Sensata Technologies Holding N.V. — Q2 2015 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2015, compared with the same 2014 periods. Sensata makes sensors and control products through Performance Sensing and Sensing Solutions. Growth in Performance Sensing reflects acquisitions, particularly Schrader, completed in October 2014; prior-year segment results were recast for a 2014 segment realignment.
Key financial results
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $770.4M | $575.9M | $1,521.1M | $1,127.4M |
| Operating profit / margin | $93.2M / 12.1% | $104.0M / 18.1% | $195.5M / 12.9% | $203.2M / 18.0% |
| Net income / diluted EPS | $40.9M / $0.24 | $63.9M / $0.37 | $76.3M / $0.44 | $132.3M / $0.76 |
| Operating cash flow | Not separately presented for Q2 | $212.2M | $217.4M |
- Q2 revenue rose 33.8%; H1 revenue rose 34.9%. Performance Sensing revenue increased 51.3% in Q2 and 50.6% in H1, largely from acquisitions, with organic growth of 5.9% and 4.5%, respectively, partly offset by currency. Sensing Solutions revenue fell 6.2% in Q2 and 2.5% in H1, reflecting weaker organic demand and foreign exchange, partly offset by Magnum.
- Q2 gross margin was approximately 32.8%, versus 36.0% a year earlier; H1 gross margin was approximately 32.6%, versus 35.6%. Lower margins reflected acquisition dilution, product mix, Brazil facility closure charges, and a warranty-related charge. Operating profit and net income declined despite higher revenue.
- Interest expense was $31.6M in Q2 and $66.3M in H1, up from $23.3M and $46.5M. H1 other expense was $33.8M, versus $4.5M of income, including $25.5M of debt-transaction losses and $6.1M of commodity-hedge losses.
- H1 investing cash outflow was $83.9M, including $86.8M of capital expenditures; financing cash outflow was $112.9M. Cash increased $15.5M from year-end to $226.8M. H1 operating cash flow was slightly lower year over year, with working-capital timing affecting results.
- At June 30, cash was $226.8M; gross debt including leases and other financing obligations was $2,768.4M. Debt included $987.6M of term loans, $1.6B of senior notes, and $130.0M drawn on the revolver. Revolver capacity available was $213.7M, net of letters of credit. Total current liabilities were $695.0M versus current assets of $1,192.5M.
Changes, outlook, risks, and unusual items
- Debt was refinanced: the company replaced existing term loans with a term loan maturing in 2021 and refinanced $700M of 6.5% notes with 5.0% notes due 2025. The revolving facility was increased to $350M and extended to 2020. Management cited lower rates from refinancing, while noting higher interest expense overall due partly to acquisition-related debt.
- Management expected 2015 capital expenditures of approximately $175M–$200M, to be funded from operating cash flow, and said available liquidity was expected to cover operations, investment, share repurchases, and debt service for at least 12 months. It cautioned that future cash generation and borrowing availability are not assured. The company reported compliance with debt covenants.
- Management expected weakness in China to continue through 2015 and channel inventory to normalize by Q4 2015. It anticipated acquisition-related cost-of-revenue dilution to ease with integration; Schrader integration could take up to three years. No revenue or earnings guidance was provided.
- Q2 included $10.1M of restructuring and special charges. The company decided to close a Schrader-acquired manufacturing facility in Brazil, recording $4.0M of severance and approximately $5.0M of asset write-downs, primarily in cost of revenue. An additional $4.0M accrual was recorded for a U.S. automaker warranty settlement.
- Material exposures include substantial indebtedness; acquisition integration; automotive demand and competition; foreign exchange and commodity price changes; and product, warranty, intellectual-property, and litigation risks. A jury found no infringement in Bridgestone’s U.S. patent case, but a German infringement judgment was under appeal. The filing states that potential losses in certain other proceedings cannot be estimated or are not considered probable; a $25M Brazil tax claim was disputed and indemnified by a former owner.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of continuing revenue growth is organic versus acquisition-driven, and whether Sensing Solutions and China demand recover as management anticipated.
- Whether acquisition integration improves gross margin and whether Brazil closure and warranty costs result in further charges.
- Debt service, leverage, covenant headroom, and the sustainability of operating cash flow against planned capital expenditures.
- Developments in the German Bridgestone appeal, Yukwang disputes, customer claims, and other legal or product-liability exposures.
- The effects of currency and commodity movements, including hedge gains and losses, on reported revenue and earnings.