Sensata Technologies Holding N.V. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. The filing describes a global manufacturer of sensors and controls for automotive, industrial, aerospace, and other markets.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $455.0 | $391.8 | $899.3 | $768.9 |
| Operating income | $76.8 | $70.7 | $155.7 | $95.4 |
| Operating margin | 16.9% | 18.0% | 17.3% | 12.4% |
| Net income (loss) | $(34.6) | $82.5 | $(44.2) | $109.8 |
| Net income (loss) per diluted share | $(0.20) | $0.46 | $(0.25) | $0.66 |
- Revenue grew 16.1% in Q2 and 16.9% in the first half. Sensors revenue rose 27.8% in Q2; controls revenue declined 2.4%. Management attributed overall growth mainly to volume, including MSP, higher content, and emerging markets, partly offset by pricing and weaker mature markets.
- Cost of revenue increased to 62.6% of revenue in Q2 from 61.4%; the resulting gross margin was 37.4%, versus 38.6%. For the first half, cost of revenue was 62.5% of revenue versus 61.6%, a gross margin of 37.5% versus 38.4%.
- Operating income improved year over year, especially for the first half, but Q2 operating margin declined. First-half SG&A fell to $90.0 million from $116.6 million, mainly because 2010 included IPO-related charges and an $18.9 million share-compensation catch-up; 2011 included acquisition-related costs.
- Net losses reflected a sharp swing in currency translation and other items: a loss of $74.7 million in Q2 and $115.4 million in the first half, versus gains of $51.8 million and $99.0 million, respectively, in 2010. First-half items included $60.4 million of debt-related currency losses and a $44.0 million debt-repurchase loss.
- First-half operating cash flow was $121.2 million, versus $88.8 million. Investing cash use was $177.1 million, including $137.3 million for MSP and $40.4 million of capital expenditures. Cash declined by $206.6 million to $287.1 million from year-end 2010. Receivables and inventory increases and pension contributions reduced operating cash.
- At June 30, cash was $287.1 million and current liabilities were $289.5 million. Gross indebtedness, including capital leases and other financing obligations, was $1,847.5 million; long-term debt net of discount and current portion was $1,783.6 million. The $250 million revolving facility had $243.1 million available, net of letters of credit.
Material changes, outlook, and risks
- In May, the company refinanced existing debt with a $1.1 billion term loan and $700 million of 6.5% senior notes due 2019, and repaid its previous term loans and 8% and 9% notes. Management cited net interest expense of $47.4 million for the first half, down from $58.5 million.
- MSP, acquired in January for estimated consideration of $152.5 million, contributed $39.2 million of Q2 revenue and $65.2 million for the first half. The purchase-price allocation was preliminary. The company announced plans to close two MSP facilities, with expected restructuring costs of about $5.1 million.
- The company agreed to acquire Sensor-NITE for approximately €225 million (about $324 million), subject to adjustment, and expected closing in Q3 2011. It expected to fund the purchase with cash and/or a revolver draw.
- Management expected 2011 capital expenditures of approximately $80–85 million and believed available liquidity would fund operations, capital spending, and debt service for at least twelve months. This is not earnings guidance. The filing gives no clear full-year revenue or profit forecast.
- Risks include high leverage and restrictive debt covenants; foreign-exchange and floating-rate exposure; automotive demand, pricing, customer and supplier concentration, and natural-disaster disruption (including Japan); and acquisition integration and financing risk. The company reported covenant compliance at June 30.
- Contingencies include Whirlpool litigation, where the company reported a $5.9 million reserve while Whirlpool was seeking approximately $290 million; TI indemnification is subject to conditions and a cap. Ford-related claims had a $0.3 million reserve against aggregate claims estimated by the company at $5–6 million. The company also disclosed an FCPA voluntary disclosure concerning a China business relationship; potential penalties were not estimable and no provision was recorded.
Important facts for investors to verify
- Whether operating cash generation and margins can withstand working-capital demands, input-cost pressure, and weaker controls or mature-market demand.
- The final MSP purchase accounting, integration progress, realized synergies, and restructuring costs; and the financing, closing, and integration of Sensor-NITE.
- Debt terms, covenant headroom, refinancing effects, and the ability to meet debt service while preserving liquidity.
- Developments in Whirlpool, Ford, and other product-liability matters, the scope of TI indemnification, and any outcome of the FCPA review.
- Foreign-exchange effects: the reported earnings swing was materially affected by debt remeasurement and debt extinguishment rather than operating performance alone.