Sensata Technologies Holding plc — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods. Sensata makes sensing and electrical protection products and reports two segments: Performance Sensing and Sensing Solutions. Its U.K. parent-company merger was completed on March 28, 2018; management reported no change to the business conducted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $913.9 million | $839.9 million | $1,800.2 million | $1,647.1 million |
| Operating profit | $178.1 million | $140.0 million | $325.7 million | $261.6 million |
| Operating margin | 19.5% | 16.7% | 18.1% | 15.9% |
| Net income | $105.3 million | $79.5 million | $195.8 million | $151.2 million |
| Diluted EPS | $0.61 | $0.46 | $1.13 | $0.88 |
| Operating cash flow | Not provided by quarter | $253.9 million | $233.8 million |
- Q2 revenue rose 8.8%; management reported organic growth of 6.4%, excluding currency and other defined effects. Six-month revenue grew 9.3%, with organic growth of 6.4%.
- Q2 revenue increased in Performance Sensing 8.7% and Sensing Solutions 9.0%. Growth drivers included automotive and heavy vehicle markets, and semiconductor, industrial, and aerospace markets.
- Q2 net income increased approximately 33% year over year. Operating margin improved 2.8 percentage points, supported by lower cost of revenue as a share of sales, lower amortization and restructuring charges, and operating efficiencies.
- R&D expense increased to $38.0 million in Q2 from $31.2 million; management cited development work supporting new design wins and emerging market trends.
Cash, debt, and liquidity
- Cash and cash equivalents were $863.4 million at June 30, 2018, up from $753.1 million at December 31, 2017.
- For the first six months, operating cash flow was $253.9 million, investing cash outflow was $61.3 million, and financing cash outflow was $82.3 million. Capital expenditures and capitalized software totaled $66.3 million.
- Gross indebtedness, including capital leases and other financing obligations and before discounts and financing costs, was $3.300 billion. Cash less gross indebtedness implies approximate net debt of $2.437 billion.
- The company had $415.4 million available under its $420 million revolving facility, net of letters of credit, and stated that the $1.0 billion incremental borrowing accordion remained available. Management believed liquidity would suffice for at least 12 months; it cautioned that future cash generation and borrowing availability are not assured.
- The company reported compliance with debt covenants at June 30, 2018. Moody’s and S&P ratings were Ba2 and BB+, respectively, each with a stable outlook.
Material changes, outlook, and risks
- On May 22, 2018, Sensata agreed to sell its Valves Business for approximately $173 million cash, subject to working-capital and other adjustments and regulatory approvals. Closing was expected in Q3 2018. The business was classified as held for sale; its assets totaled $118.8 million and liabilities $47.9 million.
- A $400 million share repurchase program was authorized in May. Sensata repurchased approximately $60.1 million of shares during Q2; $339.9 million remained available at quarter-end. Management expected to complete the program within six months.
- Management expected 2018 capital expenditures of approximately $150–$160 million, funded from operating cash flow. Restructuring actions were expected to yield about $3 million of annual pretax savings once fully implemented, with an estimated two-year payback.
- Other, net was a loss of $11.1 million in Q2 versus a $1.9 million loss in Q2 2017, primarily reflecting foreign-currency movements. For the six-month period, other, net shifted from a $2.9 million gain to a $15.7 million loss; drivers included currency and commodity movements and a $2.4 million debt-consent fee loss related to the merger.
- A patent-infringement suit concerning TPMS products seeks past damages, interest, and costs; Sensata denied liability, said loss was not probable, and recorded no accrual. The claimant’s potential recovery could be material if it prevails.
- Key disclosed risks include global and automotive market conditions, tariffs, customer pricing pressure, supply interruptions, foreign exchange, regulatory and tax matters, product and intellectual-property claims, information-security incidents, and the company’s leverage and debt covenants.
- No full-year revenue or earnings guidance is provided in the filing. The company had not recorded incremental accounting adjustments for the U.S. Tax Cuts and Jobs Act and continued to assess its tax effects. It planned to adopt the new lease standard on January 1, 2019; the impact was still being evaluated.
Important facts for investors to verify
- Whether the Valves Business sale closed as expected, and the final proceeds after adjustments.
- Whether organic revenue growth and margin improvement persisted, particularly across automotive, HVOR, industrial, and aerospace markets.
- Cash conversion and working-capital trends, including the inventory build, alongside planned capital spending and share repurchases.
- Debt repayment capacity, covenant headroom, and the implications of the company’s approximately $3.3 billion gross indebtedness.
- Developments in the TPMS patent litigation and any material tax, currency, commodity, or tariff exposures.