Sensata Technologies Holding plc — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Comparisons are against the corresponding 2019 periods. The filing describes severe COVID-19-related disruption across the company and its end markets.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $576.5 million | $883.7 million | $1,350.8 million | $1,754.2 million |
| Operating income (loss) | $(1.9) million | $147.4 million | $56.7 million | $290.0 million |
| Net income (loss) | $(42.5) million | $73.4 million | $(34.1) million | $158.5 million |
| Diluted EPS | $(0.27) | $0.45 | $(0.22) | $0.97 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $170.3 million | $252.2 million |
- Q2 revenue fell 34.8% reported and 33.9% organically. First-half revenue declined 23.0% reported and 22.3% organically.
- Q2 gross margin was approximately 28.5%, versus 34.9% a year earlier, based on cost of revenue as a share of revenue. Operating margin was (0.3%), versus 16.7%; first-half operating margin was 4.2%, versus 16.5%.
- Q2 segment revenue: Performance Sensing $385.2 million, down 40.2%; Sensing Solutions $191.3 million, down 20.0%. Segment operating income was $60.8 million and $55.8 million, respectively.
- Cash and equivalents were $1.243 billion at June 30, up from $774.1 million at year-end. First-half operating cash flow was $170.3 million; investing cash outflow was $60.5 million and financing cash inflow was $359.1 million.
- Gross indebtedness was $3.689 billion, including finance leases and other financing obligations. The company drew $400 million on its revolving facility in April; only $16.1 million remained available at quarter-end after letters of credit. Accordion capacity was approximately $0.7 billion.
Material changes and drivers
- Management attributed the downturn to COVID-19-driven demand declines, facility shutdowns and reduced production, lower manufacturing utilization, elevated logistics costs, and workforce and supply-chain constraints. End markets were down approximately 39.9% in Q2, while company organic revenue declined 33.9%.
- Automotive revenue declined 42.5%, but outgrew a market down 50.5%, supported by content growth and new product launches. China automotive demand rebounded during Q2. Aerospace revenue declined 39.4%, reflecting lower commercial production and weak aftermarket demand.
- Q2 restructuring and other charges were $38.2 million, including $24.1 million for the new global restructuring program and $12.1 million in Wasica litigation-related pre-judgment interest. First-half charges also included a $29.2 million Wasica judgment loss recorded in Q1.
- The company recognized approximately $21.8 million of Q2 savings from temporary salary reductions, furloughs, and government subsidies. Capital spending fell versus the prior year, and share repurchases were suspended in April; first-half repurchases totaled $35.2 million versus $168.2 million in 2019.
Outlook, risks and contingencies
- Management expected sequential revenue improvement in Q3 and Q4, subject to no further COVID-19-driven slowdown or customer production shutdowns. It expected approximately $7 million in restructuring savings in Q3 and annualized personnel and facility savings of approximately $49 million by 2021.
- The restructuring program is expected to affect approximately 980 positions, with most actions completed by June 30, 2021. Expected charges are $35–$39 million for reductions in force and $8–$10 million for site closures, to be funded with cash on hand.
- Management projected 2020 capital expenditures of $120–$130 million. It believed available liquidity would fund operations, capital spending, and debt service for at least 12 months, while cautioning that cash generation and future borrowing availability were uncertain.
- In the Wasica patent case, the company recorded a $31.2 million jury damages award (including a $29.2 million loss in Q1) and a further $12.1 million pre-judgment interest award in Q2. It accrued $43.3 million and intends to appeal while continuing to deny wrongdoing.
- COVID-19 duration and severity, a potential resurgence, demand recovery, supply-chain disruption, leverage and covenant compliance, customer and supplier financial health, and potential goodwill impairment were highlighted risks. Goodwill and other intangible assets were assessed as not impaired at June 30.
Most important facts for investors to verify
- Whether sequential revenue recovery occurred, particularly in automotive, industrial, and aerospace markets, and whether customer inventories normalized as expected.
- Whether restructuring actions deliver the projected $49 million annualized savings and at what cash cost and pace.
- Liquidity and debt position, including the limited remaining revolving-facility availability, accordion capacity, debt maturities, and compliance with covenants.
- The outcome, appeal timing, and ultimate cash impact of the Wasica litigation award.
- Whether COVID-19 effects, operating utilization, logistics costs, and capital expenditure plans materially differ from management’s stated expectations.