Sensata Technologies Holding N.V. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Sensata operates Performance Sensing and Sensing Solutions businesses. The company acquired CST in December 2015, contributing substantially to reported growth, particularly in Sensing Solutions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $789.8 million | $727.4 million | $2,413.9 million | $2,248.5 million |
| Operating profit | $122.8 million | $106.9 million | $364.5 million | $302.4 million |
| Operating margin | 15.5% | 14.7% | 15.1% | 13.5% |
| Net income | $69.8 million | $53.2 million | $195.9 million | $129.4 million |
| Diluted EPS | $0.41 | $0.31 | $1.14 | $0.75 |
- Revenue growth: Q3 revenue rose 8.6%; nine-month revenue rose 7.4%. Organic growth was 1.5% in Performance Sensing and 2.4% in Sensing Solutions for Q3; for nine months, Performance Sensing grew 1.0% organically while Sensing Solutions declined 2.4%.
- Margins: Gross margin was approximately 35.6% for Q3 versus 34.5% a year earlier, and 34.8% for nine months versus 33.2%. Management attributed improvement mainly to productivity and, for the nine-month period, lower material costs; prior-year charges also did not recur. SG&A and amortization increased, largely reflecting CST.
- Cash flow: Nine-month operating cash flow was $396.4 million, versus $363.7 million. Capital expenditures were $94.6 million, making operating cash flow less capex approximately $301.8 million. Investing cash outflow was $139.1 million, including a $50.0 million Quanergy preferred-stock investment; financing cash outflow was $299.6 million. Cash declined $42.4 million to $299.9 million.
- Debt and liquidity: Gross debt including capital leases and other financing obligations was $3.363 billion; cash was $299.9 million. The revolving facility had no borrowings and $414.6 million available after letters of credit; a further $230.0 million remained available under the accordion. The company reported covenant compliance and said available liquidity should cover operations, capex and debt service for at least 12 months, while warning there was no assurance future cash flows or financing would suffice.
- Other balance-sheet items: Total assets were $6.251 billion and shareholders’ equity was $1.854 billion at September 30, 2016. Current assets were $1.296 billion and current liabilities $621.9 million.
Material changes and management commentary
- Q3 Sensing Solutions revenue increased 36.0%, primarily due to CST; organic growth was 2.4%. Performance Sensing increased 1.4% reported and 1.5% organically. For nine months, reported Sensing Solutions growth of 30.0% included 33.4% acquisition contribution, while organic revenue declined 2.4% amid weak end markets.
- Management cited automotive content growth, especially in Europe and China, and China market stabilization. Price reductions and weak heavy vehicle markets—including North American Class 8 trucks and construction and agriculture markets—were offsets. Global economic conditions remained weak across several served markets.
- Interest expense rose to $41.2 million in Q3 and $125.2 million for nine months, mainly reflecting debt associated with CST. Nine-month “Other, net” improved to a $4.9 million gain from a $44.6 million loss, principally due to commodity-hedge results and the absence of 2015 debt-refinancing losses.
- The company completed the cessation of manufacturing at its Dominican Republic facility in Q3, relocating production to Mexico. Nine-month restructuring charges were $3.2 million versus $12.4 million in 2015.
Outlook, risks and contingencies
- Outlook: No specific revenue or earnings guidance is provided. Management expected 2016 capital expenditures of approximately $125 million–$150 million, funded from operating cash flows, and anticipated further cost-of-revenue improvement through productivity and integration efforts. Some larger acquisitions, including CST, may take up to three years to integrate.
- Acquisition and investment: CST’s purchase price was approximately $1.001 billion; purchase accounting remained preliminary. Sensata also invested $50 million in Quanergy preferred stock and entered an exclusive transportation-market partnership for component-level solid-state LiDAR sensors. No partnership earnings were recorded in the period.
- Legal and product matters: A customer product-defect claim was considered probable; Sensata accrued $2.2 million but could not estimate the upper end of potential loss. A Brazilian tax dispute sought approximately $26 million; management did not consider a loss probable and cited an indemnity from a former owner. The filing reports no accrual for that matter.
- Key risks: High indebtedness and debt-service capacity; automotive and end-market weakness and pricing pressure; acquisition integration; foreign-exchange exposure; product liability, warranty and recall claims; tax judgments; and Brexit-related uncertainty given the company’s European sales and U.K. manufacturing.
- Management stated disclosure controls were effective as of September 30, 2016, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Separate CST’s acquisition-driven contribution from underlying organic growth, especially the nine-month Sensing Solutions decline.
- Track cash conversion and working-capital use: receivables and inventories reduced nine-month operating cash flow.
- Assess leverage, interest costs, covenant headroom and availability under the revolving facility against reported cash and operating cash generation.
- Monitor CST integration, expected cost efficiencies, and whether management’s capital-expenditure outlook is met.
- Follow resolution and potential exposure of the accrued customer claim, and confirm the status of tax and other indemnified disputes.