Sensata Technologies Holding N.V. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Sensata operates through Performance Sensing and Sensing Solutions, serving automotive, heavy-vehicle, appliance, HVAC, and industrial markets. Figures below are unaudited; year-over-year comparisons are with Q1 2016 unless otherwise noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $807.3 million | $796.5 million | +1.3% reported; +3.5% organic, excluding currency impact |
| Operating profit / margin | $121.1 million / 15.0% | $113.6 million / 14.3% | Margin +0.7 percentage points |
| Net income / net margin | $71.7 million / 8.9% | $60.6 million / 7.6% | Net income +18.4% |
| Diluted EPS | $0.42 | $0.35 | +$0.07 |
| Operating cash flow | $119.7 million | $136.2 million | Down $16.5 million |
| Capital expenditures | $33.1 million | $34.2 million | Down $1.2 million |
Cost of revenue was 66.0% of revenue versus 66.3%; management attributed the improvement primarily to lower material and logistics costs and better operating efficiencies, partly offset by foreign-exchange effects. Interest expense declined to $40.3 million from $42.3 million. The effective tax rate, calculated from reported figures, was approximately 16.7%, versus 21.1%.
Segments and material changes
- Performance Sensing: Revenue rose 0.5% to $600.1 million; organic growth was 3.1%. Management cited automotive content and market growth in Asia, particularly China, and heavy-vehicle off-road content growth.
- Sensing Solutions: Revenue rose 3.9% to $207.1 million; organic growth was 4.9%, supported by demand in China across appliance, HVAC, and industrial markets.
- Foreign exchange reduced reported revenue growth by 2.2 percentage points overall. Management reported organic growth excluding foreign exchange and acquisitions or exited businesses within the prior 12 months.
- Restructuring and special charges increased to $11.1 million from $0.9 million, primarily reflecting severance related to closure of the acquired CST facility in Minden, Germany and employee terminations.
- Amortization expense declined to $40.3 million from $50.4 million as certain acquisition-related intangible assets approached the ends of their useful lives.
Cash, debt, and liquidity
- Cash and cash equivalents were $431.7 million at March 31, 2017, up from $351.4 million at year-end 2016. Net cash increased $80.3 million during the quarter.
- Operating cash flow fell year over year, which management attributed primarily to inventory buildup to support anticipated production-line moves and the timing of supplier payments and customer receipts. Inventory was $407.2 million, up from $389.8 million at year-end.
- Gross outstanding indebtedness, including capital leases and other financing obligations, was $3.314 billion. Long-term debt, net of discount and financing costs and current portion, was $3.226 billion. The term loan matures in 2021; senior notes mature from 2023 through 2026.
- The $420 million revolving facility had $415.2 million available, net of $4.8 million in letters of credit; $230 million remained available under the accordion. The company reported compliance with debt covenants and said available liquidity should fund operations, capital expenditure, share repurchases, and debt service for at least 12 months, while cautioning that future cash generation and financing availability are not assured.
Outlook, risks, and unusual items
- Management expected 2017 capital expenditures of approximately $130 million to $150 million, to be funded from operating cash flow. The filing provides no clear revenue or earnings guidance.
- Management noted signs of recovery in the North American Class 8 truck market and improving off-road demand, while identifying automotive-market weakness, competition, integration of acquisitions, foreign-exchange exposure, and regulatory and geopolitical developments as relevant risks.
- The company highlighted its high leverage and debt-service needs, as well as risks involving product liability, warranty and recall claims, taxes, labor, information security, and non-U.S. operations. It reported no changes to the risk factors in its 2016 Form 10-K.
- Ordinary-course litigation includes product-related property damage and other claims, including some alleging personal injury or wrongful death; management did not expect pending matters to have a material financial effect.
- The company intends to adopt revenue-recognition guidance on January 1, 2018; its initial assessment indicated no expected material impact, but evaluation was ongoing. The impact of forthcoming lease-accounting guidance had not yet been determined.
- Management stated disclosure controls were effective as of March 31, 2017, and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether reported revenue growth and segment trends persist after separating currency effects from organic growth.
- Whether working-capital needs, including inventory for production-line moves, normalize and operating cash flow recovers.
- Progress, total costs, and expected savings from the Minden facility closure and other restructuring actions.
- Debt maturities, interest costs, covenant headroom, and the availability of liquidity under the revolving facility.
- Actual 2017 capital expenditures versus the $130 million to $150 million outlook, and the eventual effects of new revenue and lease accounting standards.