Sensata Technologies Holding N.V. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited and prepared under U.S. GAAP. The company makes sensors and controls for automotive, heavy-vehicle, industrial, aerospace, and other markets.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $575.9m | $506.4m | $1,127.4m | $976.8m |
| Operating profit | $104.0m | $90.6m | $203.2m | $165.4m |
| Operating margin | 18.1% | 17.9% | 18.0% | 16.9% |
| Net income | $63.9m | $20.4m | $132.3m | $55.0m |
| Diluted EPS | $0.37 | $0.11 | $0.76 | $0.31 |
| Operating cash flow | — | $217.4m | $180.1m |
Q2 revenue rose 13.7% year over year; sensors revenue increased 16.2% and controls 7.4%. For the first half, revenue rose 15.4%, with sensors up 20.0% and controls up 4.2%. Management attributed sensors growth to organic demand, acquisitions, automotive and heavy-vehicle markets, and demand associated with emissions, fuel-efficiency, and safety requirements. Controls growth reflected semiconductor manufacturing, commercial aerospace, and automotive demand, partly offset by weaker appliance and HVAC markets in the first half.
Q2 gross margin was approximately 36.0%, versus 36.3% a year earlier; first-half gross margin was approximately 35.6%, versus 35.4%. Q2 net margin was 11.1% versus 4.0%; first-half net margin was 11.7% versus 5.6%. Higher R&D and SG&A costs reflected investment for future growth, added headcount, and acquisition integration. Cost-reduction initiatives partly offset the acquired businesses’ dilutive effect on cost of revenue.
Cash, debt, and liquidity
- Cash and equivalents were $184.6m at June 30, down from $317.9m at year-end 2013.
- First-half cash flows: $217.4m provided by operations, $176.4m used in investing, and $174.2m used in financing. Investing included $117.1m net acquisition payments and $67.2m capital expenditure; financing included $181.1m of share repurchases.
- Gross debt, including capital leases and other financing obligations, was $1,722.3m. The $250m revolving facility had no outstanding borrowing and $245m available, net of letters of credit.
- Management said available cash, operating cash flow, and revolving-credit availability were expected to fund operations, capital spending, buybacks, and debt service for at least 12 months. The company reported compliance with its debt covenants.
Material developments, outlook, and risks
- Net income benefited from the swing in “Other, net”: a $3.9m gain in Q2 2014 compared with a $32.2m loss in Q2 2013, mainly reflecting commodity-derivative results. First-half “Other, net” was a $4.5m gain versus a $34.8m loss. These items make earnings comparisons less indicative of underlying operating trends.
- The company acquired Wabash Technologies for $59.6m in January and Magnum Energy for $60.0m in May. Wabash contributed $42.6m of first-half revenue; its net income contribution was immaterial. Purchase price allocations remained preliminary.
- Capital expenditure outlook for 2014 was approximately $120m–$140m, expected to be funded from operating cash flow. A July 3 agreement to acquire DeltaTech Controls for an aggregate cash price of approximately $175.8m was expected to close in Q3, subject to customary conditions; management expected to use operating cash and the revolver.
- The company repurchased approximately 4.3m shares for $181.1m in the first half; $74.7m remained under its $250m buyback authorization at June 30. A secondary offering by an existing shareholder generated no proceeds for the company.
- Notable contingencies included a product-defect claim against the company in Italy, with a $0.3m accrual against a claimed €4.2m; automotive customer product claims with a $2.8m accrual; an unaccrued Venmar-related claim considered reasonably possible but not estimable; and supplier litigation in Korea for which the company said a loss was not probable. The SEC’s inquiry into a prior FCPA voluntary disclosure had no reported update; potential penalties could not be estimated and no provision was recorded.
- Key stated risks include leverage and ability to generate cash or refinance, economic and end-market demand, customer pricing and concentration pressures, competition, foreign operations and currency movements, and integrating acquisitions. The filing reported no material changes to previously disclosed risk factors and no significant changes in market risk.
- The company planned to adopt the new revenue-recognition standard on January 1, 2017; it was still evaluating the impact and had not selected a transition method.
Important facts for investors to verify
- How much of revenue and profit growth reflects organic demand versus acquisitions, and whether acquired businesses deliver expected returns.
- Whether cash conversion and working-capital trends improve, particularly after the increase in receivables and inventory.
- Debt-service capacity and liquidity after the planned DeltaTech acquisition, capital spending, and continued share repurchases.
- The sustainability of earnings excluding volatile commodity-derivative and other non-operating gains or losses.
- Developments in product, supplier, and regulatory matters, including the unresolved SEC inquiry and unquantified claims.