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Sensata Technologies Holding Plc - Q1 2011 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011. Sensata Technologies Holding N.V. operates in two primary segments: Sensors (pressure, force, speed, and position sensors for automotive and industrial markets) and Controls (motor protectors, circuit breakers, and HVAC controls). The company is a majority-owned subsidiary of Sensata Investment Company SCA, controlled by Bain Capital Partners and co-investors.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 17.8% year-over-year, driven by a 6.9% volume increase from the acquisition of Magnetic Speed and Position (MSP), higher content per vehicle, and growth in emerging markets (primarily China).
• Operating Profit Surge: Operating profit more than tripled to $78.9 million. This was primarily due to a significant reduction in Selling, General, and Administrative (SG&A) expenses ($44.4M vs. $77.9M in Q1 2010), which excluded one-time IPO-related costs and advisory termination fees incurred in the prior year.
• Net Loss: Despite strong operating performance, the company reported a net loss of $9.5 million. This was caused by a $40.6 million loss in "Currency translation (loss)/gain and other, net," driven largely by a $46.8 million loss on the re-measurement of foreign currency-denominated debt (Euro) against the strengthening U.S. dollar.
• Acquisition: On January 28, 2011, the company acquired the Automotive on Board sensors business of Honeywell (MSP) for approximately $152.5 million, contributing $25.9 million in revenue during the quarter.

Guidance, Outlook, and Risks

• Capital Expenditures: Management anticipates spending approximately $70 million to $75 million on capital expenditures for the full year 2011, funded by operating cash flows.
• Liquidity: The company maintains $143.1 million in available borrowing capacity under its revolving credit facility. Management believes current liquidity sources are sufficient for operations and debt service for the next 12 months.
• Legal Contingencies:
  • Whirlpool Litigation: A reserve of $5.9 million has been recorded for a lawsuit regarding defective control products in refrigerators. Texas Instruments (TI) has agreed to indemnify the company for costs exceeding $30 million, up to a cap of $300 million.
  • Ford Speed Control: A reserve of $0.2 million exists for litigation regarding a pressure switch; total claims are estimated between $5 million and $6 million.
  • FCPA Disclosure: The company voluntarily disclosed a potential violation of the Foreign Corrupt Practices Act related to a business relationship in China to the DOJ and SEC. The investigation is ongoing, and no provision has been made for potential penalties.
• Restructuring: A new plan (MSP Plan) was announced to close facilities in Illinois and the Czech Republic, affecting 210 employees with estimated costs of $5.15 million.

Investor Verification Checklist

• Currency Impact: Verify the sensitivity of future earnings to U.S. dollar/Euro exchange rate fluctuations, given the $46.8 million non-cash translation loss on debt.
• Whirlpool Indemnification: Confirm the status of the indemnification claim against Texas Instruments and the likelihood of recovering costs exceeding the $30 million threshold.
• FCPA Outcome: Monitor the resolution of the voluntary FCPA disclosure regarding China operations for potential fines or sanctions.
• Debt Service: Review the company's ability to service $1.93 billion in debt, particularly given the high leverage and interest rates on senior notes (8% and 9%).
• Acquisition Integration: Assess the integration progress and revenue contribution of the Honeywell (MSP) acquisition.