Sensata Technologies Holding plc — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are unaudited. Comparisons are with the corresponding 2020 periods unless noted.
Business context
Sensata supplies sensing, electrical protection, and related solutions across automotive, heavy vehicle and off-road (HVOR), industrial, appliance and HVAC, aerospace, and other markets. It reports two segments: Performance Sensing and Sensing Solutions. Management highlighted recovery in end markets and continued growth in its Electrification and Insights initiatives, while noting significant supply-chain and logistics pressures.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $951.0 million | $788.3 million | $2,886.2 million | $2,139.1 million |
| Operating income | $161.3 million | $126.8 million | $483.5 million | $183.6 million |
| Operating margin | 17.0% | 16.1% | 16.8% | 8.6% |
| Net income | $85.0 million | $76.7 million | $251.6 million | $42.6 million |
| Diluted EPS | $0.53 | $0.49 | $1.58 | $0.27 |
- Revenue increased 20.6% in Q3 and 34.9% year to date. Management reported organic growth of 16.6% and 29.9%, respectively, excluding currency and acquisition effects; market outgrowth was 1,190 basis points in Q3 and 1,040 basis points year to date.
- Q3 segment revenue was $706.5 million for Performance Sensing, up 21.6%, and $244.6 million for Sensing Solutions, up 17.9%. Automotive production remained constrained, while HVOR and several industrial, HVAC, and electrification applications supported growth.
- Cost of revenue was 66.1% of revenue in Q3 versus 67.3% a year earlier, implying gross margins of 33.9% and 32.7%. For the nine-month periods, cost of revenue was 66.6% versus 70.5%, implying gross margins of 33.4% versus 29.5%. Supply-chain costs partly offset improved volume, productivity, and prior cost-reduction benefits.
- Q3 net income margin was 8.9% versus 9.7% a year earlier. The quarter included $9.4 million of net other expense, compared with $9.2 million of net other income in Q3 2020, mainly reflecting commodity-derivative and currency losses.
- Nine-month results included a $30.1 million loss on redemption of the 6.25% Senior Notes. Other net expense totaled $47.8 million for the period, versus $1.5 million in 2020. The prior-year comparison also included a $7.5 million CARES Act tax benefit.
Cash flow, debt, and liquidity
- For the first nine months, operating cash flow was $393.2 million, versus $293.3 million in 2020. Capital expenditures and capitalized software were $100.4 million; reported free cash flow, a non-GAAP measure, was $292.8 million versus $213.4 million.
- Cash and equivalents were $1.96 billion at September 30, 2021, up from $1.86 billion at year-end 2020. Working-capital use, including higher receivables and raw-material purchases, partly offset higher earnings.
- Gross indebtedness, including finance leases and other financing obligations and excluding debt discounts and financing costs, was approximately $4.3 billion. Net debt was $2.32 billion; the reported net leverage ratio was 2.5x, compared with 3.2x at year-end 2020.
- The company had $416.1 million available under its $420 million revolving facility, net of letters of credit, and approximately $1.0 billion of incremental accordion availability. Management said liquidity should be sufficient for at least the next 12 months, while cautioning that cash generation and future borrowing availability are not assured.
- Sensata redeemed $750 million of 6.25% notes and issued $1.0 billion of 4.0% notes in 2021, describing the transactions as lowering fixed-debt cost and extending maturities. It reported covenant compliance at September 30.
Changes, outlook, and risks
- Management expected automotive production in Q4 2021 to be down approximately 28% year over year because of global supply shortages, and did not expect constraints to ease in the near term. It said shortages and logistics costs had affected margins and could continue into 2022; worse-than-expected effects could further impair results.
- Management’s longer-term target was company-wide market outgrowth of approximately 400–500 basis points, in addition to end-market production growth. It expected Electrification and Insights to be key growth drivers, but the filing does not provide specific Q4 revenue or earnings guidance.
- The Xirgo telematics acquisition closed in April 2021; its purchase-price allocation remained preliminary. The company agreed to acquire Spear Power Systems for $100 million plus up to $30 million contingent consideration, subject to approvals and customary conditions, with closing expected in Q4. After quarter-end, it agreed to acquire SmartWitness for $191.4 million.
- The company completed the actions under its COVID-19-related restructuring program, affecting approximately 840 positions. It reported $7.5 million of remaining program liabilities expected to be paid in cash. It also intended to resume its suspended share repurchase program in Q4; approximately $302.3 million remained authorized.
- Other stated risks include COVID-19 effects, supplier disruption, customer and market conditions, acquisition integration, debt and covenant obligations, foreign exchange, litigation and product claims, cybersecurity, regulation, and tax matters. Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether supply constraints, vehicle production cuts, and elevated procurement and logistics costs persist into 2022, and how they affect margins and cash conversion.
- Whether the Spear and SmartWitness transactions close as expected, their final terms and funding, and the integration and returns from recent acquisitions.
- The final Xirgo purchase-price allocation and realized performance against acquisition assumptions.
- Debt-service capacity, leverage, refinancing terms, covenant headroom, and the effect of any rating changes.
- Whether planned share repurchases resume and how capital is balanced among buybacks, acquisitions, and debt reduction.