Sensata Technologies Holding plc — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are presented against the comparable 2019 periods. Sensata reports Performance Sensing and Sensing Solutions segments, serving automotive, heavy vehicle and off-road (HVOR), industrial, appliance/HVAC, aerospace and other markets.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $788.3 million | $849.7 million | $2,139.1 million | $2,603.9 million |
| Operating income / margin | $126.8 million / 16.1% | $146.1 million / 17.2% | $183.6 million / 8.6% | $436.2 million / 16.8% |
| Net income | $76.7 million | $70.7 million | $42.6 million | $229.2 million |
| Diluted earnings per share | $0.49 | $0.44 | $0.27 | $1.41 |
| Operating cash flow | Not separately stated for the quarter | $293.3 million | $433.5 million |
- Revenue declined 7.2% in Q3 and 17.9% for the first nine months year over year; reported results largely reflected COVID-19-related market contraction.
- Q3 gross margin, calculated from reported revenue and cost of revenue, was approximately 32.7%, compared with 34.7% a year earlier. The corresponding nine-month margins were approximately 29.5% and 34.3%.
- Q3 net income increased despite lower revenue, while operating income and operating margin declined. The quarter included a $9.2 million gain in “Other, net” and a $10.5 million net restructuring and other credit, principally reflecting the Wasica settlement release.
- Nine-month earnings were particularly affected by lower revenue and operating income, manufacturing under-capacity, restructuring costs and the Wasica litigation charges. The nine-month tax provision also included a $7.5 million deferred tax benefit under the CARES Act.
- Cash and cash equivalents were $1.610 billion at September 30, 2020, versus $774.1 million at year-end 2019. Operating cash flow was $293.3 million; investing cash outflow was $158.5 million and financing cash inflow was $701.2 million. Capital spending was $79.9 million.
- Long-term debt, net, was $3.963 billion, up from $3.220 billion at year-end 2019. Gross indebtedness, including finance leases and other financing obligations and excluding debt discounts and issuance costs, was $4.038 billion. Cash less gross indebtedness was approximately $2.428 billion.
- Current assets were $2.714 billion and current liabilities $626.4 million. The company reported $416.1 million available on its revolving facility and approximately $0.6 billion of incremental borrowing capacity under the Accordion.
Material changes and segment performance
- Performance Sensing revenue was $580.9 million in Q3, down 7.6%; Sensing Solutions revenue was $207.4 million, down 6.2%.
- Automotive revenue fell 7.6% in Q3; Sensata reported 290 basis points of outgrowth against a market decline of 10.8%. HVOR revenue declined 7.5%, with 860 basis points of outgrowth against a market decline of 16.4%.
- Aerospace revenue declined 24.4% in Q3, reflecting lower OEM production and air traffic. Industrial and other revenue declined 2.0%, with factory automation and medical equipment partly offsetting weak industrial markets.
- Q3 total segment operating income was $209.9 million, versus $241.8 million a year earlier. The filing says comparisons are recast to reflect a change in the allocation of certain megatrend R&D and SG&A costs to corporate and other.
- Cash increased substantially following $750 million of 3.75% senior notes issued in August. The company used part of the proceeds to repay the $400 million drawn on its revolving facility in April; the new notes mature in 2031.
Outlook, commentary and risks
- Management described a dramatic global economic rebound in Q3 but said COVID-19 continued to disrupt operations, supply chains, logistics and customer demand. The duration and severity of the pandemic and any resurgence remained uncertain; no specific revenue or EPS guidance was provided in the filing text.
- Management forecast 2020 capital expenditures of approximately $110–$120 million, funded from cash on hand. It expected at least $7 million of savings in Q4 from restructuring and other cost controls, and approximately $49 million of annualized personnel- and facilities-related savings by 2021.
- The Q2 2020 Global Restructure Program is expected to affect approximately 980 positions, with most actions completed by June 30, 2021. Expected lifetime charges are $35–$38 million for workforce reductions and $8–$10 million for site closures; $24.1 million had been accrued through September 30.
- New business wins totaled $320 million year to date, including $140 million in electrification. Management cited continuing investment in Smart & Connected, electrification and industrial digitization initiatives; the filing estimates a $6.5 billion addressable market for Sensata electrification products by 2030.
- The Wasica patent case was settled for $31.6 million in September and dismissed. Sensata recognized a $29.2 million loss in Q1, a $12.1 million prejudgment-interest charge in Q2 and an $11.7 million gain in Q3 from releasing an excess accrual.
- COVID-19 risks include renewed facility shutdowns, labor and supplier constraints, logistics disruption, weaker customer demand, economic slowdown, capital-market volatility, potential impairment and pressure on debt-covenant compliance. Sensata said it was in compliance with debt covenants at quarter-end and believed its liquidity sources could fund operations and debt service for at least 12 months, while cautioning that future cash generation and borrowing availability were not assured.
- The $500 million share-repurchase authorization remained temporarily suspended; approximately $302.3 million remained available under the program. The company reported no covenant-triggered mandatory prepayments during the nine-month period.
Key facts for investors to verify
- Whether demand, production levels and supply-chain conditions recover or deteriorate after quarter-end, particularly in automotive, aerospace and industrial markets.
- How much of the reported Q3 profitability reflects sustainable operations versus the Wasica credit, currency and commodity gains, and other unusual items.
- Progress, cash costs and timing of the restructuring program, including the stated savings and position reductions.
- Debt-service capacity, covenant headroom and refinancing implications of the increased debt balance and new 2031 notes.
- Actual 2020 capital spending and operating cash conversion relative to management’s outlook, alongside any change to the suspended repurchase program.