Sensata Technologies Holding N.V. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company makes sensors and related products through Performance Sensing and Sensing Solutions. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $827.5 million | $770.4 million | $1,624.1 million | $1,521.1 million |
| Operating profit | $128.1 million | $93.2 million | $241.7 million | $195.5 million |
| Operating margin | 15.5% | 12.1% | 14.9% | 12.9% |
| Net income | $65.5 million | $40.9 million | $126.1 million | $76.3 million |
| Diluted earnings per share | $0.38 | $0.24 | $0.74 | $0.44 |
- Revenue and segments: Q2 revenue grew 7.4% year over year. Performance Sensing revenue was $615.6 million (+1.5%); Sensing Solutions was $212.0 million (+29.2%). Excluding acquisitions, exited businesses, and currency, organic revenue grew 0.8% in Performance Sensing and declined 2.4% in Sensing Solutions. For the first half, those organic changes were +0.8% and -4.8%, respectively.
- Margins and costs: Q2 cost of revenue fell to 64.9% of revenue from 67.2%; first-half cost of revenue was 65.6% versus 67.4%. Management attributed improvement to productivity and, for the half, lower material costs; comparisons also benefited from prior-year charges that did not recur. First-half SG&A rose to $149.6 million from $137.4 million, and intangible amortization rose to $101.0 million from $90.9 million, partly reflecting CST.
- Interest and taxes: Net interest expense increased to $41.8 million in Q2 from $31.6 million, and to $84.0 million for the half from $66.3 million, primarily reflecting debt issued for CST. First-half income tax expense was $37.2 million versus $19.1 million, with the change attributed mainly to the amount and jurisdictional distribution of income and currency movements.
- Cash flow: First-half operating cash flow was $246.6 million, compared with $212.2 million. Capital expenditures were $64.5 million versus $86.8 million; operating cash flow less capital expenditures was $182.2 million versus $125.4 million. Investing used $109.1 million, including a $50.0 million Quanergy preferred-stock investment. Financing used $170.6 million, including $168.7 million of debt payments. Cash declined $33.1 million to $309.1 million.
- Debt and liquidity: Gross outstanding indebtedness, including capital lease and other financing obligations, was $3.491 billion; cash was $309.1 million. The revolving facility had $289.5 million available after letters of credit, and a further $230.0 million remained available under the credit agreement’s accordion. The company reported compliance with debt covenants and said available liquidity was expected to meet needs for at least 12 months, while cautioning that future cash flows and financing availability are not assured.
- Balance sheet: Total assets were $6.289 billion and total shareholders’ equity was $1.788 billion at June 30, 2016. Cash was down from $342.3 million at December 31, 2015; current debt and financing obligations were $139.2 million.
Changes, outlook, and risks
- Revenue and earnings increased year over year; the comparison also reflects CST, acquired in December 2015. The acquisition lifted Sensing Solutions reported revenue while its organic revenue declined. Lower restructuring charges and more favorable other-net results versus 2015 also supported the earnings comparison; 2015 included debt-refinancing losses.
- Management expected Performance Sensing revenue growth for full-year 2016 from higher content, partly offset by weakness in global agriculture and construction equipment markets. It expected Sensing Solutions year-over-year comparisons to improve in the second half despite elevated supply-chain inventory. Management anticipated 2016 capital expenditures of approximately $150–$175 million, expected to be funded from operating cash flow; the filing provides no numerical revenue or earnings guidance.
- Cost of revenue as a percentage of revenue was expected to decline further as acquisitions are integrated. Integration of Schrader and CST could take up to three years.
- Q2 restructuring charges of $1.5 million mainly included facility-exit costs related to moving manufacturing from the Dominican Republic to Mexico; cessation at the Dominican Republic facility was expected in Q3 2016. The company also entered a strategic partnership with Quanergy to develop, manufacture, and sell solid-state LiDAR sensors; no related earnings were recorded in the period.
- Risks highlighted include automotive-market weakness, competition and pricing pressure, acquisition integration, foreign exchange and international operations, product liability and warranty claims, substantial indebtedness, and the uncertain effects of the U.K.’s vote to leave the EU.
- A customer defect claim was considered probable; Sensata accrued $2.2 million as its estimated minimum loss but could not estimate an upper range. A Brazilian state tax dispute claimed approximately $26 million, but management did not consider a loss probable and noted an indemnity from a former owner. The filing reported no accrual for that dispute.
Important facts for investors to verify
- Whether Sensing Solutions’ organic decline and weaker global economic conditions persist, and whether second-half comparisons improve as management expected.
- Whether CST integration delivers anticipated productivity and cost benefits, while monitoring added amortization, debt interest, and integration costs.
- Cash generation, planned capital spending, debt reduction, revolving-credit availability, and compliance with debt covenants.
- The outcome and potential exposure from the $2.2 million accrued automotive customer claim and any changes in other legal or tax contingencies.
- The sensitivity of results to foreign exchange, commodity prices, automotive and HVOR demand, and Brexit-related uncertainty.