Sensata Technologies Holding N.V. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited, compared with Q1 2014. Sensata makes sensing and control products for automotive, heavy vehicle, industrial, aerospace, and other markets. Its segments are Performance Sensing and Sensing Solutions.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $750.7 million | $551.6 million | +36.1% |
| Profit from operations | $102.4 million | $99.2 million | +3.2% |
| Operating margin | 13.6% | 18.0% | Down 4.4 percentage points |
| Net income | $35.4 million | $68.4 million | Down 48.3% |
| Diluted EPS | $0.21 | $0.39 | Down 46.2% |
| Operating cash flow | $103.1 million | $105.4 million | Down $2.3 million |
| Capital expenditures | $37.9 million | $27.3 million | Up $10.6 million |
Cost of revenue rose to 67.5% of sales from 64.8%, implying gross margin of 32.5% versus 35.2%. Net margin fell to 4.7% from 12.4%. Interest expense was $34.9 million, versus $23.5 million.
Performance Sensing revenue increased 49.8% to $591.3 million; Sensing Solutions revenue rose 1.6% to $159.4 million. Performance Sensing’s growth included 49.5% from acquisitions and 3.1% organic growth, partly offset by 2.8% foreign-exchange effects. Sensing Solutions organic revenue declined 1.4%.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $195.6 million at March 31, 2015, down from $211.3 million at year-end 2014. Current assets were $1.169 billion and current liabilities were $730.8 million.
- Gross outstanding indebtedness, including capital leases and other financing obligations, was $2.797 billion. Cash was $195.6 million. The filing reports long-term debt, net of discount and current portion, of $2.561 billion.
- Availability under the revolving credit facility was $268.7 million, net of letters of credit. Management stated that available liquidity was expected to fund operations, capital expenditures, share repurchases, and debt service for at least the next 12 months; the company was in compliance with debt covenants.
- Operating cash flow was $103.1 million; investing activities used $35.0 million and financing activities used $83.9 million. Cash declined by $15.7 million during the quarter.
Material changes and unusual items
- Q1 2015 revenue growth was substantially acquisition-driven, including Schrader, acquired in October 2014, and DeltaTech; the prior period also included fewer acquired-business results. Acquisitions increased cost and operating expenses, including amortization.
- On March 26, 2015, Sensata issued $700 million of 5.0% senior notes due 2025 and tendered $620.9 million of its 6.5% notes. The remaining $79.1 million of 6.5% notes was scheduled for redemption on April 29, 2015. The credit amendment increased the revolver to $350 million, extended maturity to March 2020, and lowered certain borrowing spreads and fees.
- The refinancing generated a $19.6 million loss on debt financing, a principal reason other, net was a $21.8 million loss, compared with a $0.5 million gain in Q1 2014. Currency remeasurement losses were $5.7 million, partly offset by $4.7 million in foreign-currency-forward gains.
- Q1 2014 net income included an $8.3 million tax benefit from a valuation-allowance release. The prior period also included $2.4 million of insurance proceeds related to a manufacturing-facility fire, making year-over-year comparisons less directly comparable.
Outlook, management commentary, and risks
- Management expected 2015 capital expenditures of approximately $175 million to $200 million, primarily for manufacturing capacity, and anticipated funding them from operating cash flow. No specific revenue or earnings guidance is provided in the filing text.
- Management said acquisition-related cost-of-revenue dilution should decline as integration progresses; most integrations generally take 18–24 months, while Schrader may take up to three years. Management cited regulatory requirements and customer design wins as drivers of sensor-content growth, alongside pricing pressure.
- Key stated risks include automotive-market weakness, competition and pricing, acquisition integration, foreign-exchange and international operating exposures, product liability and recalls, taxes, labor costs, and substantial indebtedness and debt-service capacity.
- Contingencies include Bridgestone patent litigation seeking damages in excess of $45 million (management did not consider a loss probable and recorded no accrual), ongoing Yukwang supplier-related proceedings, and a new class action alleging faulty TPMS valve stems. Other disclosed matters include a probable SGL Italia loss with a $0.3 million accrual and a customer settlement capped at $4 million.
Most important facts for investors to verify
- How much of continuing revenue growth is organic versus acquisition-related, and whether organic trends and pricing improve.
- Whether margins recover as acquired operations are integrated, given the decline in gross and operating margins.
- Whether forecast operating cash flow can fund the $175–$200 million capital-spending plan while servicing substantial debt.
- Completion and financial effect of redeeming the remaining 6.5% notes, and ongoing covenant compliance and revolver availability.
- Developments in the Bridgestone, Yukwang, TPMS class-action, and other product-related claims, including any change in loss estimates or accruals.