ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1: Business and our Financial Statements, each included elsewhere in this Annual Report on Form 10-K (this "Report").
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in Item 1A: Risk Factors included elsewhere in this Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
We innovate on behalf of our broad array of customers, solving some of their most difficult engineering challenges by providing sensors and sensor-rich solutions, electrical protection components and systems, and other products. Solving these mission-critical challenges enables us to deliver differentiated value for both our customers and shareholders, while also investing in our growth opportunities and our people. Refer to Item 1: Business included in this Report for additional discussion on our business.
We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, as well as customer demand for operator productivity and convenience, drive the need for advancements in powertrain management, efficiency, safety, and operator controls. These advancements lead to sensor growth rates that we expect to exceed underlying production growth in many of our key end markets, which we expect will continue to offer us significant growth opportunities.
Fiscal year 2025 highlights
In fiscal year 2025, we reduced our total gross debt by $354.0 million. These repayments brought our gross outstanding indebtedness at December 31, 2025 to $2.9 billion, representing a net leverage ratio of 2.7x, compared to gross indebtedness of $3.2 billion as of December 31, 2024 (representing a net leverage ratio of 3.0x). Net leverage ratio, discussed throughout this Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A"), is a financial measure not presented in accordance with U.S. generally accepted accounting principles ("GAAP"). Refer to Non-GAAP Financial Measures included elsewhere in this MD&A for additional information related to our use of net leverage ratio.
Fiscal year 2025 financial summary
Our consolidated revenue decreased 5.8% in fiscal year 2025 from the prior year. Excluding an increase of 0.6% attributed to changes in foreign currency exchange rates and a decrease of 6.5% due to the effect of divestitures, net revenue increased 0.1% on an organic basis. Organic revenue growth (or decline), discussed throughout this MD&A, is a financial measure not presented in accordance with U.S. GAAP. Refer to Non-GAAP Financial Measures included elsewhere in this MD&A for additional information related to our use of organic revenue growth (or decline). Organic revenue growth was primarily driven by content growth in our Industrials business segment.
Operating income for fiscal year 2025 increased $88.2 million, or 59.1%, to $237.5 million (6.4% of net revenue) compared to $149.3 million (3.8% of net revenue) in the prior year. This increase was primarily driven by $98.5 million of lower net restructuring and other charges, and a $65.5 million decrease in intangible asset amortization charges, partially offset by lower revenue and a $75.6 million increase in goodwill impairment charges in the current period. Refer to Results of Operations included elsewhere in this MD&A for additional discussion of our operating results for the year ended December 31, 2025.
We generated $621.5 million of operating cash flows in fiscal year 2025, ending the year with $573.0 million in cash. In addition to $352.2 million of cash used to pay debt, in fiscal year 2025, we used cash of approximately $120.6 million for share repurchases and $70.4 million for payment of dividends. In fiscal year 2026, we will continue to execute our capital allocation strategy that is currently designed to reduce our leverage and return capital to shareholders through our dividend and opportunistic share repurchases. This strategy reduces risk in our capital structure, lowers interest expense, and improves net income and earnings per share. We expect improving free cash flow (net cash provided by operating activities less capital
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expenditures) to further reduce our net leverage ratio, and over time, we believe higher profitability will naturally allow net leverage to decline and returns on invested capital to improve. Refer to Non-GAAP Financial Measures included elsewhere in this MD&A for additional information related to our use of free cash flow.
Factors Affecting Our Operating Results
The following discussion describes components of the consolidated statements of operations as well as factors that impact those components. Refer to Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report, and Critical Accounting Policies and Estimates included elsewhere in this MD&A for additional information related to the accounting policies and estimates made related to these components. Refer to Results of Operations included elsewhere in this MD&A for discussion of the actual impact on our financial statements of these factors.
Net revenue
We derive a significant portion of our revenue from sales into the automotive end market, and conditions in the automotive industry can have a significant impact on the amount of revenue that we recognize. Outside of the automotive industry, we sell our products and solutions to end-users in a wide range of industries, end markets, and geographic regions, and the drivers of demand for these products and solutions vary considerably and are influenced by industry, market, or geographic conditions. Changes in demand for these products and solutions could impact our revenue materially. Our overall net revenue is impacted by various factors, which we characterize as "organic" or "inorganic." Inorganic factors include fluctuations in foreign currency exchange rates and the net effect of acquisitions and divestitures. Organic factors include fluctuations in overall economic activity within the industries, end markets, and geographic regions in which we operate, which we term market growth. For more information about revenue risks relating to our business, refer to Item 1A: Risk Factors included elsewhere in this Report.
Cost of revenue
We manufacture most of our products, subcontracting only a limited number to third parties. As such, our cost of revenue consists principally of production materials costs and employee costs. Our remaining cost of revenue primarily consists of: gains and losses on certain foreign currency forward contracts that are designated as cash flow hedges; costs to import raw materials, such as tariffs; depreciation of fixed assets used in the manufacturing process; and other general manufacturing expenses.
Research and development expense
Research and development ("R&D") expense consists of costs related to product design and development. Our development expense is typically associated with engineering core technology platforms to specific applications and engineering major upgrades that improve the functionality or reduce the cost of existing products. Costs related to modifications of existing products for use by new and existing customers in familiar applications are presented in cost of revenue and are not included in R&D expense.
Selling, general and administrative expense
Selling, general and administrative ("SG&A") expense consists of all expenditures incurred in connection with the sale and marketing of our products, as well as administrative overhead costs, including: salary and benefit costs for sales and marketing personnel and administrative staff; share-based compensation expense; charges related to the use and maintenance of administrative offices, including depreciation expense; other administrative costs, including expenses relating to information systems, human resources, and legal, finance, and accounting services; other selling and marketing related costs, such as expenses incurred in connection with travel and communications; and transaction costs associated with acquisitions.
Depreciation expense
Depreciation expense includes depreciation of property, plant and equipment, which includes assets held under finance lease and amortization of leasehold improvements. Depreciation expense is included in either cost of revenue or SG&A expense depending on the use of the asset as a manufacturing or administrative asset.
Amortization expense
Acquisition-related definite-lived intangible assets are amortized on an economic-benefit basis, according to the useful lives of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined.
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Restructuring and other charges, net
Restructuring charges consist of severance, outplacement, other separation benefits, and facility and other exit costs. These charges may be incurred as part of an announced restructuring plan or may be individual charges recognized related to acquired businesses or the termination of a limited number of employees that do not represent the initiation of a larger restructuring plan.
Restructuring and other charges, net also includes the gain or loss, net of transaction costs, from the sale of businesses, expense incurred from acquisition-related compensation arrangements, and other operating income or expense that is not presented elsewhere in operating income.
Interest expense
Interest expense relates to interest owed on our gross outstanding indebtedness, and varies according to the balances of, and the interest rates assigned to, this indebtedness.
Interest income
Interest income relates to interest earned on our cash and cash equivalent accounts, and varies according to the balances in, and the interest rates provided by, these accounts.
Other, net
Other, net primarily includes gains and losses associated with the remeasurement of monetary assets and liabilities denominated in a currency that is not the functional currency, changes in the fair value of derivative financial instruments not designated as cash flow hedges, mark-to-market gains and losses on investments, net (gains) or losses on debt financing transactions, and net periodic benefit cost, excluding service cost.
Refer to Note 6: Other, Net of our Financial Statements included elsewhere in this Report for additional information related to the components of other, net. Refer to Item 7A: Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this Report for additional information related to our exposure to potential changes in foreign currency exchange rates and commodity prices. Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information related to our debt financing transactions.
Provision for (or benefit from) income taxes
The provision for (or benefit from) income taxes reflects taxes on our earnings in the various jurisdictions in which we operate and can vary significantly from period to period. Our income tax provision (or benefit) consists of current tax expense (or benefit), which represents taxes payable based on taxable income for the period, and deferred tax expense (or benefit), which results from changes in deferred tax assets and liabilities arising from temporary differences between the financial reporting and tax bases of our assets and liabilities.
Our effective tax rate is influenced by a number of factors, including the geographic mix of our earnings and losses, changes in tax laws and statutory tax rates, the availability and utilization of tax attributes such as net operating losses and tax credits, valuation allowance assessments, and the tax effects of acquisitions, dispositions, restructurings, and other strategic transactions. As these factors fluctuate from period to period, our effective tax rate may differ materially from the statutory tax rate applicable in any single jurisdiction and from our expectations.
The determination of our income tax provision requires significant judgment, including estimates related to future taxable income in different jurisdictions, the realizability of deferred tax assets, and the measurement of uncertain tax positions. Changes in these estimates, including as a result of new information, audit outcomes, or changes in facts and circumstances, may result in adjustments to our tax provision in future periods.
In addition, our effective tax rate may be impacted by discrete items, including non‑deductible expenses, changes in valuation allowances, audit settlements, the expiration of statutes of limitation, and the tax effects of unusual or infrequently occurring transactions. These items may cause significant variability in our effective tax rate from year to year and may not be indicative of our ongoing tax profile.
We continue to monitor global tax developments, including changes in domestic and international tax rules. While certain recent tax law changes, including global minimum tax regimes, were not significant to our overall income tax provision for the year ended December 31, 2025, future changes in tax laws, interpretations, enforcement practices, or our business and
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geographic mix of earnings could increase our effective tax rate, cash tax obligations, and compliance costs in future periods.
Seasonality
Refer to Item 1: Business included elsewhere in this Report for discussion of our assessment of seasonality related to our business.
Legal Proceedings
Refer to Item 3: Legal Proceedings included elsewhere in this Report for discussion of legal proceedings related to our business.
Results of Operations
Our discussion and analysis of results of operations are based upon our Financial Statements included elsewhere in this Report. The Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of the Financial Statements requires us to make estimates and judgments that affect the amounts reported therein. We base our estimates on historical experience and assumptions believed to be reasonable under the circumstances, and we re-evaluate such estimates on an ongoing basis. Actual results may materially differ from our estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully described in Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report and Critical Accounting Policies and Estimates included elsewhere in this MD&A.
The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue. We have derived these results of operations from our Financial Statements. Our business strategy involves leveraging new and emerging technologies, which complement our existing product offerings, and we refer to these trends collectively as "megatrends". Our operating segments' performance is primarily evaluated based on segment operating income. In the three months ended March 31, 2025, we realigned the definition of segment operating income to include megatrend costs, which were previously excluded from segment operating income and included in corporate and other costs.
In the three months ended December 31, 2025, we realigned our business as a result of organizational changes that better allocate our resources to support changes to our business strategy. These changes resulted in the dissolution of our prior segments, Performance Sensing and Sensing Solutions, and the creation of three new segments. Our Automotive segment includes our Automotive and Aftermarket businesses. The Industrials segment includes our Industrial and Dynapower businesses. The Aerospace, Defense, and Commercial Equipment segment includes our Aerospace and Commercial Equipment businesses. Results of the Insights Business, which was sold during the third quarter of 2024, are presented in the Other non-operating segment, which is not aggregated within any of our reportable segments. Our new operating structure allows us to more effectively allocate capital and investment dollars based on different end market and growth dynamics in each of these segments. Prior year amounts in this Report have been recast to reflect this realignment. Refer to Note 20: Segment Reporting for additional information.
For the year ended December 31,
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
Net revenue:
Automotive
Industrials
Aerospace, Defense, and Commercial Equipment
Other
Total net revenue
Operating costs and expenses
Operating income
Interest expense
Interest income
Other, net
Income/(loss) before taxes
Provision for/(benefit from) income taxes
Net income/(loss)
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The discussion that follows compares operating results for fiscal year 2025 to fiscal year 2024. For a discussion of our fiscal year 2024 operating results compared to fiscal year 2023, refer to Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2024, filed on February 28, 2025.
Refer to Item 1: Business included elsewhere in this Report for more detailed discussion of our reportable segments, including discussion of major products and market drivers. Refer to discussion under the heading Factors Affecting Our Operating Results included elsewhere in this MD&A for a detailed discussion of the various factors that may drive changes in our operating results. The below discussion provides information on the material factors impacting fiscal year 2025 compared to fiscal year 2024.
Net revenue
Net revenue for the year ended December 31, 2025 decreased 5.8% compared to the prior year. Net revenue increased 0.1% on an organic basis, which excludes an increase of 0.6% attributed to changes in foreign currency exchange rates and a decrease of 6.5% primarily to the effects of divestitures.
Refer to Note 21: Divestitures of our Financial Statements included elsewhere in this Report for additional information related to our divestitures.
Automotive
Automotive net revenue for the year ended December 31, 2025 decreased 3.8% compared to the prior year. Excluding an increase of 0.7% attributed to changes in foreign currency exchange rates and a decrease of 3.3% due to the effects of a divestiture, Automotive net revenue decreased 1.2% on an organic basis, which was primarily due to product mix in the markets we serve.
Industrials
Industrials net revenue for the year ended December 31, 2025 increased 5.1% compared to the prior year. Excluding an increase of 0.3% attributed to changes in foreign currency exchange rates and a decrease of 3.4% due to the effects of product lifecycle management actions, Industrials net revenue increased 8.2% on an organic basis, which primarily reflects content growth in our Industrials business segment.
Aerospace, Defense, and Commercial Equipment
Aerospace, Defense, and Commercial Equipment net revenue for the year ended December 31, 2025 decreased 6.4% compared to the prior year. Excluding an increase of 0.6% attributed to changes in foreign currency exchange rates and a decrease of 3.2% due to the effects of a divestiture, Aerospace, Defense, and Commercial Equipment net revenue decreased 3.8% on an organic basis. This organic revenue decline was primarily due to declines in the commercial equipment end market.
Operating costs and expenses
Operating costs and expenses for the years ended December 31, 2025, 2024, and 2023 are presented, in millions of dollars and as a percentage of revenue, in the following table. Amounts and percentages in the table below have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
For the year ended December 31,
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
Amount
Percent of
Net Revenue
Operating costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Amortization of intangible assets
Goodwill impairment charge
Restructuring and other charges, net
Total operating costs and expenses
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Cost of revenue
In the year ended December 31, 2025, cost of revenue as a percentage of net revenue increased versus the prior year period, due to the net impacts of inflation on material and logistics costs and the unfavorable effects of changes in foreign currency rates, partially offset by the favorable effects of divestitures.
Research and development expense
R&D expense decreased in the year ended December 31, 2025 primarily as a result of the divestiture of the Insights Business in the third quarter of 2024 and cost reductions attributable to previously announced restructuring actions.
Selling, general and administrative expense
SG&A expense decreased in the year ended December 31, 2025 primarily due to the absence of charges related to the Insights Business in the current year.
Refer to Note 21: Divestitures of our Financial Statements included elsewhere in this Report for additional information related to our divestitures.
Amortization of intangible assets
Amortization expense decreased in the year ended December 31, 2025, primarily due to (1) $9.6 million of accelerated amortization related to our decision to exit the Spear aerospace and defense business in the third quarter of 2024, (2) the divestiture of the Insights Business resulting in approximately $26.2 million of lower amortization expense during fiscal year 2025, and (3) the effect of amortization of intangible assets in accordance with their expected economic benefit, which generally results in acceleration of amortization expense in the early years of the life of an intangible asset.
We expect amortization expense to be approximately $62.5 million in fiscal year 2026.
Refer to Note 5: Restructuring and Other Charges, Net and Note 11: Goodwill and Other Intangible Assets, Net, Net of our Financial Statements included elsewhere in this Report for additional information regarding the charges related to the exit of the Spear businesses and amortization of our intangible assets, respectively.
Goodwill impairment charge
In the third quarter of 2025, impairment indicators were identified that suggested the carrying value of the Dynapower reporting unit could exceed its fair value. Accordingly, we evaluated the Dynapower reporting unit for impairment and determined that it was impaired. In the third quarter of 2025, we recorded a $225.7 million non-cash impairment charge. This impairment was primarily driven by a lower outlook within certain markets that the reporting unit operates in following recent tax legislation being enacted and a strategic shift to focus on other markets. This revised outlook led to downward revisions of forecasted future cash flows. If Dynapower does not achieve the forecasted future cash flows, or if there were a change in the discount rate or other valuation inputs, there is a possibility that additional impairments of the remaining $4.1 million of goodwill may be recognized in the future.
Restructuring and other charges, net
Restructuring and other charges, net decreased in the year ended December 31, 2025 versus the prior year period, due to (1) the loss on the sale of the Insights Business in the third quarter of 2024, and (2) charges related to our decision to exit the Spear aerospace and defense business in the third quarter of 2024, partially offset by (1) the loss on the sale of the Magnetic Speed and Positioning Business ("MSP Business") in the first quarter of 2025, and (2) an increase in charges related to our restructuring plans.
Refer to Note 5: Restructuring and Other Charges, Net of our Financial Statements included elsewhere in this Report for additional information on the components of restructuring and other charges, net.
Operating income
In the year ended December 31, 2025, operating income increased $88.2 million, or 59.1%, to $237.5 million (6.4% of net revenue) compared to $149.3 million (3.8% of net revenue) in the prior year, primarily due to (1) a decrease in product line and product lifecycle management charges, (2) a decrease in amortization of intangibles, and (3) cost savings as a result of actions taken as part of our restructuring plans, partially offset by a larger goodwill impairment charge taken in the current year than the prior year.
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Interest expense
In the year ended December 31, 2025, interest expense did not fluctuate materially from the prior period.
Interest income
In the year ended December 31, 2025, interest income did not fluctuate materially from the prior period.
Provision for/(benefit from) income taxes
The provision for (or benefit from) income taxes and our effective tax rate can vary significantly from period to period due to changes in our pre-tax income, geographic mix of earnings, discrete tax items, and other factors discussed below.
For the year ended December 31, 2025, our effective tax rate was 74.6%, compared to 1,185.4% in 2024 and 121.9% in 2023. The unusually high and volatile effective tax rates primarily reflect the impact of non-deductible goodwill impairment charges, the 2024 capital restructuring to secure future IP deductibility, and other non-recurring items including unbenefited losses on asset sales and restructuring costs. Because many of these items are either non-deductible or only partially deductible, they had a disproportionate impact relative to the level of pre-tax income in each period.
As a U.K. tax-resident company, our statutory corporate tax rate is 25%. Our effective tax rate differs from this. statutory rate due to:
• earnings generated in jurisdictions with tax rates different from the U.K. rate,
• non-deductible expenses,
• tax incentives and credits available in certain jurisdictions, and
• discrete tax items recognized in each period.
These factors may fluctuate from period to period and may not be indicative of our expected effective tax rate in future periods.
Discrete tax items, including non-deductible goodwill impairment charges, restructuring costs, acquisition and disposition related expenses, and changes in valuation allowances, also affected our income tax provision. In periods where pre-tax income is low or losses are incurred, these discrete items may result in an effective tax rate that is not meaningful or is not comparable to other periods.
For additional details related to the reconciliation between the U.K. statutory tax rate and the Company’s effective tax rate for these years, refer to Note 7: Income Taxes of our Financial Statements included elsewhere in this Report.
Deferred taxes and valuation allowances
As of December 31, 2025, we maintained valuation allowances against certain foreign deferred tax assets, primarily related to interest carryforwards and net operating loss carryforwards in jurisdictions where we do not expect to generate sufficient taxable income to realize these benefits. Changes in valuation allowances are evaluated periodically based on updated forecasts of future taxable income and other relevant factors.
Cash taxes
Cash taxes paid during 2025 were $114.9 million as compared to $92.6 million of total income tax provision reported in our consolidated statements of operations. Cash taxes paid during the year exceeded our total income tax provision primarily due to the settlement of income taxes related to prior years in certain jurisdictions, and the prepayment of income taxes in other jurisdictions in the current year. These payments reflect the timing of tax settlements and advance payments and do not necessarily correspond to income tax expense recognized in the current period. As a result, cash taxes paid may differ from the income tax provision reported in our consolidated statements of operations in a given period.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted earnings per share ("EPS"), free cash flow, adjusted corporate and other expenses, net debt, gross and net leverage ratio, and adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which are used by our management, Board of Directors, and investors. We use these non-GAAP financial measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance, and as a factor in determining compensation for certain employees.
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The use of our non-GAAP financial measures has limitations. They should be considered as supplemental in nature and are not intended to be considered in isolation from, or as an alternative to, reported net revenue growth (or decline), operating income, operating margin, net income, diluted EPS, net cash provided by operating activities, corporate and other expenses, or total debt and finance lease obligations, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, free cash flow, adjusted corporate and other expenses, gross and net leverage ratio, and adjusted EBITDA may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth (or decline) and market outgrowth
Organic revenue growth (or decline) is defined as the reported percentage change in net revenue calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign exchange rate differences as well as the net impact of material acquisitions and divestitures and product life-cycle management for the 12-month period following the respective transaction date(s).
We believe that organic revenue growth (or decline) provides investors with helpful information with respect to our operating performance, and we use organic revenue growth (or decline) to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth (or decline) provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior period.
Market outgrowth is calculated as organic revenue growth less our weighted market growth. Our weighted market growth is calculated using our regional and platform sales mix, as applicable, in the corresponding prior period. Market outgrowth is used to describe the impact of an increasing quantity and value of our products used in customer systems and applications above market growth. We believe this provides a more meaningful comparison of our revenue growth relative to the markets we serve.
Adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS
We define adjusted operating income as operating income (or loss), determined in accordance with U.S. GAAP, adjusted to exclude certain non-GAAP adjustments which are described under the heading Non-GAAP adjustments below. Adjusted operating margin is calculated by dividing adjusted operating income (or loss) by net revenue determined in accordance with U.S. GAAP. We define adjusted net income as follows: net income (or loss) determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described under the heading Non-GAAP adjustments below. Adjusted EPS is calculated by dividing adjusted net income by the number of diluted weighted-average ordinary shares outstanding in the period as determined in accordance with U.S. GAAP.
Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS (and the constant currency equivalent of each) as measures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as factors in determining compensation for certain employees. We believe investors and securities analysts also use these non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies. These non-GAAP financial measures are not measures of liquidity.
Free cash flow
Free cash flow is defined as net cash provided by operating activities less additions to property, plant and equipment and capitalized software. Free cash flow conversion is defined as Free cash flow divided by Adjusted net income. We believe free cash flow is useful to management and investors as a measure of cash generated by business operations that will be used to repay scheduled debt maturities and can be used to, among other things, fund acquisitions, repurchase ordinary shares, or accelerate the repayment of debt obligations.
Adjusted corporate and other expenses
Adjusted corporate and other expenses is defined as corporate and other expenses calculated in accordance with U.S. GAAP, excluding the portion of non-GAAP adjustments described below that relate to corporate and other expenses. We believe adjusted corporate and other expenses is useful to management and investors in understanding the impact of non-GAAP adjustments on operating expenses not allocated to our segments.
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Adjusted EBITDA
Adjusted EBITDA is defined as net income (or loss), determined in accordance with U.S. GAAP, excluding interest expense, interest income, and provision for (or benefit from) income taxes, depreciation expense, amortization of intangible assets, and the following non-GAAP adjustments, if applicable: (1) restructuring related and other, (2) financing and other transaction costs, and (3) other, net. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments.
Gross leverage ratio
Gross leverage ratio represents gross debt (total debt and finance lease obligations) divided by last twelve months ("LTM") adjusted EBITDA. We believe that gross leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition.
Net leverage ratio
Net leverage ratio represents net debt (total debt and finance lease obligations less cash and cash equivalents) divided by LTM adjusted EBITDA. We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition.
Non-GAAP adjustments
Many of our non-GAAP adjustments relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain business, supply chain or corporate activities, and various financing transactions. We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable.
• Restructuring related and other : includes net charges related to certain restructuring and other exit activities, other costs (or income) that we believe are either unique or unusual to the identified reporting period, and the impact of commodity forward contacts that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically; however, each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning and in its review and assessment of our operating and financial performance, including the performance of our segments.
• Financing and other transaction costs : includes costs incurred, such as legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction, expenses related to compensation arrangements entered into concurrent with the closing of an acquisition, adjustments related to changes in the fair value of acquisition-related contingent consideration amounts, and historical adjustments to exclude step-up depreciation in our non-GAAP measures. Beginning with the three months ended December 31, 2024, we discontinued the use of adjustments to exclude step-up depreciation in our non-GAAP measures. Prior periods have not been recast.
• Amortization of intangible assets : includes amortization of intangible assets. Beginning with the three months ended December 31, 2024, we started adjusting operating income and net income to exclude the amortization of all our intangible assets. Prior periods have not been recast.
• Other, net: includes expenses (or income) recorded within Other, net on our consolidated statements of operations. Beginning with the three months ended March 31, 2025, we started adjusting net income to exclude the impacts of these losses (or gains). Prior periods have been recast. Refer to Note 6: Other, Net of the Financial Statements, included elsewhere in this Annual Report, for additional details of the components of Other, net.
• Deferred taxes and other tax related : includes adjustments for deferred taxes and other timing differences including, but not limited to, book-to-tax basis differences on the fair value of intangible assets and goodwill, the utilization of net operating losses, and adjustments to our valuation allowance in connection with certain transactions and tax law changes. Other tax related items include certain adjustments to unrecognized tax benefits and withholding tax on repatriation of foreign earnings.
• Amortization of debt issuance costs: represents interest expense related to the amortization of deferred financing costs as well as debt discounts, net of premiums.
• Where applicable, the current income tax effect of non-GAAP adjustments.
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Our definition of adjusted net income excludes the deferred provision for (or benefit from) income taxes and other tax related items described above. As we treat deferred income taxes as an adjustment to compute adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented.
Non-GAAP reconciliations
The following tables present reconciliations of certain financial measures calculated in accordance with U.S. GAAP to the related non-GAAP financial measures for the periods presented. Refer to the discussion under the heading Non-GAAP adjustments above for additional information related to these adjustments. Amounts and percentages in the tables below have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
For the year ended December 31, 2025
($ in millions, except per share amounts)
Operating Income
Operating Margin
Income
Taxes
Net Income
Diluted
EPS
Reported (GAAP)
Non-GAAP adjustments:
Restructuring related and other (a)
Financing and other transaction costs (b)
Amortization of intangible assets (c)
Amortization of debt issuance costs
Other, net
Deferred taxes and other tax related
Total adjustments
Adjusted (non-GAAP)
For the year ended December 31, 2024
($ in millions, except per share amounts)
Operating Income
Operating Margin
Income
Taxes
Net Income
Diluted
EPS
Reported (GAAP)
Non-GAAP adjustments:
Restructuring related and other (a)
Financing and other transaction costs (b)
Amortization of intangible assets (c)
Amortization of debt issuance costs
Other, net
Deferred taxes and other tax related
Total adjustments
Adjusted (non-GAAP)
For the year ended December 31, 2023
($ in millions, except per share amounts)
Operating Income
Operating Margin
Income
Taxes
Net (Loss)/
Income
Diluted
EPS
Reported (GAAP)
Non-GAAP adjustments:
Restructuring related and other (a)
Financing and other transaction costs (b)
Amortization of intangible assets (c)
Amortization of debt issuance costs
Other, net
Deferred taxes and other tax related
Total adjustments
Adjusted (non-GAAP)
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(a) The following table presents the components of our restructuring related and other non-GAAP adjustment to net income for fiscal years 2025, 2024, and 2023 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
For the year ended December 31,
(In millions)
Business and corporate repositioning (i)
Other (ii)
Income tax effect
Total non-GAAP restructuring related and other
i. Primarily includes charges related to repositioning our business and corporate functions to more effectively respond to the challenges that face the business.
1. Fiscal 2025 included charges related to repositioning our business and corporate functions to more effectively respond to the challenges that face the business, including severance, contract termination costs, charges related to asset write-downs, and other various restructuring-related charges.
2. Fiscal year 2024 included (1) certain actions related to restructuring of our IT operations and product lifecycle management including product line discontinuations within the Industrials segment, resulting in total costs of $46.7 million, including severance, contract termination costs, and charges related to asset write-downs, (2) approximately $105.8 million, of other various restructuring-related charges, including those related to our 2H 2024 Plan, (3) approximately $12.6 million of costs associated with exiting Spear, primarily recorded in restructuring and other charges, net, and (4) a $6.2 million pension settlement charge, recorded in restructuring and other charges, net.
3. Fiscal year 2023 primarily included (1) $28.8 million of charges related to the exit the Spear Marine Business, $14.5 million of which was recorded in restructuring and other charges, net, with the remainder primarily in cost of revenue, (2) $23.5 million of charges incurred as part of the Q3 2023 Plan, recorded in restructuring and other charges, net, and (3) $18.8 million of charges arising as a result of actions taken in the Q3 2023 Plan, of which approximately $2.1 million was recorded in restructuring and other charges, net, with the remainder primarily in cost of revenue.
ii. Fiscal year 2025 primarily relates to $225.7 million and other charges primarily as a result of changes in clean energy policy, emissions regulations and excess capacity related to electrification. Fiscal year 2024 relates to $150.1 million in non-cash goodwill impairment charges related to the Dynapower reporting unit. Fiscal year 2023 primarily relates to a $321.7 million non-cash goodwill impairment charge related to the Insights reporting unit. Also includes costs related to optimization of our manufacturing processes to increase productivity and rationalize our manufacturing footprint and supply chain workforce rationalization in response to changing customer demand and recent U.S. Government policy changes and charges incurred related to legal matters associated with acquired businesses, for which new information is brought to light after the measurement period for the business combination is closed, but for which the liability relates to events or activities that occurred prior to our acquisition of the business.
(b) The following table presents the components of our financing and other transaction costs non-GAAP adjustment to net income for fiscal years 2025, 2024, and 2023 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
For the year ended December 31,
(In millions)
Transaction loss/(gain), net (i)
Merger and acquisition compensation arrangements (ii)
Other
Income tax effect
Total financing and other transaction costs
i. Primarily includes losses or gains related to the divestiture of a business, costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or other transaction. Refer to Note 21: Divestitures for further information on the below transactions.
1. Fiscal year 2025 includes costs and losses associated with the disposition of the MSP Business.
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2. Fiscal year 2024 primarily relates to a loss on the sale of the Insights Business.
ii. Primarily relates to earnout compensation arrangements entered into concurrent with the closing of an acquisition and compensation in connection with the closing of a transaction.
(c) In the three months ended December 31, 2024, we discontinued the use of adjustments to exclude step-up depreciation and amortization in our non-GAAP measures and we adjusted operating income and net income to exclude the amortization of all our intangible assets. These changes were applied prospectively and prior periods were not recast. If we had recast these non-GAAP measures for the years ended December 31, 2024, and 2023, adjusted operating income and adjusted net income would have increased by an additional $3.6 million and $5.3 million, respectively.
The following table presents a reconciliation of net cash provided by operating activities calculated in accordance with U.S. GAAP to free cash flow.
For the year ended December 31,
(In millions)
Net cash provided by operating activities
Additions to property, plant and equipment and capitalized software
Free cash flow
The following table presents a reconciliation of corporate and other expenses calculated in accordance with U.S. GAAP to adjusted corporate and other expenses.
For the year ended December 31,
(In millions)
Corporate and other expenses (GAAP)
Non-GAAP adjustments
Restructuring related and other
Financing and other transaction costs
Total adjustments
Adjusted corporate and other expenses (non-GAAP)
The following table presents a reconciliation of net income/(loss) calculated in accordance with U.S. GAAP to adjusted EBITDA.
For the year ended December 31,
(In millions)
Net income/(loss)
Interest expense, net
Provision for/(benefit from) income taxes
Depreciation expense
Amortization of intangible assets
EBITDA
Non-GAAP adjustments
Restructuring related and other
Financing and other transaction costs
Other, net
Adjusted EBITDA
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The following table presents a reconciliation of total debt and finance lease obligations calculated in accordance with U.S. GAAP to net and gross leverage ratio.
As of and for the year ended December 31,
($ in millions)
Current portion of long-term debt and finance lease obligations
Finance lease obligations, less current portion
Long-term debt, net
Total debt and finance lease obligations
Less: debt premium/(discount), net
Less: deferred financing costs
Total gross indebtedness
Adjusted EBITDA (LTM)
Gross leverage ratio
Total gross indebtedness
Less: cash and cash equivalents
Net debt
Adjusted EBITDA (LTM)
Net leverage ratio
Liquidity and Capital Resources
As of December 31, 2025 and 2024, we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
As of December 31,
(In millions)
United Kingdom
United States
The Netherlands
China
Other
Total cash and cash equivalents
The amount of cash and cash equivalents held in these geographic regions fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We recognize a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax-free manner.
In certain jurisdictions, our cash balances are subject to withholding taxes immediately upon withdrawal of funds to a different jurisdiction. In addition, in order to take advantage of incentive programs offered by various jurisdictions, including tax incentives, we are required to maintain minimum cash balances in these jurisdictions. The transfer of cash from these jurisdictions could result in loss of incentives or higher cash tax expense, but those impacts are not expected to be material.
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Our cash and cash equivalent balances as of December 31, 2025 and 2024 were held in the following significant currencies:
As of December 31, 2025
(In millions)
USD
EUR
GBP
CNY
Other
United Kingdom
United States
The Netherlands
China
Other
Total
USD Equivalent
As of December 31, 2024
(In millions)
USD
EUR
GBP
CNY
Other
United Kingdom
United States
The Netherlands
China
Other
Total
USD Equivalent
Cash Flows
The table below summarizes our primary sources and uses of cash for the years ended December 31, 2025, 2024, and 2023. We have derived this summarized statement of cash flows from our Financial Statements included elsewhere in this Report. Amounts in the table below have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
For the year ended December 31,
(In millions)
Net cash provided by/(used in):
Operating activities:
Net income/(loss) adjusted for non-cash items
Changes in operating assets and liabilities, net
Cash operating activities
Operating activities
Investing activities
Financing activities
Effects of exchange rate differences
Net change in cash and cash equivalents
Operating Activities
Refer to Results of Operations included elsewhere in this MD&A for discussion of the drivers of changes in net income/(loss) in fiscal years 2025 and 2024.
Net cash provided by operating activities for the year ended December 31, 2025 increased from the prior year primarily due to favorable changes in working capital, partially offset by lower cash provided by earnings.
Investing Activities
Investing activities primarily include cash exchanged for the acquisition or divestiture of a business or group of assets, cash paid for additions to PP&E and capitalized software, and the acquisition or sale of certain debt and equity securities.
Net cash used in investing activities for the year ended December 31, 2025 increased compared to the corresponding period of the prior year, primarily due to lower proceeds received from the sale of the MSP Business in 2025 compared to the proceeds received from sale of the Insights Business in 2024 , and lower capital expenditures. In the year ended December 31, 2025, we
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received cash proceeds of $33.7 million from the sale of a business, compared to $135.7 million and $19.0 million in the years ended December 31, 2024 and 2023.
In fiscal year 2026, we anticipate additions to PP&E and capitalized software of up to approximately $150.0 million, which we expect to be funded with cash flows from operations.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2025 increased primarily due to the increase in the amount of cash paid to repurchase ordinary shares in the current period, the settlement of our cash tender offer in the fourth quarter of 2025, and the issuance of the $500.0 million 6.625% Senior Notes in the second quarter of 2024. These increases were partially offset by the early redemption of our $700.0 million 5.0% Senior Notes in the third quarter of 2024, and the payment of $79.4 million to repurchase the remaining equity interest in a joint venture in the prior year. Refer to Note 14: Debt and Note 16: Shareholders' Equity of our Financial Statements included elsewhere in this Report for additional information.
Indebtedness and Liquidity
The following table details our gross outstanding indebtedness as of December 31, 2025 and the associated interest expense for the year then ended (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
(In millions)
Balance as of December 31, 2025
Interest Expense for the year ended December 31, 2025
4.0% Senior Notes (1)
4.375% Senior Notes
5.875% Senior Notes
3.75% Senior Notes
6.625% Senior Notes
Finance lease obligations
Total gross outstanding indebtedness
Amortization of debt issuance costs
Capitalized interest costs (2)
Other interest expense (3)
Interest expense
(1) In November 2025, we completed the settlement of $350.0 million of the 4.0% Senior Notes due 2029 (the "4.0% Senior Notes"), with an aggregate principal amount of $354.0 million, that was validly tendered in connection with a cash tender offer that commenced in October 2025.
(2) Relates to interest costs capitalized as PP&E in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest.
(3) Primarily relates to fees on the unused balance on our Revolving Credit Facility.
Debt Instruments
As of December 31, 2025, our debt instruments included $646.0 million of 4.0% Senior Notes, $450.0 million aggregate principal amount of 4.375% senior notes due 2030 (the "4.375% Senior Notes"), $500.0 million aggregate principal amount of 5.875% senior notes due 2030 (the "5.875% Senior Notes"), $750.0 million aggregate principal amount of 3.75% senior notes due 2031 (the "3.75% Senior Notes"), and $500.0 million aggregate principal amount of 6.625% senior notes due 2032 (the "6.625% Senior Notes"). There are no outstanding borrowings on the Revolving Credit Facility as of December 31, 2025.
In September 2025, certain of our indirect, wholly-owned subsidiaries, including Sensata Technologies, Inc., Sensata Technologies Intermediate Holding B.V., and Sensata Technologies B.V. (“STBV”), entered into an amendment (the “Fourteenth Amendment”) to the credit agreement, dated as of May 12, 2011 (as amended, supplemented, waived, or otherwise modified, the “Credit Agreement”).
Among other changes to the Credit Agreement, the Fourteenth Amendment, (i) reduced the total amount of the Revolving Credit Facility commitments of the lenders from $750.0 million to $650.0 million, (ii) extended the maturity date of the
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Revolving Credit Facility to September 24, 2030, and (iii) modified certain of the operational and restrictive covenants and other terms and conditions of the Credit Agreement to provide us increased flexibility and permissions thereunder.
Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information related to our debt instruments.
The aggregate principal amount of each tranche of our Senior Notes is due in full at its maturity date. Loans made pursuant to the Revolving Credit Facility must be repaid in full at its maturity date and can be repaid prior to then at par. All letters of credit issued thereunder will terminate at the final maturity of the Revolving Credit Facility unless cash collateralized prior to such time.
The following table presents the remaining mandatory principal repayments of long-term debt, in millions, excluding finance lease payments and discretionary repurchases of debt, in each of the years ended December 31, 2026 through 2030 and thereafter.
For the year ended December 31,
Aggregate Maturities
Thereafter
Total long-term debt principal payments
Capital Resources
Senior Secured Credit Facilities
In September 2025, we entered into the Fourteenth Amendment which (i) reduced the total amount of the Revolving Credit Facility commitments of the lenders from $750.0 million to $650.0 million, (ii) extended the maturity date of the Revolving Credit Facility to September 24, 2030, and (iii) modified certain of the operational and restrictive covenants and other terms and conditions of the Credit Agreement to provide us increased flexibility and permissions thereunder. Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information related to the Fourteenth Amendment.
Sources of Liquidity
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. As of December 31, 2025, there was $645.8 million available under the Revolving Credit Facility, net of $4.2 million of obligations in respect of outstanding letters of credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2025, no amounts had been drawn against these outstanding letters of credit. This Revolving Credit Facility includes an accordion feature under which maximum borrowings may be increased under certain circumstances.
We believe, based on our current level of operations for the year ended December 31, 2025, and taking into consideration the restrictions and covenants included in the Credit Agreement, Revolving Credit Facility, and Senior Notes Indentures discussed below and in Note 14: Debt of our Financial Statements included elsewhere in this Report, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, dividend payments, ordinary share repurchases, and debt service for the short and long term. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Further, the amount of our debt may limit our ability to procure additional financing in the future.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of January 28, 2026, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and S&P's corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs but will not reduce availability under the Credit Agreement.
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Restrictions and Covenants
The Credit Agreement provides that if our senior secured net leverage ratio exceeds a specified level, we are required to use a portion of our excess cash flow, as defined in the Credit Agreement, generated by operating, investing, or financing activities to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and upon the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2025.
The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14: Debt of our Financial Statements included elsewhere in this Report) that limit the ability of STBV and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and make other restricted payments. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration when we established our share repurchase programs and will be evaluated periodically with respect to future potential funding of those programs. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs or maintaining our dividend with available cash and cash flows from operations. As of December 31, 2025, we believe that we were in compliance with all the covenants and default provisions under the Credit Agreement and the Senior Notes Indentures.
Share Repurchase Program
From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by our Board of Directors at any time. Under these programs, we may repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting.
In September 2023, our Board of Directors authorized the September 2023 Program, which replaced the previous program, effective October 1, 2023.
During the year ended December 31, 2023, we purchased approximately 2.3 million ordinary shares at a weighted average price per share of $38.31. These purchases were made under the January 2022 Program and the September 2023 Program. During the year ended December 31, 2024, we repurchased approximately 1.9 million ordinary shares at a weighted average price per share of $36.19. These purchases were made under the September 2023 Program. During the year ended December 31, 2025, we repurchased approximately 4.2 million ordinary shares at a weighted average price per share of $28.47. These purchases were made under the September 2023 Program. As of December 31, 2025, approximately $282.4 million remained available under the September 2023 Program.
Dividends
In the second quarter of 2023, we increased the quarterly dividend paid to our shareholders to $0.12 per share. In the years ended December 31, 2025, 2024, and 2023 we paid aggregate cash dividends of $70.4 million, $72.2 million, and $71.5 million respectively. In January 2026, we announced that our Board of Directors declared a quarterly dividend of $0.12 per share, payable in February 2026 to shareholders of record as of February 11, 2026.
Critical Accounting Estimates
As discussed in Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting policies and estimates that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require the most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.
Revenue Recognition
The discussion below details the most significant judgments and estimates we make regarding recognition of revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers . In accordance with FASB ASC Topic 606, we recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to
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which we expect to be entitled in exchange for those goods, using a five-step model. The most critical judgments and estimates we make in the implementation of this model relate to identifying the contract with the customer and determination of the transaction price associated with the performance obligation(s) in the contract, specifically related to variable consideration.
While many of the agreements with our customers specify certain terms and conditions that apply to any transaction between the parties, many of which are in effect for a defined term, the majority of these agreements do not result in contracts (as defined in FASB ASC Topic 606) because they do not create enforceable rights and obligations on the parties. Specifically, (1) the parties are not committed to perform any obligations in accordance with the specified terms and conditions until a customer purchase order is received and accepted by us and (2) there is a unilateral right of each party to terminate the agreement at any time without compensating the other party. For this reason, the majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders. If this assessment were to change, it could result in a material change to the amount of net revenue recognized in a period.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer purchase order, in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material. However, should our judgments and estimates regarding variable consideration change, it could result in a material change to the amount of net revenue recognized in a period.
Goodwill
Businesses acquired are recognized at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Intangible assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. In accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other , goodwill is not amortized. Instead, these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired.
Our judgments regarding the existence of indicators of goodwill impairment are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We evaluate goodwill for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Identification of reporting units. We have six reporting units: Automotive, Commercial Equipment, Industrial Solutions, Aerospace, Aftermarket and Dynapower. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Assignment of assets, liabilities, and goodwill to reporting units. 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. Other assets and liabilities, such as debt, cash and cash equivalents, and PP&E associated with our corporate offices, are viewed as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the retained portion of the related reporting unit.
Evaluation of goodwill for impairment. We have the option to first assess qualitative factors to determine whether a quantitative goodwill impairment analysis must be performed. The objective of a qualitative analysis is to assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. We make this assessment based on macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant factors as
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applicable. If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we prepare a discounted cash flow analysis to determine whether the carrying value of the reporting unit exceeds its estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value, we recognize an impairment of goodwill for the amount of this excess, in accordance with the guidance in FASB ASC Topic 350.
We evaluate the goodwill of each reporting unit for impairment as of October 1, or more often if impairment indicators are identified. The annual goodwill impairment test was performed using a qualitative analysis as of October 1, 2025, and was performed using the quantitative method as of October 1, 2024.
A qualitative analysis is performed by evaluating events and circumstances that most affect the fair value of each reporting unit, including macroeconomic conditions, market conditions, industry trends, cost factors, financial performance, and other relevant qualitative factors. Based on an evaluation of the factors that most affect the fair value of each reporting unit, we determine whether it is more likely than not that a reporting unit's fair value exceeds its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a goodwill impairment test using the quantitative method. If we conclude that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, it is not necessary to perform the quantitative goodwill impairment test and no further testing is required. The results of the qualitative analyses performed as of October 1, 2025, did not indicate a need to perform quantitative analysis, as we determined that it is more likely than not that the fair value of each of our reporting units exceeded their respective carrying values. No events or circumstances occurred between October 1, 2025 and December 31, 2025 that would more likely than not reduce the fair values of the reporting units below their carrying amounts
In performing our evaluation under the quantitative method, we estimated the fair values of our reporting units using the discounted cash flow method, and, when applicable, a market multiples approach (the "Market Approach") using comparable companies appropriate to the reporting unit. For the discounted cash flow method, we prepared detailed annual projections of future net cash flows for the reporting unit for the subsequent ten fiscal years (the "Discrete Projection Period"). We estimated the value of the net cash flows beyond the tenth fiscal year (the "Terminal Year") by using either the Gordon Growth Model or the H-Model. The net cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated weighted-average cost of capital ("WACC") appropriate for each reporting unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. As these assumptions were largely unobservable, the estimated fair values fall within Level 3 of the fair value hierarchy. A change in our cash flow forecast or the discount rate used would result in an increase or decrease in our calculated fair value. We believe that our procedures for estimating discounted future net cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices.
In the third quarter of 2025, impairment indicators were identified that suggested the carrying value of the Dynapower reporting unit could exceed the fair value. The primary indicators of impairment were a lower outlook within certain markets that the reporting unit operates in following recent tax legislation being enacted, and the strategic shift to focus on other markets. This revised outlook led to downward revisions of forecasted future cash flows. We evaluated the goodwill of the Dynapower reporting unit for impairment using a combination of a market-based valuation method and an income approach that discounts forecasted cash flows. We determined that our Dynapower reporting unit was impaired, and in the third quarter of 2025, we recorded a $225.7 million non-cash impairment charge. If Dynapower does not achieve the forecasted future cash flows, or if the discount rate or other assumptions were to change, it is reasonably possible that additional impairments of the remaining $4.1 million of goodwill may be recognized in the future.
In the third quarter of 2024, impairment indicators were identified that suggested the carrying value of the Dynapower reporting unit could exceed the fair value. The primary indicators of impairment were revised projections of future cash flows and actual performance that was lower than previous projections for the reporting unit. We evaluated the goodwill of the Dynapower reporting unit for impairment using a combination of a market-based valuation method and an income approach that discounts forecasted cash flows. We determined that our Dynapower reporting unit was impaired, and in the third quarter of 2024, we recorded a $150.1 million non-cash impairment charge.
Based on our 2023 evaluation, we determined that goodwill in our Insights reporting unit was impaired, driven primarily by a lower long-range financial forecast resulting from the impact of restructuring actions taken in the third and fourth quarters of 2023 and consequent business decisions regarding our level of investment in Insights in future years considering Sensata’s focus on electrification. Other valuation assumptions for the Insights reporting unit valuation that were impacted by macroeconomic factors also contributed to the impairment. Accordingly, we recorded a $321.7 million non-cash impairment charge in the fourth quarter of 2023, representing the entire goodwill balance allocated to Insights.
The preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the discount rates, and the estimation of the multiples used in the Market Approach involve significant judgments. Changes to these
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assumptions could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Types of events that could result in a goodwill impairment. As noted above, the assumptions used in the quantitative calculation of fair value of our reporting units, including the long-range forecasts, the selection of the discount rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair values of our reporting units calculated in prior years and could result in a goodwill impairment charge in a future period. We believe that certain factors, such as a future recession, any material adverse conditions in the automotive industry and other industries in which we operate, and other factors identified in Item 1A: Risk Factors included elsewhere in this Report could cause us to revise our long-term projections. Such revisions could result in a goodwill impairment charge in the future.
We consider a combination of quantitative and qualitative factors to determine whether a reporting unit is at risk of failing the goodwill impairment test, including: the timing of our most recent quantitative impairment tests and the relative amount by which a reporting unit’s fair value exceeded its then carrying value, the inputs and assumptions underlying our valuation models and the sensitivity of our fair value measurements to those inputs and assumptions, the impact that adverse economic or market conditions may have on the degree of uncertainty inherent in our long-term operating forecasts, and changes in the carrying value of a reporting unit’s net assets from the time of our most recent goodwill impairment test. We also consider the impact of recent acquisitions in our expectations of the reporting units, such as the Dynapower reporting unit, and how these acquisitions perform against their original expected performance, as these might put pressure on the reporting units' fair value over carrying value in the short term. Based on the results of this analysis, we do not consider any of our reporting units outside of Dynapower, which has $4.1 million of goodwill remaining after its 2025 impairment, to be at risk of future goodwill tests.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for (or benefit from) income taxes in each of the jurisdictions in which we operate. This involves estimating our current tax expense, 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. Management judgment is required in determining various elements of our provision for (or benefit from) income taxes, including the amount of tax benefits on uncertain tax positions, and deferred tax assets that should be recognized.
In accordance with FASB ASC Topic 740, Income Taxes , we record uncertain tax positions on the basis of a two-step process. First, we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position. Second, for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the relevant tax authority. Significant judgment is required in evaluating whether our tax positions meet this two-step process. The more-likely-than-not recognition threshold must be met in each reporting period to support continued recognition of any tax benefits claimed, both in the current year, as well as any year which remains open for review by the relevant tax authority at the balance sheet date. Penalties and interest related to uncertain tax positions may be classified as either income taxes or another expense line item in the consolidated statements of operations. We classify interest and penalties related to uncertain tax positions within the provision for (or benefit from) income taxes line of the consolidated statements of operations.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In measuring our deferred tax assets, we consider all available evidence, both positive and negative, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations in various jurisdictions, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of these items along with the weight that should be given to each category, commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized.
Ultimately, the ability to realize our deferred tax assets is based on our assessment of future taxable income, which is based on estimated future results. 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 assessment, which could materially impact our consolidated financial position and results of operations.
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Recently issued accounting standards
Refer to Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report for additional information about recently issued accounting standards, including those adopted by the Company.
