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EX-5.1 - OPINION OF LOYENS & LOEFF N.V. - Sensata Technologies Holding N.V.dex51.htm
EX-23.2 - CONSENT OF ERNST & YOUNG LLP - Sensata Technologies Holding N.V.dex232.htm
EX-99.1 - CONSENTS OF DIRECTOR NOMINEES - Sensata Technologies Holding N.V.dex991.htm
Table of Contents

As filed with the Securities and Exchange Commission on February 2, 2011

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

SENSATA TECHNOLOGIES HOLDING N.V.

(Exact name of registrant as specified in its charter)

 

 

 

The Netherlands   3823   98-0641254

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Number)

 

(I.R.S. Employer

Identification Number)

 

 

 

Kolthofsingel 8, 7602 EM Almelo

The Netherlands

Telephone: 31-546-879-555

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Corporate Service Company

2711 Centerville Road

Wilmington, DE 19808

Telephone: (866) 403-5272

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Dennis M. Myers, P.C.   Steven P. Reynolds   Mark G. Borden
Jeffrey W. Richards, P.C.   General Counsel   Peter N. Handrinos
Kirkland & Ellis LLP   Sensata Technologies, Inc.   Wilmer Cutler Pickering Hale and Dorr LLP
300 North LaSalle   529 Pleasant Street   60 State Street
Chicago, Illinois 60654   Attleboro, Massachusetts 02703   Boston, Massachusetts 02109
Telephone: (312) 862-2000   Telephone: (508) 236-3800   Telephone: (617) 526-6000

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed to register additional securities for an offering pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

 

Large accelerated filer  ¨

   Accelerated filer  ¨

Non-accelerated filer  x

   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

  

 

 

 

CALCULATION OF REGISTRATION FEE

 

                                     
Title of Each Class of Securities to Be Registered    Amount
to be
Registered(1)
     Proposed
Maximum
Offering Price
per Share(2)
     Proposed
Maximum
Aggregate
Offering Price(2)
    

Amount of

Registration Fee

 

Ordinary Shares, €0.01 per share

     23,000,000       $ 31.56       $ 725,765,000       $ 84,261   

 

 

(1)   Includes 3,000,000 ordinary shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the “Securities Act”), based on the average of high and low prices of ordinary shares on January 31, 2011, as reported on the New York Stock Exchange.

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information contained in this prospectus is not complete and may be changed. The selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling shareholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued February 2, 2011

 

20,000,000 Ordinary Shares

 

LOGO

 

All of the ordinary shares in this offering are being sold by the selling shareholders identified in this prospectus. Sensata Technologies Holding N.V. will not receive any proceeds from the ordinary shares sold by the selling shareholders in this offering.

 

 

 

Our ordinary shares are listed on the New York Stock Exchange under the symbol “ST.” The last reported sale price of our ordinary shares on the New York Stock Exchange on January 31, 2011 was $31.51 per share.

 

 

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 11 of this prospectus.

 

 

 

Price $            Per Share

 

 

 

     Price to Public      Underwriting
Discounts and
Commissions
     Proceeds to
Selling
Shareholders
 

Per Share

     $                 $                 $           

Total

     $                     $                     $               

 

To the extent that the underwriters sell more than 20,000,000 ordinary shares, the underwriters have a 30-day option to purchase up to an additional 3,000,000 ordinary shares from the selling shareholders identified in this prospectus on the same terms set forth above. See the section of this prospectus entitled “Underwriting.”

 

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities nor passed upon the accuracy or adequacy of the disclosures in the prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the ordinary shares against payment on or about                    , 2011.

 

 

 

Morgan Stanley    Barclays Capital    Goldman, Sachs & Co.
  BofA Merrill Lynch    J.P. Morgan   
Citi  

BMO Capital Markets

 

Oppenheimer & Co.

  RBC Capital Markets

 

                    , 2011


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Executive Compensation

     103   

Certain Relationships and Related Party Transactions

     130   

Principal and Selling Shareholders

     139   

Description of Ordinary Shares

     143   

Enforcement of Civil Liabilities

     152   

Ordinary Shares Eligible for Future Sale

     153   

Description of Certain Outstanding Indebtedness

     156   

Tax Considerations

     166   

Underwriting

     175   

Legal Matters

     182   

Experts

     182   

Where You Can Find More Information

     182   

Index to Financial Statements

     F-1   

 

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by or on behalf of us or any information to which we have referred you. Neither we, the selling shareholders nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. The selling shareholders are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or any other date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares.

 

Sensata®, Klixon®, Airpax®, and Dimensions™ and other trademarks or service marks of Sensata appearing in this prospectus are the property of Sensata Technologies Holding N.V. and/or its affiliates. This prospectus also contains additional trade names, trademarks and service marks belonging to us and to other companies. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.


Table of Contents

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by the more detailed information, including the section entitled “Risk Factors” and the consolidated financial statements and related notes, included elsewhere in this prospectus. Because this is a summary, it may not contain all of the information that may be important to you. You should read the entire prospectus and the other documents to which we have referred you before deciding whether to invest in this offering. You should carefully consider, among other things, the matters discussed in “Risk Factors.”

 

Unless the context specifically indicates otherwise, references in this prospectus to: (i) “we,” “us,” “our,” the “Company” and “Sensata” refer collectively to Sensata Technologies Holding N.V. and its consolidated subsidiaries and their respective predecessors; (ii) the “2006 Acquisition” refers to the acquisition of the sensors and controls business, or “S&C business,” of Texas Instruments Incorporated, or “Texas Instruments,” on April 27, 2006 by an investor group led by investment funds advised or managed by the principals of Bain Capital Partners, LLC, or “Bain Capital;” (iii) “Sponsors” refers collectively to Bain Capital and its co-investors; and (iv) “Predecessor” for accounting purposes refers to the S&C business with respect to its results of operations for periods prior to the 2006 Acquisition.

 

SENSATA TECHNOLOGIES HOLDING N.V.

 

Our Company

 

Sensata, a global industrial technology company, is a leader in the development, manufacture and sale of sensors and controls. We produce a wide range of customized, innovative sensors and controls for mission-critical applications such as thermal circuit breakers in aircraft, pressure sensors in automotive systems, and bimetal current and temperature control devices in electric motors. We believe that we are one of the largest suppliers of sensors and controls in the majority of the key applications in which we compete and that we have developed our strong market position due to our long-standing customer relationships, technical expertise, product performance and quality and competitive cost structure. We compete in growing global market segments driven by demand for products that are safe, energy-efficient and environmentally friendly. In addition, our long-standing position in emerging markets, including our 15-year presence in China, further enhances our growth prospects. We deliver a strong value proposition to our customers by leveraging an innovative portfolio of core technologies and manufacturing at high volumes in low-cost locations such as China, Mexico, Malaysia and the Dominican Republic.

 

Our sensors are customized devices that translate a physical phenomenon such as force or position into electronic signals that microprocessors or computer-based control systems can act upon. Our controls are customized devices embedded within systems to protect them from excessive heat or current. Underlying these sensors and controls are core technology platforms—thermal and magnetic-hydraulic circuit protection, micro electromechanical systems, ceramic capacitance or capacitive, and monosilicon strain gage—that we leverage across multiple products and applications, enabling us to optimize our research, development, and engineering investments and achieve economies of scale.

 

Our primary products include pressure sensors, force sensors, position sensors, motor protectors, and thermal and magnetic-hydraulic circuit breakers and switches. We develop customized and innovative solutions for specific customer requirements, or applications, across the appliance, automotive, heating, ventilation and air-conditioning, or “HVAC,” industrial, aerospace, defense, data / telecom, and other end-markets. We have long-standing relationships with a geographically diverse base of leading global original equipment manufacturers, or “OEMs,” and other multi-national companies. Our largest end-customers for each of our segments within each of our principal operating regions of the Americas, Asia Pacific and Europe include, in

 

 

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alphabetical order: A.O. Smith, Askol, BMW, Bosch, Continental, Danfoss, Emerson, Ford, Giatek, GM, Honda, Hyundai-Kia, LG Group, Peugeot, Renault-Nissan, Samsung Electronics, Volkswagen and Whirlpool.

 

The increasing use of sensors in our targeted applications has enabled us to achieve growth rates for our sensors business in excess of underlying end-market demand for many of those applications. For example, according to IHS Automotive, global automotive production increased 27% from 2009 to 2010, while over the same period, our sensors product sales increased by 42%.

 

We develop products that address increasingly complex engineering requirements by investing substantially in research, development and application engineering. By locating our global engineering team in close proximity to key customers in regional business centers, we are exposed to many development opportunities at an early stage and work closely with our customers to deliver the required solutions. Systems development by our customers typically requires significant multi-year investment for certification and qualification, which are often government or customer mandated. We believe the capital commitment and time required for this process significantly increases the switching costs once a customer has designed and installed a particular sensor or control into a system.

 

We are a global business with a diverse revenue mix by geography, customer and end-market and we have significant operations around the world. Our subsidiaries located in the Americas, the Asia Pacific region, and Europe generated 42%, 33% and 25%, respectively, of our net revenue for the year ended December 31, 2010. Our largest customer accounted for 8% of our net revenue for the year ended December 31, 2010. Our net revenue for the year ended December 31, 2010 was derived from the following end-markets: 21% from European automotive, 17% from Asia and rest of world automotive, 16% from North American automotive, 14% from appliances and HVAC, 13% from industrial, 7% from heavy vehicle off-road and 12% from all other end-markets. Within many of our end-markets, we are a significant supplier to multiple OEMs, reducing our exposure to fluctuations in market share within individual end-markets.

 

We have a history of innovation dating back to our origins. We operated as a part of Texas Instruments from 1959 until we were acquired as a result of the 2006 Acquisition. We then expanded our operations in part through the acquisition of Airpax Holdings, Inc., or “Airpax,” in July 2007 and First Technology Automotive and Special Products, or “First Technology Automotive,” in December 2006.

 

Our Competitive Strengths

 

We believe we have a number of competitive strengths that differentiate us from our competitors. These include:

 

Leading positions in high-growth segments. We believe that we are one of the largest suppliers of sensors and controls in the majority of the key applications in which we compete. We attribute our strong market positions to our long-standing customer relationships, technical expertise, breadth of product portfolio, product performance and quality, and competitive cost structure.

 

Innovative, highly engineered products for mission-critical applications. Most of our products are highly engineered, critical components in complex systems that are essential to the proper functioning of the product in which they are integrated. Our products are differentiated by their performance, reliability and level of customization, which are critical factors in customer selection.

 

Long-standing local presence in key emerging markets. We believe that our long-standing local presence in key emerging markets such as China, India and Brazil provides us with significant growth opportunities. Our sales into these markets represented 19% of our net revenue for the fiscal year 2010.

 

 

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Collaborative, long-term relationships with diversified customer base. We have worked with our top 25 customers for an average of 22 years. As a result of the long development lead times and embedded nature of our products, we collaborate closely with our customers throughout the design and development phase of their products.

 

High switching costs. The technology-driven, highly customized and integrated nature of our products requires customers to invest heavily in certification and qualification over a one- to three-year period to ensure proper functioning of the system in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for customers once a particular sensor or control has been designed and installed in a system. In addition, our products are often relatively low-cost components integrated into mission-critical applications for high-value systems.

 

Attractive cost structure with scale advantage and low-cost footprint. We believe that our global scale and cost-focused approach have provided us with an attractive cost position within our industry. We currently manufacture approximately 1.1 billion devices per year, with approximately 90% of our production in low-cost countries including China, Mexico, Malaysia and the Dominican Republic.

 

Operating model with high cash generation and significant revenue visibility. We believe our strong customer value proposition and cost structure enable us to generate attractive operating margins and return on capital. We believe that our current manufacturing base offers significant capacity to support higher revenue levels. In addition, we believe that our business provides us with significant visibility into new business opportunities based on product development cycles that are typically more than one year, our ability to win design awards in advance of OEM system roll-outs and commercialization and our lengthy product life cycles. Additionally, customer order cycles typically provide us with visibility into more than a majority of our expected quarterly revenues at the start of each quarter.

 

Experienced management team. Our senior management team has significant collective experience both within our business and in working together managing our business. Our CEO, President and COO and other members of our senior management team have been employed by our company and its predecessor, the S&C business of Texas Instruments, for the majority of their careers.

 

Our Growth Strategy

 

We intend to enhance our position as a leading provider of customized, innovative sensors and controls on a global basis. The key elements of our growth strategy include:

 

Continue product innovation and expansion. We believe our solutions help satisfy the world’s need for safety, energy efficiency and a clean environment, as well as address the demand associated with the proliferation of electronic applications in everyday life. We expect to continue to address our customers’ increased demand for sensor and control solutions with our technology and engineering expertise. We leverage our various core technology platforms across many different products and applications to maximize the impact of our research, development and engineering investments and increase economies of scale.

 

Expand our presence in significant emerging markets. We believe emerging markets such as China, India, and Brazil represent substantial, rapidly growing opportunities. A growing middle class and rapid industrialization are creating significant demand for electric motors, consumer conveniences (such as appliances), automobiles and communication infrastructure.

 

Broaden customer relationships. We believe our global presence and investments in application engineering and support will continue to create competitive advantages in serving multinational and local companies.

 

 

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Extend low-cost advantage. By focusing on our design-driven cost initiatives and realizing economies of scale in materials and manufacturing, we will continue to strive to significantly reduce costs for our key products. We will also continue to locate our people and processes in the most strategic, cost-effective regions.

 

Recruit, retain, and develop talent globally. We intend to continue to recruit, develop and retain a highly educated, technically sophisticated and globally dispersed workforce.

 

Pursue strategic acquisitions to extend leadership and leverage global platform. We intend to continue to opportunistically pursue selective acquisitions and joint ventures to extend our leadership across global end- markets and applications, realize operational value from our global low-cost footprint, and deliver the right technology solutions for emerging markets. We intend to continue to seek acquisitions that will present attractive risk-adjusted returns and significant value-creation opportunities.

 

Recent Developments

 

On January 28, 2011, we used cash on hand to complete the acquisition of the Automotive on Board sensors business of Honeywell International Inc. for approximately $140 million, subject to a working capital adjustment and certain transfer taxes. We will refer to this business as “Magnetic Speed and Position,” which will be integrated into our sensors segment. We acquired this business in order to complement the existing operations of our sensors segment, provide new capabilities in light vehicle speed and position sensing, and expand our presence in emerging markets, particularly in China.

 

Risks Associated with Our Company

 

Investing in our company entails a high degree of risk, as more fully described in the “Risk Factors” section of this prospectus. You should consider carefully such risks before deciding to invest in our ordinary shares. These risks include, among others:

 

Continued fundamental changes in the industries in which we operate have had and could continue to have adverse effects on our businesses.

 

Our products are sold to automobile manufacturers and manufacturers of commercial and residential HVAC systems, as well as to manufacturers in the refrigeration, lighting, aerospace, telecommunications, power supply and generation and industrial markets, among others. These are global industries, and they are experiencing various degrees of growth and consolidation. This, in turn, affects overall demand and prices for our products sold to these industries.

 

We may incur material losses and costs as a result of product liability, warranty and recall claims that may be brought against us.

 

We have been and may continue to be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results in, or is alleged to result in, bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims.

 

Our substantial indebtedness could adversely affect our financial condition and our ability to operate our business, and we may not be able to generate sufficient cash flows to meet our debt service obligations.

 

Our substantial indebtedness could have important consequences to you. For example, it could make it more difficult for us to satisfy our debt obligations; limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, thereby placing us at a competitive disadvantage if our competitors are not as highly leveraged; or increase our vulnerability to general adverse economic and industry conditions.

 

 

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We reported significant net losses for fiscal years 2007, 2008 and 2009 and may not sustain recently achieved profitability in the foreseeable future.

 

We incurred a significant amount of indebtedness in connection with the 2006 Acquisition and the subsequent acquisitions of First Technology Automotive and Airpax and, as a result, our interest expense has been substantial for periods following the 2006 Acquisition. Due, in part, to this significant interest expense and the amortization of intangible assets also related to these acquisitions, we reported significant net losses for fiscal years 2007, 2008 and 2009. For fiscal year 2010, we reported net income. We repaid a portion of our indebtedness in March and April 2010 with proceeds from our initial public offering; however, we continue to have a significant amount of indebtedness. Due to the significant interest expense associated with the remaining indebtedness and the continued amortization of intangible assets, we cannot assure you that we will sustain recently achieved profitability in the foreseeable future.

 

ADDITIONAL INFORMATION

 

The address of our registered office and principal executive office is Kolthofsingel 8, 7602 EM Almelo, the Netherlands, and its telephone number is 31-546-879-555. Our principal U.S. operating subsidiary is Sensata Technologies, Inc., a Delaware corporation, or “STI.” The address for STI is 529 Pleasant Street, Attleboro, Massachusetts 02703, and its telephone number is (508) 236-3800. Our website address is www.sensata.com. The information on, or accessible through, our website is not part of this prospectus.

 

 

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THE OFFERING

 

Ordinary shares offered by the selling shareholders

20,000,000 shares.

 

Ordinary shares to be outstanding immediately after this offering

174,206,601 shares.

 

Option to purchase additional ordinary shares

The underwriters have an option to purchase a maximum of 3,000,000 additional ordinary shares from the selling shareholders identified in this prospectus. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

The selling shareholders will receive all of the net proceeds from the sale of the ordinary shares in this offering. We will not receive any of the proceeds from the ordinary shares sold by the selling shareholders.

 

Risk factors

Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 11 of this prospectus for a discussion of factors you should carefully consider before investing in our ordinary shares.

 

New York Stock Exchange symbol

“ST”

 

The number of ordinary shares that will be outstanding immediately after this offering is based on:

 

   

173,903,494 ordinary shares outstanding as of January 31, 2011, which includes 367,298 legally issued ordinary shares that are subject to forfeiture until such shares have vested and are not considered outstanding for accounting purposes; and

 

   

303,107 ordinary shares to be issued upon the exercise of outstanding stock options by the selling shareholders in connection with this offering at a weighted-average exercise price of $7.05 per share;

 

and excludes:

 

   

awards to employees for up to 48,600 ordinary shares that are subject to vesting based on achievement of specified performance and service conditions;

 

   

9,759,765 ordinary shares issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $8.87 per share (including 5,944,272 vested and exercisable options at January 31, 2011); and

 

   

5,388,845 ordinary shares reserved for future issuance under our equity incentive plans and employee stock purchase plan.

 

Except as otherwise indicated herein, all information in this prospectus, including the number of ordinary shares that will be outstanding after this offering, assumes no exercise of the underwriters’ option.

 

 

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SUMMARY HISTORICAL FINANCIAL DATA

 

Set forth below is summary historical consolidated financial data of Sensata for the years ended December 31, 2008, 2009 and 2010, which has been derived from our audited consolidated historical financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. This information is only a summary and should be read in conjunction with our historical financial statements and the related notes thereto and other financial information appearing elsewhere in this prospectus, including “Use of Proceeds,” “Capitalization,” “Selected Consolidated and Combined Historical Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    For the year ended December 31,  
(Amounts in thousands, except per share amounts)   2008     2009     2010  

Statement of Operations Data:

     

Net revenue

  $ 1,422,655      $ 1,134,944      $ 1,540,079   

Operating costs and expenses:

     

Cost of revenue

    951,763        742,080        948,070   

Research and development

    38,256        16,796        24,664   

Selling, general and administrative(1)

    166,625        126,952        194,623   

Amortization of intangible assets and capitalized software

    148,762        153,081        144,514   

Impairment of goodwill and intangible assets

    13,173        19,867          

Restructuring

    24,124        18,086        (138
                       

Total operating costs and expenses

    1,342,703        1,076,862        1,311,733   
                       

Profit from operations

    79,952        58,082        228,346   

Interest expense

    (197,840     (150,589     (106,400

Interest income

    1,503        573        1,020   

Currency translation gain and other, net(2)

    55,467        107,695        45,388   
                       

(Loss)/income from continuing operations before taxes

    (60,918     15,761        168,354   

Provision for income taxes

    53,531        43,047        38,304   
                       

(Loss)/income from continuing operations

    (114,449     (27,286     130,050   

Loss from discontinued operations

    (20,082     (395       
                       

Net (loss)/income

  $ (134,531   $ (27,681   $ 130,050   
                       

Net (loss)/income per share—basic:

     

Continuing operations

  $ (0.79   $ (0.19   $ 0.78   

Discontinued operations

    (0.14     (0.00       
                       

Net (loss)/income per share—basic

  $ (0.93   $ (0.19   $ 0.78   
                       

Net (loss)/income per share—diluted:

     

Continuing operations

  $ (0.79   $ (0.19   $ 0.75   

Discontinued operations

    (0.14     (0.00       
                       

Net (loss)/income per share—diluted

  $ (0.93   $ (0.19   $ 0.75   
                       

Weighted-average ordinary shares outstanding—basic

    144,066        144,057        166,278   

Weighted-average ordinary shares outstanding—diluted

    144,066        144,057        172,946   

Other Financial Data:

     

Net cash provided by/(used in):

     

Operating activities

  $ 47,481      $ 187,577      $ 300,046   

Investing activities

    (38,713     (15,077     (52,548

Financing activities

    8,891        (101,748     97,696   

Capital expenditures

    40,963        14,959        52,912   

Adjusted Net Income(3) (unaudited)

    99,645        124,098        306,407   

 

 

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(Amounts in thousands)    As of
December 31,
2010
 

Balance Sheet Data:

  

Cash and cash equivalents

   $ 493,662   

Working capital(4)

     609,887   

Total assets

     3,387,997   

Total debt, including capital lease and other financing obligations

     1,889,693   

Total shareholders’ equity

     1,007,781   

 

(1)   For the year ended December 31, 2010, selling, general and administrative expense includes $18.9 million recorded as a cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards under the First Amended and Restated Sensata Technologies Holding B.V. 2006 Management Option Plan and the related modification, and $22.4 million in fees related to the termination of the advisory agreement with the Sponsors at their option. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”
(2)   Currency translation gain and other, net for the years ended December 31, 2008, 2009 and 2010 includes gains/(losses) of $15.0 million, $120.1 million, and $(23.5) million, respectively, recognized on repurchases of 8% Senior Notes due 2014, or “Senior Notes,” and 9% Senior Subordinated Notes and 11.25% Senior Subordinated Notes, together the “Senior Subordinated Notes,” as well as currency translation gain/(loss) associated with the Euro-denominated debt of $53.2 million, $(13.6) million, and $72.8 million, respectively.
(3)   We present Adjusted Net Income in this prospectus to provide investors with a supplemental measure of our operating performance. We believe that Adjusted Net Income is a useful performance measure and is used by our management, board of directors and investors. Management uses Adjusted Net Income as a measure of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, and in communications with our board of directors and investors concerning our financial performance. We believe investors and securities analysts also use Adjusted Net Income in their evaluation of our performance and the performance of companies similar to us. Adjusted Net Income is a non-GAAP financial measure.

 

       We define Adjusted Net Income as net income/(loss) excluding acquisition, integration and financing costs and other significant costs (as outlined below); impairment of goodwill and intangible assets; severance and other termination costs associated with downsizing; stock compensation expense; management fees; costs related to our initial public offering; (gain)/loss on extinguishment of debt; currency translation (gain)/loss on debt and (gain)/loss on related hedges; amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets; deferred income tax and other tax expense; amortization expense of deferred financing costs; interest expense related to uncertain tax positions; and other costs or gains.

 

       Many of these adjustments to net income/(loss) relate to a series of strategic initiatives developed by our management and our Sponsors following the 2006 Acquisition aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives included, among other items, acquisitions, divestitures, restructurings of certain operations and various financing transactions. We describe these and other costs in more detail below.

 

       The use of Adjusted Net Income has limitations and you should not consider this performance measure in isolation from, or as an alternative to, U.S. GAAP measures such as net income/(loss).

 

 

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The following table provides a reconciliation to Adjusted Net Income from net (loss)/income, the most directly comparable financial measure presented in accordance with U.S. GAAP, for the periods presented:

 

     (unaudited)  
     For the year ended December 31,  
(Amounts in thousands)    2008     2009     2010  

Net (loss)/income

   $ (134,531   $ (27,681   $ 130,050   
                        

Acquisition, integration and financing costs and other significant items(a)

     69,345        22,985        *   

Impairment of goodwill and intangible assets(b)

     13,173        19,867          

Severance and other termination costs associated with downsizing(c)

     12,282        12,276        *   

Stock compensation expense(d)

     2,108        2,233        *   

Management fees(e)

     4,000        4,000          

Costs related to initial public offering(f)

                   43,298   

(Gain)/loss on extinguishment of debt(g)

     (14,961     (120,123     23,474   

Currency translation (gain)/loss on debt and (gain)/loss on related hedges(h)

     (53,209     15,301        (67,526

Amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets(i)

     160,594        157,797        145,184   

Deferred income tax and other tax expense(j)

     29,980        26,592        28,863   

Amortization expense of deferred financing costs

     10,698        9,055        8,564   

Interest expense related to uncertain tax positions

     43        823        984   

Other(k)

     123        973        (6,484
                        

Total adjustments

     234,176        151,779        176,357   
                        

Adjusted Net Income

   $ 99,645      $ 124,098      $ 306,407   
                        

 

  *   Beginning in 2010, we have not included these items as reconciling items to derive Adjusted Net Income. We eliminated these items from our calculation based on input we received from investors and analysts.

 

  (a)   See table below for details of acquisition, integration and financing costs and other significant items.
  (b)   Represents the impairment of goodwill and intangible assets associated with a reporting unit within our controls business segment and relates to products used in the semiconductor business.
  (c)   Represents severance, outplacement costs and special termination benefits associated with the downsizing of various manufacturing facilities and our corporate office.
  (d)   Represents share-based compensation expense recorded in accordance with ASC Topic 718, Compensation—Stock Compensation, excluding $18.9 million in 2010 related to the cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification. See “Executive Compensation—Components of Compensation—Equity Compensation.”
  (e)   Represents fees expensed under the terms of the advisory agreement with our Sponsors. This agreement was terminated in connection with the completion of our initial public offering. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”
  (f)   Represents costs recorded as expenses related to our initial public offering in March 2010, including $18.9 million recorded as a cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification, and $22.4 million in fees related to the termination of the advisory agreement with the Sponsors at their option. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”
  (g)   Relates to the repurchases of outstanding notes.
  (h)   Reflects the unrealized losses/(gains) associated with the translation of our Euro-denominated debt into U.S. dollars and losses/(gains) on related hedging transactions.
  (i)   Represents amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets in purchase accounting that resulted from the 2006 Acquisition and the acquisitions of First Technology Automotive and Airpax.
  (j)   Represents deferred income tax and other tax expense, including provisions for uncertain tax positions, and in 2010, $5.2 million of expense associated with the write-off of tax indemnification assets and other tax-related assets.
  (k)   Represents unrealized (gains)/losses on commodity forward contracts and estimated potential penalty expenses associated with uncertain tax positions.

 

 

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The following table provides detail of the components of acquisition, integration and financing costs and other significant items, the total of which is included as an adjustment to derive Adjusted Net Income, as shown in the table above:

 

     (unaudited)  
     For the year ended December 31,  
(Amounts in thousands)        2008              2009              2010      

Acquisition, integration and financing costs and other significant items:

        

Transition costs(a)

   $ 4,052       $ 23       $     —   

Litigation costs(b)

     840         147         *   

Integration and finance costs(c)

     20,931         2,813           

Relocation and disposition costs(d)

     12,828         8,202         *   

Pension charges(e)

     3,588         4,828         *   

Other(f)

     27,106         6,972           
                          

Total acquisition, integration and financing costs and other significant items

   $ 69,345       $ 22,985       $ *   
                          

 

  *   Beginning in 2010, we have not included these items as reconciling items to derive Adjusted Net Income. We eliminated these items from our calculation based on input we received from investors and analysts.

 

  (a)   Represents transition costs incurred by us in becoming a stand-alone company and complying with Section 404 of the Sarbanes-Oxley Act of 2002.
  (b)   Represents litigation costs we recognized related to customers alleging defects in certain of our products, which were manufactured and sold prior to April 27, 2006 (inception).
  (c)   Represents integration and financing costs related to the acquisitions of Airpax, First Technology Automotive and SMaL Camera Technologies, Inc., or “SMaL Camera,” and other consulting and advisory fees associated with acquisitions and financings, whether or not consummated.
  (d)   Represents costs we incurred to move certain operations to lower-cost Sensata locations, close certain manufacturing operations and dispose of the SMaL Camera business.
  (e)   Represents pension curtailment and settlement losses, and amortization of prior service costs associated with various restructuring activities.
  (f)   Represents other losses, including impairment losses associated with certain assets held for sale, losses related to the early termination of commodity forward contracts of $7.2 million during fiscal year 2008, a loss of $13.4 million during fiscal year 2008 associated with a settlement with a significant automotive customer that alleged defects in certain of our products installed in its automobiles, and a reserve associated with the Whirlpool recall litigation. See “Business—Legal Proceedings and Claims.”

 

(4)   We define working capital as current assets less current liabilities.

 

 

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RISK FACTORS

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below, as well as other information included in this prospectus, before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our ordinary shares could decline, and you may lose all or part of your original investment. Before deciding whether to invest in our ordinary shares, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes.

 

Risk Factors Related To Our Business

 

Continued fundamental changes in the industries in which we operate have had and could continue to have adverse effects on our businesses.

 

Our products are sold to automobile manufacturers and manufacturers of commercial and residential HVAC systems, as well as to manufacturers in the refrigeration, lighting, aerospace, telecommunications, power supply and generation and industrial markets, among others. These are global industries, and they are experiencing various degrees of growth and consolidation. Customers in these industries are located in every major geographic market. As a result, our customers are affected by changes in global and regional economic conditions, as well as by labor relations issues, regulatory requirements, trade agreements and other factors. These factors, in turn, affect overall demand and prices for our products sold to these industries. Changes in the industries in which we operate may be more detrimental to us in comparison to our competitors due to our significant levels of debt. In addition, many of our products are platform-specific—for example, sensors are designed for certain of our HVAC manufacturer customers according to specifications to fit a particular model. Our success may, to a certain degree, be connected with the success or failure of one or more of the industries to which we sell products, either in general or with respect to one or more of the platforms or systems for which our products are designed.

 

Continued pricing and other pressures from our customers may adversely affect our business.

 

Many of our customers, including automotive manufacturers and other industrial and commercial OEMs, have policies of seeking price reductions each year. Recently, many of the industries in which our products are sold have suffered from unfavorable pricing pressures in North America and Europe, which in turn has led manufacturers to seek price reductions from their suppliers. Our significant reliance on these industries subjects us to these and other similar pressures. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, those price reductions may have a material adverse effect on our results of operations and cash flows. In addition, our customers occasionally require engineering, design or production changes. In some circumstances, we may be unable to cover the costs of these changes with price increases. Additionally, as our customers grow larger, they may increasingly require us to provide them with our products on an exclusive basis, which could cause an increase in the number of products we must carry and, consequently, increase our inventory levels and working capital requirements. Certain of our customers, particularly domestic automotive manufacturers, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as a condition to engage in future business transactions. As a result, we may find it difficult to enter into agreements with such customers on terms that are commercially reasonable to us.

 

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Conditions in the automotive industry have had and may have in the future, adverse effects on our results of operations.

 

Much of our business depends on and is directly affected by the global automobile industry. Sales to customers in the automotive industry accounted for 55% of our net revenue for fiscal year 2010. Automakers and their suppliers globally continue to experience significant difficulties from a weakened economy and tightening credit markets. Globally, many automakers and their suppliers are in financial distress. Continued adverse developments in the automotive industry, including but not limited to continued declines in demand, customer bankruptcies and increased demands on us for pricing decreases, would have adverse effects on our results of operations and could impact our liquidity position and our ability to meet restrictive debt covenants. In addition, these same conditions could adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.

 

Our ability to operate our business effectively could be impaired if we fail to attract and retain key personnel.

 

Our ability to operate our business and implement our strategies effectively depends, in part, on the efforts of our executive officers and other key employees. Our management team has significant industry experience and would be difficult to replace. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. In addition, the market for engineers and other individuals with the required technical expertise to succeed in our business is highly competitive and we may be unable to attract and retain qualified personnel to replace or succeed key employees should the need arise. During 2008 and 2009, we completed certain reductions in force at a number of our sites in order to align our business operations with current and projected economic conditions. The loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on our business.

 

If we fail to maintain our existing relationships with our customers, our exposure to industry and customer specific demand fluctuations could increase and our revenue may decline as a result.

 

Our customers consist of a diverse base of OEMs across the automotive, HVAC, appliance, industrial, aerospace, defense and other end-markets in various geographic locations throughout the world. In the event that we fail to maintain our relationships with our existing customers and such failure increases our dependence on particular markets or customers, then our revenue would be exposed to greater industry and customer specific demand fluctuations, and could decline as a result.

 

We are subject to risks associated with our non-U.S. operations, which could adversely impact the reported results of operations from our international businesses.

 

Our subsidiaries outside of the Americas generated 58% of our net revenue for fiscal year 2010, and we expect sales from non-U.S. markets to continue to represent a significant portion of our total sales. International sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls and repatriation of earnings.

 

A significant portion of our revenue, expenses, receivables and payables are denominated in currencies other than U.S. dollars. We are, therefore, subject to foreign currency risks and foreign exchange exposure. Changes in the relative values of currencies occur from time to time and could affect our operating results. For financial reporting purposes, the functional currency that we use is the U.S. dollar because of the significant influence of the U.S. dollar on our operations. In certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar. At the date the transaction is recognized, each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances

 

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denominated in a currency other than the U.S. dollar are adjusted to the U.S. dollar using the current exchange rate with gains or losses recorded in Currency translation gain and other, net. During times of a weakening U.S. dollar, our reported international sales and earnings will increase because the non-U.S. currency will translate into more U.S. dollars. Conversely, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because the local currency will translate into fewer U.S. dollars.

 

There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of legal disputes through certain foreign legal systems, the collection of receivables through certain foreign legal systems, exposure to possible expropriation or other government actions, unsettled political conditions and possible terrorist attacks against American interests. These and other factors may have a material adverse effect on our non-U.S. operations and, therefore, on our business and results of operations.

 

Our businesses operate in markets that are highly competitive, and competitive pressures could require us to lower our prices or result in reduced demand for our products.

 

Our businesses operate in markets that are highly competitive, and we compete on the basis of product performance, quality, service and/or price across the industries and markets we serve. A significant element of our competitive strategy is to manufacture high-quality products at low-cost, particularly in markets where low-cost country-based suppliers, primarily China with respect to the controls business, have entered our markets or increased their sales in our markets by delivering products at low-cost to local OEMs. Some of our competitors have greater sales, assets and financial resources than we do. In addition, many of our competitors in the automotive sensors market are controlled by major OEMs or suppliers, limiting our access to certain customers. Many of our customers also rely on us as their sole source of supply for many of the products we have historically sold to them. These customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products internally, in each case in order to reduce risk of delivery interruptions or as a means of extracting pricing concessions. Certain of our customers currently have, or may develop in the future, the capability of internally producing the products we sell to them and may compete with us with respect to those and other products with respect to other customers. For example, Robert Bosch Gmbh, who is one of our largest customers with respect to our control products, also competes with us with respect to certain of our sensors products. Competitive pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit margins and/or resulting in a loss of market share.

 

We may not be able to keep up with rapid technological and other competitive changes affecting our industry.

 

The sensors and controls markets are characterized by rapidly changing technology, evolving industry standards, frequent enhancements to existing services and products, the introduction of new services and products and changing customer demands. Changes in competitive technologies may render certain of our products less attractive or obsolete, and if we cannot anticipate changes in technology and develop and introduce new and enhanced products on a timely basis, our ability to remain competitive may be negatively impacted. The success of new products depends on their initial and continued acceptance by our customers. Our businesses are affected by varying degrees of technological change, which result in unpredictable product transitions, shortened lifecycles and increased importance of being first to market with new products and services. We may experience difficulties or delays in the research, development, production and/or marketing of new products, which may negatively impact our operating results and prevent us from recouping or realizing a return on the investments required to bring new products to market.

 

As part of our ongoing cost containment program designed to align our operations with economic conditions, we have had to make, and may have to make again in the future, adjustments to both the scope and breadth of our overall research and development program. Such actions may result in choices that could adversely affect our ability to either take advantage of emerging trends or to develop new technologies or make sufficient advancements to existing technologies.

 

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We may not be able to timely and efficiently increase our production capacity in order to meet future growth in the demand for our products.

 

A substantial increase in demand for our products may require us to expand our production capacity, which could require us to identify and acquire or lease additional manufacturing facilities. If we are unable to acquire, integrate and move into production the facilities, equipment and personnel necessary to meet such increase in demand, our customer relationships, results of operations and financial performance may suffer materially.

 

We may not be able to protect our intellectual property, including our proprietary technology and the Sensata, Klixon, Airpax and Dimensions brands.

 

Our success depends to some degree on our ability to protect our intellectual property and to operate without infringing on the proprietary rights of third parties. If we fail to adequately protect our intellectual property, competitors may manufacture and market products similar to ours. We have sought and may continue from time to time to seek to protect our intellectual property rights through litigation. These efforts might be unsuccessful in protecting such rights and may adversely affect our financial performance and distract our management. We also cannot be sure that competitors will not challenge, invalidate or void the application of any existing or future patents that we receive or license. In addition, patent rights may not prevent our competitors from developing, using or selling products that are similar or functionally equivalent to our products. It is also possible that third parties may have or acquire licenses for other technology or designs that we may use or wish to use, so that we may need to acquire licenses to, or contest the validity of, such patents or trademarks of third parties. Such licenses may not be made available to us on acceptable terms, if at all, and we may not prevail in contesting the validity of third-party rights.

 

In addition to patent and trademark protection, we also protect trade secrets, know-how and other proprietary information, as well as brand names such as the Sensata, Klixon, Airpax and Dimensions brands under which we market many of the products sold in our controls business, against unauthorized use by others or disclosure by persons who have access to them, such as our employees, through contractual arrangements. These arrangements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements, and we cannot be sure that our trade secrets and proprietary technology will not otherwise become known or that our competitors will not independently develop our trade secrets and proprietary technology. If we are unable to maintain the proprietary nature of our technologies, our sales could be materially adversely affected.

 

We may be subject to claims that our products or processes infringe the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages, modify our products or processes or prevent us from selling our products.

 

Third parties may claim that our processes and products infringe on their intellectual property rights. Whether or not these claims have merit, we may be subject to costly and time-consuming legal proceedings, and this could divert our management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages and could be prevented from selling some or all of our products. We may also be obligated to indemnify our business partners or customers in any such litigation. Furthermore, we may need to obtain licenses from these third parties or substantially reengineer or rename our products in order to avoid infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to reengineer or rename our products successfully. If we are prevented from selling some or all of our products, our sales could be materially adversely affected.

 

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Increasing costs for manufactured components and raw materials may adversely affect our profitability.

 

We use a broad range of manufactured components and raw materials in the manufacture of our products, including silver, gold, nickel, aluminum and copper, which may experience significant volatility in their prices. We generally purchase raw materials at spot prices. We first entered into hedge arrangements in 2007 and may continue to do so from time to time. Such hedges might not be economically successful. In addition, these hedges do not qualify as accounting hedges in accordance with U.S. GAAP. Accordingly, the change in fair value of these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to quarter. The availability and price of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations, global economic or political events including strikes, terrorist actions and war, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels. It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Therefore, a significant increase in the price of these items could materially increase our operating costs and materially and adversely affect our profit margins.

 

We may incur material losses and costs as a result of product liability, warranty and recall claims that may be brought against us.

 

We have been and may continue to be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in death, bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates to product safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all of the repair or replacement costs of these products under warranties, when the product supplied did not perform as represented. In addition, a product recall could generate substantial negative publicity about our business and interfere with our manufacturing plans and product delivery obligations as we seek to repair affected products. Our costs associated with product liability, warranty and recall claims could be material.

 

We may not be successful in recovering damages, including those associated with product liability, warranty and recall claims, from Texas Instruments under the terms of our acquisition agreement entered into with Texas Instruments in connection with the 2006 Acquisition.

 

Texas Instruments has agreed in the 2006 Acquisition to indemnify us for certain claims and litigation. Texas Instruments is not required to indemnify us for these claims until the aggregate amount of damages from such claims exceeds $30.0 million. If the aggregate amount of these claims exceeds $30.0 million, Texas Instruments is obligated to indemnify us for amounts in excess of the $30.0 million threshold. Texas Instruments’ indemnification obligation is capped at $300.0 million. Based on claims to date, we believe that the aggregate amount of damages from these claims will ultimately exceed $30.0 million. See “Business—Legal Proceedings and Claims” included elsewhere in this prospectus. There can be no assurance that we will be successful in recovering amounts from Texas Instruments.

 

Our substantial indebtedness could adversely affect our financial condition and our ability to operate our business, and we may not be able to generate sufficient cash flows to meet our debt service obligations.

 

As of December 31, 2010, we had $1,889.7 million of outstanding indebtedness, including $1,412.0 million of indebtedness under our Senior Secured Credit Facility (excluding availability under our revolving credit facility and outstanding letters of credit), $436.2 million of outstanding Senior Notes and Senior Subordinated Notes, and $41.5 million of capital lease and other financing obligations. We may also incur additional indebtedness in the future. Our substantial indebtedness could have important consequences. For example, it could:

 

   

make it more difficult for us to satisfy our debt obligations;

 

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restrict us from making strategic acquisitions;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, thereby placing us at a competitive disadvantage if our competitors are not as highly leveraged;

 

   

increase our vulnerability to general adverse economic and industry conditions; or

 

   

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness if we do not maintain specified financial ratios or are not able to refinance our indebtedness as it comes due, thereby reducing the availability of our cash flow for other purposes.

 

In addition, our Senior Secured Credit Facility and the indentures governing our Senior Notes and 9% Senior Subordinated Notes permit us to incur substantial additional indebtedness in the future. As of December 31, 2010, we had $143.1 million available to us for additional borrowing under our $150.0 million revolving credit facility portion of our Senior Secured Credit Facility. If we increase our indebtedness by borrowing under the revolving credit facility or incur other new indebtedness, the risks described above would increase.

 

Labor disruptions or increased labor costs could adversely affect our business.

 

As of December 31, 2010, we had approximately 10,500 employees, of whom approximately 9% were located in the United States. None of our employees are covered by collective bargaining agreements. In various countries, local law requires our participation in works councils. A material labor disruption or work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, work stoppages occur relatively frequently in the industries in which many of our customers operate, such as the automotive industry. If one or more of our larger customers were to experience a material work stoppage, that customer may halt or limit the purchase of our products. This could cause us to shut down production facilities relating to those products, which could have a material adverse effect on our business, results of operations and financial condition.

 

The loss of one or more of our suppliers of finished goods or raw materials may interrupt our supplies and materially harm our business.

 

We purchase raw materials and components from a wide range of suppliers. For certain raw materials or components, however, we are dependent on sole source suppliers. We generally obtain these raw materials and components through individual purchase orders executed on an as needed basis rather than pursuant to long-term supply agreements. Our ability to meet our customers’ needs depends on our ability to maintain an uninterrupted supply of raw materials and finished products from our third-party suppliers and manufacturers. Our business, financial condition or results of operations could be adversely affected if any of our principal third-party suppliers or manufacturers experience production problems, lack of capacity or transportation disruptions or otherwise determine to cease producing such raw materials or components. The magnitude of this risk depends upon the timing of the changes, the materials or products that the third-party manufacturers provide and the volume of the production. We may not be able to make arrangements for transition supply and qualifying replacement suppliers in both a cost effective and timely manner. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements.”

 

Our dependence on third parties for raw materials and components subjects us to the risk of supplier failure and customer dissatisfaction with the quality of our products. Quality failures by our third-party manufacturers or changes in their financial or business condition which affect their production could disrupt our ability to supply quality products to our customers and thereby materially harm our business.

 

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Non-performance by our suppliers may adversely affect our operations.

 

Because we purchase various types of raw materials and component parts from suppliers, we may be materially and adversely affected by the failure of those suppliers to perform as expected. This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. The risk of non-performance may also result from the insolvency or bankruptcy of one or more of our suppliers.

 

Our efforts to protect against and to minimize these risks may not always be effective. We may occasionally seek to engage new suppliers with which we have little or no experience. For example, we do not have a prior relationship with all of the suppliers that we are qualifying for the supply of contacts. The use of new suppliers can pose technical, quality and other risks.

 

We depend on third parties for certain transportation, warehousing and logistics services.

 

We rely primarily on third parties for transportation of the products we manufacture. In particular, a significant portion of the goods we manufacture are transported to different countries, requiring sophisticated warehousing, logistics and other resources. If any of the countries from which we transport products were to suffer delays in exporting manufactured goods, or if any of our third-party transportation providers were to fail to deliver the goods we manufacture in a timely manner, we may be unable to sell those products at full value, or at all. Similarly, if any of our raw materials could not be delivered to us in a timely manner, we may be unable to manufacture our products in response to customer demand.

 

A material disruption at one of our manufacturing facilities could harm our financial condition and operating results.

 

If one of our manufacturing facilities were to be shut down unexpectedly, or certain of our manufacturing operations within an otherwise operational facility were to cease production unexpectedly, our revenue and profit margins would be adversely affected. Such a disruption could be caused by a number of different events, including:

 

   

maintenance outages;

 

   

prolonged power failures;

 

   

an equipment failure;

 

   

fires, floods, earthquakes or other catastrophes;

 

   

potential unrest or terrorist activity;

 

   

labor difficulties; or

 

   

other operational problems.

 

In addition, approximately 96% of our products are manufactured at facilities located outside the United States. Serving a global customer base requires that we place more production in emerging markets, such as China, Mexico and Malaysia, to capitalize on market opportunities and maintain our low-cost position. Our international production facilities and operations could be particularly vulnerable to the effects of a natural disaster, labor strike, war, political unrest, terrorist activity or public health concerns, especially in emerging countries that are not well-equipped to handle such occurrences. Our manufacturing facilities abroad may also be more susceptible to changes in laws and policies in host countries and economic and political upheaval than our domestic facilities. If any of these or other events were to result in a material disruption of our manufacturing operations, our ability to meet our production capacity targets and satisfy customer requirements may be impaired.

 

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We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders or for which we are currently engaged in development.

 

Our ability to generate revenue from products subject to customer awards is subject to a number of important risks and uncertainties, many of which are beyond our control, including the number of products our customers will actually produce as well as the timing of such production. Many of our customer contracts provide for supplying a certain share of the customer’s requirements for a particular application or platform, rather than for manufacturing a specific quantity of products. In some cases we have no remedy if a customer chooses to purchase less than we expect. In cases where customers do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes is limited to increased pricing on those products the customer does purchase from us or renegotiating other contract terms. There is no assurance that such price increases or new terms will offset a shortfall in expected revenue. In addition, some of our customers may have the right to discontinue a program or replace us with another supplier under certain circumstances. As a result, products for which we are currently incurring development expenses may not be manufactured by customers at all, or may be manufactured in smaller amounts than currently anticipated. Therefore, our anticipated future revenue from products relating to existing customer awards or product development relationships may not result in firm orders from customers for the same amount. We also incur capital expenditures and other costs, and price our products, based on estimated production volumes. If actual production volumes were significantly lower than estimated, our anticipated revenue and gross margin from those new products would be adversely affected. We cannot predict the ultimate demand for our customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost increases to our customers.

 

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or “Section 404,” may be costly with no assurance of maintaining effective internal controls over financial reporting.

 

We will likely experience significant operating expenses in connection with maintaining our internal control environment and Section 404 compliance activities. In addition, if we are unable to efficiently maintain effective internal controls over financial reporting, our operations may suffer and we may be unable to obtain an attestation on internal controls from our independent registered public accounting firm when required under the Sarbanes-Oxley Act of 2002. Recent cost reduction actions, including the loss of experienced finance and administrative personnel, may adversely effect our ability to maintain effective internal controls. This, in turn, could have a materially adverse impact on trading prices for our securities and adversely affect our ability to access the capital markets.

 

Export of our products are subject to various export control regulations and may require a license from either the U.S. Department of State, the U.S. Department of Commerce or the U.S. Department of the Treasury.

 

We must comply with the United States Export Administration Regulations, the International Traffic in Arms Regulations, or “ITAR,” and the sanctions, regulations and embargoes administered by the Office of Foreign Assets Control. Certain of our products that have military applications are on the munitions list of the ITAR and require an individual validated license in order to be exported to certain jurisdictions. Any changes in export regulations may further restrict the export of our products, and we may cease to be able to procure export licenses for our products under existing regulations. The length of time required by the licensing process can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. Any restriction on the export of a significant product line or a significant amount of our products could cause a significant reduction in revenue.

 

We may be adversely affected by environmental, safety and governmental regulations or concerns.

 

We are subject to the requirements of environmental and occupational safety and health laws and regulations in the United States and other countries, as well as product performance standards established by quasi governmental and industrial standards organizations. We cannot assure you that we have been and will

 

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continue to be in complete compliance with all of these requirements on account of circumstances or events that have occurred or exist but that we are unaware of, or that we will not incur material costs or liabilities in connection with these requirements in excess of amounts we have reserved. In addition, these requirements are complex, change frequently and have tended to become more stringent over time. These requirements may change in the future in a manner that could have a material adverse effect on our business, results of operations and financial condition. We have made and may be required in the future to make capital and other expenditures to comply with environmental requirements. In addition, certain of our subsidiaries are subject to pending litigation raising various environmental and human health and safety claims. We cannot assure you that our costs to defend and settle these claims will not be material.

 

Changes in existing environmental and/or safety laws, regulations and programs could reduce demand for environmental and safety-related products, which could cause our revenue to decline.

 

A significant amount of our business is generated either directly or indirectly as a result of existing U.S. federal and state laws, regulations and programs related to environmental protection, fuel economy and energy efficiency and safety regulation. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for environmental and safety products which may have a material adverse effect on our revenue.

 

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

 

The U.S. Foreign Corrupt Practices Act, or “FCPA,” and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. Many of the countries in which we operate have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our compliance program, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, may have a negative effect on our results of operations, financial condition and reputation.

 

During the second half of fiscal year 2010, we conducted an internal investigation under the direction of the audit committee of our board of directors to determine whether any laws, including the FCPA, may have been violated in connection with a certain business relationship entered into by one of our operating subsidiaries involving business in China. We believe the amount of payments and the business involved are immaterial. We discontinued the specific business relationship and did not identify any other suspect transactions in our investigation. We contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, investigation, and initial findings. We will cooperate fully with their review; however, the outcome of such review is unknown. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. We are unable to estimate the potential penalties and/or sanctions, if any, that might be assessed in connection with our voluntary disclosure of possible FCPA violations. Any such penalties or sanctions may have a negative effect on our results of operations, financial condition and reputation.

 

Integration of acquired companies and any future acquisitions and joint ventures or dispositions may require significant resources and/or result in significant unanticipated losses, costs or liabilities.

 

We have grown and in the future we intend to grow by making acquisitions or entering into joint ventures or similar arrangements. On January 28, 2011, we closed the acquisition from Honeywell International Inc. of the Automotive on Board business, which we will refer to as Magnetic Speed and Position. The Automotive on Board business was expected to generate approximately $130 million of revenue in 2010; however, there can be

 

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no assurance that Magnetic Speed and Position will perform as expected in the future. Any future acquisitions will depend on our ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions. We will also face competition for suitable acquisition candidates that may increase our costs. In addition, acquisitions or investments require significant managerial attention, which may be diverted from our other operations. Furthermore, acquisitions of businesses or facilities, including the Automotive on Board sensors business and those which may occur in the future, entail a number of additional risks, including:

 

   

problems with effective integration of operations;

 

   

the inability to maintain key pre-acquisition customer, supplier and employee relationships;

 

   

increased operating costs; and

 

   

exposure to unanticipated liabilities.

 

Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional indebtedness and/or by issuing additional equity securities. In addition, we could face financial risks associated with incurring additional indebtedness such as reducing our liquidity and access to financing markets and increasing the amount of debt service. If conditions in the credit markets remain tight, the availability of debt to finance future acquisitions will be restricted and our ability to make future acquisitions will be limited.

 

We may also seek to restructure our business in the future by disposing of certain of our assets. There can be no assurance that any restructuring of our business will not adversely affect our financial position, leverage or results of operations. In addition, any significant restructuring of our business will require significant managerial attention which may be diverted from our operations and may require us to accept non-cash consideration for any sale of our assets, the market value of which may fluctuate.

 

We may not realize all of the anticipated operating synergies and cost savings from acquisitions, and we may experience difficulties in integrating these businesses, which may adversely affect our financial performance.

 

There can be no assurance that we will realize all of the anticipated operating synergies and cost savings from our acquisitions. We anticipate that we will achieve synergies from the acquisition of Magnetic Speed and Position over 18 to 24 months following the closing. However, there can be no assurance that any of the anticipated synergies will be achieved and no assurance that they will be achieved in our estimated time frame. We may not be able to successfully integrate and streamline overlapping functions from this transaction or future acquisitions, and integration may be more costly to accomplish than we expect. We expect to incur approximately $15 million in integration costs related to Magnetic Speed and Position in 2011. In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.

 

Taxing authorities could challenge our historical and future tax positions or our allocation of taxable income among our subsidiaries, or tax laws to which we are subject could change in a manner adverse to us.

 

The amount of income taxes we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken and will continue to take tax positions based on our interpretation of such tax laws. There can be no assurance that a taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. Should we be assessed with additional taxes, this may result in a material adverse effect on our results of operations or financial condition.

 

We conduct operations through manufacturing and distribution subsidiaries in numerous tax jurisdictions around the world. Our transfer pricing methodology is based on economic studies. The price charged for products, services and financing among our companies could be challenged by the various tax authorities resulting in additional tax liability, interest and/or penalties.

 

Tax laws are subject to change in the various countries in which we operate. Such future changes could be unfavorable and result in an increased tax burden to us. See “Tax Considerations” included elsewhere in this prospectus.

 

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We have significant unfunded benefit obligations with respect to our defined benefit and other post-retirement benefit plans.

 

We provide various retirement plans for employees, including defined benefit, defined contribution and retiree healthcare benefit plans. As of December 31, 2010, we had recognized a net accrued benefit liability of approximately $43.9 million, representing the unfunded benefit obligations of the defined benefit and retiree healthcare plans.

 

We have previously experienced declines in interest rates and pension asset values. Future declines in interest rates or the market values of the securities held by the plans, or certain other changes, could materially deteriorate the funded status of our plans and affect the level and timing of required contributions in 2011 and beyond. Additionally, a material deterioration in the funded status of the plans could significantly increase pension expenses and reduce our profitability. We fund certain of our benefit obligations on a pay-as-you-go basis; accordingly, the related plans have no assets. As a result, we are subject to increased cash outlays and costs due to, among other factors, rising healthcare costs. Increases in the expected cost of health care in excess of current assumptions could increase actuarially determined liabilities and related expenses along with future cash outlays. Our assumptions used to calculate pension and healthcare obligations as of the annual measurement date directly impact the expense to be recognized in future periods. While our management believes that these assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect our pension and healthcare obligations and future expense.

 

We have recorded a significant amount of impairment charges of our goodwill and other identifiable intangible assets, and we may be required to recognize additional goodwill or intangible asset impairments which would reduce our earnings.

 

We have recorded a significant amount of goodwill and other identifiable intangible assets, including tradenames. Goodwill and other net identifiable intangible assets totaled $2.3 billion as of December 31, 2010, or 66% of our total assets. Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was $1.5 billion as of December 31, 2010, or 45% of our total assets. Goodwill and other net identifiable intangible assets were recorded at fair value on the date of acquisition. Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in laws or regulations, unexpected significant or planned changes in use of assets and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income which may impact our ability to raise capital. During fiscal years 2009 and 2008, we recorded impairment charges on goodwill and other intangible assets associated with our Interconnection reporting unit totaling $19.9 million and $13.2 million, respectively. No impairment charges were required during fiscal year 2010. Should certain assumptions used in the development of the fair value of our reporting units change, we may be required to recognize additional goodwill or intangible asset impairment.

 

Our business may not generate sufficient cash flow from operations, or future borrowings under our Senior Secured Credit Facility or from other sources may not be available to us in an amount sufficient, to enable us to repay our indebtedness, including our existing Senior Notes and 9% Senior Subordinated Notes, or to fund our other liquidity needs, including capital expenditure requirements.

 

We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital expenditures and business plan. If we complete additional acquisitions, our debt service requirements could also increase. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity investments or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.

 

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Our failure to comply with the covenants contained in our credit arrangements, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.

 

Our Senior Secured Credit Facility requires us to maintain specified financial ratios, including a maximum ratio of total indebtedness to Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization and certain other adjustments as defined in the Senior Secured Credit Facility), a minimum ratio of Adjusted EBITDA to interest expense, and maximum capital expenditures. In addition, our Senior Secured Credit Facility and the indentures governing the Senior Notes and 9% Senior Subordinated Notes require us to comply with various operational and other covenants. For purposes of the Senior Secured Credit Facility, Adjusted EBITDA is calculated using various add-backs to EBITDA. During the fourth quarter of fiscal year 2010, the leverage and coverage ratios tightened from levels in 2009 to a maximum leverage ratio covenant of 7.00 to 1 and a minimum interest coverage ratio covenant of 1.60 to 1. These ratios will remain at these amounts for the remaining term of the Senior Secured Credit Facility.

 

Based on indebtedness (as defined in the Senior Secured Credit Facility) as of December 31, 2010 of $1,503.6 million, our wholly-owned subsidiary Sensata Technologies B.V.’s minimum Adjusted EBITDA during the preceding twelve months to maintain compliance with the maximum leverage ratio covenant is $214.8 million. Based on interest expense (as defined in the Senior Secured Credit Facility) for the year ended December 31, 2010 of $96.0 million, Sensata Technologies B.V.’s minimum Adjusted EBITDA during the preceding twelve months to maintain compliance with the minimum interest coverage ratio requirement is $153.6 million. Sensata Technologies B.V.’s Adjusted EBITDA during the preceding twelve months as of December 31, 2010 was $462.2 million.

 

Sufficiently adverse financial performance, including the failure to achieve our financial forecasts, could result in default under the Senior Secured Credit Facility. Additionally, creditors may challenge the nature of our add-backs to EBITDA, possibly increasing the risk of default. If there were an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn would result in cross defaults under our other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings if accelerated upon an event of default.

 

If, when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our credit agreement, or if a default otherwise occurs, the lenders under our Senior Secured Credit Facility could elect to terminate their commitments thereunder, cease making further loans, declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, institute foreclosure proceedings against those assets that secure the borrowings under our Senior Secured Credit Facility and prevent us from making payments on the Senior Notes and 9% Senior Subordinated Notes. Any such actions could force us into bankruptcy or liquidation, and we might not be able to repay our obligations in such an event.

 

In the future, we may not secure financing necessary to operate and grow our business or to exploit opportunities.

 

Our future liquidity and capital requirements will depend upon numerous factors, some of which are outside our control, including the future development of the markets in which we participate. We may need to raise additional funds to support expansion, develop new or enhanced services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional debt or equity securities or obtain other debt financing. The incurrence of debt would result in increased expenses and could include covenants that would further restrict our operations. If the credit markets remain tight, we may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.

 

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We reported significant net losses for fiscal years 2007, 2008 and 2009 and may not sustain recently achieved profitability in the foreseeable future.

 

We incurred a significant amount of indebtedness in connection with the 2006 Acquisition and the subsequent acquisitions of First Technology Automotive and Airpax and, as a result, our interest expense has been substantial for periods following the 2006 Acquisition. Due, in part, to this significant interest expense and the amortization of intangible assets also related to these acquisitions, we reported net losses of $252.5 million, $134.5 million and $27.7 million for fiscal years 2007, 2008 and 2009, respectively. For fiscal year 2010, we reported net income of $130.1 million. We repaid approximately $321.7 million in principal of our indebtedness in March and April 2010 with proceeds from our initial public offering; however, we continue to have a significant amount of indebtedness. Due to the significant interest expense associated with the remaining indebtedness and the continued amortization of intangible assets, we cannot assure you that we will sustain recently achieved profitability in the foreseeable future.

 

Risks Related to Our Organization and Structure

 

We are a Netherlands public limited liability company and it may be difficult for you to obtain or enforce judgments against us in the United States.

 

We are incorporated under the laws of the Netherlands, and a substantial portion of our assets are located outside of the United States. As a result, although we have appointed an agent for service of process in the U.S., it may be difficult or impossible for United States investors to effect service of process within the United States upon us or to realize in the United States on any judgment against us including for civil liabilities under the United States securities laws. Therefore, any judgment obtained in any United States federal or state court against us may have to be enforced in the courts of the Netherlands, or such other foreign jurisdiction, as applicable. Because there is no treaty or other applicable convention between the United States and the Netherlands with respect to legal judgments, a judgment rendered by any United States federal or state court will not be enforced by the courts of the Netherlands unless the underlying claim is relitigated before a Dutch court. Under current practice, however, a Dutch court will generally grant the same judgment without a review of the merits of the underlying claim (i) if that judgment resulted from legal proceedings compatible with Dutch notions of due process, (ii) if that judgment does not contravene public policy of the Netherlands and (iii) if the jurisdiction of the United States federal or state court has been based on internationally accepted principles of private international law.

 

To date, we are aware of only one case in which a Dutch court has considered whether such a foreign judgment would be enforced in the Netherlands. In that case, a U.S. court entered a default judgment against the defendant, a Netherlands resident, in a lawsuit involving a breach of contract claim. The defendant sought to relitigate the claim in the Netherlands. The Dutch lower court ruled that the criteria discussed above were satisfied with respect to the U.S. judgment, as a result of which the Dutch court granted the same judgment without a review of the merits of the underlying claim.

 

Investors should not assume, however, that the courts of the Netherlands, or such other foreign jurisdiction, would enforce judgments of United States courts obtained against us predicated upon the civil liability provisions of the United States securities laws or that such courts would enforce, in original actions, liabilities against us predicated solely upon such laws.

 

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Your rights and responsibilities as a shareholder will be governed by Dutch law and will differ in some respects from the rights and responsibilities of shareholders under U.S. law, and your shareholder rights under Dutch law may not be as clearly established as shareholder rights are established under the laws of some U.S. jurisdictions.

 

Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The rights of our shareholders and the responsibilities of members of our board of directors under Dutch law may not be as clearly established as under the laws of some U.S. jurisdictions. In the performance of its duties, our board of directors is required by Dutch law to consider the interests of our company, its shareholders, its employees and other stakeholders in all cases with reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder. It is anticipated that all of our shareholder meetings will take place in the Netherlands.

 

In addition, the rights of holders of ordinary shares and many of the rights of shareholders as they relate to, for example, the exercise of shareholder rights, are governed by Dutch law and our articles of association and differ from the rights of shareholders under U.S. law. For example, Dutch law does not grant appraisal rights to a company’s shareholders who wish to challenge the consideration to be paid upon a merger or consolidation of the company. See “Description of Ordinary Shares” included elsewhere in this prospectus.

 

The provisions of Dutch corporate law and our articles of association have the effect of concentrating control over certain corporate decisions and transactions in the hands of our board of directors. As a result, holders of our shares may have more difficulty in protecting their interests in the face of actions by members of our board of directors than if we were incorporated in the United States. See “Description of Ordinary Shares” included elsewhere in this prospectus.

 

The payment of cash dividends on our shares is restricted under the terms of the agreements governing our indebtedness and is dependent on our ability to obtain funds from our subsidiaries.

 

We have never declared or paid any dividends on our ordinary shares and we currently do not plan to declare dividends on our ordinary shares in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from subsidiaries, including restrictions under the terms of the agreements governing our and our subsidiaries’ indebtedness. In that regard, our wholly-owned subsidiary, Sensata Technologies B.V., is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us. Under Dutch law, we may only pay dividends out of profits as shown in our adopted annual accounts prepared in accordance with International Financial Reporting Standards, or “IFRS.” We will only be able to declare and pay dividends to the extent our equity exceeds the sum of the paid and called up portion of our ordinary share capital and the reserves that must be maintained in accordance with provisions of Dutch law and our articles of association. See “Description of Ordinary Shares—Shareholder Rights—Dividends.” Subject to these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital requirements, contractual restrictions, its financial condition and any other factors deemed relevant by our shareholders and board of directors.

 

We are a “controlled company” within the meaning of the New York Stock Exchange listing rules and, as a result, we qualify for, and rely on, applicable exemptions from certain corporate governance requirements.

 

We are a “controlled company” under the rules of the New York Stock Exchange. Under these rules, a company of which more than 50% of the voting power is held by a group is a “controlled company” and may elect not to comply with certain corporate governance requirements of such exchange, including the requirement that a majority of the board of directors consist of independent directors. Upon completion of this offering, our principal shareholder, Sensata Investment Company S.C.A., will own 53.1% of our outstanding ordinary shares

 

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(or 51.4% if the underwriters exercise their option to purchase additional shares in full). We will continue to rely on this exemption to the extent it is applicable, and therefore we may not have a majority of independent directors, nor will our nominating and governance or compensation committees consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are not deemed “controlled companies.”

 

Risks Related to Our Ordinary Shares and This Offering

 

There may not be an active, liquid trading market for our ordinary shares, and you may not be able to resell your shares at or above the price at which you purchase them.

 

The initial public offering of our ordinary shares was completed in March 2010. There has been a public market for our ordinary shares for only a relatively short period of time. An active, liquid and orderly market for our ordinary shares may not be sustained, which could depress the trading price of our ordinary shares. An inactive market may also impair your ability to sell any of our ordinary shares that you purchase. In addition, the market price of our ordinary shares may fluctuate significantly and may be adversely affected by broad market and industry factors, regardless of our actual operating performance.

 

As a public company, we are subject to financial and other reporting and corporate governance requirements that may be difficult for us to satisfy.

 

We are subject to financial and other reporting and corporate governance requirements, including the requirements of the New York Stock Exchange listing rules, which impose compliance obligations upon us. We are working with our legal and financial advisors to manage our growth and obligations as a public company. We have made, and will continue to make, changes to our financial and management control systems. The expenses that we are required to incur in order to satisfy these requirements could be material. The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

 

Our principal shareholder will continue to have control over us after this offering which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Upon completion of this offering, our principal shareholder, Sensata Investment Company S.C.A., will own 53.1% of our outstanding ordinary shares (or 51.4% if the underwriters exercise their option to purchase additional shares in full). This entity is indirectly controlled by investment funds advised or managed by the principals of Bain Capital and, pursuant to agreements among all of its existing shareholders, Bain Capital has the right to appoint all of its directors. See “Principal and Selling Shareholders” and “Certain Relationships and Related Party Transactions.” As a result, this shareholder would be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium for their ordinary shares as part of a sale of us and might ultimately affect the market price of our ordinary shares.

 

Future sales of our ordinary shares in the public market could cause our share price to fall.

 

If our existing shareholders sell substantial amounts of our ordinary shares in the public market following this offering, the market price of our ordinary shares could decrease significantly. The perception in the public market that our existing shareholders might sell shares could also depress the market price of our ordinary shares. Upon the consummation of this offering, we will have 174,206,601 ordinary shares outstanding. Our directors,

 

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officers and selling shareholders (other than certain charities which may receive contributions of ordinary shares prior to this offering from certain partners and other employees of the funds that own Sensata Investment Co. and which may sell such shares in this offering) will be subject to lock-up agreements with certain representatives of the underwriters for a period of 90 days from the date of this prospectus as described in “Ordinary Shares Eligible for Future Sale—Lock-up Agreements” and “Underwriting.” After these lock-up agreements and the similar lock-up periods set forth in our investor rights agreement have expired, 93,008,703 shares, some of which will be subject to vesting, will be eligible for sale in the public market. The market price of our ordinary shares may drop significantly when the restrictions on resale by our existing shareholders lapse. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities.

 

Our share price may be volatile, and the market price of our ordinary shares after this offering may drop below the price you pay.

 

Securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our shares regardless of our operating performance. The trading price of our ordinary shares is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

 

   

market conditions in the broader stock market;

 

   

actual or anticipated fluctuations in our quarterly financial and operating results;

 

   

introduction of new products or services by us or our competitors;

 

   

issuance of new or changed securities analysts’ reports or recommendations;

 

   

sales, or anticipated sales, of large blocks of our stock;

 

   

additions or departures of key personnel;

 

   

regulatory or political developments;

 

   

litigation and governmental investigations; and

 

   

changing economic conditions.

 

These and other factors may cause the market price and demand for our ordinary shares to fluctuate substantially, which may limit or prevent investors from readily selling their ordinary shares and may otherwise negatively affect the liquidity of our ordinary shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

 

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our ordinary shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

 

The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our ordinary shares, or if our results of operations do not meet their expectations, our share price could decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including any documents incorporated by reference herein, includes “forward-looking statements.” These forward-looking statements include statements relating to our business. In some cases, forward-looking statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “believes,” “projects,” “forecasts,” “continue” or the negative of such terms or comparable terminology. Forward-looking statements contained herein (including future cash contractual obligations), or in other statements made by us, are made based on management’s expectations and beliefs concerning future events impacting us and are subject to uncertainties and other important factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. We believe that the following important factors, among others (including those described in “Risk Factors”), 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:

 

   

continued fundamental changes in the industries in which we operate have had and could continue to have adverse effects on our businesses;

 

   

we may incur material losses and costs as a result of product liability, warranty and recall claims that may be brought against us;

 

   

our substantial indebtedness could adversely affect our financial condition and our ability to operate our business, and we may not be able to generate sufficient cash flows to meet our debt service obligations;

 

   

we may not realize all of the anticipated operating synergies and cost savings from acquisitions, and we may experience difficulties in integrating these business, which may adversely affect our financial performance;

 

   

we reported significant net losses for fiscal years 2007, 2008 and 2009 and may not sustain recently achieved profitability in the foreseeable future; and

 

   

the other risks set forth in “Risk Factors” included elsewhere in this prospectus.

 

All forward-looking statements speak only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements contained in this prospectus. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

 

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MARKET AND INDUSTRY DATA AND FORECASTS

 

Market data and certain industry data and forecasts included in this prospectus were obtained from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications and surveys. We have relied upon publications of J.D. Power and Associates, Global Industry Analysts, IC Insights, IHS Automotive, International Data Corporation, or “International Data,” Strategy Analytics, and VDC Research Group, Inc., or “VDC Research,” as our primary sources for third-party industry data and forecasts. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s knowledge of the industry, have not been independently verified. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements as to our market position are based on recently available data. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” appearing elsewhere in this prospectus. While we believe our internal business research is reliable and market definitions are appropriate, neither such research nor definitions have been verified by any independent source. This prospectus may only be used for the purpose for which it has been published.

 

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USE OF PROCEEDS

 

The selling shareholders will receive all of the net proceeds from the sale of the ordinary shares in this offering. We will not receive any of the proceeds from the sale of ordinary shares by the selling shareholders, including any sales pursuant to the underwriters’ option to purchase additional shares. However, we will receive in the aggregate approximately $2.1 million from selling shareholders who will pay to us the exercise price for options exercised by them for the purpose of selling shares in this offering. The proceeds received by us in connection with the exercise of options to purchase our ordinary shares by the selling shareholders in connection with this offering will be used for general corporate purposes. We will pay the expenses of this offering, other than underwriting discounts and commissions.

 

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DIVIDEND POLICY

 

We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare dividends on our ordinary shares in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from subsidiaries, including restrictions under the terms of the agreements governing our and our subsidiaries’ indebtedness. In that regard, our wholly-owned subsidiary, Sensata Technologies B.V., is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness and Liquidity.” Under Dutch law, we may only pay dividends out of profits as shown in our adopted annual accounts prepared in accordance with IFRS. We will only be able to declare and pay dividends to the extent our equity exceeds the sum of the paid and called up portion of our ordinary share capital and the reserves that must be maintained in accordance with provisions of Dutch law and our articles of association. See “Description of Ordinary Shares—Shareholder Rights—Dividends.” Subject to these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition and any other factors deemed relevant by our shareholders and board of directors.

 

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PRICE RANGE OF ORDINARY SHARES

 

Our ordinary shares have traded on the New York Stock Exchange under the symbol “ST” since March 11, 2010. Prior to that time, there was no public market for our ordinary shares. The following table sets forth the high and low intraday sales prices per share of our ordinary shares, as reported by the New York Stock Exchange, for the periods indicated.

 

     Price Range  
     High      Low  

2010

     

Quarter ended March 31, 2010(1)

   $ 19.00       $ 17.12   

Quarter ended June 30, 2010

   $ 21.12       $ 15.30   

Quarter ended September 30, 2010

   $ 20.12       $ 15.25   

Quarter ended December 31, 2010

   $ 31.05       $ 19.43   

2011

     

Quarter ending March 31, 2011 (through January 31, 2011)

   $ 32.12       $ 28.85   

 

  (1)   Our ordinary shares began trading on March 11, 2010.

 

The closing sale price per share of our ordinary shares, as reported by the New York Stock Exchange, on January 31, 2011 was $31.51. As of January 31, 2011, there were 15 holders of record of our ordinary shares.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2010.

 

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add to the totals due to the effect of rounding.

 

     As of
December 31, 2010
 
(Amounts in millions, except share data)       

Long-term debt, including current maturities:

  

Senior Secured Credit Facility:

  

Revolving credit facility(a)

   $   

Term loan facility(b)

     1,412.0   

Capital lease and other financing obligations

     41.5   

Senior Notes

     201.2   

Senior Subordinated Notes(c)

     235.0   
        

Total debt

     1,889.7   

Shareholders’ equity:

  

Ordinary shares, €0.01 nominal value per share; 400,000,000 shares authorized, 173,522,647 shares issued

   $ 2.2   

Treasury shares, at cost, 11,973 shares

     (0.1

Additional paid-in capital

     1,530.8   

Accumulated deficit

     (497.6

Accumulated other comprehensive loss

     (27.5
        

Total shareholders’ equity

     1,007.8   
        

Total capitalization

   $ 2,897.5   
        

 

(a)   Our revolving credit facility provides for up to $150.0 million of borrowings to fund our working capital needs.
(b)   Our term loan facility includes a Euro-denominated term loan in an aggregate principal amount of €380.5 million as of December 31, 2010. We converted this term loan into U.S. dollars as of December 31, 2010 using an exchange rate of $1.33 = €1.00. On January 31, 2011, the exchange rate was $1.36 = €1.00.
(c)   Our existing Senior Subordinated Notes are Euro-denominated with an aggregate principal amount of €177.1 million outstanding as of December 31, 2010. We converted the Senior Subordinated Notes into U.S. dollars as of December 31, 2010 using an exchange rate of $1.33 = €1.00. On January 31, 2011, the exchange rate was $1.36 = €1.00.

 

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SELECTED CONSOLIDATED AND COMBINED HISTORICAL FINANCIAL DATA

 

We have derived the selected consolidated statement of operations and other financial data for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 from the audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated and combined statement of operations and other financial data for the periods from January 1, 2006 to April 26, 2006 and April 27, 2006 (inception) to December 31, 2006 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 from the audited consolidated financial statements not included in this prospectus.

 

You should read the following information in conjunction with the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes thereto included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in any future period.

 

    Predecessor
(combined)
          Sensata Technologies Holding N.V. (consolidated)  

(Amounts in thousands, except

per share data)

  For the
period
January 1
to April 26,
          For the
period
April 27
(inception) to
December 31,
    For the year ended December 31,  
  2006           2006     2007     2008     2009     2010  

Statement of Operations Data:

               

Net revenue

  $ 375,600          $ 798,507      $ 1,403,254      $ 1,422,655      $ 1,134,944      $ 1,540,079   

Operating costs and expenses:

               

Cost of revenue

    253,028            536,485        944,765        951,763        742,080        948,070   

Research and development

    8,635            19,742        33,891        38,256        16,796        24,664   

Selling, general and administrative(1)

    38,674            94,755        166,065        166,625        126,952        194,623   

Amortization of intangible assets and capitalized software

    1,078            82,740        131,064        148,762        153,081        144,514   

Impairment of goodwill and intangible assets

                             13,173        19,867          

Restructuring

    2,456                   5,166        24,124        18,086        (138
                                                   

Total operating costs and expenses

    303,871            733,722        1,280,951        1,342,703        1,076,862        1,311,733   
                                                   

Profit from operations

    71,729            64,785        122,303        79,952        58,082        228,346   

Interest expense

    (511         (165,160     (191,161     (197,840     (150,589     (106,400

Interest income

               1,567        2,574        1,503        573        1,020   

Currency translation gain/(loss) and other, net(2)

    115            (63,633     (105,449     55,467        107,695        45,388   
                                                   

Income/(loss) from continuing operations before income taxes

    71,333            (162,441     (171,733     (60,918     15,761        168,354   

Provision for income taxes

    25,796            48,560        62,504        53,531        43,047        38,304   
                                                   

Income/(loss) from continuing operations

    45,537            (211,001     (234,237     (114,449     (27,286     130,050   

Loss from discontinued operations

    (167         (1,309     (18,260     (20,082     (395       
                                                   

Net income/(loss)

  $ 45,370          $ (212,310   $ (252,497   $ (134,531   $ (27,681   $ 130,050   
                                                   

Net income/(loss) per share—basic:

               

Continuing operations

    NA          $ (2.73   $ (1.62   $ (0.79   $ (0.19   $ 0.78   

Discontinued operations

    NA            (0.02     (0.13     (0.14     (0.00       
                                             

Net income/(loss) per share—basic

    NA          $ (2.75   $ (1.75   $ (0.93   $ (0.19   $ 0.78   
                                             

Net income/(loss) per share—diluted:

               

Continuing operations

    NA          $ (2.73   $ (1.62   $ (0.79   $ (0.19   $ 0.75   

Discontinued operations

    NA            (0.02     (0.13     (0.14     (0.00       
                                             

Net income/(loss) per share—diluted

    NA          $ (2.75   $ (1.75   $ (0.93   $ (0.19   $ 0.75   
                                             

Weighted-average ordinary shares outstanding—basic

    NA            77,276        144,054        144,066        144,057        166,278   

Weighted-average ordinary shares outstanding—diluted

    NA            77,276        144,054        144,066        144,057        172,946   

 

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    Predecessor
(combined)
          Sensata Technologies Holding N.V. (consolidated)  
(Amounts in thousands)   For the
period
January 1
to April 26,
          For the
period
April 27
(inception) to
December 31,
    For the year ended December 31,  
  2006           2006     2007     2008     2009     2010  

Other Financial Data:

               
Net cash provided by/(used in):                

Operating activities

  $ 40,599          $ 129,923      $ 155,278      $ 47,481      $ 187,577      $ 300,046   

Investing activities

    (16,705         (3,142,543     (355,710     (38,713     (15,077     (52,548

Financing activities

    (23,894         3,097,373        175,736        8,891        (101,748     97,696   

Capital expenditures

    16,705            29,630        66,701        40,963        14,959        52,912   

 

    As of December 31,  
(Amounts in thousands)   2006     2007     2008     2009     2010  

Balance Sheet Data:

         

Cash and cash equivalents

  $ 84,753      $ 60,057      $ 77,716      $ 148,468      $ 493,662   

Working capital(3)

    221,486        161,418        15,663        245,445        609,887   

Total assets

    3,372,292        3,555,508        3,303,381        3,166,870        3,387,997   

Total debt, including capital lease and other financing obligations

    2,272,633        2,562,480        2,511,187        2,300,826        1,889,693   

Total shareholders’ equity

    824,609        566,310        405,332        387,158        1,007,781   

 

(1)   For the year ended December 31, 2010, selling, general and administrative expense includes $18.9 million recorded as a cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification, and $22.4 million in fees related to the termination of the advisory agreement with the Sponsors at their option. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”
(2)   Currency translation gain/(loss) and other, net in the period from April 27, 2006 (inception) to December 31, 2006 primarily includes currency translation loss associated with Euro-denominated debt and the deferred payments certificates of $65.5 million. Currency translation gain/(loss) and other, net for the year ended December 31, 2007 primarily includes currency translation loss associated with the Euro-denominated debt of $111.9 million. Currency translation gain/(loss) and other, net for the years ended December 31, 2008, 2009 and 2010 includes gains/(losses) of $15.0 million, $120.1 million, and $(23.5) million, respectively, recognized on repurchases of Senior Notes and Senior Subordinated Notes, as well as currency translation gain/(loss) associated with the Euro-denominated debt of $53.2 million, $(13.6) million and $72.8 million, respectively.
(3)   We define working capital as current assets less current liabilities. Working capital amounts as of December 31, 2006, 2007, 2008 and 2009 have not been recast to include assets designated as held-for-sale during 2010.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with “Selected Consolidated and Combined Historical Financial Data,” and our audited consolidated financial statements and the related notes beginning on page F-1 of this prospectus.

 

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Overview

 

Sensata, a global industrial technology company, is a leader in the development, manufacture and sale of sensors and controls. We produce a wide range of customized, innovative sensors and controls for mission-critical applications such as thermal circuit breakers in aircraft, pressure sensors in automotive systems, and bimetal current and temperature control devices in electric motors. We believe that we are one of the largest suppliers of sensors and controls in the majority of the key applications in which we compete and that we have developed our strong market position due to our long-standing customer relationships, technical expertise, product performance and quality and competitive cost structure. We compete in growing global market segments driven by demand for products that are safe, energy-efficient and environmentally-friendly. In addition, our long-standing position in emerging markets, including our 15-year presence in China, further enhances our growth prospects. We deliver a strong value proposition to our customers by leveraging an innovative portfolio of core technologies and manufacturing at high volumes in low-cost locations such as China, Mexico, Malaysia and the Dominican Republic.

 

History

 

We have a history of innovation dating back to our origins. We operated as a part of Texas Instruments from 1959 until we were acquired as a result of the 2006 Acquisition. Since then, we have expanded our operations in part through the acquisitions of First Technology Automotive in December 2006 and Airpax in July 2007.

 

Prior to our initial public offering in March 2010, we were a direct, 99% owned subsidiary of Sensata Investment Company S.C.A., a Luxembourg company, which we refer to as “SCA” or “Sensata Investment Co.,” which is owned by investment funds or vehicles advised or managed by Bain Capital, its co-investors and certain members of our senior management. As of January 31, 2011, Sensata Investment Co. owned 64.6% of our outstanding ordinary shares.

 

We conduct our operations through subsidiary companies, which operate business and product development centers in the United States, the Netherlands and Japan and manufacturing operations in China, South Korea, Malaysia, Mexico, the Dominican Republic and the United States. Many of these companies are the successors to businesses that have been engaged in the sensing and control business since 1916.

 

Recent Developments

 

On January 28, 2011, we used cash on hand to complete the acquisition of the Automotive on Board business of Honeywell International Inc. for approximately $140 million, subject to a working capital adjustment and certain transfer taxes. We will refer to the acquired business as Magnetic Speed and Position, which will be integrated into our sensors segment. We acquired this business in order to complement the existing operations of

 

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our sensors segment, provide new capabilities in light vehicle speed and position sensing, and expand our presence in emerging markets, particularly in China.

 

Selected Segment Information

 

We manage our sensors and controls businesses separately and report their results of operations as two segments for accounting purposes. Set forth below is selected information for each of these business segments for each of the periods presented.

 

Amounts and percentages in the tables below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add to the totals due to the effect of rounding.

 

The following table presents net revenue by segment and segment operating income for the following periods:

 

     For the year ended December 31,  
     2008      2009      2010  
(Amounts in millions)                     

Net revenue

        

Sensors segment

   $ 867.4       $ 685.1       $ 969.6   

Controls segment

     555.3         449.9         570.5   
                          

Total

   $ 1,422.7       $ 1,134.9       $ 1,540.1   
                          

Segment operating income

        

Sensors segment

   $ 221.9       $ 201.3       $ 327.1   

Controls segment

     136.5         133.9         193.3   
                          

Total

   $ 358.3       $ 335.2       $ 520.4   
                          

 

The following table presents net revenue by segment as a percentage of total net revenue and segment operating income as a percentage of segment net revenue for the following periods:

 

     For the year ended December 31,  
         2008             2009             2010      

Net revenue

      

Sensors segment

     61.0 %     60.4 %     63.0 %

Controls segment

     39.0        39.6        37.0   
                        

Total

     100.0 %     100.0 %     100.0 %
                        

Segment operating income

      

Sensors segment

     25.6 %     29.4 %     33.7 %

Controls segment

     24.6 %     29.8 %     33.9 %

 

For a reconciliation of total segment operating income to profit from operations, see Note 18 to our audited consolidated financial statements included elsewhere in this prospectus.

 

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Factors Affecting Our Operating Results

 

The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.

 

Net Revenue

 

We generate revenue from the sale of sensors and controls products across all major geographic areas. Our net revenue from product sales includes total sales less estimates of returns for product quality reasons and for price allowances. Price allowances include discounts for prompt payment as well as volume-based incentives.

 

Because we sell our products to end-users in a wide range of industries and geographies, demand for our products is generally driven more by the level of general economic activity rather than conditions in one particular industry or geographic region.

 

Our overall net revenue is generally impacted by the following factors:

 

   

fluctuations in overall economic activity within the geographic markets in which we operate;

 

   

underlying growth in one or more of our core end-markets, either worldwide or in particular geographies in which we operate;

 

   

the number of sensors and/or controls used within existing applications, or the development of new applications requiring sensors and/or controls;

 

   

the “mix” of products sold, including the proportion of new or upgraded products and their pricing relative to existing products;

 

   

changes in product sales prices (including quantity discounts, rebates and cash discounts for prompt payment);

 

   

changes in the level of competition faced by our products, including the launch of new products by competitors;

 

   

our ability to successfully develop and launch new products and applications; and

 

   

fluctuations in exchange rates.

 

While the factors described above impact net revenue in each of our operating segments, the impact of these factors on our operating segments can differ, as described below. For more information about risks relating to our business, see “Risk Factors—Risk Factors Related To Our Business.”

 

Cost of Revenue

 

We manufacture the majority of our products and subcontract only a limited number of products to third parties. As such, our cost of revenue consists principally of the following:

 

   

Production Materials Costs. Although we purchase much of the materials used in production on a global lowest-cost basis, our production materials costs are affected by global and local market conditions. A portion of our production materials contains metals, such as copper, nickel and aluminum, and precious metals, such as gold and silver, and the costs of these materials may vary with underlying metals pricing. We enter into forward contracts to hedge a portion of our exposure to the potential change in prices associated with these commodities. The terms of these contracts fix the price at a future date for various notional amounts associated with these commodities.

 

   

Employee Costs. These employee costs include the salary costs and benefit charges for employees involved in our manufacturing operations. These costs generally increase on an aggregate basis as sales

 

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and production volumes increase, and may decline as a percent of net revenue as a result of economies of scale associated with higher production volumes. We rely heavily on contract workers in certain geographies.

 

   

Sustaining Engineering Activity costs. These costs relate to modifications of existing products for use by new customers in familiar applications.

 

   

Other. Our remaining cost of revenue consists of:

 

   

customer-related development costs;

 

   

depreciation of fixed assets;

 

   

freight costs;

 

   

warehousing expenses;

 

   

purchasing costs; and

 

   

other general manufacturing expenses, such as expenses for energy consumption.

 

The main factors that influence our cost of revenue as a percent of net revenue include:

 

   

production volumes—production costs are capitalized in inventory based on normal production volumes; as revenue increases, the fixed portion of these costs does not;

 

   

transfer of production to our lower cost production facilities;

 

   

the implementation of cost control measures aimed at improving productivity, including reduction of fixed production costs, refinements in inventory management and the coordination of purchasing within each subsidiary and at the business level;

 

   

product lifecycles, as we typically incur higher cost of revenue associated with manufacturing over-capacity during the initial stages of product launches and when we are phasing out discontinued products;

 

   

the increase in the carrying value of the inventory that was adjusted to fair value as a result of the application of purchase accounting associated with acquisitions;

 

   

depreciation expense, including amounts arising from the adjustment of property, plant and equipment to fair value associated with acquisitions; and

 

   

changes in the price of raw materials, including certain metals.

 

Research and Development

 

Research and development, or “R&D” expenses, consist of costs related to direct product design, development and process engineering. The level of research and development expense is related to the number of products in development, the stage of development process, the complexity of the underlying technology, the potential scale of the product upon successful commercialization and the level of our exploratory research. We conduct such activities in areas we believe will accelerate our longer term net revenue growth. Our basic technologies have been developed through a combination of internal development and third-party efforts (often by parties with whom we have joint development relationships). Our development expense is typically associated with:

 

   

engineering core technology platforms to specific applications; and

 

   

improving functionality of existing products.

 

Costs related to modifications of existing products for use by new customers in familiar applications is accounted for in cost of revenue and not included in research and development expense.

 

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Selling, General and Administrative

 

Our selling, general and administrative, or “SG&A,” expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs, including:

 

   

salary and benefit costs for sales personnel and administrative staff, including share-based compensation expense. Expenses relating to our sales personnel generally increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume;

 

   

expense related to the use and maintenance of administrative offices, including depreciation expense;

 

   

other administrative expense, including expense relating to logistics, information systems and legal and accounting services;

 

   

general advertising expense;

 

   

other selling expenses, such as expenses incurred in connection with travel and communications; and

 

   

transaction costs associated with acquisitions.

 

Changes in SG&A expense as a percent of net revenue have historically been impacted by a number of factors, including:

 

   

changes in sales volume, as higher volumes enable us to spread the fixed portion of our administrative expense over higher revenue;

 

   

changes in the mix of products we sell, as some products may require more customer support and sales effort than others;

 

   

changes in our customer base, as new customers may require different levels of sales and marketing attention;

 

   

new product launches in existing and new markets, as these launches typically involve a more intense sales activity before they are integrated into customer applications;

 

   

customer credit issues requiring increases to the allowance for doubtful accounts; and

 

   

volume and timing of acquisitions.

 

Amortization of Intangible Assets and Capitalized Software

 

Acquisition-related intangible assets are amortized on an economic benefit basis according to the useful lives of the assets. Capitalized software licenses are amortized on a straight-line basis over the term of the license.

 

Impairment of Goodwill and Intangible Assets

 

Goodwill and intangible assets are reviewed for impairment on an annual basis unless events or circumstances occur which trigger the need for an earlier impairment review. For the years ended December 31, 2008 and 2009, we recorded impairment charges of $13.2 million and $19.9 million, respectively, associated with the Interconnection reporting unit. No impairment charges were required during fiscal year 2010. We believe that the global economic crisis, economic conditions within the semiconductor end-market and an increase in the competitive landscape surrounding suppliers to the semiconductor end-market were all factors that led to these impairment charges.

 

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Our revenue and earnings forecasts depend on many factors, including our ability to project customer spending, particularly within the semiconductor industry. Changes in the level of spending in the industry and/or by our customers could result in a change to our forecasts, which, in turn, could result in a future impairment of goodwill and/or intangible assets. See “—Critical Accounting Policies and Estimates” below for more discussion of the key assumptions that are used in the determination of fair value of our reporting units.

 

Restructuring

 

Restructuring costs consist of severance, outplacement, other separation benefits, pension settlement and curtailment losses and facilities and other exit costs.

 

Depreciation Expense

 

Property, plant and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Property, plant and equipment acquired through the 2006 Acquisition and the acquisitions of the First Technology Automotive and Airpax businesses were “stepped-up” to fair value on the date of the respective business acquisition resulting in a new cost basis for accounting purposes. The amount of the adjustment to the cost basis of these assets as a result of the 2006 Acquisition, the First Technology Automotive acquisition and the Airpax acquisition totaled $57.8 million, $2.2 million and $5.1 million, respectively.

 

Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

 

Assets held under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. These assets are depreciated on a straight-line basis over the shorter of the estimated useful lives or the period of the related lease.

 

Interest Expense, Net

 

Interest expense, net consists primarily of interest expense on institutional borrowings, interest rate derivative instruments and capital lease and other financing obligations. Interest expense, net also includes the amortization of deferred financing costs and interest expense on liabilities arising from uncertain tax positions.

 

Currency Translation Gain and Other, Net

 

Currency translation gain and other, net includes gains and losses recognized on currency translation, gains and losses recognized on our derivatives used to hedge commodity prices and foreign currency exposures, gains and losses on the disposition of property, plant and equipment and gains and losses on the repurchases of debt. We continue to derive a significant portion of our revenue in markets outside of the United States, primarily Europe and Asia. For financial reporting purposes, the functional currency of all our subsidiaries is the U.S. dollar. In certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar. At the date the transaction is recognized, each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are adjusted to the U.S. dollar using the current exchange rate with gains or losses recorded in the consolidated statements of operations.

 

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Provision for Income Taxes

 

We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. While the extent of our future tax liability is uncertain, the impact of purchase accounting for past and future acquisitions, changes to debt and equity capitalization of our subsidiaries and the realignment of the functions performed and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and Sensata as a whole.

 

Loss from Discontinued Operations

 

In December 2008, we announced our intention to discontinue and sell our Automotive Vision sensing business, or “Vision business.” In connection with this announcement, we reclassified to discontinued operations the results from operations of the Vision business and recognized a loss associated with measuring the net assets of the Vision business at fair value less cost to sell and other exit costs, in accordance with ASC Topic 360, Property, Plant, and Equipment.

 

Effects of Acquisitions and Other Transactions

 

Purchase Agreement

 

On April 27, 2006, our indirect wholly-owned subsidiary, Sensata Technologies B.V., completed the 2006 Acquisition, which was effected through a number of its subsidiaries that collectively acquired the assets and assumed the liabilities being transferred. The acquisition structure resulted in significant tax amortization, which has reduced our overall cash tax expense compared to predecessor periods. We also entered into a transition services agreement with Texas Instruments pursuant to which the parties agreed to provide various services to each other in the area of facilities-related services, finance and accounting, human resources, information technology system services, warehousing and logistics and records retention and storage. We ceased relying on these services from Texas Instruments in 2008. The fees for these services were equivalent to the provider’s cost.

 

Shareholders’ Equity

 

On March 16, 2010, we completed an initial public offering of our ordinary shares in which we sold 26,315,789 ordinary shares and our existing shareholders and certain employees sold 5,284,211 ordinary shares at a public offering price of $18.00 per share. The net proceeds to us of the initial public offering, excluding $2.5 million of proceeds from the exercise of stock options, totaled approximately $433.5 million after deducting the underwriters’ discounts and commissions and offering expenses. On April 12, 2010, we announced that the underwriters of our initial public offering exercised their option to purchase an additional 4,740,000 ordinary shares from selling shareholders, which included 353,465 ordinary shares obtained by certain selling shareholders through the exercise of stock options to purchase ordinary shares. The sale of the additional ordinary shares closed on April 14, 2010. We did not receive any proceeds from the sale of the additional ordinary shares, other than the proceeds from the exercise of the aforementioned stock options which totaled $2.5 million.

 

On November 17, 2010, we completed a secondary public offering of our ordinary shares in which our existing shareholders and certain employees sold 23,000,000 ordinary shares at a public offering price of $24.10 per share. The net proceeds to us of this secondary public offering were limited to the proceeds received from the exercise of stock options, which totaled $3.7 million. After that secondary public offering, Sensata Investment Co. owned approximately 64.7% of our ordinary shares.

 

Our authorized share capital consists of 400,000,000 ordinary shares with a nominal value of €0.01 per share, of which 173,522,647 ordinary shares were issued and 173,510,674 were outstanding as of December 31, 2010. This excludes 399,698 unvested restricted shares. We also have authorized 400,000,000 preference shares

 

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with a nominal value of €0.01 per share, none of which are outstanding. At December 31, 2010, there were 317,345 options available for grant under the First Amended and Restated Sensata Technologies Holding B.V. 2006 Management Option Plan and 4,571,500 options available for grant under the Sensata Technologies Holding N.V. 2010 Equity Incentive Plan. In addition, we had 10,088,394 shares available for issuance upon exercise of outstanding options, and 500,000 ordinary shares available for issuance under the Sensata Technologies Holding N.V. 2010 Employee Stock Purchase Plan.

 

Purchase Accounting

 

We accounted for the 2006 Acquisition and the acquisitions of First Technology Automotive and Airpax using the purchase method of accounting. As a result, the purchase prices for each of these transactions were allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values as of the date of each acquisition. The excess of the purchase price over the fair value of assets and liabilities was assigned to goodwill, which is not amortized for accounting purposes, but is subject to testing for impairment at least annually. The application of purchase accounting resulted in an increase in amortization and depreciation expense in the periods subsequent to acquisition relating to our acquired intangible assets and property, plant and equipment. In addition to the increase in the carrying value of property, plant and equipment, we extended the remaining depreciable lives of property, plant and equipment to reflect the estimated remaining useful lives for purposes of calculating periodic depreciation. We also adjusted the value of the inventory to fair value, increasing the costs and expenses recognized upon the sale of this acquired inventory.

 

On January 28, 2011, we used cash on hand to complete the acquisition of the Automotive on Board business for approximately $140 million, subject to a working capital adjustment and certain transfer taxes. We have not yet completed our allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed.

 

Increased Leverage

 

We are a highly leveraged company and our interest expense increased significantly in the periods following the consummation of the 2006 Acquisition and the acquisitions of First Technology Automotive and Airpax. While our interest expense declined in 2009 and 2010, it continues to represent a significant percentage of our results of operations. A portion of our debt has a variable interest rate. We have utilized interest rate swaps, interest rate collars and interest rate caps to hedge the effect of variable interest rates. Refer to “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk,” for more information regarding our hedging activities. In addition, a portion of our debt and the related interest is denominated in Euros, subjecting us to changes in foreign currency rates. We monitor our exposures to these foreign currency risks and generally employ operating and financing activities to offset these exposures where appropriate. Refer to “Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Risk,” for more information regarding our activities to mitigate these risks. Our large amount of indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities since a substantial portion of our cash flow from operations will be dedicated to the servicing of our debt, and this may place us at a competitive disadvantage as some of our competitors are less leveraged. Our leverage may make us more vulnerable to a downturn in our business, industry or the economy in general. See “Risk Factors.”

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Those estimates form the basis for our judgments that affect the amounts reported in the financial statements. Actual results could differ from

 

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our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 to our audited consolidated financial statements that appear elsewhere in this prospectus.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements.

 

Revenue Recognition

 

We recognize revenue in accordance with ASC Topic 605, Revenue Recognition. Revenue and related cost of revenue from product sales are recognized when the significant risks and rewards of ownership have been transferred, title to the product and risk of loss transfers to our customers and collection of sales proceeds is reasonably assured. Based on the above criteria, revenue is generally recognized when the product is shipped from our warehouse or, in limited instances, when it is received by the customer depending on the specific terms of the arrangement. Product sales are recorded net of trade discounts (including volume and early payment incentives), sales returns, value-added tax and similar taxes. Fees charged to our customers for shipping and handling are recorded in revenue. Shipping and handling costs are included in cost of revenue. Sales to customers generally include a right of return for defective or non-conforming product. Sales returns have not historically been significant to our net revenue and have been within our estimates.

 

Many of our products are designed and engineered to meet customer specifications. These activities and the testing of our products to determine compliance with those specifications occur prior to any revenue being recognized. Products are then manufactured and sold to customers. Customer arrangements do not involve post-installation or post-sale testing and acceptance.

 

Impairment of Goodwill and Intangible Assets

 

Identification of reporting units. We have four reporting units: Sensors, Electrical Protection, Power Protection and Interconnection. These reporting units have been identified based on the definitions and guidance provided in ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”), which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated. As businesses are acquired, we assign them to an existing reporting unit or create a new reporting unit.

 

Assignment of assets, liabilities and goodwill to each reporting unit. Assets acquired and liabilities assumed are assigned to a reporting unit as of the date of acquisition. In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units. Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from year to year. We view some assets and liabilities, such as cash and cash equivalents, our corporate offices, debt and deferred financing costs as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.

 

Accounting policies relating to goodwill and the goodwill impairment test. Businesses acquired are recorded at their fair value on the date of acquisition. The excess of the purchase price over the fair value of assets

 

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acquired and liabilities assumed is recognized as goodwill. As of December 31, 2010, goodwill and other intangible assets totaled $1,529.0 million and $723.1 million, respectively, or approximately 45.1% and 21.3% of our total assets, respectively.

 

In accordance with ASC 350, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis and whenever events or business conditions change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Our judgments regarding the existence of impairment indicators are based on several factors, including the performance of the end-markets served by our customers as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We perform our annual evaluation of goodwill and other intangible assets for impairment in the fourth quarter of each fiscal year.

 

The first step of our annual evaluation is to compare the estimated fair value of our reporting units to their respective carrying values to determine whether there is an indicator of potential impairment. If the carrying amount of a reporting unit exceeds its estimated fair value, we conduct a second step, in which we calculate the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the calculated implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets such as the assembled workforce) as if the reporting unit had been acquired in a business combination at the date of assessment and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

 

Estimated fair value for each reporting unit. In connection with our 2010 annual impairment review, we estimated the fair value of our reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future cash flows for each reporting unit for fiscal years 2011 through 2015, the “Discrete Projection Period.” We estimated the value of the cash flows beyond fiscal year 2015, or the “Terminal Year,” by applying a multiple to the projected fiscal year 2015 EBITDA. The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated weighted-average cost of capital appropriate for each reporting unit. The estimated weighted-average cost of capital was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures for estimating discounted future cash flows, including the Terminal Year valuation were reasonable and consistent with accepted valuation practices.

 

We also estimated the fair value of our reporting units using the guideline company method. Under this method we performed an analysis to identify a group of publicly-traded companies that were comparable to each reporting unit. We calculated an implied EBITDA multiple (e.g., invested capital/ EBITDA) for each of the guideline companies and selected either the high, low or average multiple depending on various facts and circumstances surrounding the reporting unit and applied it to that reporting units’ trailing twelve month EBITDA. Although we estimate the fair value of our reporting units using the guideline method, we do so for corroborative purposes, and place primary weight on the discounted cash flow method.

 

The preparation of the long-range forecasts, the selection of the discount rates and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period.

 

Goodwill impairment. During the fourth quarter of 2008, we determined that goodwill associated with the Interconnection reporting unit was impaired and recorded a charge of $13.2 million in the consolidated statements of operations. During the first quarter of 2009, we determined that goodwill associated with the

 

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Interconnection reporting unit had become further impaired and recorded a charge of $5.3 million. We believe that the global economic crisis, the economic conditions within the semiconductor end-market and an increase in the competitive landscape surrounding suppliers to the semiconductor end-market were all factors that led to the impairment of goodwill. We believe that the global economic crisis and the economic conditions within the semiconductor end-market worsened from the fourth quarter of 2008 to the first quarter of 2009, leading to the second impairment charge.

 

The fair value and carrying value of the Interconnection reporting unit after the impairment charges in the first quarter of 2009 were $15.1 million and $14.1 million, respectively. The fair value and carrying value of the Interconnection reporting unit as of October 1, 2009 were $26.7 million and $14.7 million, respectively. Our financial performance changed significantly during 2009. For example, our net revenue during the quarters ended March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009 was $239.0 million, $255.4 million, $302.5 million and $338.1 million, respectively. We believe these changes generally follow the pattern of the performance in the various end-markets served by our customers.

 

During the quarter ended December 31, 2010, we evaluated our goodwill for impairment and determined that the fair values of the reporting units exceeded their carrying values on that date. Should certain assumptions used in the development of the fair values of our reporting units change, we may be required to recognize additional goodwill impairments. The estimated fair values of the Sensors, Electrical Protection, Power Protection and Interconnection reporting units used in those analyses exceeded their carrying values by approximately 215%, 180%, 60% and 190%, respectively.

 

We did not prepare updated interim goodwill impairment analyses as of December 31, 2010 for any reporting unit, as we believed, based on our financial performance during the fourth quarter of 2010, the financial forecasts and the improvement in the global economy and the end-markets our customers serve, that there were no indicators of potential impairments.

 

Types of events that could result in a goodwill impairment. As noted above, the preparation of the long-range forecasts, the selection of the discount rates and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period. We believe that a “double-dip” in the global economy, a scenario in which there is a short period of growth following the bottom of a recession, followed immediately by another sharp decline that results in another recession could require us to revise our long-term projections and could reduce the multiples applied to the Terminal Year value. Such revisions could result in a goodwill impairment charge in the future.

 

Indefinite-lived intangible assets. We perform an annual impairment review of our indefinite-lived intangible assets unless events occur which trigger the need for an earlier impairment review. The impairment review requires management to make assumptions about future conditions impacting the value of the indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, royalty rates, market share and other items. During the fourth quarter of 2010, we evaluated our indefinite-lived intangible assets for impairment and determined that the fair values of the indefinite-lived trade names exceeded their carrying values at that time. Should certain assumptions used in the development of the fair value of our indefinite-lived intangible assets change, we may be required to recognize impairments of these intangible assets.

 

Definite-lived intangible assets. Reviews are regularly performed to determine whether facts or circumstances exist that indicate the carrying values of our definite-lived intangible assets are impaired. The recoverability of these assets is assessed by comparing the projected undiscounted net cash flows associated with those assets to their respective carrying amounts. If the sum of the projected undiscounted net cash flows falls below the carrying value of the assets, the impairment charge is based on the excess of the carrying amount over the fair value of those assets. We determine fair value by using the appropriate income approach valuation

 

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methodology depending on the nature of the intangible asset. During the first quarter of 2009, we determined that certain intangible assets associated with the Interconnection reporting unit were impaired, and we recorded a charge of $14.6 million. We believe that the global economic crisis, the economic conditions within the semiconductor end-market and an increase in the competitive landscape surrounding suppliers to the semiconductor end-market were all factors that led to the impairment of intangible assets.

 

Impairment of long-lived assets. We periodically re-evaluate carrying values and estimated useful lives of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the related assets may not be recoverable. We use estimates of undiscounted cash flows from long-lived assets to determine whether the carrying value of such assets is recoverable over the assets’ remaining useful lives. These estimates include assumptions about future conditions within us and the industry. If an asset is determined to be impaired, the impairment is the amount by which the carrying value of the asset exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.

 

Income Taxes

 

As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce the deferred tax assets to an amount that, in our judgment, is more likely than not to be recovered.

 

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered. Our assessment of future taxable income is based on historical experience and current and anticipated market and economic conditions and trends. In the event that actual results differ from these estimates or we adjust our estimates in the future, we may need to adjust our valuation allowance, which could materially impact our consolidated financial position and results of operations.

 

Pension and Post-Employment Benefit Plans

 

We sponsor various pension and post-employment benefit plans covering our employees in several countries. The estimates of our obligations and related expense of these plans recorded in our financial statements are based on certain assumptions. The most significant assumptions relate to the discount rate, expected return on plan assets and rate of increase in healthcare costs. Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates and mortality rates. These assumptions are updated annually by us. The difference between these assumptions and actual experience results in the recognition of an asset or liability. If total net actuarial (gain)/loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pension cost over the average remaining service lives of the employees participating in the benefit plan.

 

The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in our financial statements. In estimating this rate, we consider rates of return on high-quality fixed income investments included in various published bond indexes, adjusted to eliminate the effect of call provisions and differences in the timing and amounts of cash outflows related to the bonds.

 

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To determine the expected return on plan assets, we considered the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future and our investment strategy and asset mix with respect to the plans’ funds.

 

The rate of increase in healthcare costs directly impacts the estimate of our future obligations in connection with our post-employment medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs under similarly designed plans, the level of increase in healthcare costs expected in the future and the design features of the underlying plans.

 

Share-Based Payment Plans

 

ASC Topic 718, Compensation—Stock Compensation (“ASC 718”) requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units, and recognize the fair value as compensation expense over the requisite service period.

 

Prior to our initial public offering, our outstanding option awards were generally divided into three tranches. The first tranche is subject to time vesting. The second and third tranches are subject to time-based vesting and, additionally, the completion of a liquidity event that results in specified returns on the Sponsors’ investment. During the third quarter of 2009, Tranche 3 options were converted to Tranche 2 options. During the first quarter of 2010, we completed our initial public offering, which converted all Tranche 2 and 3 options to time-based vesting only.

 

The fair value of the Tranche 1 options are estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Key assumptions used in estimating the grant-date fair value of these options are as follows: the fair value of the ordinary shares, dividend yield, expected volatility, risk-free interest rate and expected term. The expected term of the time vesting options was based on the “simplified” methodology prescribed by the Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”), in which the expected term is determined by computing the mathematical mean of the average vesting period and the contractual life of the options. We utilize the simplified method for options granted due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the term. Also, because of our lack of history as a public company, we consider the historical and implied volatility of publicly-traded companies within our industry when selecting the appropriate volatility to apply to the options. Ultimately, we utilize the implied volatility to calculate the fair value of the options as it provides a forward-looking indication and may offer insight into expected industry volatility. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected life of the related grant. The forfeiture rate is based on our estimate of forfeitures by plan participants based on historical forfeiture rates. The dividend yield is based on management’s judgment with input from our board of directors.

 

Since completion of our initial public offering in March 2010, we have valued ordinary shares in connection with the issuance of share-based payment awards using the closing price of our stock on the New York Stock Exchange on the date of grant. Prior to our stock being traded on the New York Stock Exchange, we relied on valuation analyses that utilized a combination of the discounted cash flow method and the guideline company method to determine the fair value of our ordinary shares in connection with our awards granted in September and December 2009. For our other awards granted prior to our stock being traded on the New York Stock Exchange, we relied solely on the discounted cash flow method. The assumptions required by these valuation methods involved the use of significant judgments and estimates. For the discounted cash flow method, we prepared detailed annual projections of future cash flows over a period of five fiscal years, or the “Discrete Projection Period.” We estimated the total value of the cash flow beyond the final fiscal year (the “Terminal Year”) by applying a multiple to our Terminal Year EBITDA. The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated weighted-average cost of capital. The estimated weighted-average cost of capital was derived, in part, from the median capital structure of comparable companies

 

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within similar industries. We believe that our procedures for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices. For the guideline company method, we performed an analysis to identify a group of publicly-traded companies that were comparable to us. Many of our competitors are smaller, privately-held companies or divisions within large publicly-traded companies. Therefore, in order to develop market-based multiples, we used data from publicly-traded companies that we believe operate in industries similar to our own. We calculated an implied EBITDA multiple (e.g., enterprise value/EBITDA) for each of the guideline companies and selected the high multiple to apply to our projected EBITDA for the next fiscal year. Because the resulting enterprise value under this guideline company method had generally been within 10% of the enterprise value under the discounted cash flow method, we utilized the average of the two methods to determine the fair value of the ordinary shares. In addition, we applied a marketability discount to the implied value of equity. We believe that this approach is consistent with the principles and guidance set forth in the 2004 AICPA Practice Aid on Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

 

During 2009, we amended our First Amended and Restated Sensata Technologies Holding B.V. 2006 Management Option Plan to increase the ordinary shares reserved for issuance and to change the vesting rules by changing the performance measure of Tranche 3 options to equal that of the Tranche 2 options, effectively converting the Tranche 3 options to Tranche 2 options. See “Executive Compensation—Components of Compensation—Equity Compensation” for further discussion of our share-based payment plans.

 

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Results of Operations

 

The table below presents our historical results of operations in millions of dollars and as a percent of net revenue. We have derived the statements of operations for the years ended December 31, 2008, 2009 and 2010 from the audited consolidated financial statements included elsewhere in this prospectus. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add to the totals due to the effect of rounding.

 

     For the year ended December 31,  
     2008     2009     2010  
(Amounts in millions)    Amount     Percent of
Revenue
    Amount     Percent of
Revenue
    Amount     Percent of
Revenue
 

Net revenue:

            

Sensors segment

   $ 867.4        61.0   $ 685.1        60.4   $  969.6        63.0

Controls segment

     555.3        39.0        449.9        39.6        570.5       37.0   
                                                

Net revenue

     1,422.7        100.0        1,134.9        100.0        1,540.1        100.0   

Operating costs and expenses:

            

Cost of revenue

     951.8        66.9        742.1        65.4        948.1        61.6   

Research and development

     38.3        2.7        16.8        1.5        24.7       1.6   

Selling, general and administrative

     166.6        11.7        127.0        11.2        194.6       12.6   

Amortization of intangible assets and capitalized software

     148.8        10.5        153.1        13.5        144.5       9.4   

Impairment of goodwill and intangible assets

     13.2        0.9        19.9        1.8                 

Restructuring

     24.1        1.7        18.1        1.6        (0.1     (0.0
                                                

Total operating costs and expenses

     1,342.7        94.4        1,076.9        94.9        1,311.7       85.2   
                                                

Profit from operations

     80.0        5.6        58.1        5.1        228.3       14.8   

Interest expense

     (197.8     (13.9     (150.6     (13.3     (106.4 )     (6.9

Interest income

     1.5        0.1        0.6        0.1        1.0       0.1   

Currency translation gain and other, net

     55.5        3.9        107.7        9.5        45.4       2.9   
                                                

(Loss)/income from continuing operations before income taxes

     (60.9     (4.3     15.8        1.4        168.4       10.9   

Provision for income taxes

     53.5        3.8        43.0        3.8        38.3       2.5   
                                                

(Loss)/income from continuing operations

     (114.4     (8.0     (27.3     (2.4     130.1       8.4   

Loss from discontinued operations

     (20.1     (1.4     (0.4                     
                                                

Net (loss)/income

   $ (134.5     (9.5 )%    $ (27.7     (2.4 )%    $ 130.1        8.4
                                                

 

Year Ended December 31, 2010 (“fiscal year 2010”) Compared to the Year Ended December 31, 2009 (“fiscal year 2009”)

 

Net revenue

 

Net revenue for fiscal year 2010 increased $405.1 million, or 35.7%, to $1,540.1 million from $1,134.9 million for fiscal year 2009. Net revenue increased 36.9% due to higher volumes, partially offset by a decrease of 0.9% due to pricing and 0.3% due to unfavorable foreign exchange rates, primarily the U.S. dollar to Euro exchange rate. The increase in volumes was due primarily to growth in our mature markets of 16.0%, growth in content of 10.1%, growth in our emerging markets (primarily China) of 6.9% and inventory replenishment of 4.4%, partially offset by a 0.5% reduction due to other miscellaneous factors.

 

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Sensors business segment net revenue for fiscal year 2010 increased $284.5 million, or 41.5%, to $969.6 million from $685.1 million for fiscal year 2009. Sensors net revenue increased 43.8% due to higher volumes, partially offset by decreases of 1.6% due to pricing and 0.7% due to the effect of unfavorable foreign exchange rates, primarily the U.S. dollar to Euro exchange rate.

 

Controls business segment net revenue for fiscal year 2010 increased $120.6 million, or 26.8%, to $570.5 million from $449.9 million for fiscal year 2009. Controls net revenue increased 26.4% due to higher volumes, 0.3% due to pricing and 0.1% due to favorable foreign exchange rates.

 

Cost of revenue

 

Cost of revenue for fiscal year 2010 was $948.1 million, or 61.6% of net revenue, compared to $742.1 million, or 65.4% of net revenue, for fiscal year 2009. Cost of revenue increased primarily due to the increase in unit volumes sold. Cost of revenue decreased as a percentage of net revenue primarily due to cost savings initiatives resulting from the various restructuring activities implemented during the second half of fiscal year 2008 and fiscal year 2009, and the leverage effect of higher volumes on certain fixed manufacturing costs. Depreciation expense for fiscal years 2010 and 2009 was $38.6 million and $48.4 million, respectively, of which $34.8 million and $44.7 million, respectively, was included in cost of revenue.

 

Research and development expense

 

Research and development expense increased $7.9 million, or 46.8%, to $24.7 million, or 1.6% of net revenue in fiscal year 2010, from $16.8 million, or 1.5% of net revenue in fiscal year 2009. We have continued to increase research and development spending across various areas to continue developing innovative solutions for our customers.

 

Selling, general and administrative expense

 

SG&A expense for fiscal year 2010 was $194.6 million, or 12.6% of net revenue compared to $127.0 million, or 11.2% of net revenue for fiscal year 2009. SG&A expense increased primarily due to $22.4 million of expense associated with the termination of the advisory agreement with the Sponsors at their election upon completion of our initial public offering, $18.9 million of stock compensation expense associated with the performance vesting of the Tranche 2 and 3 option awards, both of which occurred in March 2010, an $11.5 million increase in incentive compensation, and $3.2 million in costs associated with the acquisition of the Automotive on Board business.

 

Amortization of intangible assets and capitalized software

 

Amortization expense associated with intangible assets and capitalized software for fiscal year 2010 was $144.5 million, or 9.4% of net revenue, compared to $153.1 million, or 13.5% of net revenue for fiscal year 2009. The decrease in amortization expense reflects the pattern in which the economic benefits of the intangible assets are being realized.

 

Impairment of goodwill and intangible assets

 

During 2010, no impairment charges were required related to goodwill and other intangible assets. In the fourth quarter of 2010, we estimated that the fair value of the Sensors, Electrical Protection, Power Protection and Interconnection reporting units (as of October 1, 2010) exceeded their carrying values by approximately 215%, 180%, 60% and 190%, respectively. We did not update the goodwill impairment analysis through December 31, 2010 as we believe that our financial performance, future projections, and the global economy provide sufficient evidence that there were no indicators of impairment between the time our annual test was performed and December 31, 2010.

 

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During 2009, we recorded a $19.9 million impairment charge related to goodwill and intangible assets associated with our Interconnection reporting unit. See Note 5, “Goodwill and Other Intangible Assets,” in our audited consolidated financial statements included elsewhere in this prospectus for more detailed discussion of this impairment. See “—Critical Accounting Policies and Estimates” for more discussion of the key assumptions that are used in the determination of fair value of our reporting units.

 

Restructuring

 

Restructuring charges decreased by $18.2 million to $(0.1) million in fiscal year 2010 from $18.1 million in fiscal year 2009. Beginning in the second half of fiscal year 2008 and continuing into fiscal year 2009, we implemented several restructuring activities in order to reduce costs given the decline in our net revenue, activities which are referred to as the “2008 Plan”. These activities consisted of reducing the workforce in our business centers and manufacturing facilities throughout the world and moving certain manufacturing operations to low-cost countries. Restructuring charges associated with the 2008 Plan totaled $18.3 million for fiscal year 2009 and consisted of $12.9 million related to severance, $4.8 million related to pension settlement, curtailment and other related charges, and $0.6 million related to other exit costs.

 

The decrease in charges in 2010 is primarily due to the fact that the 2008 Plan activity was substantially completed in 2009. However, in 2010 we recorded approximately $1.1 million in charges that represented the termination of a limited number of employees located in various business centers and facilities throughout the world, but which we did not consider to be the initiation of a larger restructuring program. These charges were offset by a reversal of prior restructuring accruals related to the assignment of the Farnborough lease at better-than-expected rates and to the expiration of underutilized termination benefits (tuition assistance, job placement services, etc.).

 

Interest expense

 

Interest expense was $106.4 million for fiscal year 2010 compared to $150.6 million for fiscal year 2009. Interest expense decreased primarily due to a reduction of principal balances related to the repurchase of the Senior Notes and the Senior Subordinated Notes in April 2009, March 2010 and May 2010, as well as lower average interest rates on the U.S. dollar and Euro term loan facilities.

 

Interest expense for fiscal year 2010 consisted primarily of $80.5 million on our outstanding debt, $11.6 million associated with our outstanding derivative instruments, $8.6 million in amortization of deferred financing costs, $3.6 million associated with capital lease and other financing obligations and $1.0 million on line of credit and revolving credit facility fees.

 

Interest expense for fiscal year 2009 consisted primarily of $120.8 million on our outstanding debt, $14.6 million associated with our outstanding derivative instruments, $9.1 million in amortization of deferred financing costs, $3.7 million of interest associated with capital lease and other financing obligations and $1.6 million on line of credit and revolving credit facility fees.

 

Interest income

 

Interest income for fiscal years 2010 and 2009 was $1.0 million and $0.6 million, respectively.

 

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Currency translation gain and other, net

 

Currency translation gain and other, net was $45.4 million for fiscal year 2010 compared to $107.7 million for fiscal year 2009. Currency translation gain and other, net for fiscal year 2010 consisted primarily of currency gains of $72.8 million resulting from the re-measurement of our foreign currency denominated debt and net gains of $9.1 million associated with our commodity forward contracts, partially offset by losses of $23.5 million resulting from the extinguishment of debt, net currency losses of $7.3 million resulting from the re-measurement of net monetary assets denominated in foreign currencies, and losses of $5.2 million related to the write-off of tax indemnification assets and other tax-related items.

 

Currency translation gain and other, net for fiscal year 2009 consisted primarily of gains of $120.1 million resulting from the extinguishment of debt, net gains of $2.6 million associated with our commodity forward contracts and net currency gains of $0.3 million resulting from the re-measurement of net monetary assets denominated in foreign currencies. Currency translation gain and other, net for fiscal year 2009 also included currency losses of $13.6 million resulting from the re-measurement of our foreign currency denominated debt and an impairment loss of $1.7 million associated with our manufacturing facilities classified as held for sale.

 

Provision for income taxes

 

Provision for income taxes for fiscal years 2010 and 2009 totaled $38.3 million and $43.0 million, respectively. Our current tax provision relates primarily to our profitable operations in foreign tax jurisdictions and withholding taxes on interest and royalty income. Our deferred tax expense relates primarily to amortization of tax deductible goodwill, withholding taxes on subsidiary earnings and other temporary book to tax differences. Additionally, during the fourth quarter of 2010, based upon an analysis of our cumulative history of Japan earnings over a twelve-quarter period and an assessment of our expected future results of operations, we determined that it had become more-likely-than-not that we would be able to realize our Japan net operating loss carry-forward tax assets prior to their expiration. As a result, during the fourth quarter of 2010, we released the valuation allowance related to our Japan deferred tax assets resulting in a net benefit in our deferred tax expense of approximately $18.5 million.

 

Year Ended December 31, 2009 (“fiscal year 2009”) Compared to the Year Ended December 31, 2008 (“fiscal year 2008”)

 

Net revenue

 

Net revenue for fiscal year 2009 decreased $287.7 million, or 20.2%, to $1,134.9 million from $1,422.7 million for fiscal year 2008. Net revenue decreased 18.5% due to a reduction in volume, 1.1% due to unfavorable foreign currency exchange rates, primarily the U.S. dollar to Euro exchange rate, and 0.6% due to pricing. Sales during fiscal year 2009 benefited from government incentive programs, such as the “Car Allowance Rebate System” in the U.S. and the “New Countryside Initiative” in China.

 

Sensors business segment net revenue for fiscal year 2009 decreased $182.3 million, or 21.0%, to $685.1 million from $867.4 million for fiscal year 2008. Sensors net revenue decreased 18.2% due to lower volumes, 1.3% due to unfavorable foreign exchange rates, primarily the U.S. dollar to Euro exchange rate, and 1.5% due to pricing. The decrease in volumes was due to the deterioration in the global economy and the automotive end-market, which began during the second half of fiscal year 2008 and continued during fiscal year 2009.

 

Controls business segment net revenue for fiscal year 2009 decreased $105.4 million, or 19.0%, to $449.9 million from $555.3 million for fiscal year 2008. Controls net revenue decreased 19.1% due to lower volumes and 0.7% due to unfavorable foreign exchange rates, primarily the U.S. dollar to Euro exchange rate, partially offset by an increase of 0.8% due to higher pricing. The decrease in volumes was also due to the deterioration in the global economy and certain end-markets, such as heating, ventilation and air-conditioning, lighting and appliances, which began during the second half of fiscal year 2008 and continued during fiscal year 2009.

 

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Cost of revenue

 

Cost of revenue for fiscal years 2009 and 2008 was $742.1 million and $951.8 million, respectively. Cost of revenue decreased primarily due to lower revenue and cost savings initiatives resulting from the various restructuring activities implemented during the second half of fiscal year 2008 and continuing into fiscal year 2009. Depreciation expense for fiscal years 2009 and 2008 was $48.4 million and $51.4 million, respectively, of which $44.7 million and $47.7 million, respectively, was included in cost of revenue. Cost of revenue as a percentage of net revenue for fiscal years 2009 and 2008 was 65.4% and 66.9%, respectively. Cost of revenue as a percentage of net revenue decreased due primarily to the cost saving initiatives described above.

 

Research and development expense

 

Research and development expense for fiscal years 2009 and 2008 was $16.8 million and $38.3 million, respectively. Research and development expense as a percentage of net revenue for fiscal years 2009 and 2008 was 1.5% and 2.7%, respectively. The decrease in research and development expense and as a percentage of net revenue was due to a reduction in headcount and other spending resulting from various restructuring and other cost reduction activities.

 

Selling, general and administrative expense

 

SG&A expense for fiscal years 2009 and 2008 was $127.0 million and $166.6 million, respectively. SG&A expenses decreased primarily due to the cost savings resulting from the restructuring activities that were implemented during the second half of fiscal year 2008 and in fiscal year 2009, as well as other cost reduction measures in response to global economic conditions. SG&A expense as a percentage of net revenue for fiscal years 2009 and 2008 was 11.2% and 11.7%, respectively. SG&A expense as a percentage of net revenue decreased primarily due to the cost saving measures described above.

 

Amortization of intangible assets and capitalized software

 

Amortization expense associated with intangible assets and capitalized software for fiscal years 2009 and 2008 was $153.1 million and $148.8 million, respectively. The increase in amortization expense reflects the pattern in which the economic benefits of the intangible assets are being realized. Amortization expense as a percentage of net revenue was 13.5% and 10.5% for fiscal years 2009 and 2008, respectively. The increase in amortization expense as a percentage of net revenue was due to the increase in amortization expense described above, combined with the decrease in net revenue.

 

Impairment of goodwill and intangible assets

 

Impairment of goodwill and intangible assets for fiscal years 2009 and 2008 was $19.9 million and $13.2 million, respectively. These charges relate to the Interconnection reporting unit as discussed in more detail in Note 5, “Goodwill and Other Intangible Assets,” in our audited consolidated financial statements included elsewhere in this prospectus.

 

We attribute these impairment charges to the global economic crisis, economic conditions within the semiconductor end-market and an increase in the competitive landscape surrounding suppliers to the semiconductor end-market. See “—Critical Accounting Policies and Estimates” for more discussion of the key assumptions that are used in the determination of fair value of our reporting units.

 

In the fourth quarter of 2009, we estimated that the fair values of the Sensors, Electrical Protection, Power Protection and Interconnection reporting units (as of October 1, 2009) exceeded their carrying values by approximately 145%, 115%, 25% and 80%, respectively.

 

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Restructuring

 

Restructuring charges for fiscal years 2009 and 2008 were $18.1 million and $24.1 million, respectively. Beginning in the second half of fiscal year 2008 and continuing into fiscal year 2009, we implemented the 2008 Plan, which consisted of reducing the workforce in our business centers and manufacturing facilities throughout the world and moving certain manufacturing operations to low-cost countries. Restructuring charges associated with the 2008 Plan totaled $18.3 million for fiscal year 2009 and consisted of $12.9 million related to severance, $4.8 million related to pension settlement, curtailment and other related charges, and $0.6 million related to other exit costs. In addition, in fiscal year 2009, we recognized a credit of $0.2 million in our consolidated statement of operations associated with certain facility exit costs related to the First Technology Automotive Plan.

 

Interest expense

 

Interest expense for fiscal years 2009 and 2008 was $150.6 million and $197.8 million, respectively. Interest expense for fiscal year 2009 consisted primarily of $120.8 million of interest expense on our outstanding debt, $14.6 million of interest associated with our outstanding derivative instruments, $9.1 million of amortization of deferred financing costs, $3.7 million of interest associated with our capital lease and other financing obligations and $1.6 million of interest on line of credit and revolving credit facility fees.

 

Interest expense for fiscal year 2008 consisted primarily of $177.1 million of interest expense on our outstanding debt, $10.7 million of amortization of deferred financing costs, $4.9 million of interest associated with our outstanding derivative instruments, $3.3 million of interest associated with our capital lease and other financing obligations, and $1.3 million of interest on line of credit and revolving credit facility fees.

 

Interest income

 

Interest income for fiscal years 2009 and 2008 was $0.6 million and $1.5 million, respectively.

 

Currency translation gain and other, net

 

Currency translation gain and other, net for fiscal years 2009 and 2008 was $107.7 million and $55.5 million, respectively. Currency translation gain and other, net for fiscal year 2009 consisted primarily of gains of $120.1 million resulting from the extinguishment of debt, net gains of $2.6 million associated with our commodity forward contracts and net currency gains of $0.3 million resulting from the re-measurement of net monetary assets denominated in foreign currencies. These gains were partially offset by currency losses of $13.6 million resulting from the re-measurement of our foreign currency denominated debt and an impairment loss of $1.7 million associated with our manufacturing facilities classified as held for sale.

 

Currency translation gain and other, net for fiscal year 2008 consisted primarily of currency gains of $53.2 million resulting from the re-measurement of our foreign currency denominated debt and gains of $15.0 million resulting from the extinguishment of debt, partially offset by losses of $8.3 million associated with our commodity forward contracts and net currency losses of $5.0 million resulting from the re-measurement of net monetary assets denominated in foreign currencies.

 

Provision for income taxes

 

Provision for income taxes for fiscal years 2009 and 2008 totaled $43.0 million and $53.5 million, respectively. Our tax provision consists of current tax expense which relates primarily to our profitable operations in foreign tax jurisdictions and deferred tax expense which relates primarily to amortization of tax deductible goodwill. Several factors contributed to the decrease in our income tax provision for fiscal year 2009 as compared to fiscal year 2008 including the composition of income and loss among jurisdictions and a tax benefit related to the goodwill impairment recorded during the first quarter of 2009.

 

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Loss from discontinued operations

 

Loss from discontinued operations for fiscal years 2009 and 2008 totaled $0.4 million and $20.1 million, respectively.

 

Other Important Performance Measures

 

We present Adjusted Net Income in this prospectus to provide investors with a supplemental measure of our operating performance. We believe that Adjusted Net Income is a useful performance measure and is used by our management, board of directors and investors. Management uses Adjusted Net Income as a measure of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, and in communications with our board of directors and investors concerning our financial performance. We believe investors and securities analysts also use Adjusted Net Income in their evaluation of our performance and the performance of companies similar to us. Adjusted Net Income is a non-GAAP financial measure.

 

We define Adjusted Net Income as net income/(loss) excluding acquisition, integration and financing costs and other significant costs (as outlined below); impairment of goodwill and intangible assets; severance and other termination costs associated with downsizing; stock compensation expense; management fees; costs related to our initial public offering; (gain)/loss on extinguishment of debt; currency translation (gain)/loss on debt and (gain)/loss on related hedges; amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets; deferred income tax and other tax expense; amortization expense of deferred financing costs; interest expense related to uncertain tax positions; and other costs or gains.

 

Many of these adjustments to net income/(loss) relate to a series of strategic initiatives developed by our management and our Sponsors following the 2006 Acquisition aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives included, among other items, acquisitions, divestitures, restructurings of certain operations and various financing transactions. We describe these and other costs in more detail below.

 

The use of Adjusted Net Income has limitations and you should not consider this performance measure in isolation from, or as an alternative to, U.S. GAAP measures such as net income/(loss).

 

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The following table provides a reconciliation to Adjusted Net Income from net (loss)/income, the most directly comparable financial measure presented in accordance with U.S. GAAP, for the periods presented:

 

     (unaudited)  
     For the year ended December 31,  
(Amounts in thousands)    2008     2009     2010  

Net (loss)/income

   $ (134,531   $ (27,681   $ 130,050   
                        

Acquisition, integration and financing costs and other significant items(a)

     69,345        22,985        *   

Impairment of goodwill and intangible assets(b)

     13,173        19,867          

Severance and other termination costs associated with downsizing(c)

     12,282        12,276        *   

Stock compensation expense(d)

     2,108        2,233        *   

Management fees(e)

     4,000        4,000          

Costs related to initial public offering(f)

                   43,298   

(Gain)/loss on extinguishment of debt(g)

     (14,961     (120,123     23,474   

Currency translation (gain)/loss on debt and (gain)/loss on related hedges(h)

     (53,209     15,301        (67,526

Amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets(i)

     160,594        157,797        145,184   

Deferred income tax and other tax expense(j)

     29,980        26,592        28,863   

Amortization expense of deferred financing costs

     10,698        9,055        8,564   

Interest expense related to uncertain tax positions

     43        823        984   

Other(k)

     123        973        (6,484
                        

Total adjustments

     234,176        151,779        176,357   
                        

Adjusted Net Income

   $ 99,645      $ 124,098      $ 306,407   
                        

 

  *   Beginning in 2010, we have not included these items as reconciling items to derive Adjusted Net Income. We eliminated these items from our calculation based on input we received from investors and analysts.

 

  (a)   See table below for details of acquisition, integration and financing costs and other significant items.
  (b)   Represents the impairment of goodwill and intangible assets associated with a reporting unit within our controls business segment and relates to products used in the semiconductor business.
  (c)   Represents severance, outplacement costs and special termination benefits associated with the downsizing of various manufacturing facilities and our corporate office.
  (d)   Represents share-based compensation expense recorded in accordance with ASC Topic 718, Compensation—Stock Compensation, excluding $18.9 million in 2010 related to the cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification.
  (e)   Represents fees expensed under the terms of the advisory agreement with our Sponsors. This agreement was terminated in connection with the completion of our initial public offering. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”
  (f)   Represents costs recorded as expenses related to our initial public offering in March 2010, including $18.9 million recorded as a cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification, and $22.4 million in fees related to the termination of the advisory agreement with the Sponsors at their option. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”
  (g)   Relates to the repurchases of outstanding notes.

 

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  (h)   Reflects the unrealized losses/(gains) associated with the translation of our Euro-denominated debt into U.S. dollars and losses/(gains) on related hedging transactions.
  (i)   Represents amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets in purchase accounting that resulted from the 2006 Acquisition and the acquisitions of First Technology Automotive and Airpax.
  (j)   Represents deferred income tax and other tax expense, including provisions for uncertain tax positions, and in 2010, $5.2 million of expense associated with the write-off of tax indemnification assets and other tax-related assets.
  (k)   Represents unrealized (gains)/losses on commodity forward contracts and estimated potential penalty expenses associated with uncertain tax positions.

 

The following table provides detail of the components of acquisition, integration and financing costs and other significant items, the total of which is included as an adjustment to derive Adjusted Net Income, as shown in the table above:

 

     (unaudited)  
     For the year ended December 31,  
(Amounts in thousands)        2008            2009          2010    

Acquisition, integration and financing costs and other significant items:

        

Transition costs(a)

   $ 4,052       $ 23       $   

Litigation costs(b)

     840         147         *   

Integration and finance costs(c)

     20,931         2,813           

Relocation and disposition costs(d)

     12,828         8,202         *   

Pension charges(e)

     3,588         4,828         *   

Other(f)

     27,106         6,972           
                          

Total acquisition, integration and financing costs and other significant items

   $ 69,345       $ 22,985       $ *   
                          

 

  *   Beginning in 2010, we have not included these items as reconciling items to derive Adjusted Net Income. We eliminated these items from our calculation based on input we received from investors and analysts.

 

 

  (a)   Represents transition costs incurred by us in becoming a stand-alone company and complying with Section 404 of the Sarbanes-Oxley Act of 2002.
  (b)   Represents litigation costs we recognized related to customers alleging defects in certain of our products, which were manufactured and sold prior to April 27, 2006 (inception).
  (c)   Represents integration and financing costs related to the acquisitions of Airpax, First Technology Automotive and SMaL Camera Technologies, Inc., or “SMaL Camera,” and other consulting and advisory fees associated with acquisitions and financings, whether or not consummated.
  (d)   Represents costs we incurred to move certain operations to lower-cost Sensata locations, close certain manufacturing operations and dispose of the SMaL Camera business.
  (e)   Represents pension curtailment and settlement losses, and amortization of prior service costs associated with various restructuring activities.
  (f)   Represents other losses, including impairment losses associated with certain assets held for sale, losses related to the early termination of commodity forward contracts of $7.2 million during fiscal year 2008, a loss of $13.4 million during fiscal year 2008 associated with a settlement with a significant automotive customer that alleged defects in certain of our products installed in its automobiles, and a reserve associated with the Whirlpool recall litigation. See “Business—Legal Proceedings and Claims.”

 

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Quarterly Results of Operations

 

The following tables set forth unaudited quarterly consolidated statement of operations data and other financial data for fiscal years 2009 and 2010. We have prepared the statement of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of our management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

 

(Amounts in thousands, except per
share data)
  Mar 31,
2009
    June 30,
2009
    Sept 30,
2009
    Dec 31,
2009
    Mar 31,
2010
    June 30,
2010
    Sept 30,
2010
    Dec 31,
2010
 

Statement of Operations Data:

               

Net revenue

  $ 239,016      $ 255,371      $ 302,468      $ 338,089      $ 377,137      $ 391,806      $ 383,294      $ 387,842   

Cost of revenue

    161,344        168,902        190,908        220,926        232,783        240,590        238,646        236,051   

Research and development

    5,163        3,960        3,569        4,104        4,930        6,211        6,112        7,411   

Selling, general and administrative

    31,629        30,482        33,190        31,651        77,891        38,740        39,382        38,610   

Profit/(loss) from operations

    (29,279     11,815        32,212        43,334        24,698        70,677        63,072        69,899   

Currency translation gain/(loss) and other, net

    69,142        58,086        (33,127     13,594        47,185        51,796        (78,456     24,863   

Net (loss)/income

    (10,199     22,621        (54,035     13,932        27,310        82,519        (48,389     68,610   

Diluted net (loss)/income per share

  $ (0.07   $ 0.16      $ (0.38   $ 0.10      $ 0.17      $ 0.46      $ (0.28   $ 0.38   

Other Financial Data:

               

Adjusted Net Income (unaudited)

  $ 5,653      $ 24,179      $ 43,948      $ 50,318      $ 69,179      $ 77,454      $ 79,218      $ 80,556   
(As a percentage of net revenue)   Mar 31,
2009
    June 30,
2009
    Sept 30,
2009
    Dec 31,
2009
    Mar 31,
2010
    June 30,
2010
    Sept 30,
2010
    Dec 31,
2010
 

Statement of Operations Data:

               

Cost of revenue

    67.5     66.1     63.1     65.4     61.7     61.4     62.3     60.9

Research and development

    2.2        1.6        1.2        1.2        1.3        1.6        1.6        1.9   

Selling, general and administrative

    13.2        11.9        11.0        9.4        20.7        9.9        10.3        10.0   

Profit/(loss) from operations

    (12.2     4.6        10.6        12.8        6.5        18.0        16.5        18.0   

Currency translation gain/(loss) and other, net

    28.9        22.7        (11.0     4.0        12.5        13.2        (20.5     6.4   

Net (loss)/income

    (4.3     8.9        (17.9     4.1        7.2        21.1        (12.6     17.7   

Other Financial Data:

               

Adjusted Net Income (unaudited)

    2.4     9.5     14.5     14.9     18.3     19.8     20.7     20.8

 

Revenue in the first quarter of 2009 reflected the impact of reduced orders from our customers that began in the third quarter of 2008 due to the global economic crisis. In the second, third and fourth quarters of 2009, we believe that we experienced higher volume due to an increase in orders from our customers as the global economy began to stabilize, from government incentive programs such as the “Car Allowance Rebate System” in the United States and the “New Countryside Initiative” in China, and supply chain replenishment. In the first and second quarters of 2010, we believe our increasing volume was due to continued improvement in global economic

 

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conditions, as revenue increased to levels experienced in the first half of 2008. In the third quarter of 2010, sales were down slightly compared to the previous quarter due to seasonality.

 

Cost of revenue as a percentage of net revenue decreased from 67.5% for the three months ended March 31, 2009 to 60.9% for the three months ended December 31, 2010. Cost of revenue as a percentage of net revenue decreased during this period primarily due to cost savings initiatives resulting from the various restructuring activities implemented during the second half of fiscal year 2008 and fiscal year 2009, and the leverage effect on fixed manufacturing costs associated with an increase in net revenue.

 

SG&A expense as a percentage of net revenue decreased from 13.2% for the three months ended March 31, 2009 to 10.0% for the three months ended December 31, 2010. SG&A expense as a percentage of net revenue decreased during this period due to several factors, including net revenues growing faster than the SG&A expense and cost savings initiatives resulting from the various restructuring activities implemented during the second half of fiscal year 2008 and fiscal year 2009. During the three months ended March 31, 2010, SG&A expense as a percentage of net revenue increased to 20.7% due to expenses recognized associated with our initial public offering, including $22.4 million of expense associated with the termination of the advisory agreement with the Sponsors at their election and $18.9 million of stock compensation expense associated with the performance vesting of the Tranche 2 and 3 option awards.

 

Currency translation gain/(loss) and other, net includes gain/(loss) resulting from the re-measurement of our foreign currency denominated debt, (loss)/gains associated with the repurchase of our Senior Notes and Senior Subordinated Notes and other gains and losses. Gain/(loss) resulting from the re-measurement of our foreign currency denominated debt for the eight quarters beginning with the three months ended March 31, 2009 was $69.0 million, $(62.5) million, $(35.0) million, $14.9 million, $60.1 million, $73.7 million, $(80.1) million and $19.1 million, respectively. Gain/(loss) associated with the repurchase of our Senior Notes and Senior Subordinated Notes for the three months ended June 30, 2009, March 31, 2010 and June 30, 2010 was $120.1 million, $(8.1) million and $(15.4) million, respectively.

 

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Reconciliation of Quarterly Non-GAAP Financial Measures

 

The following unaudited table provides a reconciliation to Adjusted Net Income from net income/(loss), the most directly comparable financial measure presented in accordance with U.S. GAAP, for the quarterly periods presented:

 

    For the three months ended  
(Amounts in thousands)   Mar 31,
2009
    June 30,
2009
    Sept 30,
2009
    Dec 31,
2009
    Mar 31,
2010
    June 30,
2010
    Sept 30,
2010
    Dec 31,
2010
 

Net (loss)/income

  $ (10,199   $ 22,621      $ (54,035   $ 13,932      $ 27,310      $ 82,519      $ (48,389   $ 68,610   
                                                               

Acquisition, integration and financing costs and other significant items(a)

    4,058        9,016        7,580        2,331        *        *        *        *   

Impairment of goodwill and intangible assets(b)

    19,867                                                    

Severance and other termination costs associated with downsizing(c)

    10,776        668        677        155        *        *        *        *   

Stock compensation expense(d)

    202        492        480        1,059        *        *        *        *   

Management fees(e)

    1,000        1,000        1,000        1,000                               

Costs related to initial public offering(f)

                                43,208        90                 

(Gain)/loss on extinguishment of debt(g)

           (120,123                   8,098        15,376                 

Currency translation (gain)/loss on debt and (gain)/loss on related hedges(h)

    (68,955     62,453        34,984        (13,181     (55,953     (72,583     80,076        (19,066

Amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets(i)

    40,010        38,997        38,670        40,120        37,032        36,267        35,981        35,904   

Deferred income tax and other tax expense(j)

    6,888        6,823        11,985        896        8,556        11,550        11,388        (2,631

Amortization expense of deferred financing costs

    2,383        2,209        2,183        2,280        2,293        2,084        2,135        2,052   

Interest expense related to uncertain tax positions

    252        129        283        159        330        846        (824     632   

Other(k)

    (629     (106     141        1,567        (1,695     1,305        (1,149     (4,945
                                                               

Total adjustments

    15,852        1,558        97,983        36,386        41,869        (5,065     127,607        11,946   
                                                               

Adjusted Net Income

  $ 5,653      $ 24,179      $ 43,948      $ 50,318      $ 69,179      $ 77,454      $ 79,218      $ 80,556   
                                                               

 

*   Beginning in 2010, we have not included these items as reconciling items to derive Adjusted Net Income. We eliminated these items from our calculation based on input we received from investors and analysts.

 

(a)   See table below for a detail of the components of acquisition, integration and financing costs and other significant items.
(b)   Represents the impairment of goodwill and intangible assets associated with a reporting unit within our controls business segment and relates to products used in the semiconductor business.
(c)   Represents severance, outplacement costs and special termination benefits associated with the downsizing of various manufacturing facilities and our corporate office.
(d)   Represents share-based compensation expense recorded in accordance with ASC Topic 718, Compensation—Stock Compensation, excluding $18.9 million recorded in the three months ended March 31, 2010 related to the cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification.
(e)   Represents fees expensed under the terms of the advisory agreement with our Sponsors. This agreement was terminated in connection with the completion of our initial public offering. See "Certain Relationships and Related Party Transactions—Advisory Agreement.”
(f)   Represents costs recorded as expenses related to our initial public offering in the three months ended March 31, 2010, including $18.9 million recorded as a cumulative catch-up adjustment for previously unrecognized compensation expense associated with the Tranche 2 and 3 option awards and the related modification, and $22.4 million in fees related to the termination of the advisory agreement with the Sponsors at their option. See "Certain Relationships and Related Party Transactions—Advisory Agreement."
(g)   Relates to the repurchases of outstanding notes.
(h)   Reflects the unrealized (gains)/losses associated with the translation of our Euro-denominated debt into U.S. dollars and (gains)/losses on related hedging transactions.
(i)   Represents amortization and depreciation expense related to the step-up in fair value of fixed and intangible assets related to the 2006 Acquisition and the acquisitions of First Technology Automotive and Airpax.
(j)   Represents deferred income tax and other tax expense, including provisions for uncertain tax positions, and in the three months ended September 30, 2010, $5.2 million of expense associated with the write-off of tax indemnification assets and other tax-related assets.
(k)   Represents unrealized (gains)/losses on commodity forward contracts and estimated potential penalty expenses associated with uncertain tax positions.

 

 

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The following unaudited table provides detail of the components of acquisition, integration and financing costs and other significant items, the total of which is included as an adjustment to derive Adjusted Net Income, as shown in the table above:

 

     For the three months ended  
(Amounts in thousands)    Mar 31,
2009
    June 30,
2009
    Sept 30,
2009
    Dec 31,
2009
    Mar 31,
2010
     June 30,
2010
     Sept 30,
2010
     Dec 31,
2010
 

Acquisition, integration and financing costs and other significant items:

                   

Transition costs(a)

   $ (4   $ 27      $      $      $   —       $   —       $   —       $   —   

Litigation costs(b)

     164        (77     (11     71        *         *         *         *   

Integration and finance costs(c)

     909        1,651        469        (216                               

Relocation and disposition costs(d)

     2,685        2,499        2,135        883        *         *         *         *   

Pension charges(e)

     310        966        3,426        126        *         *         *         *   

Other(f)

     (6     3,950        1,561        1,467                                  
                                                                   

Total acquisition, integration and financing costs and other significant items

   $ 4,058      $ 9,016      $ 7,580      $ 2,331      $ *       $ *       $ *       $ *   
                                                                   

 

*   Beginning in 2010, we have not included these items as reconciling items to derive Adjusted Net Income. We eliminated these items from our calculation based on input we received from investors and analysts.

 

(a)   Represents transition costs incurred by us in becoming a stand-alone company and complying with Section 404 of the Sarbanes-Oxley Act of 2002.
(b)   Represents litigation costs we recognized related to customers alleging defects in certain of our products, which were manufactured and sold prior to April 27, 2006 (inception).
(c)   Represents integration and financing costs related to the acquisitions of Airpax, First Technology Automotive and SMaL Camera and other consulting and advisory fees associated with acquisitions and financings, whether or not consummated.
(d)   Represents costs we incurred to move certain operations to lower-cost Sensata locations, close certain manufacturing operations and dispose of the SMaL Camera business.
(e)   Represents pension curtailment and settlement losses, and amortization of prior service costs associated with various restructuring activities.
(f)   Represents other (gains)/losses, including impairment losses associated with certain assets held for sale and a reserve associated with the Whirlpool recall litigation. See “Business—Legal Proceedings and Claims.”

 

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Liquidity and Capital Resources

 

Cash Flows

 

The table below summarizes our primary sources and uses of cash for the years ended December 31, 2008, 2009 and 2010. We have derived the summarized statements of cash flows for the years ended December 31, 2008, 2009 and 2010 from the audited consolidated financial statements included elsewhere in this prospectus. Amounts in the table have been calculated based on unrounded numbers. Accordingly, certain amounts may not add to the totals due to the effect of rounding.

 

     For the years ended December 31,  
(Amounts in millions)        2008             2009             2010      

Net cash provided by/(used in):

      

Operating activities:

      

Continuing operations:

      

Net income, adjusted for non-cash items

   $ 73.0      $ 128.2      $ 322.2   

Changes in operating assets and liabilities

     (11.1     59.7        (22.2
                        

Continuing operations

     61.9        188.0        300.0   

Discontinued operations

     (14.4     (0.4       
                        

Operating activities

     47.5        187.6        300.0   

Investing activities:

      

Continuing operations

     (38.5     (15.4     (52.5

Discontinued operations

     (0.2     0.4          
                        

Investing activities

     (38.7     (15.1     (52.5

Financing activities

     8.9        (101.7     97.7   
                        

Net change

   $ 17.7      $ 70.8      $ 345.2   
                        

 

Operating activities

 

Net cash provided by operating activities during fiscal year 2010 totaled $300.0 million compared to $187.6 million during fiscal year 2009 and $47.5 million during fiscal year 2008. Net cash (used in)/provided by changes in operating assets and liabilities for fiscal years 2010, 2009 and 2008 totaled $(22.2) million, $59.7 million and $(11.1) million, respectively.

 

The most significant components to the change in operating assets and liabilities for fiscal year 2010 were increases in accounts receivables of $17.4 million and in inventories of $15.6 million, partially offset by increases in other liabilities of $13.1 million. The increase in accounts receivables was due to higher sales in the fourth quarter of 2010 as compared to the fourth quarter of 2009. The increase in inventories was due to higher materials and finished goods requirements as a result of the increased sales demand. The increase in other liabilities was primarily due to the write-off of tax indemnification assets and other tax-related assets and the change in fair value of derivatives.

 

The most significant components to the change in operating assets and liabilities of $59.7 million for fiscal year 2009 were an increase in accounts payable and accrued expenses of $61.6 million and a decrease in inventories of $13.9 million, offset by an increase in accounts receivable of $35.1 million. The increase in accounts payable and accrued expenses was due to our initiative to migrate certain strategic vendors to 60-day payment terms. The increase in accounts receivable was due to higher sales in the fourth quarter of 2009 as compared to the fourth quarter of 2008. The decrease in inventory was due to initiatives we implemented to minimize the days of inventory on hand given the rapid decline in net revenue during the fourth quarter of fiscal year 2008.

 

The most significant component to the change in operating assets and liabilities of $(11.1) million for fiscal year 2008 was the decrease in accounts payable and accrued expenses of $108.1 million, partially offset by the

 

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decrease in accounts receivable of $66.5 million and a decrease in inventories of $26.7 million. The decrease in accounts payable and accrued expenses was due to interest pre-payments on our U.S. and Euro term loan facilities and 11.25% Senior Subordinated Notes and payments to certain strategic vendors who agreed to migrate to 60-day payment terms. The decrease in accounts receivable reflects the decline in net revenue that occurred during the fourth quarter of fiscal year 2008, specifically the month of December. During December 2008, many of our facilities and the facilities of our largest customers were closed due to the economic environment. The decrease in inventory reflects actions we took to lower inventories given the decline in net revenue that occurred during the fourth quarter of fiscal year 2008.

 

As of December 31, 2010, we had commitments to purchase certain raw materials that contain various commodities, such as gold, silver, copper, nickel and aluminum. In general, the price for these products varies with the market price for the related commodity. In addition, when we place orders for materials, we do so in quantities that will satisfy our production demand for various periods of time. In general, we place these orders for quantities that will satisfy our production demand over a one-, two- or three-month period. We do not have a significant number of long-term supply contracts that contain fixed-price commitments. Accordingly, we believe that our exposure to a decline in the spot prices for those commodities under contract is not material.

 

On January 28, 2011, we used cash on hand to complete the acquisition of the Automotive on Board business for approximately $140 million, subject to a working capital adjustment and certain transfer taxes. We expect to incur approximately $15 million in integration costs related to this business in 2011.

 

Investing activities

 

Net cash used in investing activities during fiscal year 2010 totaled $52.5 million compared to $15.1 million during fiscal year 2009 and $38.7 million during fiscal year 2008. Net cash used in investing activities during fiscal years 2010, 2009 and 2008 consisted primarily of capital expenditures of $52.9 million, $15.0 million and $41.0 million, respectively, which were partially offset by the sale of assets of $0.4 million, $0.6 million, and $2.3 million, respectively. Also, in 2009 we made a $1.1 million payment related to our Euro call option.

 

In 2011, we anticipate spending approximately $70 million to $75 million on capital expenditures (including capital expenditures of acquired businesses), which will be funded with cash flow from operations. In addition, we used approximately $140 million, subject to a working capital adjustment and certain transfer taxes, for the acquisition of the Automotive on Board business, which was funded by cash on hand.

 

Our investing cash flows will be impacted in the future by any additional acquisitions we make, whether in 2011 or beyond. At this time, we cannot predict what the impact of these additional cash flows will be.

 

Financing activities

 

Net cash provided by/(used in) financing activities during fiscal year 2010 totaled $97.7 million compared to $(101.7) million during fiscal year 2009 and $8.9 million during fiscal year 2008. Net cash provided by financing activities during fiscal year 2010 consisted primarily of proceeds of $433.5 million from the issuance of 26.3 million ordinary shares in our March 2010 initial public offering and $21.9 million related to the exercise of 3.1 million options to purchase ordinary shares, partially offset by $338.3 million in payments ($321.7 million in principal amount) to repurchase outstanding Senior Notes and Senior Subordinated Notes, and principal payments totaling $14.7 million on our U.S. dollar and Euro term loan facilities.

 

Net cash used in financing activities during fiscal year 2009 consisted primarily of payments to purchase outstanding debt of $57.2 million, in addition to principal payments totaling $15.1 million on our U.S. dollar term loan and Euro term loan facilities and payments totaling $25.0 million on our revolving credit facility. The principal amount of the Senior Notes that were repurchased totaled $110.0 million, and the principal amount of the Senior Subordinated Notes that were repurchased totaled €54.3 million (or $72.5 million at the date of repurchase).

 

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Net cash provided by financing activities of $8.9 million during fiscal year 2008 consisted primarily of $25.0 million of borrowings under the revolving credit facility and proceeds received from the financing arrangement associated with our facility in Malaysia of $12.6 million, partially offset by principal payments totaling $15.5 million on our U.S. dollar term loan and Euro term loan facilities, payments of debt issuance costs of $5.2 million associated with the refinancing of the senior subordinated term loan utilized to finance the acquisition of Airpax and payments of $6.7 million to repurchase 9% Senior Subordinated Notes. The principal amount of the 9% Senior Subordinated Notes that were repurchased totaled $22.4 million. During fiscal year 2008, we sold, and are now leasing back, our facility in Malaysia. We received proceeds of $12.6 million from this transaction, which has been accounted for as a financing arrangement, rather than a sale-leaseback, due to the nature of the terms of the lease.

 

Indebtedness and liquidity

 

Our liquidity requirements are significant due to the highly leveraged nature of our company. As of December 31, 2010, we had $1,889.7 million in outstanding indebtedness, including our debt and outstanding capital lease and other financing obligations.

 

The following table outlines our outstanding indebtedness as of December 31, 2010 and the associated interest expense and interest rate for such borrowings for fiscal year 2010.

 

Description

   Balance as of
December 31,

2010
     Interest expense
for

fiscal year 2010
     Weighted-
average annual
interest rate
 
(Amounts in thousands)                     

Senior secured term loan facility (denominated in U.S. dollars)

   $ 907,250       $ 19,358         2.09 %

Senior secured term loan facility (€380.5 million)

     504,741         14,290         2.79 %

Revolving credit facility

                    

Senior Notes (denominated in U.S. dollars)

     201,181         19,856         8.00 %

Senior Subordinated Notes (€177.1 million)

     234,978         21,054         9.00 %

Senior Subordinated Notes

            5,911         11.25

Derivatives

            11,611           

Capital lease obligations

     29,461         2,723         9.03 %

Other financing obligations

     12,082         891         7.62 %

Amortization of financing costs

             8,572      

Other

             2,134      
                    

Total

   $ 1,889,693       $ 106,400      
                    

 

We have a Senior Secured Credit Facility under which Sensata Technologies B.V. and Sensata Technologies Finance Company, LLC are the borrowers and certain of our other subsidiaries are guarantors. The Senior Secured Credit Facility includes a $150.0 million multi-currency revolving credit facility, a $950.0 million U.S. dollar-denominated term loan facility, and a €325.0 million Euro-denominated term loan facility ($400.1 million, at issuance). As of December 31, 2010, after adjusting for outstanding letters of credit with an aggregate value of $6.9 million, we had $143.1 million of borrowing capacity available under the revolving credit facility. The outstanding letters of credit were issued primarily for various operating activities. As of December 31, 2010, no amounts had been drawn against these outstanding letters of credit. These outstanding letters of credit are scheduled to expire in the next twelve months. Upon expiration, we intend to renew these letters of credit and do not anticipate difficulty in this regard.

 

The Senior Secured Credit Facility also provides for an incremental term loan facility and/or incremental revolving credit facility in an aggregate principal amount of $250.0 million under certain conditions at the option of our bank group. During fiscal year 2006, to finance the purchase of First Technology Automotive, we borrowed €73.0 million ($95.4 million, at issuance), reducing the available borrowing capacity of this

 

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incremental facility to $154.6 million. The incremental borrowing facilities may be activated at any time up to a maximum of three times during the term of the Senior Secured Credit Facility with consent required only from those lenders that agree, at their sole discretion, to participate in such incremental facility and subject to certain conditions, including pro forma compliance with all financial covenants as of the date of incurrence and for the most recent determination period after giving effect to the incurrence of such incremental facility.

 

The Senior Secured Credit Facility provides us with the ability to draw funds for ongoing working capital and other general corporate purposes under a revolving credit facility, or the “Revolving Credit Facility,” which includes a subfacility for swingline loans. The Revolving Credit Facility bears interest (i) for amounts drawn in U.S. dollars, at the borrower’s option, (x) at LIBOR plus a 200 basis point spread subject to a pricing grid based on our leverage ratio (the spreads range from 125 basis points to 200 basis points) or (y) at the greater of the Prime rate as published by the Wall Street Journal or 1/2 of 1% per annum above the Federal Funds rate plus a 100 basis point spread subject to a pricing grid based on our leverage ratio (the spreads range from 25 basis points to 100 basis points) (all amounts drawn under the swingline subfacility are subject to interest calculated under this clause (i)(y)), and (ii) for amounts drawn in Euros, at EURIBOR plus a 200 basis point spread. We are subject to a 37.5 basis point commitment fee on the unused portion of the Revolving Credit Facility. This commitment fee is also subject to a pricing grid based on our leverage ratio. The spreads on the commitment fee range from 37.5 basis points to 50 basis points. The maximum that can be drawn under the swingline subfacility is $25.0 million, and is part of, not in addition to, the total Revolving Credit Facility amount of $150.0 million. Amounts drawn under the Revolving Credit Facility can be prepaid at any time without premium or penalty, subject to certain restrictions, including advance notice. Amounts drawn under the Revolving Credit Facility must be paid in full at the final maturity date of April 27, 2012.

 

We had uncommitted local lines of credit with commercial lenders at certain of our subsidiaries in the amount of $11.0 million as of December 31, 2010.

 

As of December 31, 2010, we had $1,412.0 million in term loans outstanding against our Senior Secured Credit Facility. Term loans are repayable at 1.0% per year in quarterly installments with the balance due in quarterly installments during the year preceding the final maturity of April 27, 2013. Interest on U.S. dollar term loans is calculated at LIBOR plus 175 basis points, and interest on Euro term loans is calculated at EURIBOR plus 200 basis points. The spreads are fixed for the duration of the term loans. Interest payments on the Senior Secured Credit Facility are due quarterly. All term loan borrowings under the Senior Secured Credit Facility are pre-payable at our option at par.

 

All obligations under the Senior Secured Credit Facility are unconditionally guaranteed by certain of our indirect wholly-owned subsidiaries in the U.S. (with the exception of those subsidiaries acquired in the First Technology Automotive acquisition) and certain of our indirect wholly-owned subsidiaries in non-U.S. jurisdictions located in the Netherlands, Mexico, Brazil, Japan, South Korea and Malaysia (with the exception of those subsidiaries acquired in the Airpax acquisition), collectively the “Guarantors.” The collateral for such borrowings under the Senior Secured Credit Facility consists of all shares of capital stock, intercompany debt and substantially all present and future property and assets of the Guarantors.

 

The Senior Secured Credit Facility contains various affirmative and negative covenants that are customary for a financing of this type. The Senior Secured Credit Facility also requires us to comply with financial covenants, including covenants with respect to maximum leverage ratio and minimum interest coverage ratio, which became more restrictive in the fourth quarter of fiscal year 2010, but do not become more restrictive for the remaining term of the facility. We satisfied all ratios required by our financial covenants with regard to the Senior Secured Credit Facility as of December 31, 2010.

 

We have also issued Senior Notes and 9% Senior Subordinated Notes. In fiscal year 2010, we repurchased all of our 11.25% Senior Subordinated Notes.

 

The Senior Notes mature on May 1, 2014. Each Senior Note bears interest at 8% per annum from April 27, 2006 (inception), or from the most recent date to which interest has been paid or provided for. Interest is payable

 

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semi-annually in cash to holders of Senior Notes of record at the close of business on the April 15 or October 15 immediately preceding the interest payment date, on May 1 and November 1 of each year, commencing November 1, 2006. Interest is paid on the basis of a 360-day year consisting of twelve 30-day months. The Senior Notes were issued initially in an aggregate principal amount of $450.0 million. Proceeds from the issuance of the Senior Notes were used to fund a portion of the 2006 Acquisition. The Senior Notes issuance costs are being amortized over the eight year term of the Senior Notes using the effective interest method. The Senior Notes are unsecured.

 

The 9% Senior Subordinated Notes mature on May 1, 2016. Each 9% Senior Subordinated Note bears interest at a rate of 9% per annum from April 27, 2006 (inception), or from the most recent date to which interest has been paid or provided for. Interest is payable semi-annually in cash to holders of such 9% Senior Subordinated Notes of record at the close of business on the April 15 or October 15 immediately preceding the interest payment date, on May 1 and November 1 of each year, commencing November 1, 2006. Interest is paid on the basis of a 360-day year consisting of twelve 30-day months. The 9% Senior Subordinated Notes were issued initially in an aggregate principal amount of €245.0 million ($301.6 million, at issuance). Proceeds from the issuance of the 9% Senior Subordinated Notes were used to fund a portion of the 2006 Acquisition. The 9% Senior Subordinated Notes issuance costs are being amortized over the ten year term of the 9% Senior Subordinated Notes using the effective interest method. The 9% Senior Subordinated Notes are unsecured and are subordinated in right of payment to all existing and future senior indebtedness and on par with our existing and future Senior Subordinated Notes.

 

In addition, the indentures governing the Senior Notes and 9% Senior Subordinated Notes limit, under certain circumstances, our ability and that of our Restricted Subsidiaries (as defined under the Senior Secured Credit Facility) to incur additional indebtedness, create liens, pay dividends and make other distributions in respect of our capital stock, redeem our capital stock, make certain investments or certain restricted payments, sell certain kinds of assets, enter into certain types of transactions with affiliates and effect mergers or consolidations. These covenants are subject to a number of important exceptions and qualifications.

 

The Senior Secured Credit Facility, the Senior Notes and the 9% Senior Subordinated Notes contain customary events of default, including, but not limited to, cross-defaults among these agreements. An event of default, if not cured, could cause cross-default causing substantially all of our indebtedness to become due.

 

The subsidiary guarantors under the Senior Secured Credit Facility and the indentures governing the Senior Notes and 9% Senior Subordinated Notes are generally not restricted in their ability to pay dividends or otherwise distribute funds to Sensata Technologies B.V., except for restrictions imposed under applicable corporate law. Sensata Technologies B.V., however, is limited in its ability to pay dividends or otherwise make other distributions to its immediate parent company and, ultimately, to Sensata Technologies Holding, under the Senior Secured Credit Facility and the indentures governing the Senior Notes and 9% Senior Subordinated Notes. Specifically, the Senior Secured Credit Facility prohibits Sensata Technologies B.V. from paying dividends or making any distributions to its parent companies except for limited purposes, including, but not limited to: (i) customary and reasonable out-of-pocket expenses, legal and accounting fees and expenses and overhead of such parent companies incurred in the ordinary course of business to the extent attributable to the business of Sensata Technologies B.V. and its subsidiaries and in the aggregate not to exceed $5 million in any fiscal year, plus reasonable and customary indemnification claims made by our directors or officers attributable to the ownership of Sensata Technologies B.V. and its Restricted Subsidiaries, (ii) franchise taxes, general corporate and operating expenses, certain advisory fees and customary compensation of officers and employees of such parent companies, (iii) tax liabilities to the extent attributable to the business of Sensata Technologies B.V. and its subsidiaries, (iv) repurchase, retirement or other acquisition of our equity interests from certain present, future and former employees, directors, managers, consultants of the parent companies, Sensata Technologies B.V. or its subsidiaries in an aggregate amount not to exceed $7.5 million in any fiscal year, plus the amount of cash proceeds from certain equity issuances to such persons, the amount of equity interests subject to a certain deferred compensation plan and the amount of certain key-man life insurance proceeds, (v) payment of dividends

 

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or distributions with proceeds from the disposition of certain assets (net of mandatory prepayments) in an amount not to exceed $200 million and (vi) dividends and other distributions in an aggregate amount not to exceed $25 million (subject to increase to $35 million if the leverage ratio is less than 5.0 to 1.0 and to $50 million if the leverage ratio is less than 4.0 to 1.0, plus, if the leverage ratio is less than 5.0 to 1.0, the amount of excess cash flow not otherwise applied). Leverage ratio is defined in the Senior Secured Credit Facility as total indebtedness including capital lease and other financing obligations, less cash and equivalents, all divided by Adjusted EBITDA for the last 12 months. EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and Adjusted EBITDA is defined as EBITDA before certain other adjustments as defined in the Senior Secured Credit Facility.

 

The indentures governing the Senior Notes and 9% Senior Subordinated Notes generally provide that Sensata Technologies B.V. can pay dividends and make other distributions to its parent companies in an amount not to exceed (i) 50% of Sensata Technologies B.V.’s consolidated net income for the period beginning March 31, 2006 and ending as of the end of the last fiscal quarter before the proposed payment, plus (ii) 100% of the aggregate amount of cash and the fair market value of property and marketable securities received by Sensata Technologies B.V. after April 27, 2006 from the issuance and sale of equity interests of Sensata Technologies B.V. (subject to certain exceptions), plus (iii) 100% of the aggregate amount of cash and the fair market value of property and marketable securities contributed to the capital of Sensata Technologies B.V. after April 27, 2006, plus (iv) 100% of the aggregate amount received in cash and the fair market value of property and marketable securities received after April 27, 2007 from the sale of certain investments or the sale of certain subsidiaries, provided that certain conditions are satisfied, including that Sensata Technologies B.V. has a consolidated interest coverage ratio of greater than 2.0 to 1.0. The restrictions on dividends and other distributions contained in the indentures are subject to certain exceptions, including (i) the payment of dividends following the first public offering of the common stock of any of its direct or indirect parent companies in an amount up to 6.0% per annum of the net cash proceeds contributed to Sensata Technologies B.V. in any such offering, (ii) the payment of dividends to permit any of its parent companies to pay taxes, general corporate and operating expenses, certain advisory fees and customary compensation of officers and employees of such parent companies and (iii) dividends and other distributions in an aggregate amount not to exceed $75.0 million.

 

Repurchases of indebtedness

 

Fiscal 2010

 

On February 26, 2010, we announced the commencement of cash tender offers related to the Senior Notes due 2014, the 9% Senior Subordinated Notes due 2016 and the 11.25% Senior Subordinated Notes due 2014. The cash tender offers settled during the first quarter of 2010. The aggregate principal amount of the Senior Notes validly tendered was $0.3 million, representing approximately 0.1% of the outstanding Senior Notes. The aggregate principal amount of the Senior Subordinated Notes tendered was €71.9 million, representing approximately 22.8% of the outstanding Senior Subordinated Notes. We paid $96.7 million in principal ($0.3 million for the Senior Notes and €71.9 million for the Senior Subordinated Notes), $5.4 million in premiums (€4.0 million on the Senior Subordinated Notes) and $2.2 million of accrued interest to settle the tender offers and retire the debt on March 29, 2010.

 

On April 1, 2010, we announced the redemption of all of the outstanding 11.25% Senior Subordinated Notes due 2014 at a redemption price equal to 105.625% of the principal amounts as well as the redemption of $138.6 million of the outstanding Senior Notes at a redemption price equal to 104.000% of the principal amount. We paid $225.0 million in principal, $10.4 million in premiums and $8.4 million of accrued interest in May 2010 to complete the redemption.

 

In connection with these transactions, we recorded a loss in Currency translation gain and other, net of $23.5 million, including the write-off of debt issuance costs of $6.8 million.

 

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Fiscal 2009

 

On March 3, 2009, we announced the commencement of two separate cash tender offers related to the Senior Notes and Senior Subordinated Notes. The cash tender offers settled during the second quarter of 2009. The aggregate principal amount of the Senior Notes validly tendered was $110.0 million, representing 24.4% of the outstanding Senior Notes. The aggregate principal amount of the Senior Subordinated Notes tendered was €72.1 million, representing approximately 19.6% of the outstanding Senior Subordinated Notes. The tender offer for the 9% Senior Subordinated Notes was oversubscribed, and we accepted for purchase a pro rata portion of the 9% Senior Subordinated Notes tendered. The aggregate principal amount accepted for repurchase totaled €44.3 million ($58.4 million at the closing foreign exchange rate of $1.317 to €1.00), representing approximately 12.0% of the outstanding 9% Senior Subordinated Notes. We paid $50.7 million ($40.7 million for the Senior Notes and €7.6 million for the 9% Senior Subordinated Notes) to settle the tender offers and retire the debt on April 1, 2009.

 

In addition, during the second quarter of 2009, we agreed to purchase certain 9% Senior Subordinated Notes having a principal value of €10.0 million ($14.1 million at the closing exchange rate of $1.41 to 1.00). We paid $5.1 million (€3.6 million) to settle the transaction and retire the debt on May 25, 2009.

 

In conjunction with these transactions, we wrote off $5.3 million of debt issuance costs during the second quarter of 2009 and recorded a net gain in Currency translation gain and other, net of $120.1 million.

 

Fiscal 2008

 

During 2008, we repurchased certain outstanding 9% Senior Subordinated Notes with a principal balance of €17.4 million (or $22.4 million at the date of repurchase). We paid $6.7 million (€5.3 million) to settle the transactions and retire the debt. In conjunction with these transactions, we wrote off $0.7 million of debt issuance costs during 2008 and recorded a net gain in Currency translation gain and other, net of $15.0 million.

 

Capital resources

 

Our sources of liquidity include cash on hand, cash flow from operations and amounts available under the Senior Secured Credit Facility. We believe, based on our current level of operations as reflected in our results of operations for the year ended December 31, 2010, that these sources of liquidity will be sufficient to fund our operations, capital expenditures and debt service for at least the next twelve months.

 

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 January 31, 2011, Moody’s Investors Service’s corporate credit rating for Sensata Technologies B.V. was B2 with positive outlook and Standard & Poor’s corporate credit rating for Sensata Technologies B.V. was B+ with positive outlook.

 

We cannot make assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness, including the Senior Notes and 9% Senior Subordinated Notes, or to fund our other liquidity needs. Further, our highly leveraged nature may limit our ability to procure additional financing in the future.

 

As of December 31, 2010, we were in compliance with all the covenants and default provisions under our credit arrangements. For more information on our indebtedness and related covenants and default provisions, refer to the notes to our audited consolidated financial statements included elsewhere in this prospectus and “Risk Factors.”

 

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Contractual Obligations and Commercial Commitments

 

The following table reflects our contractual obligations as of December 31, 2010. Amounts we pay in future periods may vary from those reflected in the table:

 

     Payments Due by Period  
(Amounts in millions)    Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 

Senior debt obligations principal(1)

   $ 1,848.2       $ 14.8       $ 1,397.2       $ 201.2       $ 235.0   

Senior debt obligations interest(2)

     240.1         71.4         107.7         50.4         10.6   

Capital lease obligations principal(3)

     29.4         0.9         2.2         2.7         23.6   

Capital lease obligations interest(3)

     25.7         2.7         5.0         4.6         13.4   

Other financing obligations principal(4)

     12.1         1.1         1.5         0.0         9.5   

Other financing obligations interest(4)

     5.6         0.8         1.5         1.5         1.8   

Operating lease obligations(5)

     13.1         3.8         4.6         1.8         2.9   

Non-cancelable purchase obligations(6)

     3.8         1.9         1.9         0.0         0.0   
                                            

Total(7)(8)

   $ 2,178.0       $ 97.4       $ 1,521.6       $ 262.2       $ 296.8   
                                            

 

(1) Represents the contractually required principal payments under the senior debt obligations in existence as of December 31, 2010 in accordance with the required payment schedule.
(2) Represents the contractually required interest payments on the senior debt obligations in existence as of December 31, 2010 in accordance with the required payment schedule. Cash flows associated with the next interest payment to be made subsequent to December 31, 2010 on our variable rate debt were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2010, plus the appropriate credit spread. The three-month LIBOR and EURIBOR rates used in this calculation were 0.29% and 1.04%, respectively. Cash flows associated with all other future interest payments to be made on our variable rate debt were calculated using the interest rates in effect as of December 31, 2010, plus the appropriate credit spread. The three-month LIBOR and EURIBOR rates used in these calculations were 0.30% and 1.01%, respectively.
(3) Represents the contractually required payments under the capital lease obligations in existence as of December 31, 2010 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease term at its expiration date.
(4) Represents the contractually required payments under the financing obligations in existence as of December 31, 2010 in accordance with the required payment schedule. No assumptions were made with respect to renewing the financing arrangements at their expiration dates.
(5) Represents the contractually required payments under the operating lease obligations in existence as of December 31, 2010 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease obligations at the expiration date of their initial terms.
(6) Represents the contractually required payments under the various purchase obligations in existence as of December 31, 2010. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, no amounts are assumed to be prepaid and no assumptions were made for early termination of any obligations.
(7) Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency exchange rates in effect as of December 31, 2010. The most significant foreign currency denominated obligation relates to our Euro-denominated debt. The U.S. dollar to Euro exchange rate as of December 31, 2010 was $1.33 to €1.00.
(8) This table does not include the contractual obligations associated with our defined benefit and other post-retirement benefit plans. As of December 31, 2010, we had recognized an accrued benefit liability of $43.9 million representing the unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 9 to our audited consolidated financial statements appearing elsewhere in this prospectus for further discussion on pension and other post-retirement benefits. This table also does not include $17.0 million of unrecognized tax b