter of 2012. As a result, our U.S. federal net operating loss utilization will be limited to an amount equal to the
market capitalization of our U.S. subsidiaries at the time of the ownership change multiplied by the federal long-term tax
exempt rate. A change of ownership under Section 382 of the Internal Revenue Code is defined as a cumulative change of
fifty percentage points or more in the ownership positions of certain stockholders owning five percent or more of our
common stock over a three year rolling period. We do not believe the resulting limitation will prohibit the utilization of our
U.S. federal net operating loss.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
Balance at December 31, 2014
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to settlements with tax authorities
Balance at December 31, 2015
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to lapse of applicable statute of limitations
Decreases related to settlements with tax authorities
Balance at December 31, 2016
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to lapse of applicable statute of limitations
Decreases related to settlements with tax authorities
Balance at December 31, 2017
$
$
22,774
5,467
18,382
(8,566)
38,057
6,390
8,462
(256)
(6,755)
45,898
7,968
14,585
(1,356)
(7,211)
59,884
During the year ended December 31, 2015, we established a reserve of $16.0 million in connection with a capital
restructuring transaction executed during the year.
We record 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 (income)/expense related to such interest and penalties
recognized in the consolidated statements of operations during the years ended December 31, 2017, 2016, and 2015, and the
amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2017 and 2016:
(in millions)
Interest
Penalties
Statements of Operations
Balance Sheets
For the year ended December 31,
As of December 31,
2017
2016
2015
2017
2016
$
$
0.2 $
(0.1) $
0.1 $
0.1 $
0.1 $
(0.3) $
0.7 $
0.5 $
1.0
1.1
The liability for unrecognized tax benefits generally relates to the allocation of taxable income to the various
jurisdictions where we are subject to tax. At December 31, 2017, we anticipate that the liability for unrecognized tax benefits
could decrease by up to $0.2 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,
2017 and 2016 that will impact our effective tax rate are $5.4 million and $12.0 million, respectively.
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Our major tax jurisdictions include the Netherlands, the U.S., Japan, Germany, Mexico, China, South Korea, Belgium,
Bulgaria, France, Malaysia, and the U.K. These jurisdictions generally remain open to examination by the relevant tax
authority for the tax years 2006 through 2017.
Indemnifications
We have various indemnification provisions in place with Texas Instruments Incorporated ("TI"), Honeywell, William
Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement by TI,
Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd of future tax liabilities paid by us that
relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive, Airpax,
Schrader, and CST, respectively.
10. 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.
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. We do not expect to
contribute to the qualified defined benefit pension plan during 2018.
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
Prior to August 1, 2012, we offered two defined contribution plans. Both defined contribution plans offered an
employer matching savings option that allowed employees to make pre-tax contributions to various investment choices.
Employees who elected not to remain in the qualified defined benefit pension plan, and new employees hired after
November 1997, could participate in an enhanced defined contribution plan, where employer matching contributions were
provided for up to 4% of the employee’s annual eligible earnings. In addition, this plan provided for an additional fixed
employer contribution of 2% of the employee’s annual eligible earnings for employees who elected not to remain in the
qualified defined benefit pension plan and employees hired between November 1997 and December 31, 2003. Effective in
2012, we discontinued the additional fixed employer contribution of 2%.
Employees who remained in the qualified defined benefit pension plan were permitted to participate in a defined
contribution plan, where 50% employer matching contributions were provided for up to 2% of the employee’s annual eligible
earnings. Effective in 2012, we increased the employer matching contribution to 100% for up to 4% of the employee's annual
eligible earnings.
In 2012, we merged the two defined contribution plans into one plan. The combined plan provides for an employer
matching contribution of up to 4% of the employee's annual eligible earnings. Our matching of employees’ contributions
under our defined contribution plan is discretionary and is based on our assessment of our financial performance.
91
The aggregate expense related to the defined contribution plans for U.S. employees was $5.9 million, $5.8 million, and
$4.7 million for the years ended December 31, 2017, 2016, and 2015, 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, 2017, 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, 2017 and 2016 did not include an assumption for a Federal subsidy.
In the fourth quarter of 2013, we amended the retiree healthcare benefit plan to eliminate supplemental medical
coverage offered to Medicare eligible retirees, effective January 1, 2014. As a result of the amendment, we recognized a gain
of $7.2 million that was recorded in Other comprehensive (loss)/income in the fourth quarter of 2013, which is being
amortized as a component of net periodic benefit cost over a period of approximately 5 years from the date of recognition,
which represents the remaining average service period to the full eligibility dates of the active plan participants.
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 expect to contribute approximately $2.3 million to non-U.S. defined benefit plans during 2018.
Impact on Financial Statements
The following table outlines the net periodic benefit cost of the defined benefit and retiree healthcare benefit plans for
the years ended December 31, 2017, 2016, and 2015:
For the year ended December 31,
2017
2016
2015
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
$
— $
74 $
2,582 $
— $
83 $
2,716 $
— $
102 $
1,604
325
1,053
1,461
(2,151)
1,149
—
3,225
—
—
54
(905)
287
(2,684)
707
(1,335)
—
—
(4)
100
—
—
1,293
—
364
—
143
(1,335)
—
—
1,179
1,564
(952)
488
(20)
34
(486)
(2,666 )
473
—
391
—
272
—
361
(1,335)
—
—
2,811
1,075
(892)
19
(37)
479
1,901
$
3,827 $
(882 ) $
3,113 $
777 $
(745) $
2,959 $
(238) $
(600) $
5,356
Service cost
Interest cost
Expected return on plan
assets
Amortization of net loss
Amortization of net prior
service credit
Loss on settlement
(Gain)/loss on
curtailment
Net periodic benefit
cost/(credit)
92
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, 2017 and 2016:
For the year ended December 31,
2017
2016
U.S. Plans
Defined
Benefit
Retiree
Healthcare
Non-U.S.
Plans
Defined
Benefit
U.S. Plans
Defined
Benefit
Retiree
Healthcare
Non-U.S.
Plans
Defined
Benefit
$
57,679 $
10,296 $
59,056 $
57,626 $
11,108 $
56,102
—
1,604
—
—
2,936
—
(13,604)
—
—
74
325
519
—
(197)
—
(1,325)
—
—
2,582
1,053
120
(6)
2,692
—
(2,572)
—
4,488
—
1,461
—
—
4,946
—
(6,354)
—
—
83
364
405
—
(984)
—
(962)
282
—
48,615 $
9,692 $
67,413 $
57,679 $
10,296 $
2,716
1,179
139
(73)
5,127
(2,169)
(3,186)
253
(1,032)
59,056
52,042 $
— $
37,361 $
55,867 $
— $
33,961
2,319
344
—
—
1,325
—
1,241
2,586
120
2,262
267
—
—
962
—
2,469
3,552
139
(13,604)
(1,325)
(2,572)
(6,354)
(962)
(3,186)
—
—
2,486
—
—
426
41,101 $
— $
41,222 $
52,042 $
— $
37,361
(7,514) $
(9,692) $
(26,191) $
(5,637) $
(10,296) $
(21,695)
48,615
NA $
60,588 $
57,679
NA $
53,995
Change in Benefit Obligation
Beginning balance
Service cost
Interest cost
Plan participants’ contributions
Plan amendment
Actuarial loss/(gain)
Curtailments
Benefits paid
Acquisitions (1)
Foreign currency exchange rate
changes
Ending balance
Change in Plan Assets
Beginning balance
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Foreign currency exchange rate
changes
Ending balance
Funded status at end of year
Accumulated benefit obligation at end
of year
$
$
$
$
$
(1) Relates to unfunded defined benefit plans assumed as part of the acquisition of CST.
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of
December 31, 2017 and 2016:
Noncurrent assets
Current liabilities
Noncurrent liabilities
December 31, 2017
December 31, 2016
U.S. Plans
Defined
Benefit
Retiree
Healthcare
Non-U.S.
Plans
Defined
Benefit
U.S. Plans
Defined
Benefit
Retiree
Healthcare
$
— $
— $
— $
— $
— $
(638)
(6,876)
(1,210)
(8,482)
(1,494)
(24,697)
(651)
(4,986)
(1,226)
(9,070)
$
(7,514) $
(9,692) $
(26,191) $
(5,637) $
(10,296) $
Non-U.S.
Plans
Defined
Benefit
—
(873)
(20,822)
(21,695)
93
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, 2017, 2016, and 2015 are as follows:
2017
2016
2015
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
credit
Net loss
$
$
— $
823 $
(220) $
— $
(512) $
(218) $
— $
(1,847) $
(538)
20,884 $
1,009 $
12,489 $
22,490 $
1,260 $
11,070 $
19,122 $
2,387 $
10,719
We expect to amortize a loss of $0.3 million from Accumulated other comprehensive loss to net periodic benefit cost
during 2018.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2017 and
2016 is as follows:
Projected benefit obligation
Accumulated benefit obligation
Plan assets
December 31, 2017
December 31, 2016
U.S.
Plans
Non-U.S.
Plans
U.S.
Plans
Non-U.S.
Plans
$
$
$
48,615 $
48,615 $
41,101 $
31,680 $
26,609 $
5,759 $
57,679 $
57,679 $
52,042 $
25,367
22,285
4,876
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2017 and 2016 is
as follows:
Projected benefit obligation
Plan assets
December 31, 2017
December 31, 2016
U.S.
Plans
Non-U.S.
Plans
U.S.
Plans
Non-U.S.
Plans
$
$
58,307 $
41,101 $
63,153 $
36,990 $
67,975 $
52,042 $
54,849
33,606
Other changes in plan assets and benefit obligations, net of tax, recognized in Other comprehensive loss for the years
ended December 31, 2017, 2016, and 2015 are as follows:
2017
2016
2015
For the year ended December 31,
U.S. Plans
Defined
Benefit
Retiree
Healthcare
Non-U.S.
Plans
Defined
Benefit
U.S. Plans
Defined
Benefit
Retiree
Healthcare
Non-U.S.
Plans
Defined
Benefit
U.S. Plans
Defined
Benefit
Retiree
Healthcare
Non-U.S.
Plans
Defined
Benefit
$
2,768 $
(197) $
1,618 $
5,368 $
(984) $
2,505 $
2,792 $
(949) $
(1,233)
(1,149)
(54)
(130)
(707)
(143)
(436)
(473)
(361)
—
—
(3,225)
—
1,335
—
—
—
3
(5)
(69)
—
—
—
(1,293)
—
1,335
—
—
—
15
(73)
(67)
(1,272)
—
—
(391)
—
1,335
—
—
—
70
32
24
(330)
—
$
(1,606) $
1,084 $
1,417 $
3,368 $
208 $
672 $
1,928 $
25 $
(1,437)
Net loss/(gain)
Amortization of
net (loss)/gain
Amortization of
net prior service
credit
Plan amendment
Settlement effect
Curtailment effect
Total recognized in
other
comprehensive
loss/(income)
94
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, 2017 and 2016 are as follows:
U.S. assumed discount rate
Non-U.S. assumed discount rate
Non-U.S. average long-term pay progression
December 31, 2017
December 31, 2016
Defined
Benefit
Retiree
Healthcare
Defined
Benefit
Retiree
Healthcare
3.00%
2.07%
2.66%
3.10%
NA
NA
3.20%
1.75%
2.46%
3.30%
NA
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, 2017, 2016, and 2015 are as follows:
For the year ended December 31,
2017
2016
2015
Defined
Benefit
Retiree
Healthcare
Defined
Benefit
Retiree
Healthcare
Defined
Benefit
Retiree
Healthcare
U.S. assumed discount rate
Non-U.S. assumed discount rate
U.S. average long-term rate
of return on plan assets
Non-U.S. average long-term rate of return on
plan assets
3.20%
3.90%
4.50%
2.29%
Non-U.S. average long-term pay progression
3.75%
3.30%
NA
NA
NA
NA
3.10%
3.83%
5.00%
2.60%
3.78%
3.50%
NA
NA
NA
NA
2.90%
4.19%
5.00%
2.51%
4.34%
2.90%
NA
NA
NA
NA
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2017, 2016, and
2015 are as follows:
Assumed healthcare trend rate for next year:
Attributed to less than age 65
Attributed to age 65 or greater
Ultimate trend rate
Year in which ultimate trend rate is reached:
Attributed to less than age 65
Attributed to age 65 or greater
Retiree Healthcare
December 31,
2017
December 31,
2016
December 31,
2015
6.90%
7.50%
4.50%
2038
2038
7.10%
7.80%
4.50%
2038
2038
7.30%
6.80%
4.50%
2029
2029
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, 2017 would have the
following effect:
Effect on total service and interest cost components
Effect on post-retirement benefit obligations
1 percentage
point
increase
1 percentage
point
decrease
$
$
8 $
261 $
(7)
(227)
95
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
2018
2019
2020
2021
2022
2023 - 2027
Plan Assets
U.S.
Defined
Benefit
U.S.
Retiree
Healthcare
Non-U.S.
Defined
Benefit
$
6,211 $
1,210 $
5,851
5,341
4,956
4,001
12,185
1,257
1,219
1,112
1,022
3,273
2,848
2,905
3,178
3,258
3,937
20,474
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.
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 collaboratively reviewed market opportunities using historic and
statistical 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. Currently, we believe that there are no significant concentrations of risk associated with the plan
assets.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of
December 31, 2017:
Asset Class
U.S. large cap equity
U.S. small / mid cap equity
Globally managed volatility fund
International (non-U.S.) equity
Fixed income (U.S. investment and non-investment grade)
High-yield fixed income
International (non-U.S.) fixed income
Money market funds
The portfolio is monitored for automatic rebalancing on a monthly basis.
Target Allocation
Actual Allocation as of
December 31, 2017
8%
2%
3%
4%
68%
2%
1%
12%
8%
2%
3%
4%
67%
2%
1%
12%
96
The following table presents information about the plan assets measured at fair value as of December 31, 2017 and
2016, aggregated by the level in the fair value hierarchy within which those measurements fall:
December 31, 2017
December 31, 2016
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Asset Class
U.S. large cap equity
U.S. small / mid cap equity
Global managed volatility
fund
International (non-U.S.)
equity
Total equity mutual funds
Fixed income (U.S.
investment grade)
High-yield fixed income
International (non-U.S.)
fixed income
Total fixed income mutual
funds
Money market funds
$
3,288 $
— $
— $ 3,288 $
3,786 $
— $
942
1,288
1,788
7,306
27,507
821
398
28,726
5,069
—
—
—
—
—
—
—
—
—
—
—
—
—
942
2,109
1,288
1,788
7,306
—
2,867
8,762
— 27,507
42,053
—
—
821
398
788
439
— 28,726
—
5,069
43,280
—
—
—
—
—
—
—
—
—
—
Total
$
41,101 $
— $
— $ 41,101 $
52,042 $
— $
— $ 3,786
— 2,109
—
—
— 2,867
— 8,762
— 42,053
—
—
788
439
— 43,280
—
—
— $ 52,04
2
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, and 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 investment in individual
securities, derivatives, long-duration fixed income, and cash and cash equivalents is permitted, the plan did not hold these
types of investments as of December 31, 2017 or 2016.
Prohibited investments include direct investment in real estate, commodities, unregistered securities, uncovered
options, currency exchange, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% equity securities and 50% fixed income securities
and 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 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, 2017:
Asset Class
Equity securities
Fixed income securities and cash and cash equivalents
Target Allocation
Actual Allocation as of
December 31, 2017
10%-90%
10%-90%
29%
71%
97
The following table presents information about the plan assets measured at fair value as of December 31, 2017 and
2016, aggregated by the level in the fair value hierarchy within which those measurements fall:
December 31, 2017
December 31, 2016
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
2,461 $
— $
— $
2,461 $
2,791 $
— $
— $
2,791
6,567
9,028
2,968
11,046
14,014
7,921
—
—
268
—
268
—
—
—
—
—
—
—
6,567
9,028
3,236
5,581
8,372
2,894
11,046
11,288
14,282
14,182
7,921
5,927
—
—
249
—
249
—
—
—
—
—
—
—
5,581
8,372
3,143
11,288
14,431
5,927
Asset Class
U.S. equity
International (non-
U.S.) equity
Total equity securities
U.S. fixed income
International (non-
U.S.) fixed income
Total fixed income
securities
Cash and cash
equivalents
Total
$
30,963 $
268 $
— $ 31,231 $
28,481 $
249 $
— $
28,730
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, and cash and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plans are composed of insurance policies. The contributions (or
premiums) we pay are used to purchase insurance policies that provide for specific benefit payments to our plan participants.
The benefit formula is determined independently by us. On 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, these defined benefit plans are not considered multi-employer plans.
The following table presents information about the plans’ assets measured at fair value as of December 31, 2017 and
2016, aggregated by the level in the fair value hierarchy within which those measurements fall:
December 31, 2017
December 31, 2016
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
— $
— $
— $
— $
9,059 $
9,059 $
9,059 $
9,059 $
— $
— $
— $
— $
8,014 $
8,014 $
8,014
8,014
Asset Class
Insurance policies
Total
98
The following table presents a rollforward of the Level 3 assets in our Netherlands' pension plans for the years ended
December 31, 2017 and 2016:
Balance at December 31, 2015
Actual return on plan assets still held at reporting date
Purchases, sales, settlements, and exchange rate changes
Balance at December 31, 2016
Actual return on plan assets still held at reporting date
Purchases, sales, settlements, and exchange rate changes
Balance at December 31, 2017
Significant unobservable
inputs (Level 3)
5,757
2,064
193
8,014
(597)
1,642
9,059
$
$
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., no allowance for future salary increases or pension
increases). The cash flows of the future benefit payments are discounted using the same discount rate as is used to value the
defined benefit plan liabilities.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are composed of insurance policies. As of December 31, 2017 and 2016
the fair value of these plan assets was $0.9 million and $0.8 million, respectively, which are considered to be Level 3
financial instruments.
11. Share-Based Payment Plans
In connection with the completion of our initial public offering ("IPO"), we adopted the Sensata Technologies Holding
N.V. 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 under the
2010 Equity Incentive Plan, of which 3.8 million were available as of December 31, 2017.
Share-Based Compensation Awards
We grant share-based compensation awards under the 2010 Equity Incentive Plan for which vesting is subject only to
continued employment and the passage of time (options and restricted stock units ("RSUs")), as well as those for which
vesting also depends on the attainment of certain performance criteria (performance options and performance-based restricted
stock units ("PRSUs")). RSUs and PRSUs are generally referred to in this Annual Report on Form 10-K as "restricted
securities."
99
Options
A summary of stock option activity for the years ended December 31, 2017, 2016, and 2015 is presented in the table
below (amounts have been calculated based on unrounded shares):
Weighted-Average
Exercise Price Per
Option
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
Stock Options
Balance at December 31, 2014
Granted
Forfeited and expired
Exercised
Balance at December 31, 2015
Granted (1)
Forfeited and expired
Exercised
Balance at December 31, 2016
Granted
Forfeited and expired
Exercised
Balance at December 31, 2017
Options vested and exercisable as of December 31,
2017
Vested and expected to vest as of December 31,
2017 (2)
4,089 $
353 $
(65) $
(1,016) $
3,361 $
654 $
(111) $
(358) $
3,546 $
387 $
(1) $
(326) $
3,606 $
2,422 $
3,426 $
27.53
56.60
43.93
18.85
32.89
37.89
43.95
11.05
35.67
43.67
32.03
22.86
37.69
35.47
37.43
6.3 $
101,705
$
6.2 $
$
6.3 $
$
6.0 $
4.8 $
5.8 $
34,835
47,967
9,501
19,844
7,175
50,130
38,872
48,476
__________________
(1)
(2)
Includes 257 performance-based options.
Consists of vested options and unvested options that are expected to vest. The expected to vest options are determined
by applying the forfeiture rate assumption, adjusted for cumulative actual forfeitures, to total unvested options.
A summary of the status of our unvested options as of December 31, 2017, and of the changes during the year then
ended, is presented in the table below (amounts have been calculated based on unrounded shares):
Unvested as of December 31, 2016
Granted during the year
Vested during the year
Forfeited or expired during the year
Unvested as of December 31, 2017
Stock Options
Weighted-
Average Grant-
Date Fair Value
1,223 $
387 $
(425) $
(1) $
1,184 $
13.28
14.50
13.16
10.09
13.72
The fair value of stock options that vested during the years ended December 31, 2017, 2016, and 2015 was $5.6
million, $7.1 million, and $7.5 million, respectively.
Non-performance-based options granted to employees under the 2010 Equity Incentive Plan generally vest 25% per
year over four years from the date of grant. Performance-based options granted to employees under the 2010 Equity Incentive
Plan vest after three years, depending on the extent to which certain performance criteria are met. Options granted to directors
under the 2010 Equity Incentive Plan vest after one year.
100
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 expire ten years from the date of grant. Except as otherwise provided in
specific option award agreements, if a participant ceases to be employed by us, options not yet vested expire and are forfeited
at the termination date, and options that are fully vested expire 60 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) or due to
death or disability (in which case the options expire 6 months after the participant’s termination date).
The weighted-average grant-date fair value per option granted during the years ended December 31, 2017, 2016, and
2015 was $14.50, $12.08, and $17.94, respectively. The fair value of options was estimated on the date of grant using the
Black-Scholes-Merton option-pricing model. See Note 2, "Significant Accounting Policies," for further discussion of how we
estimate the fair value of options. The weighted-average key assumptions used in estimating the grant-date fair value of
options are as follows:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
Fair value per share of underlying ordinary shares
For the year ended December 31,
2017
2016
2015
0.00%
30.00%
2.08%
0.00%
30.00%
1.48%
0.00%
30.00%
1.52%
6.0
6.0
5.9
$
43.67
$
37.89
$
56.60
We did not grant options to our directors in 2017 or 2016. We granted 72 options to our directors under the 2010 Equity
Incentive Plan in 2015. These options vested after one year and were not subject to performance conditions. The weighted-
average grant date fair value per option was $17.05.
Restricted Securities
We grant RSUs that cliff vest over various lengths of time ranging from one to four years, as well as those that vest
25% per year over four years. We grant PRSUs that generally cliff vest three years after the grant date. The number of PRSUs
that ultimately vest will depend on the extent to which certain performance criteria are met, as defined in the table below. See
Note 2, "Significant Accounting Policies," for discussion of how we estimate the fair value of restricted securities.
A summary of restricted securities granted in the past three years is presented below:
Year ended December 31,
2017
2016
2015
Percentage Range of PRSUs Awarded That May Vest (1)
0.0% to 172.5%
0.0% to 200.0%
RSUs
Granted
Weighted-
Average
Grant-Date
Fair Value
PRSUs
Granted
Weighted-
Average
Grant-Date
Fair Value
PRSUs
Granted
Weighted-
Average
Grant-Date
Fair Value
182 $
319 $
150 $
43.24
38.33
56.42
183 $
180 $
128 $
43.67
38.96
56.94
53 $
— $
— $
43.33
—
—
(1) Represents the percentage range of PRSUs that may vest according to the terms of the awards, and does not reflect our
current assessment of the probable outcome of vesting based on the achievement or expected achievement of
performance conditions.
Compensation cost for the year ended December 31, 2017 reflects our estimate of the probable outcome of the
performance conditions associated with the PRSUs granted in 2017 and 2016.
101
A summary of activity related to outstanding restricted securities for 2017, 2016, and 2015 is presented in the table
below (amounts have been calculated based on unrounded shares):
Balance at December 31, 2014
Granted
Forfeited
Vested
Balance at December 31, 2015
Granted
Forfeited
Vested
Balance at December 31, 2016
Granted
Forfeited
Vested
Balance at December 31, 2017
Restricted
Securities
Weighted-Average
Grant-Date
Fair Value
656 $
278 $
(165) $
(115) $
654 $
499 $
(48) $
(185) $
920 $
418 $
(35) $
(222) $
1,081 $
36.06
56.66
38.55
26.72
45.87
38.56
47.01
33.41
44.35
43.44
43.94
42.24
44.43
Aggregate intrinsic value information for restricted securities as of December 31, 2017, 2016, and 2015 is presented
below:
Outstanding
Expected to vest
December 31,
2017
December 31,
2016
December 31,
2015
$
$
55,271 $
42,106 $
35,845 $
26,937 $
30,115
22,704
The weighted-average remaining periods over which the restrictions will lapse, expressed in years, as of December 31,
2017, 2016, and 2015 are as follows:
Outstanding
Expected to vest
December 31,
2017
December 31,
2016
December 31,
2015
1.3
1.4
1.5
1.5
1.4
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 PRSUs.
On April 25, 2016, our Board of Directors approved retroactive amendments to our RSUs and PRSUs to allow for
accelerated vesting upon termination without cause within 24 months after a change in control, as defined in the 2010 Equity
Incentive Plan. These changes were made in order to provide consistency across our equity awards, to better align
management and shareholder interests, and to incorporate equity compensation best practices. There was no change to the
terms of our option awards, as Section 4.3(b) of the 2010 Equity Incentive Plan specifically provides for accelerated vesting
of options upon termination without cause within 24 months after a change in control.
102
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards:
Options
Restricted securities
Total share-based compensation expense
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
$
$
6,046 $
13,773
19,819 $
7,094 $
10,331
17,425 $
7,176
8,150
15,326
This compensation expense is recorded within SG&A expense in the consolidated statements of operations during the
identified periods. We did not recognize a tax benefit associated with these expenses.
The table below presents unrecognized compensation expense at December 31, 2017 for each class of award, and the
remaining expected term for this expense to be recognized:
Options
Restricted securities
Total unrecognized compensation expense
12. Shareholders’ Equity
Unrecognized
compensation expense
Expected
recognition (years)
$
$
9,924
19,755
29,679
2.1
1.6
Our authorized share capital consists of 400.0 million ordinary shares with a nominal value of €0.01 per share, of which
178.4 million ordinary shares were issued and 171.4 million were outstanding as of December 31, 2017. Issued and
outstanding shares exclude 1.1 million outstanding restricted securities and 3.6 million outstanding stock options. See Note
11, "Share-Based Payment Plans," for awards available for grant under our outstanding equity plan.
Treasury Shares
We have a $250.0 million share repurchase program in place. Under this program, we may repurchase ordinary shares
from time to time, 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. The share
repurchase program may be modified or terminated by our Board of Directors at any time. We did not repurchase any
ordinary shares under this program during the years ended December 31, 2017, 2016, or 2015. At December 31, 2017, $250.0
million remained available for share repurchase under this program.
Ordinary shares repurchased by us are recorded at cost as treasury shares and result in a reduction of shareholders'
equity. We reissue treasury shares as part of our share-based compensation programs. When shares are reissued, we determine
the cost using the first-in, first-out method. During the years ended December 31, 2017, 2016, and 2015, we reissued 0.5
million, 0.5 million, and 1.1 million treasury shares, respectively. During the years ended December 31, 2017 and 2016, in
connection with our treasury share reissuances, we recognized reductions in Retained earnings of $13.6 million, and $16.8
million, respectively.
103
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss were as follows:
Balance at December 31, 2014
Pre-tax current period change
Income tax benefit/(expense)
Balance at December 31, 2015
Pre-tax current period change
Income tax benefit
Balance at December 31, 2016
Pre-tax current period change
Income tax benefit
Balance at December 31, 2017
Defined Benefit
and Retiree
Healthcare Plans
Accumulated
Other
Comprehensive
Loss
Cash Flow Hedges
$
17,578 $
(18,301)
4,575
3,852
(5,106)
1,277
23
(37,603)
9,401
(29,326) $
359
(875)
(29,842)
(4,934)
686
(34,090)
(1,445)
550
$
(28,179) $
(34,985) $
(11,748)
(17,942)
3,700
(25,990)
(10,040)
1,963
(34,067)
(39,048)
9,951
(63,164)
The details of the components of Other comprehensive loss, net of tax, for the years ended December 31, 2017, 2016,
and 2015 are as follows:
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Defined
Benefit and
Retiree
Healthcare
Plans
Cash Flow
Hedges
Total
Cash Flow
Hedges
Defined
Benefit and
Retiree
Healthcare
Plans
Total
Cash Flow
Hedges
Defined
Benefit and
Retiree
Healthcare
Plans
Total
$ (39,387) $
(4,184) $ (43,571) $
(6,356) $
(6,816) $ (13,172) $ 19,464 $
(634) $ 18,830
11,185
3,289
14,474
2,527
2,568
5,095
(33,190)
118
(33,072)
$ (28,202) $
(895) $ (29,097) $
(3,829) $
(4,248) $
(8,077) $ (13,726) $
(516) $ (14,242)
Other comprehensive
(loss)/income before
reclassifications
Amounts reclassified
from Accumulated
other comprehensive
loss
Net current period
other
comprehensive
loss
104
The details of the amounts reclassified from Accumulated other comprehensive loss for the years ended December 31,
2017, 2016, and 2015 are as follows:
Component
Derivative instruments designated and
qualifying as cash flow hedges
Amount of Loss/(Gain) Reclassified from Accumulated
Other Comprehensive Loss
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Affected Line in Consolidated
Statements of Operations
Foreign currency forward contracts
$
916 $
(17,720) $
Foreign currency forward contracts
Total, before taxes
Income tax effect
Total, net of taxes
Defined benefit and retiree healthcare plans
Income tax effect
Total, net of taxes
13,997
14,913
(3,728)
11,185 $
3,476 $
(187)
21,089
3,369
(842)
2,527 $
2,975 $
(407)
3,289 $
2,568 $
$
$
$
(54,537)
10,284
(44,253 )
11,063
(33,190)
351
(233 )
118
Net revenue (1)
Cost of revenue (1)
Income before taxes
(Benefit from)/provision for
income taxes
Net income
Various (2)
(Benefit from)/provision for
income taxes
Net income
(1) See Note 16, "Derivative Instruments and Hedging Activities," for additional details on amounts to be reclassified in the
future from Accumulated other comprehensive loss.
(2) Amounts related to defined benefit and retiree healthcare plans reclassified from Accumulated other comprehensive loss
affect the Cost of revenue, Research and development, Restructuring and special charges, and SG&A line items in the
consolidated statements of operations. The amounts reclassified are included in the computation of net periodic benefit
cost. See Note 10, "Pension and Other Post-Retirement Benefits," for additional details of net periodic benefit cost.
13. Related Party Transactions
Texas Instruments
Cross License Agreement
We have entered into a perpetual, royalty-free cross license agreement with TI (the “Cross License Agreement”). Under
the Cross License Agreement, the parties granted each other a license to use certain technology used in connection with the
other party’s business.
14. Commitments and Contingencies
Future minimum payments for capital leases, other financing obligations, and non-cancelable operating leases in effect
as of December 31, 2017 are as follows:
Future Minimum Payments
Capital
Leases
Other Financing
Obligations
Operating
Leases
Total
For the year ending December 31,
2018
$
5,472 $
2019
2020
2021
2022
2023 and thereafter
Net minimum rentals
Less: interest portion
5,393
5,429
4,931
4,561
15,267
41,053
(11,798)
3,125 $
2,498
459
178
—
—
6,260
(858)
12,871 $
9,255
6,534
5,165
4,189
30,595
68,609
—
Present value of future minimum rentals
$
29,255 $
5,402 $
68,609 $
105
21,468
17,146
12,422
10,274
8,750
45,862
115,922
(12,656)
103,266
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, 2017, we had the
following purchase commitments:
For the year ending December 31,
2018
2019
2020
2021
2022
2023 and thereafter
Total
Collaborative Arrangements
Purchase
Commitments
$
17,310
11,200
8,153
6,467
1,682
70
$
44,882
On March 4, 2016, we entered into a strategic partnership agreement (the "SPA") with Quanergy Systems, Inc.
("Quanergy") to jointly develop, manufacture, and sell solid state Light Detection and Ranging ("LiDAR") sensors. Under the
terms of the SPA, we will be exclusive partners with Quanergy for component level solid state LiDAR sensors in the
transportation market.
We are accounting for the SPA under the provisions of ASC Topic 808, Collaborative Arrangements, under which the
accounting for certain transactions is determined using principal versus agent considerations. Using the guidance in ASC
Subtopic 605-45, Principal Agent Considerations, we have determined that we are the principal with respect to the SPA.
During the year ended December 31, 2017, there were no material amounts recorded to earnings related to the SPA.
Off-Balance Sheet Commitments
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 sale 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. 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.
106
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
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective
materials, which, depending on the product, generally exists 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. We do not offer separately priced extended warranty or product maintenance contracts. 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 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.
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. Any potentially material liabilities associated with these claims are
discussed in this Note under the heading Legal Proceedings and Claims.
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 account for litigation and claims losses in accordance with ASC Topic 450, Contingencies (“ASC 450”). Under
ASC 450, loss contingency provisions are recorded 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
107
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 recorded. 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.
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. We believe that the ultimate resolution of the
current litigation matters pending against us will not be material to our financial statements.
15. Fair Value Measures
Our assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance
with ASC 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 following table presents information about certain of our assets and liabilities measured at fair value on a recurring
basis as of December 31, 2017 and 2016, aggregated by the level in the fair value hierarchy within which those
measurements fell:
December 31, 2017
December 31, 2016
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Foreign currency forward
contracts
Commodity forward
contracts
Total
Liabilities
Foreign currency forward
contracts
Commodity forward
contracts
Total
$
$
$
$
— $
3,955 $
6,458
— $
10,413 $
— $
40,969 $
—
1,104
— $
42,073 $
— $
—
— $
— $
—
— $
— $
32,757 $
—
2,639
— $
35,396 $
— $
27,201 $
—
3,790
— $
30,991 $
—
—
—
—
—
—
See Note 2, "Significant Accounting Policies," under the caption Financial Instruments, for discussion of how we
estimate the fair value of our financial instruments. See Note 16, "Derivative Instruments and Hedging Activities," for
specific contractual terms utilized as inputs in determining fair value and a discussion of the nature of the risks being
mitigated by these instruments.
Although we have determined that the majority of the inputs used to value our derivatives 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
108
current credit spreads, to appropriately reflect both our own non-performance risk and the respective counterparties' non-
performance risk in the fair value measurement. However, as of December 31, 2017 and 2016, 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 evaluate the recoverability of goodwill and other indefinite-lived intangible assets in the fourth quarter of each
fiscal year, or more frequently if events or changes in circumstances indicate that goodwill or other intangible assets may be
impaired. As of October 1, 2017, we evaluated our goodwill for impairment using a combination of the qualitative and
quantitative methods. Refer to Note 2, "Significant Accounting Policies," for further discussion of this process. Based on
these analyses, we determined that, for each of the reporting units subject to the qualitative method, it was more likely than
not that their fair values were greater than their carrying values at that date, and for each of the reporting units subject to the
quantitative method, that their fair values exceeded their carrying values at that date.
As of October 1, 2017, we evaluated our other indefinite-lived intangible assets for impairment (using the quantitative
method) and determined that the fair values of those assets exceeded their carrying values on that date. The fair values of our
other indefinite-lived intangible assets are considered Level 3 fair value measurements.
As of December 31, 2017, 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.
A long-lived asset, which includes PP&E, is considered held for sale when it meets certain criteria described in ASC
Topic 360, Property, Plant, and Equipment. A long-lived asset classified as held for sale is initially measured at the lower of
its carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment of the asset's carrying
amount to its fair value less cost to sell in the period the held for sale criteria are met. In the period that a long-lived asset is
considered held for sale it is presented within Prepaid expenses and other current assets on our balance sheet where it remains
until it is either sold or no longer meets the held for sale criteria. For comparative purposes, the prior year carrying amount of
a long-lived asset considered held for sale is presented within Other assets on our balance sheet.
In the first quarter of 2017, we determined that one of our facilities met the held for sale criteria and recorded it at its
fair value less costs to sell of $1.7 million (which approximated its net carrying value at that time). In the third quarter of
2017, we sold the asset for an immaterial gain.
The fair value of assets held for sale is considered to be a Level 3 fair value measurement and is determined based on
the use of appraisals, input from market participants, our experience selling similar assets, internally developed cash flow
models, or a combination thereof.
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, 2017 and 2016:
Carrying
Value (1)
December 31, 2017
Fair Value
Level 1
Level 2
Level 3
Carrying
Value (1)
December 31, 2016
Fair Value
Level 1
Level 2
Level 3
Liabilities
Term loans
4.875% Senior Notes
5.625% Senior Notes
5.0% Senior Notes
6.25% Senior Notes
$
$
$
$
$
927,794 $
500,000 $
400,000 $
700,000 $
750,000 $
— $
— $
— $
— $
— $
930,114 $
521,875 $
439,000 $
741,125 $
813,750 $
— $
— $
— $
— $
— $
937,794 $
500,000 $
400,000 $
700,000 $
750,000 $
— $
— $
— $
— $
— $
942,483 $
514,375 $
417,752 $
686,000 $
786,098 $
—
—
—
—
—
(1) The carrying value excludes discounts and deferred financing costs.
The fair values of the term loans and the Senior Notes are determined using observable prices in markets where these
instruments are generally not traded on a daily basis.
109
Cash and cash equivalents, accounts receivable, and accounts payable are carried at their cost, which approximates fair
value because of their short-term nature.
In March 2016, we acquired Series B Preferred Stock of Quanergy for $50.0 million. In accordance with the guidance
in ASC Topic 323, Investments - Equity Method and Joint Ventures, we have accounted for this investment as a cost method
investment under ASC Subtopic 325-20, Cost Method Investments, as the Series B Preferred Stock is not "in substance"
common stock and does not have a readily determinable fair value. We did not estimate the fair value of this cost method
investment as of December 31, 2017 as there were no indicators of impairment, and because we determined it was not
practicable to estimate its fair value due to the restricted marketability of the investment.
16. Derivative Instruments and Hedging Activities
In accordance with ASC 815 we recognize derivative instruments on our balance sheet, and we measure them at fair
value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we
have elected to designate the derivative as being in a hedging relationship, and whether the hedging relationship has satisfied
the criteria necessary to apply hedge accounting. Derivative instruments that are designated, and qualify as hedges of the
exposure to changes in the fair value of an asset, liability, 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. We currently only utilize
cash flow hedges.
Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging
instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the
hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may
enter into derivative contracts that are intended to economically hedge certain risks, even though we elect not to apply hedge
accounting under ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded
directly in the consolidated statements of operations. Specific information about the valuations of derivatives is described in
Note 2, "Significant Accounting Policies," and classification of derivatives in the fair value hierarchy is described in Note 15,
“Fair Value Measures.”
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is
recorded in Accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the
hedged forecasted transaction affects earnings. Refer to Note 12, "Shareholders' Equity," and elsewhere in this Note, for more
details on the reclassification of amounts from Accumulated other comprehensive loss into earnings. The ineffective portion
of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recognized directly in earnings.
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. As of December 31, 2017 and 2016, we had
posted no cash collateral.
Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar. We use
foreign currency forward agreements 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; these instruments are not designated for
hedge accounting treatment in accordance with ASC 815. Foreign currency forward contracts not designated as hedges are
not speculative and are used to manage our exposure to foreign exchange movements.
For each of the years ended December 31, 2017, 2016, and 2015, the ineffective portion of the changes in the fair value
of our foreign currency forward agreements that are designated as cash flow hedges was not material and no amounts were
excluded from the assessment of effectiveness. As of December 31, 2017, we estimate that $29.9 million in net losses will be
reclassified from Accumulated other comprehensive loss to earnings during the twelve months ending December 31, 2018.
110
As of December 31, 2017, we had the following outstanding foreign currency forward contracts:
Notional
(in millions)
Effective Date
Maturity Date
Index
61.0 EUR
December 27, 2017
January 31, 2018
443.0 EUR
Various from March
2016 to December 2017
Various from January
2018 to December 2019
640.0 CNY
December 26, 2017
January 31, 2018
Euro to U.S. Dollar
Exchange Rate
Euro to U.S. Dollar
Exchange Rate
U.S. Dollar to Chinese
Renminbi Exchange Rate
Weighted-
Average
Strike Rate
Cash Flow
Hedge
Designation
1.19 USD
Non-designated
1.15 USD
Designated
6.57 CNY
Non-designated
960.0 CNY
Various from October to
December 2017
Various from January to
December 2018
U.S. Dollar to Chinese
Renminbi Exchange Rate
6.72 CNY
Designated
200.0 JPY
December 27, 2017
January 31, 2018
U.S. Dollar to Japanese
Yen Exchange Rate
112.83 JPY
Non-designated
40,954.5 KRW
Various from March
2016 to December 2017
Various from January
2018 to November 2019
U.S. Dollar to Korean Won
Exchange Rate
1,130.61
KRW
Designated
19.5 MYR
Various from March to
November 2016
Various from January to
October 2018
U.S. Dollar to Malaysian
Ringgit Exchange Rate
4.21 MYR
Designated
215.0 MXN
December 27, 2017
January 31, 2018
U.S. Dollar to Mexican
Peso Exchange Rate
19.83 MXN Non-designated
2,541.0 MXN
Various from March
2016 to December 2017
Various from January
2018 to November 2019
U.S. Dollar to Mexican
Peso Exchange Rate
20.25 MXN
Designated
35.5 GBP
Various from March
2016 to December 2017
Various from January
2018 to November 2019
British Pound Sterling to
U.S. Dollar Exchange Rate
1.31 USD
Designated
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods.
Hedges of Commodity Risk
Our objective in using commodity forward contracts is to offset a portion of our exposure to the potential change in
prices associated with certain commodities used in the manufacturing of our products, including silver, gold, nickel,
aluminum, copper, platinum, and palladium. 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 ASC 815. Commodity forward contracts not designated as hedges are not speculative and are used to
manage our exposure to commodity price movements.
We had the following outstanding commodity forward contracts, none of which were designated as derivatives in
qualifying hedging relationships, as of December 31, 2017:
Commodity
Silver
Gold
Nickel
Aluminum
Copper
Platinum
Palladium
Notional
Remaining Contracted Periods
1,117,049 troy oz.
January 2018 - November 2019
12,200 troy oz.
275,490 pounds
5,592,797 pounds
7,413,661 pounds
8,029 troy oz.
1,935 troy oz.
January 2018 - November 2019
January 2018 - November 2019
January 2018 - November 2019
January 2018 - November 2019
January 2018 - November 2019
January 2018 - November 2019
Weighted-
Average
Strike Price Per Unit
$17.75
$1,288.85
$4.84
$0.88
$2.71
$987.12
$819.85
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods.
111
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, 2017 and 2016:
Derivatives designated as hedging
instruments
Foreign currency forward contracts
Foreign currency forward contracts
Total
Derivatives not designated as hedging
instruments
Commodity forward contracts
Commodity forward contracts
Foreign currency forward contracts
Asset Derivatives
Liability Derivatives
Fair Value
Fair Value
Balance Sheet
Location
December
31, 2017
December
31, 2016
Balance Sheet
Location
December
31, 2017
December
31, 2016
Prepaid expenses
and other current
assets
Other assets
$
3,576 $
373
24,796 Accrued expenses
and other current
liabilities
5,693 Other long-term
liabilities
$
32,806 $
20,990
6,881
3,814
$
$
Prepaid expenses
and other current
assets
Other assets
Prepaid expenses
and other current
assets
3,949 $
30,489
$
39,687 $
24,804
5,403 $
1,055
6
2,097 Accrued expenses
and other current
liabilities
542 Other long-term
liabilities
2,268 Accrued expenses
and other current
liabilities
$
1,006 $
2,764
98
1,282
1,026
2,397
Total
$
6,464 $
4,907
$
2,386 $
6,187
These fair value measurements are all categorized within Level 2 of the fair value hierarchy. Refer to Note 15, "Fair
Value Measures," for more information on these measurements.
The following tables present the effect of our derivative financial instruments on the consolidated statements of
operations for the years ended December 31, 2017 and 2016:
Location of Net
(Loss)/Gain
Reclassified from
Accumulated
Other
Comprehensive
Loss into Net
Income
Amount of Deferred (Loss)/Gain
Recognized in Other
Comprehensive Loss
2017
2016
(68,071) $
24,044
Net revenue
15,555 $
(32,519)
Cost of revenue
Amount of Net (Loss)/Gain
Reclassified from Accumulated
Other Comprehensive Loss into
Net Income
2017
2016
$
$
(916) $
17,720
(13,997) $
(21,089)
Amount of Gain/(Loss) on
Derivatives Recognized in Net
Income
2017
2016
9,989 $
(15,618) $
7,399
(1,850)
Location of Gain/(Loss) on Derivatives
Recognized in Net Income
Other, net
Other, net
Derivatives designated as
hedging instruments
Foreign currency forward contracts
Foreign currency forward contracts
Derivatives not designated as
hedging instruments
Commodity forward contracts
Foreign currency forward contracts
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 where 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, 2017, the termination value of outstanding derivatives in a liability position, excluding any
adjustment for non-performance risk, was $42.4 million. As of December 31, 2017, we have not posted any cash collateral
112
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.
17. Restructuring and Special Charges
Restructuring and special charges for fiscal years 2017, 2016, and 2015 were $19.0 million, $4.1 million, and $21.9
million, respectively.
Restructuring and special charges recognized during the year ended December 31, 2017 consisted primarily of severance
charges of $11.1 million and facility exist costs of $7.9 million, each of which related primarily to the closing of our facility in
Minden, Germany that was part of the acquisition of CST and the closing of our manufacturing facility in Bydgoszcz, Poland.
Charges related to the closing of our facility in Minden, Germany for the year ended December 31, 2017 consisted of severance
charges of $8.4 million and facility exit costs of $3.2 million. Charges related to the closing of our facility in Bydgoszcz,
Poland for the year ended December 31, 2017 consisted of severance charges of $0.8 million and facility exit costs of $2.3
million.
Restructuring and special charges recognized during the year ended December 31, 2016 primarily included facility exit
costs related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in
Mexico and severance charges recorded in connection with acquired businesses and the termination of a limited number of
employees in various locations throughout the world. We completed the cessation of manufacturing in our Dominican Republic
facility in the third quarter of 2016.
Restructuring and special charges recognized during the year ended December 31, 2015 included $7.6 million of
severance charges incurred in order to integrate acquired businesses with ours, $4.0 million of severance charges incurred in the
second quarter of 2015 related to the announced closing of our Schrader Brazil manufacturing facility, with the remainder
primarily associated with the termination of a limited number of employees in various locations throughout the world.
The following table outlines the changes to the restructuring liability during the years ended December 31, 2017 and
2016:
Balance at December 31, 2015
Charges, net of reversals
Payments
Impact of changes in foreign currency exchange rates
Balance at December 31, 2016
Charges, net of reversals
Payments
Impact of changes in foreign currency exchange rates
Balance at December 31, 2017
Severance
$
24,574
813
(7,252)
(785)
17,350
11,125
(22,511)
1,619
7,583
$
The following table outlines the current and long-term components of our restructuring liabilities recognized in the
consolidated balance sheets as of December 31, 2017 and 2016.
Accrued expenses and other current liabilities
Other long-term liabilities
Total
Exit and Disposal Activities
December 31,
2017
December 31,
2016
$
$
4,184 $
3,399
7,583 $
14,268
3,082
17,350
In the second quarter of 2015, we closed our Schrader Brazil manufacturing facility. During the year ended December 31,
2015, in connection with this closing, and in addition to the $4.0 million of severance charges recorded in the Restructuring and
special charges line of the consolidated statements of operations as discussed above, we incurred approximately $5.0 million of
charges, primarily recorded in Cost of revenue, related to the write-down of certain assets, including PP&E and Inventory.
These charges are not included in the restructuring and special charges table above.
113
18. Segment Reporting
We organize our business into 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 profit, which excludes amortization of
intangible assets, restructuring and special charges, 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. In addition, an operating segment’s performance excludes results from discontinued
operations, if any. Corporate 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 profit, 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, profit from
operations or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of
each of our two reportable segments are materially consistent with those described in Note 2, "Significant Accounting
Policies."
The Performance Sensing segment is a manufacturer of pressure sensors, speed and position sensors, temperature
sensors, and pressure switches used in subsystems of automobiles (e.g., powertrain, air conditioning, tire pressure monitoring,
and ride stabilization) and HVOR. These products help improve operating performance, for example, by making an
automobile’s heating and air conditioning systems work more efficiently, thereby improving gas mileage. These products are
also used in systems that address environmental or safety concerns, for example, by reducing vehicle emissions or improving
the stability control of the vehicle.
The Sensing Solutions segment is a manufacturer of various control products, which are used in industrial, aerospace,
military, commercial, medical device, and residential markets, and sensors products, which are used in aerospace and
industrial applications such as HVAC systems and military and commercial aircraft. These products include motor and
compressor protectors, motor starters, temperature sensors and switches/thermostats, pressure sensors and switches,
electronic HVAC sensors and controls, charge controllers, solid state relays, linear and rotary position sensors, circuit
breakers, and semiconductor burn-in test sockets. These products help prevent damage from overheating and fires in a wide
variety of applications, including commercial HVAC systems, refrigerators, aircraft, lighting, and other industrial applications
and help optimize performance by using sensors which provide feedback to control systems. The Sensing Solutions segment
also manufactures DC to AC power inverters, which enable the operation of electronic equipment when grid power is not
available.
114
The following table presents Net revenue and Segment profit for the reportable segments and other operating results
not allocated to the reportable segments for the years ended December 31, 2017, 2016, and 2015:
Net revenue:
Performance Sensing
Sensing Solutions
Total net revenue
Segment profit (as defined above):
Performance Sensing
Sensing Solutions
Total segment profit
Corporate and other
Amortization of intangible assets
Restructuring and special charges
Profit from operations
Interest expense, net
Other, net
Income before taxes
$
$
$
For the year ended December 31,
2017
2016
2015
2,460,600 $
2,385,380 $
2,346,226
846,133
816,908
628,735
3,306,733 $
3,202,288 $
2,974,961
664,186 $
615,526 $
277,450
941,636
(209,226)
(161,050)
(18,975)
552,385
(159,761)
9,817
261,914
877,440
(179,665)
(201,498)
(4,113)
492,164
(165,818)
(4,901)
$
402,441 $
321,445 $
598,524
199,744
798,268
(196,133)
(186,632)
(21,919)
393,584
(137,626)
(50,329)
205,629
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, 2017, 2016, and 2015:
Net revenue:
Pressure sensors (1)
Speed and position sensors
Bimetal electromechanical controls
Temperature sensors
Power conversion and control
Thermal and magnetic-hydraulic circuit breakers
Pressure switches
Interconnection
Other
Performance
Sensing
Sensing
Solutions
For the year ended December 31,
2017
2016
2015
X
X
X
X
X
X
X
X
X
X
X
X
X
X
$
1,818,382 $ 1,736,160 $
1,669,393
425,371
333,907
193,322
127,348
107,097
96,086
59,725
420,111
321,202
191,463
120,357
109,719
88,905
57,518
328,102
318,721
191,369
58,180
110,980
86,994
61,738
145,495
156,853
149,484
$
3,306,733 $
3,202,288 $
2,974,961
(1) Certain products, totaling $28.5 million, that were categorized as pressure sensors in 2016 have been recast to other.
115
The following table presents depreciation and amortization expense for our reportable segments for the years ended
December 31, 2017, 2016 and 2015:
Total depreciation and amortization
Performance Sensing
Sensing Solutions
Corporate and other(1)
Total
For the year ended December 31,
2017
2016
2015
$
$
68,910 $
68,837 $
17,179
184,282
14,095
225,469
270,371 $
308,401 $
62,754
10,643
209,286
282,683
__________________
(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 recorded 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, 2017 and 2016:
Total assets
Performance Sensing
Sensing Solutions
Corporate and other(1)
Total
December 31,
2017
December 31,
2016
$
$
1,396,565 $
1,295,381
424,237
4,820,723
6,641,525 $
396,224
4,549,371
6,240,976
__________________
(1)
Included within Corporate and other as of December 31, 2017 and 2016 is $3,005.5 million of Goodwill, as well as
$920.1 million and $1,075.4 million, respectively, of Other intangible assets, net, $753.1 million and $351.4 million,
respectively, of cash and cash equivalents, and $36.1 million and $21.1 million, respectively, of PP&E, net. This
treatment is consistent with the financial information reviewed by our chief operating decision maker.
The following table presents capital expenditures for our reportable segments for the years ended December 31, 2017,
2016, and 2015:
Total capital expenditures
Performance Sensing
Sensing Solutions
Corporate and other
Total
For the year ended December 31,
2017
2016
2015
$
$
106,520 $
99,299 $
13,980
24,084
11,947
18,971
144,584 $
130,217 $
125,376
16,899
34,921
177,196
116
Geographic Area Information
The following tables present Net revenue by geographic area and by significant country for the years ended
December 31, 2017, 2016, and 2015. In these tables, Net revenue is aggregated based on an internal methodology that
considers both the location of our subsidiaries and the primary location of each subsidiary's customers.
Americas
Asia
Europe
United States
The Netherlands
China
Korea
Japan
All other
Net Revenue
For the year ended December 31,
2017
2016
2015
1,367,113 $
1,367,860 $
1,217,626
903,118
1,036,502
810,094
1,024,334
764,298
993,037
3,306,733 $
3,202,288 $
2,974,961
$
$
Net Revenue
For the year ended December 31,
2017
2016
2015
$
1,276,304 $
1,322,206 $
1,084,757
571,735
478,713
184,101
164,735
631,145
550,937
412,460
182,464
152,234
581,987
553,192
346,890
198,440
153,114
638,568
$
3,306,733 $
3,202,288 $
2,974,961
The following tables present PP&E, net, by geographic area and by significant country as of December 31, 2017 and
2016. In these tables, PP&E is aggregated based on the location of our subsidiaries.
Americas
Asia
Europe
Total
United States
China
Mexico
Bulgaria
United Kingdom
Malaysia
The Netherlands
All Other
$
$
$
PP&E, net
December 31,
2017
December 31,
2016
296,863 $
266,524
186,662
750,049 $
269,697
262,045
192,304
724,046
PP&E, net
December 31,
2017
December 31,
2016
95,603 $
211,566
196,813
97,562
63,310
50,783
4,969
29,443
109,600
208,821
155,607
81,719
75,495
48,477
4,142
40,185
$
750,049 $
724,046
117
19. 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, 2017, 2016, and 2015,
the weighted-average ordinary shares outstanding for basic and diluted net income per share were as follows:
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
Basic weighted-average ordinary shares outstanding
Dilutive effect of stock options
Dilutive effect of unvested restricted securities
171,165
170,709
616
388
489
262
Diluted weighted-average ordinary shares outstanding
172,169
171,460
169,977
1,265
271
171,513
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 they would have had an anti-dilutive effect on net income per share, or because they related to share-
based awards that were contingently issuable, for which the contingency had not been satisfied. Refer to Note 11, "Share-
Based Payment Plans," for further discussion of our share-based payment plans.
Anti-dilutive shares excluded
Contingently issuable shares excluded
20. Unaudited Quarterly Data
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
1,410
871
1,401
606
747
409
A summary of the unaudited quarterly results of operations for the years ended December 31, 2017 and 2016 is as
follows:
For the year ended December 31, 2017
Net revenue
Gross profit
Net income
Basic net income per share (1)
Diluted net income per share
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
$
$
$
$
$
840,534 $
819,054 $
839,874 $
807,271
300,416 $
291,622 $
298,842 $
274,545
169,129 $
88,035 $
79,457 $
71,736
0.99 $
0.98 $
0.51 $
0.51 $
0.46 $
0.46 $
0.42
0.42
(1)
The sum of basic net income per share for the four quarters does not equal the full year basic net income per share due
to rounding.
For the year ended December 31, 2016
Net revenue
Gross profit
Net income
Basic net income per share
Diluted net income per share
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
$
$
$
$
$
788,396 $
789,798 $
827,545 $
796,549
278,898 $
280,854 $
290,104 $
268,171
66,527 $
69,785 $
65,510 $
60,612
0.39 $
0.39 $
0.41 $
0.41 $
0.38 $
0.38 $
0.36
0.35
118
Income taxes
In the fourth quarter of 2017, we recorded an income tax benefit of $73.7 million to remeasure deferred tax liabilities
associated with indefinite-lived intangible assets that are deemed to reverse as a result of changes in applicable U.S. tax law
set forth in the 2017 Tax Cuts and Jobs Act.
Refer to Note 9, "Income Taxes," for further discussion of tax related matters.
Commodity forward contracts
Gains and losses related to our commodity forward contracts, which are not designated for hedge accounting treatment
in accordance with ASC 815, are recorded in Other, net in the consolidated statements of operations. During the first, second,
third, and fourth quarters of 2017, we recognized gains/(losses) of $5.4 million, $(2.0) million, $3.0 million, and $3.6 million,
respectively, related to these contracts. During the first, second, third, and fourth quarters of 2016, we recognized
gains/(losses) of $5.3 million, $5.4 million, $1.3 million, and $(4.7) million, respectively.
Refer to Note 16, "Derivative Instruments and Hedging Activities," for further discussion of our commodity forward
contracts, and Note 2, "Significant Accounting Policies," for a detail of Other, net for the years ended December 31, 2017 and
2016.
Restructuring and Special charges
In the first, second, third, and fourth quarters of 2017, we recorded Restructuring and special charges of $11.1 million,
$6.4 million, $1.3 million, and $0.2 million, respectively. These charges consisted primarily of severance charges recorded in
connection with the closing of our facility in Minden, Germany that was part of the acquisition of CST and the closing of our
manufacturing facility in Bydgoszcz, Poland.
In the first, second, third, and fourth quarters of 2016, we recorded Restructuring and special charges of $0.9 million,
$1.5 million, $0.8 million, and $0.9 million, respectively. These charges consisted primarily of facility exit costs related to the
relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico and
severance charges recorded in connection with acquired businesses and the termination of a limited number of employees in
various locations throughout the world.
Refer to Note 17, "Restructuring and Special Charges," for further discussion of our restructuring charges.
Charges related to the proposed cross-border merger
In the second, third, and fourth quarters of 2017, we incurred $1.0 million, $3.5 million, and $2.1 million, respectively,
in charges related to our proposed cross border merger. Refer for Note 1, “Business Description and Basis of Presentation,”
for further discussion of our proposed cross-border merger.
21. Subsequent Event
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent
company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V.
are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata
U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being
the surviving entity (the “Merger”).
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed
cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general
meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on
the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High
Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will
become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
119
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
SENSATA TECHNOLOGIES HOLDING N.V.
(Parent Company Only)
Balance Sheets
(In thousands)
Assets
Current assets:
Cash and cash equivalents
Intercompany receivables from subsidiaries
Prepaid expenses and other current assets
Total current assets
Investment in subsidiaries
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Intercompany payables to subsidiaries
Accrued expenses and other current liabilities
Total current liabilities
Pension obligations
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2017
December 31,
2016
$
2,150 $
94,094
643
96,887
2,258,559
$
2,355,446 $
1,719
84,396
683
86,798
1,857,502
1,944,300
$
608 $
7,465
1,219
9,292
528
9,820
63
175
1,580
1,818
475
2,293
2,345,626
$
2,355,446 $
1,942,007
1,944,300
The accompanying notes are an integral part of these condensed financial statements.
120
SENSATA TECHNOLOGIES HOLDING N.V.
(Parent Company Only)
Statements of Operations
(In thousands)
Net revenue
Operating costs and expenses:
Selling, general and administrative
Total operating expenses
Loss from operations
Interest income, net
Other, net
(Loss)/gain before income taxes and equity in net income of subsidiaries
Equity in net income of subsidiaries
Provision for income taxes
Net income
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
$
— $
— $
—
6,894
6,894
(6,894)
8
(169)
(7,055)
415,412
—
104
104
(104)
72
107
75
262,359
—
618
618
(618)
—
60
(558)
348,254
—
$
408,357 $
262,434 $
347,696
The accompanying notes are an integral part of these condensed financial statements.
121
SENSATA TECHNOLOGIES HOLDING N.V.
(Parent Company Only)
Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive loss, net of tax:
Defined benefit plan
Subsidiaries' other comprehensive loss
Other comprehensive loss
Comprehensive income
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
$
408,357 $
262,434 $
347,696
77
(29,174)
(29,097)
515
(8,592)
(8,077)
$
379,260 $
254,357 $
(22)
(14,220)
(14,242)
333,454
The accompanying notes are an integral part of these condensed financial statements.
122
SENSATA TECHNOLOGIES HOLDING N.V.
(Parent Company Only)
Statements of Cash Flows
(In thousands)
Net cash used in operating activities
Cash flows from investing activities:
Return of capital from subsidiaries
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of ordinary shares
Payments to repurchase ordinary shares
Net cash provided by/(used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
$
(9,186) $
(4,756) $
(25,576)
5,077
5,077
7,450
(2,910)
4,540
431
1,719
6,000
6,000
3,944
(4,752)
(808)
436
1,283
$
2,150 $
1,719 $
6,100
6,100
19,411
(50)
19,361
(115)
1,398
1,283
The accompanying notes are an integral part of these condensed financial statements.
123
1. Basis of Presentation and Description of Business
Sensata Technologies Holding N.V. (Parent Company)—Schedule I—Condensed Financial Information of Sensata
Technologies Holding N.V. (“Sensata N.V.”), included in this Annual Report on Form 10-K, provides all parent company
information that is required to be presented in accordance with 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 N.V. and subsidiaries' audited
consolidated financial statements are included elsewhere in this Annual Report on Form 10-K.
Sensata N.V. conducts limited separate operations and acts primarily as a holding company. Sensata N.V. has no direct
outstanding debt obligations. However, Sensata Technologies B.V, an indirect, wholly-owned subsidiary of Sensata N.V., is
limited in its ability to pay dividends or otherwise make other distributions to its immediate parent company and, ultimately,
to Sensata N.V., 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 N.V., see Note 8, "Debt," of the audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent
company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V.
are being asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata
U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being
the surviving entity (the “Merger”).
To this end, on January 19, 2018, Sensata N.V. filed a definitive proxy statement (DEFM14A) regarding the proposed
cross-border merger, which details the proposed plan and risks to the Company and shareholders. An extraordinary general
meeting will be held on February 16, 2018, at which shareholders of record as of January 19, 2018 will be asked to vote on
the proposed Merger. If approved by our shareholders, we will seek review and approval of the transaction by the U.K. High
Court of Justice and would expect to complete the Merger in March 2018. If the Merger is consummated, Sensata U.K. will
become the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
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 N.V., see Note 14, "Commitments
and Contingencies," of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
124
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
For the year ended December 31, 2017
Accounts receivable allowances
For the year ended December 31, 2016
Accounts receivable allowances
For the year ended December 31, 2015
Accounts receivable allowances
Additions
Charged, net of
reversals, to
expenses/against
revenue
Balance at the
beginning of
the period
Deductions
Balance at the
end of
the period
$
$
$
11,811 $
2,205 $
(1,069) $
12,947
9,535 $
3,072 $
(796) $
11,811
10,364 $
2,424 $
(3,253) $
9,535
125
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
The required certifications of our Chief Executive Officer and Chief Financial Officer are included as Exhibits 31.1 and
31.2 to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the
evaluation of our disclosure controls and procedures, management's report on internal control over financial reporting, and
changes in internal control over financial reporting referred to in these certifications. These certifications should be read in
conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.
Evaluation of Disclosure Controls and Procedures
With the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2017. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including
its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as
of December 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the fourth quarter of the year ended December 31, 2017 that materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
126
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control system was designed to provide
reasonable assurance to the Company’s management, Board of Directors, and shareholders regarding the preparation and fair
presentation of the Company’s published financial statements in accordance with generally accepted accounting
principles. The Company’s internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the financial statements.
There are inherent limitations to the effectiveness of any system of internal control over financial reporting.
Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with
respect to financial statement preparation and presentation in accordance with accounting principles generally accepted in the
United States of America. Our internal controls over financial reporting are subject to various inherent limitations, including
cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our
systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the
degree of compliance with policies or procedures may deteriorate over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2017. In making its assessment of internal control over financial reporting, management used the criteria issued by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in May 2013.
Based on the results of this assessment, management, including our Chief Executive Officer and Chief Financial
Officer, has concluded that, as of December 31, 2017, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on
the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K.
Hengelo, The Netherlands
February 1, 2018
127
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Sensata Technologies Holding N.V.
Opinion on Internal Control over Financial Reporting
We have audited Sensata Technologies Holding N.V.’s internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Sensata Technologies Holding N.V. (the Company)
maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2017, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Sensata Technologies Holding N.V. as of December 31, 2017 and 2016, and the
related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders’ equity for each of
the three years in the period ended December 31, 2017 of the Company and our report dated February 1, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 1, 2018
128
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated herein by reference from the Company's Definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 2017.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference from the Company's Definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 2017.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated herein by reference from the Company's Definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 2017.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference from the Company's Definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 2017.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference from the Company's Definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 2017.
129
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
1. Financial Statements — See “Financial Statements” under Item 8, "Financial Statements and Supplementary Data," of
this Annual Report on Form 10-K.
2. Financial Statement Schedules — See “Financial Statement Schedules” under Item 8, "Financial Statements and
Supplementary Data," of this Annual Report on Form 10-K.
3. Exhibits
2.1
3.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
EXHIBIT INDEX
Common Draft Terms of the Cross-Border Legal Merger by and among Sensata Technologies Holding N.V.
and Sensata Technologies Holding plc dated October 26, 2017 (incorporated by reference to Exhibit 2.1 of
the Registrant's Current Report on Form 8-K filed on November 1, 2017).
Amended Articles of Association of Sensata Technologies Holding N.V. (incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q filed on October 24, 2017).
Indenture, dated as of April 17, 2013, among Sensata Technologies B.V., the Guarantors, and The Bank of
New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K filed on April 18, 2013).
Form of 4.875% Senior Note due 2023 (incorporated by reference to Exhibit 4.2 of the Registrant's Current
Report on Form 8-K filed on April 18, 2013) (included as Exhibit A to Exhibit 4.1 thereof).
Indenture, dated as of October 14, 2014, among Sensata Technologies B.V., the Guarantors, and The Bank of
New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K filed on October 17, 2014).
Form of 5.625% Senior Note due 2024 (incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on October 17, 2014) (included as Exhibit A thereto).
Indenture, dated as of March 26, 2015, among Sensata Technologies B.V., the Guarantors, and The Bank of
New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K filed on April 1, 2015).
Form of 5.0% Senior Notes due 2025 (incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on April 1, 2015) (included as Exhibit A thereto).
Indenture, dated as of November 27, 2015, among Sensata Technologies UK Financing Co. plc, the
Guarantors, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed on December 2, 2015).
Form of 6.25% Senior Notes due 2026 (incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on December 2, 2015) (included as Exhibit A thereto).
Sixth Supplemental Indenture dated as of October 10, 2017, amending the indenture dated as of April 17,
2013 pursuant to which the 4.875% Senior Notes were issued, among Sensata Technologies B.V., the
guarantors party thereto and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit
4.1 of the Registrant's Current Report on Form 8-K filed on October 13, 2017).
Fifth Supplemental Indenture dated as of October 10, 2017, amending the indenture dated as of October 14,
2014 pursuant to which the 5.625% Senior Notes were issued, among Sensata Technologies B.V., the
guarantors party thereto and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit
4.2 of the Registrant's Current Report on Form 8-K filed on October 13, 2017).
Sixth Supplemental Indenture dated as of October 10, 2017, amending the indenture dated as of March 26,
2015 pursuant to which the 5.000% Senior Notes were issued, among Sensata Technologies B.V., the
guarantors party thereto and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit
4.3 of the Registrant's Current Report on Form 8-K filed on October 13, 2017).
Third Supplemental Indenture dated as of October 10, 2017, amending the indenture dated as of November
27, 2015 pursuant to which the 6.250% Senior Notes were issued, among Sensata Technologies UK
Financing Co. plc, the guarantors party thereto and The Bank of New York Mellon, as trustee (incorporated
by reference to Exhibit 4.4 of the Registrant's Current Report on Form 8-K filed on October 13, 2017).
130
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Cross-License Agreement, dated April 27, 2006, among Texas Instruments Incorporated, Sensata
Technologies B.V. and Potazia Holding B.V. (incorporated by reference to Exhibit 10.10 of the Registration
Statement on Form S-4 of Sensata Technologies B.V. filed on December 29, 2006).
Sensata Technologies Holding B.V. First Amended and Restated 2006 Management Option Plan
(incorporated by reference to Exhibit 10.12 of the Registration Statement on Form S-4 of Sensata
Technologies B.V. filed on December 29, 2006).†
First Amendment to the Sensata Technologies Holding B.V. First Amended and Restated 2006 Management
Option Plan (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Sensata
Technologies B.V. filed on November 13, 2009, Commission File Number 333-139739).†
Form of Indemnification Agreement, entered among Sensata Technologies Holding N.V. (formerly known as
Sensata Technologies Holding B.V.) and certain of its executive officers and directors listed on a schedule
attached thereto (incorporated by reference to Exhibit 10.51 of Amendment No. 2 of the Registrant's
Registration Statement on Form S-1 filed on January 22, 2010).†
Amended and Restated Employment Agreement, dated March 22, 2011, between Sensata Technologies, Inc.
and Jeffrey Cote (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-
Q filed on April 22, 2011, Commission File Number 001-34652).†‡
Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata
Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., Morgan Stanley
Senior Funding, Inc., as administrative agent, the initial l/c issuer and initial swing line lender named therein,
and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652).
Domestic Guaranty, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company,
LLC, Sensata Technologies, Inc., Sensata Technologies Massachusetts, Inc. and each of the Additional
Guarantors from time to time made a party thereto in favor of the Secured Parties (as defined therein)
(incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on May 17,
2011, Commission File Number 001-34652).
Guaranty, dated as of May 12, 2011, made by Sensata Technologies B.V. in favor of the Secured Parties (as
defined therein) (incorporated by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K
filed on May 17, 2011, Commission File Number 001-34652).
Foreign Guaranty, dated as of May 12, 2011, made by each of Sensata Technologies Holding Company US
B.V., Sensata Technologies Holland, B.V., Sensata Technologies Holding Company Mexico, B.V., Sensata
Technologies de México, S. de R.L. de C.V., Sensata Technologies Japan Limited, Sensata Technologies
Malaysia Sdn. Bhd. and each of the Additional Guarantors from time to time made a party thereto in favor of
the Secured Parties (as defined therein) (incorporated by reference to Exhibit 10.4 of the Registrant's Current
Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652).
Patent Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance
Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley
Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.5 of the Registrant's
Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652).
Trademark Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance
Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley
Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.6 of the Registrant's
Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652).
Domestic Pledge Agreement, dated as of May 12, 2011, made by each of Sensata Technologies B.V. and
Sensata Technologies Holding Company US B.V. to Morgan Stanley Senior Funding, Inc., as collateral agent
(incorporated by reference to Exhibit 10.7 of the Registrant's Current Report on Form 8-K filed on May 17,
2011, Commission File Number 001-34652).
Domestic Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance
Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley
Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.8 of the Registrant's
Current Report on Form 8-K filed on May 17, 2011, Commission File Number 001-34652).
Amendment to Award Agreement between Sensata Technologies Holding N.V. and Jeffrey Cote dated
January 23, 2012 (incorporated by reference to Exhibit 10.39 of the Registrant's Annual Report on Form 10-
K filed on February 10, 2012).†
10.15
Form of Director Options Agreement (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q filed on July 27, 2012).
131
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Amendment No. 1 to Credit Agreement dated as of December 6, 2012, to the Credit Agreement dated as of
May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley
Senior Funding, Inc., and Barclays Bank PLC (incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K filed on December 10, 2012).
Separation Agreement, dated December 10, 2012, between Sensata Technologies, Inc. and Thomas Wroe
(incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on December
10, 2012).†
Amendment to Equity Award Agreements, dated December 10, 2012, between Sensata Technologies Holding
N.V. and Thomas Wroe (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on
Form 8-K filed on December 10, 2012).†
Second Amended and Restated Employment Agreement, dated January 1, 2013, between Sensata
Technologies, Inc. and Martha Sullivan (incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on January 4, 2013).†‡
Employment Agreement, dated January 1, 2013, between Sensata Technologies, Inc. and Steven Beringhause
(incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on January 4,
2013).†‡
Intellectual Property License Agreement, dated March 14, 2013, between Sensata Technologies, Inc. and
Measurement Specialties, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report
on Form 8-K filed on March 20, 2013).
Sensata Technologies Holding N.V. 2010 Equity Incentive Plan, as Amended May 22, 2013 (incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q filed on July 29, 2013).†
Share Repurchase Agreement, dated as of November 29, 2013, between Sensata Technologies Holding N.V.
and Sensata Investment Company S.C.A. (incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K filed on December 2, 2013)
Amendment No. 2 to Credit Agreement dated as of December 11, 2013, to the Credit Agreement dated as of
May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, and Morgan
Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on
Form 8-K filed on December 11, 2013).
Employment Agreement, entered into on February 4, 2014 between Sensata Technologies, Inc. and Paul S.
Vasington (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on
February 4, 2014).†‡
Share Repurchase Agreement, dated as of May 19, 2014, between Sensata Technologies Holding N.V. and
Sensata Investment Company S.C.A. (incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on May 20, 2014).
Stock Purchase Agreement, dated as of July 3, 2014, by and among Sensata Technologies Minnesota, Inc.,
CoActive Holdings, LLC, and CoActive US Holdings, Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K filed on July 7, 2014).
Share Purchase Agreement, dated as of August 15, 2014, by and among Sensata Technologies B.V., Sensata
Technologies Holding N.V., and Schrader International, Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K filed on August 18, 2014).
Amendment No. 3 to Credit Agreement dated as of October 14, 2014, to the Credit Agreement dated as of
May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Barclays Bank PLC
and the other lenders party thereto, and Morgan Stanley Senior Funding, Inc. (incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on October 17, 2014).
Amendment No. 4 to Credit Agreement, dated as of November 4, 2014, to the Credit Agreement, dated as of
May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley
Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on November 10, 2014).
132
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
21.1
23.1
31.1
31.2
32.1
101
Amendment No. 5 to Credit Agreement, dated as of March 26, 2015, to the Credit Agreement dated as of
May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley
Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on April 1, 2015).
Amendment No. 6 to Credit Agreement dated as of May 11, 2015, to the Credit Agreement dated as of May
12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata
Technologies Intermediate Holding B.V., Morgan Stanley Senior Funding, Inc. and Barclays Bank PLC as
joint lead arrangers and bookrunners, Morgan Stanley Senior Funding, Inc. as administrative agent on behalf
of the lenders party to the Credit Agreement, and the lenders party thereto (incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on May 14, 2015).
Stock and Asset Purchase Agreement, dated as of July 30, 2015, by and among Sensata Technologies
Holding N.V., Custom Sensors &Technologies Ltd., Crouzet Automatismes S.A.S. and Custom Sensors &
Technologies (Huizhou) Limited (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report
on Form 8-K filed on August 5, 2015).
Amendment No. 7 to Credit Agreement, dated as of September 29, 2015, to the Credit Agreement, dated as
of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley
Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on October 2, 2015).
Employment Agreement, dated February 26, 2016, between Sensata Technologies, Inc. and Allisha Elliott
(incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on March 3,
2016).†
Form of modified Award Agreement for Performance Restricted Stock Units (incorporated by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q filed on April 26, 2016).†
Form of modified Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.3 of
the Registrant's Quarterly Report on Form 10-Q filed on April 26, 2016).†
Amendment No. 8 to Credit Agreement, dated as of November 7, 2017, to the Credit Agreement, dated as of
May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC,
Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley
Senior Funding, Inc. and the other lenders party thereto. (incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on November 14, 2017)
Subsidiaries of Sensata Technologies Holding N.V.*
Consent of Ernst & Young LLP.*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
The following materials from Sensata's Annual Report on Form 10-K for the year ended December 31, 2017,
formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations
for the years ended December 31, 2017, 2016, and 2015, (ii) Consolidated Statements of Comprehensive
Income for the years ended December 31, 2017, 2016, and 2015, (iii) Consolidated Balance Sheets at
December 31, 2017 and 2016, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years
ended December 31, 2017, 2016, and 2015, (v) Consolidated Statements of Cash Flows for the years ended
December 31, 2017, 2016, and 2015, (vi) the Notes to Consolidated Financial Statements, (vii) Schedule I —
Condensed Financial Information of the Registrant and (viii) Schedule II — Valuation and Qualifying
Accounts.
____________________
* Filed herewith.
†
‡ There have been non-material modifications to this contract since inception
Indicates management contract or compensatory plan, contract or arrangement.
133
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SENSATA TECHNOLOGIES HOLDING N.V.
By:
Its:
/s/ MARTHA SULLIVAN
Martha Sullivan
President and Chief Executive Officer
Date: February 1, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
President, Chief Executive Officer, and Director
(Principal Executive Officer)
DATE
February 1, 2018
/S/ MARTHA SULLIVAN
Martha Sullivan
/S/ PAUL VASINGTON
Paul Vasington
/S/ PAUL EDGERLEY
Paul Edgerley
/S/ BEDA BOLZENIUS
Beda Bolzenius
/S/ JAMES HEPPELMANN
James Heppelmann
/S/ CHARLES PEFFER
Charles Peffer
/S/ KIRK POND
Kirk Pond
/S/ CONSTANCE SKIDMORE
Constance Skidmore
/S/ ANDREW TEICH
Andrew Teich
/S/ THOMAS WROE
Thomas Wroe
/S/ STEPHEN ZIDE
Stephen Zide
/S/ MARTHA SULLIVAN
Martha Sullivan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
February 1, 2018
Chairman of the Board of Directors
February 1, 2018
Director
Director
Director
Director
Director
Director
Director
Director
February 1, 2018
February 1, 2018
February 1, 2018
February 1, 2018
February 1, 2018
February 1, 2018
February 1, 2018
February 1, 2018
Authorized Representative in the United States
February 1, 2018
134
Corporate Information
MANAGEMENT TEAM
BOARD OF DIRECTORS
STOCKHOLDER INFORMATION
Corporate Headquarters
Interface House
Interface Business Park
Bincknoll Lane
Royal Wootton Bassett
Swindon SN4 8SY
United Kingdom
U.S. Headquarters
529 Pleasant Street
Attleboro, MA 02703
Telephone: 508-236-3800
Web: www.sensata.com
Investor Relations
Sensata Technologies
529 Pleasant Street
Attleboro, MA 02703
Email: Joshua.young@sensata.com
Independent Auditors
Ernst & Young LLP
Boston, Massachusetts
Stock Listing
Sensata Technologies
Common stock is traded on the NYSE
under symbol “ST”
Transfer Agent
Computershare
PO Box 505000
Louisville, KY 40233-5000
Telephone: 866-644-4127
Web: www.computershare.com
The 2017 Annual Report, Form 10-K
and other investor information can be
viewed at www.sensata.com
Martha Sullivan
President and Chief Executive Officer
Jeffrey Cote
Chief Operating Officer and
Executive Vice President,
Sensing Solutions, Global HVOR
Paul Vasington
Chief Financial Officer and
Executive Vice President
Steve Beringhause
Chief Technology Officer
Allisha Elliott
Senior Vice President,
Chief Human Resources Officer
Paul Chawla
Senior Vice President,
Performance Sensing, Automotive
Jing Chang
Senior Vice President,
Performance Sensing,
China/India and
Asia Sensing Solutions
Yann Etienvre
Senior Vice President,
Control Solutions
Charles Kirol
Senior Vice President,
Global Operations
Hans Lidforss
Senior Vice President,
Strategy and M&A
Vineet Nargolwala
Senior Vice President,
Performance Sensing,
North America, Japan and Korea
Steven Reynolds
Vice President,
General Counsel
Rob Stefanic
Vice President,
Chief Information Officer
Paul Edgerley 3,4
Chairman of the Board
Sensata Technologies
Senior Advisor
Bain Capital
Managing Director
VantEdge Partners
Martha Sullivan 5
President and Chief Executive Officer
Sensata Technologies
James E. Heppelmann 2,3,4,5
President and Chief Executive Officer
PTC, Inc.
Charles W. Peffer 1
Retired Partner
KPMG LLP
Kirk P. Pond 2
Retired President, Chief Executive
Officer, Chairman
Fairchild Semiconductor International
Constance E. Skidmore 1,4,5
Retired Audit Partner
PricewaterhouseCoopers
Andrew C. Teich 2,3,4,5
Retired President and
Chief Executive Officer
FLIR Systems
Thomas Wroe
Chairman of the Board
Apex Tool Group
Stephen Zide 1,3
Senior Advisor
Bain Capital
1 Member of the Audit Committee
2 Member of the Compensation
Committee
3 Member of the Finance Committee
4 Member of the Nominating and
Governance Committee
5 Member of Growth and Innovation
Committee
sensata.com
The World Depends on Sensors and Controls
CORPORATE HEADQUARTERS
U.S. HEADQUARTERS
Interface House, Interface Business Park
Bincknoll Lane
Royal Wootton Bassett
Swindon SN4 8SY
United Kingdom
Sensata Technologies
529 Pleasant Street
Attleboro, MA 02703
Telephone: +1-508-236-3800