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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - Sensata Technologies Holding plcexhibit311_093018.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - Sensata Technologies Holding plcexhibit321_093018.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - Sensata Technologies Holding plcexhibit312_093018.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-34652
_____________________________________ 
SENSATA TECHNOLOGIES HOLDING PLC
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
ENGLAND AND WALES
 
98-1386780
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
Interface House, Interface Business Park
Bincknoll Lane
Royal Wootton Bassett
Swindon SN4 8SY
United Kingdom
 
+1 (508) 236 3800
(Address of Principal Executive Offices, including Zip Code)
 
(Registrant’s Telephone Number, Including Area Code)
Former name, former address and former fiscal year, if changed since last report.
_____________________________________ 
Indicate by 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  ý    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 ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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 ý
As of October 17, 2018, 164,146,335 ordinary shares were outstanding.



TABLE OF CONTENTS

PART I
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
PART II 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 6.
 
 
 

2


PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(unaudited)
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
811,394

 
$
753,089

Accounts receivable, net of allowances of $12,984 and $12,947 as of September 30, 2018 and December 31, 2017, respectively
614,616

 
556,541

Inventories
489,251

 
446,129

Prepaid expenses and other current assets
111,940

 
92,532

Total current assets
2,027,201

 
1,848,291

Property, plant and equipment, net
757,185

 
750,049

Goodwill
2,966,664

 
3,005,464

Other intangible assets, net of accumulated amortization of $1,861,241 and $1,767,001 as of September 30, 2018 and December 31, 2017, respectively
808,666

 
920,124

Deferred income tax assets
22,214

 
33,003

Other assets
82,385

 
84,594

Total assets
$
6,664,315

 
$
6,641,525

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt, capital lease and other financing obligations
$
13,378

 
$
15,720

Accounts payable
373,137

 
322,671

Income taxes payable
19,939

 
31,544

Accrued expenses and other current liabilities
248,196

 
259,560

Total current liabilities
654,650

 
629,495

Deferred income tax liabilities
347,929

 
338,228

Pension and other post-retirement benefit obligations
27,654

 
40,055

Capital lease and other financing obligations, less current portion
24,548

 
28,739

Long-term debt, net
3,220,401

 
3,225,810

Other long-term liabilities
33,635

 
33,572

Total liabilities
4,308,817

 
4,295,899

Commitments and contingencies (Note 10)



Shareholders’ equity:
 
 
 
Ordinary shares, €0.01 nominal value per share, 177,069 and 400,000 shares authorized, and 171,718 and 178,437 shares issued, as of September 30, 2018 and December 31, 2017, respectively
2,203

 
2,289

Treasury shares, at cost, 7,571 and 7,076 shares as of September 30, 2018 and December 31, 2017, respectively
(399,417
)
 
(288,478
)
Additional paid-in capital
1,685,136

 
1,663,367

Retained earnings
1,086,537

 
1,031,612

Accumulated other comprehensive loss
(18,961
)
 
(63,164
)
Total shareholders’ equity
2,355,498

 
2,345,626

Total liabilities and shareholders’ equity
$
6,664,315

 
$
6,641,525

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
 
 
For the three months ended
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net revenue
$
873,552

 
$
819,054

 
$
2,673,705

 
$
2,466,199

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
558,334

 
527,239

 
1,723,300

 
1,600,163

Research and development
37,800

 
33,998

 
111,781

 
97,005

Selling, general and administrative
73,886

 
75,891

 
235,681

 
226,810

Amortization of intangible assets
33,911

 
40,317

 
103,574

 
121,578

Restructuring and other charges, net
(52,698
)
 
1,329

 
(48,688
)
 
18,768

Total operating costs and expenses
651,233

 
678,774

 
2,125,648

 
2,064,324

Profit from operations
222,319

 
140,280

 
548,057

 
401,875

Interest expense, net
(38,058
)
 
(40,263
)
 
(114,808
)
 
(120,578
)
Other, net
(10,581
)
 
2,834

 
(26,267
)
 
5,690

Income before taxes
173,680

 
102,851

 
406,982

 
286,987

Provision for income taxes
24,562

 
14,816

 
62,086

 
47,759

Net income
$
149,118

 
$
88,035

 
$
344,896

 
$
239,228

Basic net income per share:
$
0.89

 
$
0.51

 
$
2.03

 
$
1.40

Diluted net income per share:
$
0.88

 
$
0.51

 
$
2.01

 
$
1.39

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
 
For the three months ended
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income
$
149,118

 
$
88,035

 
$
344,896

 
$
239,228

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Cash flow hedges
10,343

 
(6,784
)
 
39,555

 
(17,820
)
Defined benefit and retiree healthcare plans
3,610

 
274

 
4,648

 
1,489

Other comprehensive income/(loss)
13,953

 
(6,510
)
 
44,203

 
(16,331
)
Comprehensive income
$
163,071

 
$
81,525

 
$
389,099

 
$
222,897

The accompanying notes are an integral part of these condensed consolidated financial statements.
 

5


SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
Net income
$
344,896

 
$
239,228

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
79,518

 
82,014

Amortization of debt issuance costs
5,480

 
5,528

Gain on sale of business
(63,688
)
 

Share-based compensation
17,813

 
15,106

Loss on debt financing
2,350

 

Amortization of intangible assets
103,574

 
121,578

Deferred income taxes
9,547

 
11,836

Unrealized loss on hedges and other
9,020

 
4,664

Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures:
 
 
 
Accounts receivable, net
(78,611
)
 
(69,670
)
Inventories
(65,370
)
 
(58,476
)
Prepaid expenses and other current assets
(13,350
)
 
(19,251
)
Accounts payable and accrued expenses
84,082

 
40,144

Income taxes payable
(8,910
)
 
3,142

Other
(6,212
)
 
(3,564
)
Net cash provided by operating activities
420,139

 
372,279

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment and capitalized software
(111,275
)
 
(103,536
)
Proceeds from the sale of business
149,136

 

Proceeds from the sale of assets

 
8,862

Other
5,000

 
(3,000
)
Net cash provided by (used in) investing activities
42,861

 
(97,674
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options and issuance of ordinary shares
6,051

 
5,332

Payment of employee restricted stock tax withholdings
(3,673
)
 
(2,817
)
Payments on debt
(14,094
)
 
(14,459
)
Payments to repurchase ordinary shares
(399,417
)
 

Payments of debt and equity issuance costs
(9,931
)
 
(1,117
)
Other
16,369

 

Net cash used in financing activities
(404,695
)
 
(13,061
)
Net change in cash and cash equivalents
58,305

 
261,544

Cash and cash equivalents, beginning of period
753,089

 
351,428

Cash and cash equivalents, end of period
$
811,394

 
$
612,972

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts, or unless otherwise noted)
(unaudited)
1. Business Description and Basis of Presentation
Description of Business
The accompanying unaudited condensed consolidated financial statements reflect the financial position, results of operations, comprehensive income, and cash flows of Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V."), and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," or "us."
On September 28, 2017, the Board of Directors of Sensata N.V. unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018, the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the surviving entity (the "Merger").
We received approval of the transaction by the U.K. High Court of Justice, and the Merger was completed on March 28, 2018, on which date Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata plc conducts its operations through subsidiary companies that operate business and product development centers primarily in the United States (the "U.S."), the U.K., Belgium, Bulgaria, China, Germany, Japan, the Netherlands, and South Korea; and manufacturing operations primarily in China, Malaysia, Mexico, Bulgaria, Germany, the U.K., and the U.S. We organize our operations into two segments, Performance Sensing and Sensing Solutions.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q. Accordingly, these interim financial statements do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements. The accompanying financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the interim period results. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year, nor were the results of operations of the comparable periods in 2017 necessarily representative of those actually experienced for the full year 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
All intercompany balances and transactions have been eliminated.
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. New Accounting Standards
Adopted in the current year
In May 2014, the 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 (that is, FASB ASC Topic 606, Revenue from Contracts with Customers) the guidance found in FASB ASC Topic 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. FASB ASC Topic 606 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 at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted FASB ASC Topic 606 on January 1, 2018 using the modified retrospective

7


transition method. Refer to Note 16, "Revenue Recognition," for additional details on this implementation and the required disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new recognition and measurement guidance requires entities to measure equity investments (other than those accounted for under the equity method, those that result in consolidation of the investee, and certain other investments) either at fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative. Under the measurement alternative, such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. We adopted this guidance on January 1, 2018, which resulted in no impact on our consolidated financial position or results of operations. Refer to Note 11, "Fair Value Measures," for further detail regarding the application of the measurement alternative to our $50.0 million equity investment in Series B Preferred Stock of Quanergy, Inc ("Quanergy").
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires a change in the presentation of net periodic benefit cost on the consolidated statements of operations. Specifically, entities must present the service cost component of net periodic benefit cost in the same financial statement line item(s) as other compensation costs arising from services rendered by the related employees during the period, whereas the non–service components of net periodic benefit cost must be presented separately from the financial statement line item(s) that include service cost and outside of operating income. We adopted this guidance on January 1, 2018 and, as a result, we present the service cost component of net periodic benefit cost in the Cost of revenue, Research and development, and Selling, general, and administrative ("SG&A") expense line items, and we present the non–service components of net periodic benefit cost in Other, net. Refer to Note 13, "Other, Net," for the total other components of net periodic benefit cost. All prior period amounts have been recast to reflect the revised presentation, and the adjustments made to revise the presentation of our prior year condensed consolidated statement of operations are presented in Note 8, "Pension and Other Post–Retirement Benefits."
To be adopted in a future period
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 one year or less) using a method similar to the current operating lease model. The statement 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. FASB ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods therein, with early adoption permitted.
We are in the process of implementing a plan for the adoption of FASB ASU No. 2016-02. Through our implementation efforts, we have decided that we will elect to apply the package of practical expedients, and we will not elect to apply the hindsight practical expedient. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which creates an optional transition expedient that allows an entity to apply the transition provisions of the new standard, including its disclosure requirements, at its adoption date instead of at the beginning of the earliest comparative period presented as originally required by FASB ASU No. 2016-02. We will adopt FASB ASU No. 2016-02 on January 1, 2019 using this transition expedient.
We expect that adoption of this standard will result in the recognition of a lease liability and right-of-use asset for certain operating leases that are currently not recognized on our condensed consolidated balance sheets. At December 31, 2017, we were 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 facility leases.
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. The adoption of FASB ASU No. 2017-12 will not have a material impact on our consolidated financial position or results of operations.
3. Inventories
The components of inventories as of September 30, 2018 and December 31, 2017 were as follows:
 
September 30,
2018
 
December 31,
2017
Finished goods
$
202,819

 
$
195,089

Work-in-process
102,611

 
92,678

Raw materials
183,821

 
158,362

Inventories
$
489,251

 
$
446,129

 
4. Shareholders' Equity
Prior to the Merger, Sensata N.V.’s articles of association authorized it to issue up to 400.0 million ordinary shares. However, entities incorporated under the laws of England and Wales are limited in the number of shares they can issue to those shares that have been authorized for "allotment" by their shareholders. In connection with the Merger, our Board of Directors asked shareholders to approve an allotment of ordinary shares equal to the total ordinary shares then issued and outstanding plus the maximum number of ordinary shares that could be reasonably expected to be issued under our equity plans within the next year, which resulted in an allotment of 177.1 million ordinary shares.
Treasury Shares
Ordinary shares repurchased by us are recognized, measured at cost, and presented as treasury shares on our condensed consolidated balance sheets, resulting in a reduction of shareholders' equity.
In connection with the Merger, all then outstanding treasury shares were canceled in accordance with U.K. law. Accordingly, we (1) derecognized the total purchase price of these treasury shares, (2) recognized a reduction to ordinary shares at an amount equal to the total par value of such shares, and (3) recognized a reduction to Retained earnings at an amount equal to the excess of the total repurchase price over the total par value of the then outstanding treasury shares, or $286.1 million.
Also, upon completion of the Merger, the $250.0 million share repurchase program previously authorized by the Board of Directors of Sensata N.V. lapsed, and our ability to repurchase shares as a company incorporated in England and Wales became contingent upon the completion of certain court proceedings in the U.K. (which were completed in the second quarter of 2018), approval of our shareholders (which occurred at our May 31, 2018 annual general meeting of shareholders), and authorization by our Board of Directors.
On May 31, 2018, we announced that our Board of Directors had authorized a $400.0 million share repurchase program. Under this program, we may repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions are completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our share repurchase program may be modified or terminated by our Board of Directors at any time. We repurchased 7,571 ordinary shares under this program during the nine months ended September 30, 2018, for a total purchase price of approximately $399.4 million, which are now held as treasury shares.
As a result of certain aspects of U.K. law, we discontinued the practice of reissuing treasury shares as part of our share-based compensation programs upon completion of the Merger. The number of treasury shares reissued prior to completion of the Merger was not material.
In October 2018, our Board of Directors authorized a new $250.0 million share repurchase program, subject to the same conditions that applied to the previously authorized $400.0 million share repurchase program.

8


Accumulated Other Comprehensive Loss
The following is a roll forward of the components of Accumulated other comprehensive loss for the nine months ended September 30, 2018:
 
 
Cash Flow Hedges
 
Defined Benefit and Retiree Healthcare Plans
 
Accumulated Other Comprehensive Loss
Balance as of December 31, 2017
 
$
(28,179
)
 
$
(34,985
)
 
$
(63,164
)
Other comprehensive income before reclassifications, net of tax
 
25,586

 
3,821

 
29,407

Reclassifications from accumulated other comprehensive loss, net of tax
 
13,969

 
827

 
14,796

Other comprehensive income
 
39,555

 
4,648

 
44,203

Balance as of September 30, 2018
 
$
11,376

 
$
(30,337
)
 
$
(18,961
)
The details of the amounts reclassified from Accumulated other comprehensive loss for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss/(Gain) Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line in Condensed Consolidated Statements of Operations
 
 
For the three months ended
 
For the nine months ended
 
Component
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
Derivative instruments designated and qualifying as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
1,490

 
$
4,075

 
$
20,438

 
$
(3,678
)
 
Net revenue (1)
Foreign currency forward contracts
 
(1,353
)
 
1,953

 
(3,189
)
 
13,356

 
Cost of revenue (1)
Foreign currency forward contracts
 

 

 
1,376

 

 
Other, net (1)
Total, before taxes
 
137

 
6,028

 
18,625

 
9,678

 
Income before taxes
Income tax effect
 
(34
)
 
(1,507
)
 
(4,656
)
 
(2,420
)
 
Provision for income taxes
Total, net of taxes
 
$
103

 
$
4,521

 
$
13,969

 
$
7,258

 
Net income
 
 
 
 
 
 
 
 
 
 
 
Defined benefit and retiree healthcare plans
 
$
171

 
$
297

 
$
488

 
$
1,557

 
Other, net (2)
Defined benefit and retiree healthcare plans
 
228

 

 
228

 

 
Restructuring and other charges, net (3)
Total, before taxes
 
399

 
297

 
716

 
1,557

 
Income before taxes
Income tax effect
 
(32
)
 
(23
)
 
111

 
(68
)
 
Provision for income taxes
Total, net of taxes
 
$
367

 
$
274

 
$
827

 
$
1,489

 
Net income
(1)
See Note 12, "Derivative Instruments and Hedging Activities," for additional details on amounts to be reclassified in the future from Accumulated other comprehensive loss.
(2)
See Note 8, "Pension and Other Post-Retirement Benefits," for additional details of net periodic benefit cost.
(3)
Amount represents an equity component of the Valves Business, which was sold in the third quarter of 2018. Refer to Note 5, "Restructuring and Other Charges, Net" and Note 17, "Acquisitions and Divestitures" for additional information related to the sale of the Valves Business.

9


5. Restructuring and Other Charges, Net
Restructuring and other charges, net for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
 
For the three months ended
 
For the nine months ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Severance costs, net
 
$
4,888

 
$
(418
)
 
$
8,208

 
$
11,747

Facility and other exit costs
 
187

 
1,747

 
877

 
7,021

Gain on sale of Valves Business (1)
 
(63,688
)
 

 
(63,688
)
 

Other (2)
 
5,915

 

 
5,915

 

Restructuring and other charges, net
 
$
(52,698
)
 
$
1,329

 
$
(48,688
)
 
$
18,768

(1)
Refer to Note 17, "Acquisitions and Divestitures," for further discussion.
(2)
In the three and nine months ended September 30, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business. Refer to Note 17, "Acquisitions and Divestitures," for further discussion.
Severance costs for the three and nine months ended September 30, 2018 were primarily related to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of certain positions related to site consolidations.
Severance costs, net for the nine months ended September 30, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Facility and other exit costs for the three and nine months ended September 30, 2017 included $1.3 million and $2.4 million, respectively, of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites. Facility and other exit costs for the nine months ended September 30, 2017 also included $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe.
Changes to the severance portion of our restructuring liability during the nine months ended September 30, 2018 were as follows:
 
 
Severance
Balance at December 31, 2017
 
$
7,583

Charges, net of reversals
 
8,208

Payments
 
(6,555
)
Impact of changes in foreign currency exchange rates
 
(103
)
Balance at September 30, 2018
 
$
9,133


10


6. Debt
Our long-term debt and capital lease and other financing obligations as of September 30, 2018 and December 31, 2017 consisted of the following:
 
 
Maturity Date
 
September 30,
2018
 
December 31,
2017
Term Loan
 
October 14, 2021
 
$
917,794

 
$
927,794

4.875% Senior Notes
 
October 15, 2023
 
500,000

 
500,000

5.625% Senior Notes
 
November 1, 2024
 
400,000

 
400,000

5.0% Senior Notes
 
October 1, 2025
 
700,000

 
700,000

6.25% Senior Notes
 
February 15, 2026
 
750,000

 
750,000

Less: discount
 
 
 
(15,857
)
 
(14,424
)
Less: deferred financing costs
 
 
 
(24,308
)
 
(27,758
)
Less: current portion
 
 
 
(7,228
)
 
(9,802
)
Long-term debt, net
 
 
 
$
3,220,401

 
$
3,225,810

 
 
 
 
 
 
 
Capital lease and other financing obligations
 
 
 
$
30,698

 
$
34,657

Less: current portion
 
 
 
(6,150
)
 
(5,918
)
Capital lease and other financing obligations, less current portion
 
 
 
$
24,548

 
$
28,739

In connection with the Merger, which we completed in the first quarter of 2018, we paid $5.8 million of creditor fees and related third-party costs in order to obtain consents to the transaction from our existing lenders. We applied the provisions of FASB ASC Subtopic 470-50, Modifications and Extinguishments, in accounting for the amounts paid. As a result, we recorded an adjustment of $3.5 million to the carrying amount of Long-term debt, net, and we recognized a loss of $2.4 million in Other, net.
As of September 30, 2018, we had $416.0 million available under our $420.0 million revolving credit facility, net of $4.0 million in letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of September 30, 2018, no amounts had been drawn against these outstanding letters of credit.
Accrued Interest
Accrued interest associated with our outstanding debt is included as a component of Accrued expenses and other current liabilities in the condensed consolidated balance sheets. As of September 30, 2018 and December 31, 2017, accrued interest totaled $45.8 million and $36.9 million, respectively.
7. Income Taxes
Provision for income taxes for the three months ended September 30, 2018 and 2017 totaled $24.6 million and $14.8 million, respectively, and for the nine months ended September 30, 2018 and 2017 totaled $62.1 million and $47.8 million, respectively. The Provision for income taxes consists of current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions, and deferred tax expense, which relates to adjustments in book-to-tax basis differences primarily due to the step-up in fair value of fixed and intangible assets, including goodwill, acquired in connection with business combination transactions, and the utilization of net operating losses.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform" or "the Act") was signed into U.S. law. FASB 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.
Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin 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. As of September 30, 2018, we have not recorded incremental accounting adjustments related to the Act. We continue to consider interpretations of its application and await final guidance on the application of specific elements of the Act.

11


In measuring the related deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The greater negative evidence that exists, more positive evidence is necessary to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740, Income Taxes, to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we maintain 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.
We have concluded that a valuation allowance is required on our deferred tax assets in the U.S., in large part due to the cumulative losses that our U.S. operations have experienced in recent years. Such cumulative losses are negative evidence that is difficult to overcome in concluding whether a valuation allowance is required. We continue to assess both positive and negative evidence surrounding our U.S. operations, and to evaluate the impact of Tax Reform on our tax attributes and related valuation allowance implications. As a consequence of our assessment, we have concluded that maintaining the U.S. valuation allowance is appropriate as of September 30, 2018.
8. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement benefit plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans.
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the three months ended September 30, 2018 and 2017 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
 
 
Defined Benefit
 
Retiree Healthcare
 
Defined Benefit
 
Total
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$
9

 
$
21

 
$
757

 
$
661

 
$
766

 
$
682

Interest cost
387

 
385

 
45

 
80

 
327

 
273

 
759

 
738

Expected return on plan assets
(415
)
 
(527
)
 

 

 
(230
)
 
(230
)
 
(645
)
 
(757
)
Amortization of net loss
235

 
291

 
20

 
8

 
237

 
64

 
492

 
363

Amortization of prior service (credit)/cost

 

 
(530
)
 
(334
)
 
2

 
(1
)
 
(528
)
 
(335
)
Loss on settlement
207

 
269

 

 

 

 

 
207

 
269

Net periodic benefit cost/(credit)
$
414

 
$
418

 
$
(456
)
 
$
(225
)
 
$
1,093

 
$
767

 
$
1,051

 
$
960


12


The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the nine months ended September 30, 2018 and 2017 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
 
 
Defined Benefit
 
Retiree Healthcare
 
Defined Benefit
 
Total
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$
47

 
$
64

 
$
2,392

 
$
1,917

 
$
2,439

 
$
1,981

Interest cost
1,078

 
1,214

 
185

 
239

 
1,001

 
784

 
2,264

 
2,237

Expected return on plan assets
(1,251
)
 
(1,617
)
 

 

 
(702
)
 
(677
)
 
(1,953
)
 
(2,294
)
Amortization of net loss
835

 
854

 
20

 
32

 
372

 
202

 
1,227

 
1,088

Amortization of prior service (credit)/cost

 

 
(1,198
)
 
(1,001
)
 
3

 
(3
)
 
(1,195
)
 
(1,004
)
Loss on settlement
752

 
1,473

 

 

 

 

 
752

 
1,473

Gain on curtailment

 

 

 

 
(296
)
 

 
(296
)
 

Net periodic benefit cost/(credit)
$
1,414

 
$
1,924

 
$
(946
)
 
$
(666
)
 
$
2,770

 
$
2,223

 
$
3,238

 
$
3,481

On January 1, 2018, we adopted the guidance in FASB ASU No. 2017-07. Refer to Note 2, "New Accounting Standards," for further discussion. As a result of this adoption, the components of net periodic benefit cost, excluding service cost, were reclassified in our condensed consolidated statements of operations from various operating cost and expense line items to Other, net for the three and nine months ended September 30, 2017.
The table below presents the effects of this adjustment.
 
For the three months ended September 30, 2017
 
For the nine months ended September 30, 2017
 
As reported
 
ASU No. 2017-07 Adjustment
 
As Adjusted
 
As reported
 
ASU No. 2017-07 Adjustment
 
As Adjusted
Net revenue
$
819,054

 
$

 
$
819,054

 
$
2,466,199

 
$

 
$
2,466,199

Operating costs and expenses:
 
 
 
 

 
 
 
 
 
 
Cost of revenue
527,432

 
(193
)
 
527,239

 
1,601,190

 
(1,027
)
 
1,600,163

Research and development
34,002

 
(4
)
 
33,998

 
97,032

 
(27
)
 
97,005

Selling, general and administrative
75,972

 
(81
)
 
75,891

 
227,256

 
(446
)
 
226,810

Amortization of intangible assets
40,317

 

 
40,317

 
121,578

 

 
121,578

Restructuring and other charges, net
1,329

 

 
1,329

 
18,768

 

 
18,768

Total operating costs and expenses
679,052

 
(278
)
 
678,774

 
2,065,824

 
(1,500
)
 
2,064,324

Profit from operations
140,002

 
278

 
140,280

 
400,375

 
1,500

 
401,875

Interest expense, net
(40,263
)
 

 
(40,263
)
 
(120,578
)
 

 
(120,578
)
Other, net
3,112

 
(278
)
 
2,834

 
7,190

 
(1,500
)
 
5,690

Income before taxes
$
102,851

 
$

 
$
102,851

 
$
286,987

 
$

 
$
286,987


13


9. Share-Based Payment Plans
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards, which is recognized within SG&A expense in the condensed consolidated statements of operations, during the identified periods:
 
For the three months ended
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Stock options
$
1,381

 
$
1,575

 
$
4,459

 
$
5,055

Restricted securities
4,930

 
3,522

 
13,354

 
10,051

Share-based compensation expense
$
6,311

 
$
5,097

 
$
17,813

 
$
15,106

Equity Awards
We grant options and restricted stock units ("RSUs") for which vesting is subject only to continued employment and the passage of time. In addition, we grant performance–based options and performance–based restricted stock units ("PRSUs") for which vesting also depends on the attainment of certain performance criteria.
We granted the following options under the Sensata Technologies Holding plc First Amended and Restated 2010 Equity Incentive Plan (the "2010 Equity Plan") during the nine months ended September 30, 2018:
Options Granted to
 
Number of Options Granted (in thousands)
 
Weighted- Average Grant Date Fair Value
 
Vesting Period
Various executives and employees
 
307

 
$
15.70

 
25% per year over four years
We granted the following RSUs and PRSUs under the 2010 Equity Plan during the nine months ended September 30, 2018:
Awards Granted to
 
Type of Award
 
Number of Units Granted (in thousands)
 
Percentage of PRSUs Awarded That May Vest
 
Weighted- Average Grant Date Fair Value
Various executives and employees
 
RSU (1)
 
148

 
N/A
 
$
52.02

Directors
 
RSU (1)
 
23

 
N/A
 
$
52.47

Various executives and employees
 
PRSU (2)
 
118

 
0.0% - 172.5%
 
$
51.83

Various executives and employees
 
PRSU (2)
 
63

 
0.0% - 150.0%
 
$
51.83

(1)
RSUs granted during the nine months ended September 30, 2018 vest on various dates between June 2019 and July 2021.
(2)
PRSUs granted during the nine months ended September 30, 2018 vest on April 1, 2021, with the amount ultimately vesting within the range shown in the table above, depending on the extent to which certain performance criteria are met.
Option Exercises
During the nine months ended September 30, 2018, 170 thousand stock options were exercised.
10. Commitments and Contingencies
We are the defendant in a lawsuit, Wasica Finance Gmbh et al v. Schrader International Inc. et al, Case No. 13-1353-CPS, U.S.D.C., Delaware, in which the claimant alleges infringement of their patent (US 5,602,524) in connection with our TPMS products. The patent in question has expired, and as a result, the claimant only seeks damages for past infringement with interest and costs. Should the claimant prevail, these amounts could be material. We have denied liability and have been defending the litigation, which is in discovery. The court has currently scheduled a claims construction hearing for December 2018 and trial for February 2020. We do not believe a loss related to this matter is probable. As of September 30, 2018, we have not recorded an accrual for this matter.
We are regularly involved in a number of claims and litigation matters in the ordinary course of business, primarily related to allegations of intellectual property infringement and property damage or personal injury caused by our products. Although it is

14


not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, or cash flows.
11. Fair Value Measures
Our assets and liabilities recorded at fair value have been categorized based upon the fair value hierarchy in accordance with FASB ASC Topic 820, Fair Value Measurement.
Measured on a Recurring Basis
The fair values of our assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are as shown in the below table. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Foreign currency forward contracts
$
19,539

 
$
3,955

Commodity forward contracts
577

 
6,458

Total
$
20,116

 
$
10,413

Liabilities
 
 
 
Foreign currency forward contracts
$
4,728

 
$
40,969

Commodity forward contracts
5,358

 
1,104

Total
$
10,086

 
$
42,073

Measured on a Nonrecurring Basis
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2017 and determined that they were not impaired. In connection with the sale of the Valves Business, which is described in Note 17, "Acquisitions and Divestitures," and as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment and determined that it was not impaired.
We periodically reevaluate the carrying values and estimated useful lives of long-lived assets whenever events or changes in circumstances indicate that the carrying values of such assets may not be recoverable.
On January 1, 2018, we adopted FASB ASU No. 2016-01, which requires that equity investments (other than those accounted for under the equity method, those that result in consolidation of the investee, and certain other investments) be measured at either fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative. Under the measurement alternative, such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. As it relates to our $50.0 million equity investment in Quanergy, we elected to use the measurement alternative. As of September 30, 2018, we noted no material observable price changes as a result of orderly transactions for an identical or similar investment of the same issuer, nor did we note any indicators of impairment that would require us to measure the fair value of the asset.

15


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 condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
 
September 30, 2018
 
December 31, 2017
 
Carrying
Value (1)
 
Fair Value
 
Carrying
Value (1)
 
Fair Value
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Term Loan
$
917,794

 
$
922,383

 
$
927,794

 
$
930,114

4.875% Senior Notes
$
500,000

 
$
500,000

 
$
500,000

 
$
521,875

5.625% Senior Notes
$
400,000

 
$
413,000

 
$
400,000

 
$
439,000

5.0% Senior Notes
$
700,000

 
$
694,750

 
$
700,000

 
$
741,125

6.25% Senior Notes
$
750,000

 
$
789,375

 
$
750,000

 
$
813,750

(1)    Carrying value excludes discounts and deferred financing costs.
The fair values of the Term Loan and senior notes are determined primarily using observable prices in markets where these instruments are generally not traded on a daily basis.
Cash and cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates fair value because of their short-term nature.
12. Derivative Instruments and Hedging Activities
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 and are 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 not designated for hedge accounting treatment in accordance with FASB ASC Topic 815, Derivatives and Hedging, and are intended to preserve the economic value of foreign currency denominated monetary assets and liabilities.
For the three and nine months ended September 30, 2018 and 2017, amounts excluded from the assessment of effectiveness and the ineffective portion of the changes in the fair value of our foreign currency forward agreements that are designated as cash flow hedges were not material. As of September 30, 2018, we estimate that $12.3 million of net gains will be reclassified from Accumulated other comprehensive loss to earnings during the twelve-month period ending September 30, 2019.

16


As of September 30, 2018, we had the following outstanding foreign currency forward contracts: 
Notional
(in millions)
 
Effective Date(s)
 
Maturity Date(s)
 
Index
 
Weighted- Average Strike Rate
 
Hedge Designation
39.0 EUR
 
September 26, 2018
 
October 31, 2018
 
Euro to U.S. Dollar Exchange Rate
 
1.18 USD
 
Not designated
338.2 EUR
 
Various from November 2016 to September 2018
 
Various from October 2018 to August 2020
 
Euro to U.S. Dollar Exchange Rate
 
1.21 USD
 
Designated
432.0 CNY
 
September 25, 2018
 
October 31, 2018
 
U.S. Dollar to Chinese Renminbi Exchange Rate
 
6.91 CNY
 
Not designated
270.3 CNY
 
Various from October 2017 to January 2018
 
Various from October to December 2018
 
U.S. Dollar to Chinese Renminbi Exchange Rate
 
6.74 CNY
 
Designated
300.0 JPY
 
September 26, 2018
 
October 31, 2018
 
U.S. Dollar to Japanese Yen Exchange Rate
 
112.75 JPY
 
Not designated
205.9 JPY
 
January 25, 2018
 
Various from October to December 2018
 
U.S. Dollar to Japanese Yen Exchange Rate
 
106.55 JPY
 
Designated
29,357.3 KRW
 
Various from November 2016 to September 2018
 
Various from October 2018 to August 2020
 
U.S. Dollar to Korean Won Exchange Rate
 
1,097.69 KRW
 
Designated
27.0 MYR
 
September 25, 2018
 
October 31, 2018
 
U.S. Dollar to Malaysian Ringgit Exchange Rate
 
4.13 MYR
 
Not Designated
0.4 MYR
 
November 21, 2016
 
October 31, 2018
 
U.S. Dollar to Malaysian Ringgit Exchange Rate
 
4.53 MYR
 
Designated
283.0 MXN
 
September 26, 2018
 
October 31, 2018
 
U.S. Dollar to Mexican Peso Exchange Rate
 
19.05 MXN
 
Not designated
2,655.1 MXN
 
Various from November 2016 to September 2018
 
Various from October 2018 to August 2020
 
U.S. Dollar to Mexican Peso Exchange Rate
 
20.53 MXN
 
Designated
1.6 GBP
 
September 26, 2018
 
October 31, 2018
 
British Pound Sterling to U.S. Dollar Exchange Rate
 
1.32 USD
 
Not Designated
41.9 GBP
 
Various from July 2016 to September 2018
 
Various from October 2018 to August 2020
 
British Pound Sterling to U.S. Dollar Exchange Rate
 
1.34 USD
 
Designated
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 FASB ASC Topic 815.
As of September 30, 2018, we had the following outstanding commodity forward contracts, none of which were designated as derivatives in qualifying hedging relationships:
Commodity
 
Notional
 
Remaining Contracted Periods
 
Weighted-Average Strike Price Per Unit
Silver
 
982,226 troy oz.
 
October 2018-August 2020
 
$17.03
Gold
 
9,091 troy oz.
 
October 2018-August 2020
 
$1,317.90
Nickel
 
264,885 pounds
 
October 2018-August 2020
 
$5.74
Aluminum
 
2,095,560 pounds
 
October 2018-August 2020
 
$0.98
Copper
 
2,726,545 pounds
 
October 2018-August 2020
 
$3.27
Platinum
 
7,823 troy oz.
 
October 2018-August 2020
 
$941.73
Palladium
 
1,300 troy oz.
 
October 2018-August 2020
 
$933.99

17


Financial Instrument Presentation
The following table presents the fair values of our derivative financial instruments and their classification in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value
 
 
 
Fair Value
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
Prepaid expenses and other current assets
 
$
14,786

 
$
3,576

 
Accrued expenses and other current liabilities
 
$
4,048

 
$
32,806

Foreign currency forward contracts
Other assets
 
4,010

 
373

 
Other long-term liabilities
 
543

 
6,881

Total
 
 
$
18,796

 
$
3,949

 
 
 
$
4,591

 
$
39,687

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity forward contracts
Prepaid expenses and other current assets
 
$
546

 
$
5,403

 
Accrued expenses and other current liabilities
 
$
4,592

 
$
1,006

Commodity forward contracts
Other assets
 
31

 
1,055

 
Other long-term liabilities
 
766

 
98

Foreign currency forward contracts
Prepaid expenses and other current assets
 
743

 
6

 
Accrued expenses and other current liabilities
 
137

 
1,282

Total
 
 
$
1,320

 
$
6,464

 
 
 
$
5,495

 
$
2,386

These fair value measurements are all categorized within Level 2 of the fair value hierarchy.
The following tables present the effect of our derivative financial instruments on the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three months ended September 30, 2018 and 2017:
Derivatives designated as
hedging instruments
 
Amount of Deferred Gain/(Loss) Recognized in Other Comprehensive Income/(Loss)
 
Location of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income
 
Amount of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income
 
 
September 30, 2018
 
September 30, 2017
 
 
 
September 30, 2018
 
September 30, 2017
Foreign currency forward contracts
 
$
7,190

 
$
(16,688
)
 
Net revenue
 
$
(1,490
)
 
$
(4,075
)
Foreign currency forward contracts
 
$
6,464

 
$
1,614

 
Cost of revenue
 
$
1,353

 
$
(1,953
)
Derivatives not designated as
hedging instruments
 
Amount of (Loss)/Gain Recognized in Net Income
 
Location of (Loss)/Gain Recognized in Net Income
 
 
September 30, 2018
 
September 30, 2017
 
 
Commodity forward contracts
 
$
(4,233
)
 
$
2,956

 
Other, net
Foreign currency forward contracts
 
$
3,668

 
$
(3,865
)
 
Other, net

18


The following tables present the effect of our derivative financial instruments on the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the nine months ended September 30, 2018 and 2017:
Derivatives designated as
hedging instruments
 
Amount of Deferred Gain/(Loss) Recognized in Other Comprehensive Income/(Loss)
 
Location of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income
 
Amount of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income
 
 
September 30, 2018
 
September 30, 2017
 
 
 
September 30, 2018
 
September 30, 2017
Foreign currency forward contracts
 
$
22,993

 
$
(56,479
)
 
Net revenue
 
$
(20,438
)
 
$
3,678

Foreign currency forward contracts
 
$
11,122

 
$
23,041

 
Cost of revenue
 
$
3,189

 
$
(13,356
)
Foreign currency forward contracts
 
$

 
$

 
Other, net
 
$
(1,376
)
 
$

Derivatives not designated as
hedging instruments
 
Amount of (Loss)/Gain Recognized in Net Income
 
Location of (Loss)/Gain Recognized in Net Income
 
 
September 30, 2018
 
September 30, 2017
 
 
Commodity forward contracts
 
$
(8,854
)
 
$
6,439

 
Other, net
Foreign currency forward contracts
 
$
4,494

 
$
(10,542
)
 
Other, net
Credit Risk Related Contingent Features
We have agreements with certain of our derivative counterparties that contain a provision whereby if we default on our indebtedness, and 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 September 30, 2018, the termination value of outstanding derivatives in a liability position, excluding any adjustment for non-performance risk, was $10.2 million. As of September 30, 2018, we had not posted any cash collateral related to these agreements. If we breach any of the default provisions on any of our indebtedness, as described above, we could be required to settle our obligations under the derivative agreements at their termination values.
13. Other, Net
Other, net consisted of the following for the three and nine months ended September 30, 2018 and 2017:
 
For the three months ended
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Currency remeasurement (loss)/gain on net monetary assets
$
(9,568
)
 
$
3,989

 
$
(18,497
)
 
$
11,010

Gain/(loss) on foreign currency forward contracts
3,668

 
(3,865
)
 
3,118

 
(10,542
)
(Loss)/gain on commodity forward contracts
(4,233
)
 
2,956

 
(8,854
)
 
6,439

Loss on debt financing

 

 
(2,350
)
 

Net periodic benefit cost, excluding service cost (1)
(285
)
 
(278
)
 
(799
)
 
(1,500
)
Other
(163
)
 
32

 
1,115

 
283

Other, net
$
(10,581
)
 
$
2,834

 
$
(26,267
)
 
$
5,690

(1)
On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the service cost component and other components of net periodic benefit cost to be presented separately on the condensed consolidated statements of operations. Refer to Note 2, "New Accounting Standards" and Note 8, "Pension and Other Post-Retirement Benefits" for additional details.
14. 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.

19


An operating segment’s performance is primarily evaluated based on Segment profit, which excludes Amortization of intangible assets, Restructuring and other charges, net, and certain corporate costs/credits not associated with the operations of the segment, including share-based compensation expense and a portion of depreciation expense associated with assets recorded in connection with acquisitions. In addition, an operating segment’s performance excludes results from discontinued operations, if any. Corporate and other costs excluded from an operating segment’s performance are separately stated below and also include costs that are related to functional areas, such as finance, information technology, legal, and human resources. We believe that Segment 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 reporting segments are materially consistent with those in the summary of significant accounting policies as described in Note 2, "Significant Accounting Policies," included in our Annual Report on Form 10-K for the year ended December 31, 2017.
The following table presents Net revenue and Segment profit for the reported segments and other operating results not allocated to the reported segments for the three and nine months ended September 30, 2018 and 2017:
 
For the three months ended
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net revenue:
 
 
 
 
 
 
 
Performance Sensing
$
649,611

 
$
603,932

 
$
1,988,657

 
$
1,825,904

Sensing Solutions
223,941

 
215,122

 
685,048

 
640,295

Total net revenue
$
873,552

 
$
819,054

 
$
2,673,705

 
$
2,466,199

Segment profit (as defined above):
 
 
 
 
 
 
 
Performance Sensing
$
178,391

 
$
162,655

 
$
535,166

 
$
483,491

Sensing Solutions
73,295

 
72,372

 
224,249

 
209,911

Total segment profit
251,686

 
235,027

 
759,415

 
693,402

Corporate and other
(48,154
)
 
(53,101
)
 
(156,472
)
 
(151,181
)
Amortization of intangible assets
(33,911
)
 
(40,317
)
 
(103,574
)
 
(121,578
)
Restructuring and other charges, net
52,698

 
(1,329
)
 
48,688

 
(18,768
)
Profit from operations
222,319

 
140,280

 
548,057

 
401,875

Interest expense, net
(38,058
)
 
(40,263
)
 
(114,808
)
 
(120,578
)
Other, net
(10,581
)
 
2,834

 
(26,267
)
 
5,690

Income before taxes
$
173,680

 
$
102,851

 
$
406,982

 
$
286,987

15. 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 three and nine months ended September 30, 2018 and 2017, the weighted-average ordinary shares outstanding for basic and diluted net income per share were as follows:
 
For the three months ended
 
For the nine months ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Basic weighted-average ordinary shares outstanding
167,290

 
171,269

 
170,045

 
171,116

Dilutive effect of stock options
886

 
618

 
898

 
567

Dilutive effect of unvested restricted securities
418

 
358

 
438

 
340

Diluted weighted-average ordinary shares outstanding
168,594

 
172,245

 
171,381

 
172,023

Net income and net income per share are presented in the condensed consolidated statements of operations.

20


Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti–dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. These potential ordinary shares are as follows:
 
For the three months ended
 
For the nine months ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Anti-dilutive shares excluded
983

 
1,584

 
894

 
1,635

Contingently issuable shares excluded
807

 
884

 
801

 
783

16. Revenue Recognition
As described in Note 2, "New Accounting Standards," we adopted FASB ASC Topic 606 on January 1, 2018, and we applied the pertinent transition provisions to contracts that were not completed as of January 1, 2018 using the modified retrospective method.
Because (1) the vast majority of our revenue is derived from the sale of tangible products for which we recognize revenue at a point in time and (2) the contracts that relate to these product shipments are purchase orders that have firm purchase commitments (generally over a short period of time), the adoption of FASB ASC Topic 606 did not have a material effect on our financial statements or results of operations, and no cumulative catch-up adjustment was required.
We are electing to apply certain practical expedients that allow for more limited disclosures than those that would otherwise be required by FASB ASC Topic 606, including (1) the disclosure of transaction price allocated to the remaining unsatisfied performance obligations at the end of the period and (2) an explanation of when we expect to recognize the related revenue.
The following tables present revenue by segment, further disaggregated by end market:
 
 
For the three months ended September 30, 2018
 
For the three months ended September 30, 2017
 
 
Performance Sensing
 
Sensing Solutions
 
Total
 
Performance Sensing
 
Sensing Solutions
 
Total
Automotive
 
$
507,961

 
$
11,544

 
$
519,505

 
$
485,277

 
$
11,809

 
$
497,086

HVOR
 
141,650

 

 
141,650

 
118,655

 

 
118,655

Appliance and HVAC
 

 
53,505

 
53,505

 

 
51,976

 
51,976

Industrial
 

 
84,057

 
84,057

 

 
78,424

 
78,424

Aerospace
 

 
41,062

 
41,062

 

 
38,249

 
38,249

Other
 

 
33,773

 
33,773

 

 
34,664

 
34,664

Total
 
$
649,611

 
$
223,941

 
$
873,552

 
$
603,932

 
$
215,122

 
$
819,054

 
 
For the nine months ended September 30, 2018
 
For the nine months ended September 30, 2017
 
 
Performance Sensing
 
Sensing Solutions
 
Total
 
Performance Sensing
 
Sensing Solutions
 
Total
Automotive
 
$
1,570,340

 
$
38,402

 
$
1,608,742

 
$
1,471,338

 
$
38,143

 
$
1,509,481

HVOR
 
418,317

 

 
418,317

 
354,566

 

 
354,566

Appliance and HVAC
 

 
164,432

 
164,432

 

 
161,129

 
161,129

Industrial
 

 
253,289

 
253,289

 

 
235,853

 
235,853

Aerospace
 

 
123,268

 
123,268

 

 
113,305

 
113,305

Other
 

 
105,657

 
105,657

 

 
91,865

 
91,865

Total
 
$
1,988,657

 
$
685,048

 
$
2,673,705

 
$
1,825,904

 
$
640,295

 
$
2,466,199

Performance Obligations
Our revenue and related cost of revenue are primarily the result of promises to transfer products to our customers. Revenue is recognized when control of the product is transferred to the customer, which is generally 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. Payment for products is generally due a short time (that is, less than a year) after shipment to the customer.

21


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. Product sales are recorded net of variable consideration, such as sales returns and trade discounts (including volume and early payment incentives), as well as 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.
Warranties
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.
Contract Assets and Liabilities
Our contract assets consist of accounts receivable. Contract liabilities, whereby we receive payment from customers related to our promise to satisfy performance obligations in the future, are not material.
17. Acquisitions and Divestitures
GIGAVAC acquisition
On September 24, 2018, we entered into an agreement and plan of merger with GIGAVAC, LLC (“GIGAVAC”). According to the agreement, in exchange for cash consideration of $233 million to be paid by Sensata, subject to working capital and other adjustments, GIGAVAC will merge with one of our wholly-owned subsidiaries thereby becoming a wholly-owned subsidiary of Sensata (the “GIGAVAC Merger”).
We expect the GIGAVAC Merger to close in the fourth quarter of 2018, and we intend to use cash on hand to finance the acquisition.
GIGAVAC is a leading provider of solutions that enable electrification in demanding environments within the automotive, battery storage, industrial, and HVOR markets.
Valves Business Divestiture
On August 31, 2018, we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the “Valves Business”) to Pacific Industrial Co. Ltd. (together with its affiliates, “Pacific”). Contemporaneous with the closing of the sale, Sensata and Pacific entered into a long-term supply agreement, which imposes an obligation on us to purchase minimum quantities of product from Pacific over a period of nearly five years.
In exchange for selling the Valves Business and entering into the long-term supply agreement, we received cash consideration from Pacific of approximately $165.5 million, net of $11.8 million of cash and cash equivalents sold. We recognized a (pre-tax) gain on sale of $63.7 million, which is presented in Restructuring and other charges, net. In addition, we recognized $5.9 million of costs to sell the Valves Business, which are also presented in Restructuring and other charges, net.
The terms of the long-term supply agreement, entered into concurrent with the sale of the Valves Business, we determined were not at market. Accordingly, we recognized a liability of $16.4 million, measured at fair value, which represented the fair value of the off-market component of the supply agreement.
The Valves Business, which we acquired in 2014 as part of our acquisition of Schrader, manufactures mechanical valves for pressure applications in tires and fluid controls and assembles tire hardware aftermarket products. The Valves Business has manufacturing locations in the United States and Europe.
The Valves Business was included in our Performance Sensing segment (and reporting unit). We allocated goodwill to the Valves Business based on its fair value relative to the fair value of the retained Performance Sensing reporting unit.


22


Cautionary Statements Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q, including any document 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 and 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, which are difficult to predict and, oftentimes, beyond our control, and 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 in our Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 1, 2018), 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, such as trade tariffs, by the U.S. government;
losses and costs as a result of intellectual property, product liability, warranty, and recall claims that may be brought against us;
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, dispositions, joint ventures, collaborative arrangements, or other investments that either require significant resources, result in significant unanticipated losses, costs, or liabilities, or a combination thereof;
market acceptance of new product introductions and product innovations;
changes to, or our inability to comply with, various regulations, including tax laws, import/export regulations, anti-bribery laws, environmental and safety laws, privacy laws, and other governmental regulations;
foreign currency risks, changes in socio-economic conditions, or changes to monetary and fiscal policies, including as a result of the impending exit of the U.K. from the European Union;
taxing authorities challenging our historical and future tax positions or our allocation of taxable income among our subsidiaries, and challenges to the sovereign taxation regimes of European Union member states by the European Commission;
our level of indebtedness, or our inability to meet debt service obligations or comply with the covenants contained in the credit agreement and indentures; and
security breaches, cyber theft of our intellectual property, and other disruptions to our information technology infrastructure.
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q. 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 our Annual Report on Form 10-K for the year ended December 31, 2017 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.

23


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission on February 1, 2018, and the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations
The tables below present our results of operations, in millions of dollars and as a percentage of net revenue, for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017. We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
For the three months ended
 
September 30, 2018
 
September 30, 2017
($ in millions)
Amount
 
Percent of Net
Revenue
 
Amount
 
Percent of Net
Revenue
Net revenue:
 
 
 
 
 
 
 
Performance Sensing
$
649.6

 
74.4
 %
 
$
603.9

 
73.7
 %
Sensing Solutions
223.9

 
25.6

 
215.1

 
26.3

Net revenue
873.6

 
100.0

 
819.1

 
100.0

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
558.3

 
63.9

 
527.2

 
64.4

Research and development
37.8

 
4.3

 
34.0

 
4.2

Selling, general and administrative
73.9

 
8.5

 
75.9

 
9.3

Amortization of intangible assets
33.9

 
3.9

 
40.3

 
4.9

Restructuring and other charges, net
(52.7
)
 
(6.0
)
 
1.3

 
0.2

Total operating costs and expenses
651.2

 
74.5

 
678.8

 
82.9

Profit from operations
222.3

 
25.5

 
140.3

 
17.1

Interest expense, net
(38.1
)
 
(4.4
)
 
(40.3
)
 
(4.9
)
Other, net
(10.6
)
 
(1.2
)
 
2.8

 
0.3

Income before taxes
173.7

 
19.9

 
102.9

 
12.6

Provision for income taxes
24.6

 
2.8

 
14.8

 
1.8

Net income
$
149.1

 
17.1
 %
 
$
88.0

 
10.7
 %
Net revenue
Net revenue for the three months ended September 30, 2018 increased $54.5 million, or 6.7%, to $873.6 million from $819.1 million for the three months ended September 30, 2017. This increase in net revenue was composed of a 7.6% increase in Performance Sensing and a 4.1% increase in Sensing Solutions. Excluding a 1.2% decrease in revenue due to the sale of the capital stock of Schrader-Bridgeport International, Inc. and August France Holding Company SAS (collectively, the “Valves Business”) as discussed in Note 17, “Acquisitions and Divestitures,” of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, organic revenue growth was 7.9% when compared to the three months ended September 30, 2017. 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 net revenue for the three months ended September 30, 2018 increased $45.7 million, or 7.6%, to $649.6 million from $603.9 million for the three months ended September 30, 2017. Excluding a 1.6% decrease due to the sale of the Valves Business and a 0.1% decrease due to changes in foreign currency exchange rates, organic revenue growth was 9.3% when compared to the three months ended September 30, 2017. Performance Sensing organic revenue growth was primarily attributable to content growth in our automotive business, particularly in North America and China, as well as a combination of market and content growth in our heavy vehicle off-road ("HVOR") business. Regarding our HVOR business, we benefited

24


from production growth in the construction, North American on-road truck, and agriculture markets, and we generated content growth primarily from sales to customers in the North American on-road truck, European on-road truck, and agriculture markets.
Sensing Solutions net revenue for the three months ended September 30, 2018 increased $8.8 million, or 4.1%, to $223.9 million from $215.1 million for the three months ended September 30, 2017. Excluding a 0.1% increase due to changes in foreign currency exchange rates, organic revenue growth was 4.0% when compared to the three months ended September 30, 2017. Sensing Solutions organic revenue growth was largely the result of content growth, derived mainly from our industrial sensing business, and production growth in the aerospace and industrial end markets.
Cost of revenue
Cost of revenue for the three months ended September 30, 2018 and 2017 was $558.3 million (63.9% of net revenue) and $527.2 million (64.4% of net revenue), respectively. Cost of revenue as a percentage of net revenue decreased primarily due to the favorable impact of foreign currency exchange rates, partially offset by higher trade tariffs.
Research and development expense
Research and development ("R&D") expense for the three months ended September 30, 2018 and 2017 was $37.8 million and $34.0 million, respectively. R&D expense was higher primarily due to increased design and development effort to support new design wins and fund development activities to intersect emerging "megatrends" that are shaping our markets. We invest in R&D to support new platform and technology developments, both in our recently acquired and existing businesses, in order to drive future revenue growth. The level of R&D expense is related to the number of products in development, the stage of such products in 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.
Selling, general and administrative expense
Selling, general and administrative ("SG&A") expense for the three months ended September 30, 2018 and 2017 was $73.9 million and $75.9 million, respectively. SG&A expense declined primarily due to the absence of Merger related costs incurred in the third quarter of 2018 and the effect of completing the sale of the Valves Business, partially offset by higher share-based compensation expense. Refer to Note 17, "Acquisitions and Divestitures," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion regarding the sale of the Valves Business. SG&A expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs. These costs are fixed or variable in nature, and we may at times experience increased or decreased variable costs for reasons other than increased or decreased net revenue. As a result, SG&A expense will not necessarily remain consistent as a percentage of revenue.
Amortization of intangible assets
Amortization expense associated with definite-lived intangible assets for the three months ended September 30, 2018 and 2017 was $33.9 million and $40.3 million, respectively. Definite-lived intangible assets are amortized on an economic benefit basis according to the useful lives of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined. In general, the economic benefit of an intangible asset is concentrated towards the beginning of that intangible asset's useful life. The decrease in amortization expense is primarily due to the effect of the economic benefit method.
Restructuring and other charges, net
Restructuring and other charges, net for the three months ended September 30, 2018 and 2017 were $(52.7) million and $1.3 million, respectively. During the three months ended September 30, 2018, we completed the sale of the Valves Business to Pacific Industrial Co., Ltd. (together with its affiliates, "Pacific"). We recognized a $63.7 million gain on the sale of the Valves Business, and we incurred $5.9 million of incremental direct costs to complete the sale. Both the gain on sale and the related selling costs are presented in Restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," of our condensed consolidated financial statements included elsewhere in the Quarterly Report on Form 10-Q for further information on the sale of the Valves Business.
Excluding amounts related to the sale of the Valves Business, Restructuring and other charges, net for the three months ended September 30, 2018 was largely composed of $4.9 million of severance costs, which were attributable both to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of certain positions in connection with site consolidations.

25


Restructuring and other charges, net for the three months ended September 30, 2017 consisted primarily of facility and other exit costs of $1.3 million related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST") and the transfer of equipment to alternate operating sites.
Interest expense, net
Interest expense, net for the three months ended September 30, 2018 and 2017 was $38.1 million and $40.3 million, respectively. The decrease in interest expense, net relates primarily to higher interest income due to increasing cash balances.
Other, net
Other, net for the three months ended September 30, 2018 and 2017 represented a net loss of $(10.6) million and a net gain of $2.8 million, respectively. The change in Other, net relates primarily to fluctuations in foreign currency exchange rates, primarily the Chinese Renminbi, net of any hedge gain or loss, and fluctuations in commodity prices relative to the strike prices on outstanding forward contracts. Refer to Note 13, "Other, Net," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a detail of the components of Other, net.
Provision for income taxes
Provision for income taxes for the three months ended September 30, 2018 and 2017 was $24.6 million and $14.8 million, respectively. The provision for income taxes consists of (i) 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 (ii) deferred tax expense, which represents adjustments in book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets, including goodwill, acquired in connection with business combination transactions, the utilization of net operating losses, and prospective changes in U.S. tax rates due to newly enacted legislation.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform" or "the Act") was signed into U.S. law. Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740, 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.
Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin 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. As of September 30, 2018, we have not recorded incremental accounting adjustments related to the Act. We continue to consider interpretations of its application and await final guidance on the application of specific elements of the Act, including its impact on the realizability of our U.S. deferred tax asset valuation allowance.

26


Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
($ in millions)
Amount
 
Percent of Net
Revenue
 
Amount
 
Percent of Net
Revenue
Net revenue:
 
 
 
 
 
 
 
Performance Sensing
$
1,988.7

 
74.4
 %
 
$
1,825.9

 
74.0
 %
Sensing Solutions
685.0

 
25.6

 
640.3

 
26.0

Net revenue
2,673.7

 
100.0

 
2,466.2

 
100.0

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
1,723.3

 
64.5

 
1,600.2

 
64.9

Research and development
111.8

 
4.2

 
97.0

 
3.9

Selling, general and administrative
235.7

 
8.8

 
226.8

 
9.2

Amortization of intangible assets
103.6

 
3.9

 
121.6

 
4.9

Restructuring and other charges, net
(48.7
)
 
(1.8
)
 
18.8

 
0.8

Total operating costs and expenses
2,125.6

 
79.5

 
2,064.3

 
83.7

Profit from operations
548.1

 
20.5

 
401.9

 
16.3

Interest expense, net
(114.8
)
 
(4.3
)
 
(120.6
)
 
(4.9
)
Other, net
(26.3
)
 
(1.0
)
 
5.7

 
0.2

Income before taxes
407.0

 
15.2

 
287.0

 
11.6

Provision for income taxes
62.1

 
2.3

 
47.8

 
1.9

Net income
$
344.9

 
12.9
 %
 
$
239.2

 
9.7
 %
Net revenue
Net revenue for the nine months ended September 30, 2018 increased $207.5 million, or 8.4%, to $2,673.7 million from $2,466.2 million for the nine months ended September 30, 2017. This increase in net revenue was composed of an 8.9% increase in Performance Sensing and a 7.0% increase in Sensing Solutions. Excluding a 0.4% decrease in revenue due to the sale of the Valves Business and a 1.9% increase due to changes in foreign currency exchange rates, primarily the Euro and Chinese Renminbi, organic revenue growth was 6.9% when compared to the nine months ended September 30, 2017. 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 net revenue for the nine months ended September 30, 2018 increased $162.8 million, or 8.9%, to $1,988.7 million from $1,825.9 million for the nine months ended September 30, 2017. Excluding a 0.5% decrease due to the sale of the Valves Business and a 2.2% increase due to changes in foreign currency exchange rates, primarily the Euro and Chinese Renminbi, organic revenue growth was 7.2% when compared to the nine months ended September 30, 2017. Performance Sensing organic revenue growth was primarily attributable to content growth in our automotive business, particularly in China and North America, as well as a combination of market and content growth in our HVOR business. Regarding our HVOR business, we benefited from production growth in the construction, North American on-road truck, and agriculture markets, and we generated content growth primarily from sales to customers in the European on-road truck, North American on-road truck, and agriculture markets.
Sensing Solutions net revenue for the nine months ended September 30, 2018 increased $44.8 million, or 7.0%, to $685.0 million from $640.3 million for the nine months ended September 30, 2017. Excluding a 1.0% increase due to changes in foreign currency exchange rates, largely related to the Chinese Renminbi and Euro, organic revenue growth was 6.0% when compared to the nine months ended September 30, 2017. Sensing Solutions organic revenue growth was largely the result of production growth in the industrial end market and content growth provided by our industrial sensing and aerospace businesses.
Cost of revenue
Cost of revenue for the nine months ended September 30, 2018 and 2017 was $1,723.3 million (64.5% of net revenue) and $1,600.2 million (64.9% of net revenue), respectively. Cost of revenue as a percentage of net revenue decreased primarily due to the favorable impact of foreign currency exchange rates, partially offset by higher trade tariffs.

27


Research and development expense
R&D expense for the nine months ended September 30, 2018 and 2017 was $111.8 million and $97.0 million, respectively. R&D expense was higher primarily due to increased design and development effort to support new design wins and fund development activities to intersect emerging "megatrends" that are shaping our markets as well as the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
SG&A expense for the nine months ended September 30, 2018 and 2017 was $235.7 million and $226.8 million, respectively. SG&A increased primarily due to the unfavorable impact of foreign currency exchange rates, higher selling costs, and higher share-based compensation expense, partially offset by lower integration costs, synergies from the integration of acquired businesses, and productivity improvements.
Amortization of intangible assets
Amortization expense associated with definite-lived intangible assets for the nine months ended September 30, 2018 and 2017 was $103.6 million and $121.6 million, respectively. The decrease in amortization expense is primarily due to the effect of the economic benefit method.
Restructuring and other charges, net
Restructuring and other charges, net for the nine months ended September 30, 2018 and 2017 were $(48.7) million and $18.8 million, respectively. During the nine months ended September 30, 2018, we completed the sale of the Valves Business to Pacific. We recognized a $63.7 million gain on the sale of the Valves Business, and we incurred $5.9 million of incremental direct costs to complete the sale. Both the gain on sale and the related selling costs are presented in Restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information on the sale of the Valves Business.
Excluding amounts related to the sale of the Valves Business, Restructuring and other charges, net for the nine months ended September 30, 2018 was largely composed of $8.2 million of severance costs, which were attributable both to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of certain positions in connection with site consolidations.
Restructuring and other charges, net for the nine months ended September 30, 2017 consisted primarily of severance charges of $8.4 million and facility and other exit costs of $2.4 million recorded in connection with the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites. Facility and other exit costs for the nine months ended September 30, 2017 also included $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe.
Interest expense, net
Interest expense, net for the nine months ended September 30, 2018 and 2017 was $114.8 million and $120.6 million, respectively. The reduction in interest expense, net relates primarily to higher interest income due to increasing cash balances.
Other, net
Other, net for the nine months ended September 30, 2018 and 2017 represented a net loss of $(26.3) million and a net gain of $5.7 million, respectively. The change in Other, net relates primarily to fluctuations in foreign currency exchange rates, primarily the Chinese Renminbi, net of any hedge gain or loss, fluctuations in commodity prices relative to the strike prices on outstanding forward contracts, and a $(2.4) million loss recognized in connection with obtaining creditor consents prior to completing the Merger. Refer to Note 13, "Other, Net," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a detail of the components of Other, net. Refer to Note 6, "Debt," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion of the loss recognized in connection with obtaining creditor consents.
Provision for income taxes
Provision for income taxes for the nine months ended September 30, 2018 and 2017 was $62.1 million and $47.8 million, respectively. The provision for income taxes consists of (i) 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 (ii) deferred tax expense, which represents adjustments in book-to-tax basis differences primarily related to the step-up in fair value of fixed and

28


intangible assets, including goodwill, acquired in connection with business combination transactions, and the utilization of net operating losses, and prospective changes in U.S. tax rates due to newly enacted legislation.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes references to organic revenue growth, which is a non-GAAP financial measure. Organic revenue growth is defined as the reported percentage change in net revenue calculated in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), excluding the impact of acquisitions, net of exited businesses that occurred within the previous 12 months and the effect of differences in foreign currency exchange rates, net of related hedges, between the current 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 as well as for internal planning and forecasting purposes. We believe 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.
However, organic revenue growth should be considered as supplemental in nature and is not intended to be considered in isolation or as a substitute for the reported percentage change in net revenue calculated in accordance with U.S. GAAP. In addition, our measure of organic revenue growth may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Liquidity and Capital Resources
As of September 30, 2018 and December 31, 2017, we held cash and cash equivalents in the following regions:
(in millions)
September 30, 2018
 
December 31, 2017
United Kingdom
$
14.8

 
$
13.7

United States
7.8

 
9.0

The Netherlands
437.4

 
260.9

China
246.2

 
383.0

Other
105.2

 
86.5

Total
$
811.4

 
$
753.1

The amount of cash and cash equivalents held in these geographic regions fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We record a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax free manner.

29


Cash Flows:
The table below summarizes our primary sources and uses of cash for the nine months ended September 30, 2018 and 2017. We have derived the summarized statements of cash flows from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
 
For the nine months ended
(in millions)
September 30, 2018
 
September 30, 2017
Net cash provided by/(used in):
 
 
 
Operating activities:
 
 
 
Net income adjusted for non-cash items
$
508.5

 
$
480.0

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures
(88.4
)
 
(107.7
)
Operating activities
420.1

 
372.3

Investing activities
42.9

 
(97.7
)
Financing activities
(404.7
)
 
(13.1
)
Net change
$
58.3

 
$
261.5

Operating activities. Net cash provided by operating activities for the nine months ended September 30, 2018 and 2017 was $420.1 million and $372.3 million, respectively. The increase in cash provided by operating activities relates primarily to improved operating profitability and timing of supplier payments and customer receipts.
Investing activities. Net cash provided by/(used in) investing activities for the nine months ended September 30, 2018 and 2017 was $42.9 million and $(97.7) million, respectively, which included $111.3 million and $103.5 million, respectively, in capital expenditures. The nine months ended September 30, 2018 also included $149.1 million of net proceeds from the sale of the Valves Business. In 2018, we anticipate capital expenditures of approximately $155 million to $160 million, which we expect to be funded from net cash provided by operating activities.
Financing activities. Net cash used in financing activities for the nine months ended September 30, 2018 and 2017 was $404.7 million and $13.1 million, respectively, which included $14.1 million and $14.5 million, respectively, in payments on debt. The nine months ended September 30, 2018 also included $399.4 million in payments to repurchase our ordinary shares related to our $400.0 million share repurchase program.
Indebtedness and Liquidity:
As of September 30, 2018, we had $3,298.5 million in gross indebtedness, which includes capital lease and other financing obligations and excludes debt discounts and deferred financing costs.
A summary of our indebtedness as of September 30, 2018 is as follows:
($ in thousands)
Maturity Date
 
September 30, 2018
Term Loan
October 14, 2021
 
$
917,794

4.875% Senior Notes
October 15, 2023
 
500,000

5.625% Senior Notes
November 1, 2024
 
400,000

5.0% Senior Notes
October 1, 2025
 
700,000

6.25% Senior Notes
February 15, 2026
 
750,000

Less: discount
 
 
(15,857
)
Less: deferred financing costs
 
 
(24,308
)
Less: current portion
 
 
(7,228
)
Long-term debt, net
 
 
$
3,220,401

 
 
 
 
Capital lease and other financing obligations
 
 
$
30,698

Less: current portion
 
 
(6,150
)
Capital lease and other financing obligations, less current portion
 
 
$
24,548


30


As of September 30, 2018, we had $416.0 million available under our $420.0 million revolving credit facility (the "Revolving Credit Facility"), net of $4.0 million in letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of September 30, 2018, 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, our senior secured credit facilities provide for incremental facilities (the "Accordion"), under which additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased. Pursuant to the eighth amendment of the credit agreement under which the senior secured credit facilities were issued (as amended, the "Credit Agreement"), in November 2017, the Accordion was increased from $230.0 million to $1,000.0 million, subject to certain limitations as defined in the indentures under which our senior notes were issued.
We believe, based on our current level of operations as reflected in our results of operations for the three and nine months ended September 30, 2018, 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.
Upon completion of the Merger, the $250.0 million share repurchase program previously authorized by the Board of Directors of Sensata Technologies Holding N.V. lapsed, and our ability to repurchase shares as a company incorporated in England and Wales became contingent upon the completion of certain court proceedings in the U.K. (which were completed in the second quarter of 2018), approval of our shareholders (which occurred at our May 31, 2018 annual general meeting of shareholders), and authorization by our Board of Directors.
On May 31, 2018, we announced that our Board of Directors had authorized a $400.0 million share repurchase program. Under this program, we may repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions are completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our share repurchase program may be modified or terminated by our Board of Directors at any time. We repurchased 7,571 ordinary shares under this program during the nine months ended September 30, 2018, at a weighted-average price of $52.75 per share, which are now held as treasury shares.
In October 2018, our Board of Directors authorized a new $250.0 million share repurchase program, subject to the same conditions that applied to the previously authorized $400.0 million share repurchase program.
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 nine months ended September 30, 2018.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of October 26, 2018, Moody’s Investors Service’s corporate credit rating for Sensata Technologies B.V. ("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.
The Credit Agreement and the indentures under which our senior notes were issued contain restrictions and covenants that limit the ability of STBV and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, make capital expenditures, pay dividends, and make other restricted payments. For a full discussion of these restrictions and covenants, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources," included in our Annual Report on Form 10-K for the year ended December 31, 2017.
As of September 30, 2018, we believe we were in compliance with all covenants and default provisions under our credit arrangements.

31


Recently Issued Accounting Pronouncements
Adopted in the current period
In May 2014, the 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 (that is, FASB ASC Topic 606, Revenue from Contracts with Customers) the guidance found in FASB ASC Topic 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. FASB ASC Topic 606 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 at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted FASB ASC Topic 606 on January 1, 2018 using the modified retrospective transition method. Refer to Note 16, "Revenue Recognition," for additional details on this implementation and the required disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new recognition and measurement guidance requires entities to measure equity investments (other than those accounted for under the equity method, those that result in consolidation of the investee, and certain other investments) either at fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative. Under the measurement alternative, such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. We adopted this guidance on January 1, 2018, which resulted in no impact on our consolidated financial position or results of operations. Refer to Note 11, "Fair Value Measures," for further detail regarding the application of the measurement alternative to our $50.0 million equity investment in Series B Preferred Stock of Quanergy, Inc ("Quanergy").
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires a change in the presentation of net periodic benefit cost on the consolidated statements of operations. Specifically, entities must present the service cost component of net periodic benefit cost in the same financial statement line item(s) as other compensation costs arising from services rendered by the related employees during the period, whereas the non-service components of net periodic benefit cost must be presented separately from the financial statement line item(s) that include service cost and outside of operating income. We adopted this guidance on January 1, 2018 and, as a result, we present the service cost component of net periodic benefit cost in the Cost of revenue, R&D, and SG&A expense line items, and we present the non-service components of net periodic benefit cost in Other, net. Refer to Note 13, "Other, Net," for the total other components of net periodic benefit cost. All prior period amounts have been recast to reflect the revised presentation, and the adjustments made to revise the presentation of our prior year condensed consolidated statement of operations are presented in Note 8, "Pension and Other Post–Retirement Benefits."
To be adopted in a future period
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 one year or less) using a method similar to the current operating lease model. The statement 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. FASB ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods therein, with early adoption permitted.
We are in the process of implementing a plan for the adoption of FASB ASU No. 2016-02. Through our implementation efforts, we have decided that we will elect to apply the package of practical expedients, and we will not elect to apply the hindsight practical expedient. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which creates an optional transition expedient that allows an entity to apply the transition provisions of the new standard, including its disclosure requirements, at its adoption date instead of at the beginning of the earliest comparative period presented as originally required by FASB ASU No. 2016-02. We will adopt FASB ASU No. 2016-02 on January 1, 2019 using this transition expedient.
We expect that adoption of this standard will result in the recognition of a lease liability and right-of-use asset for certain operating leases that are currently not recognized on our condensed consolidated balance sheets. At December 31, 2017, we

32


were 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 facility leases.
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. The adoption of FASB ASU No. 2017-12 will not have a material impact on our consolidated financial position or results of operations.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates," included in our Annual Report on Form 10-K for the year ended December 31, 2017.

33


Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
No significant changes to our market risk have occurred since December 31, 2017. For a discussion of market risk affecting us, refer to Part II, Item 7A—"Quantitative and Qualitative Disclosures About Market Risk," included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 4.
Controls and Procedures.
The required certifications of our Chief Executive Officer and Chief Financial Officer are included as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures and changes in internal control over financial reporting referred to in these certifications. These certifications should be read in conjunction with this Item 4 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 September 30, 2018. 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 U.S. Securities and Exchange Commission’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 September 30, 2018, 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 three months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
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 U.S. generally accepted accounting principles. 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.

34


PART II—OTHER INFORMATION
Item 1.
Legal Proceedings.
As discussed in Part I, Item 3—"Legal Proceedings," in our Annual Report on Form 10-K for the year ended December 31, 2017, 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. Information on certain legal proceedings in which we are involved is included in Note 10, "Commitments and Contingencies," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, or cash flows.
Item 1A.
Risk Factors.
Information regarding risk factors appears in Part I, Item 1A—"Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no changes to the risk factors disclosed therein.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Period
 
Total 
Number
of Shares
Purchased (in shares)
 
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)
July 1 through July 31, 2018
 
2,114,209

 
$
50.92

 
2,114,209

 
$
232.2

August 1 through August 31, 2018
 
2,431,828

 
$
54.95

 
2,431,828

 
$
98.6

September 1 through September 30, 2018
 
1,889,038

(1) 
$
51.88

 
1,888,401

 
$
0.6

Total
 
6,435,075

 
$
52.72

 
6,434,438

 
$
0.6

__________________
(1)
Upon the vesting of restricted securities, we collect and pay withholding tax for employees by withholding shares to cover such tax. The number of shares presented includes 637 shares withheld in this manner. These withholdings took place outside of a publicly announced repurchase plan.
Item 3.
Defaults Upon Senior Securities.
None.

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Item 6.
Exhibits.
 
Exhibit No.
 
Description
 
 
 
10.1
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
101
 
The following materials from the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.
 
 
 
___________________________
*    Filed herewith
†    Indicates management contract or compensatory plan, contract, or arrangement



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SIGNATURES
Pursuant to the requirements 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.
Date: October 30, 2018
SENSATA TECHNOLOGIES HOLDING PLC
 
/s/ Martha Sullivan
(Martha Sullivan)
President and Chief Executive Officer
(Principal Executive Officer)
 
/s/ Paul Vasington
(Paul Vasington)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)


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