Sensata Technologies Holding N.V. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited U.S. GAAP results. The company makes sensors and controls for automotive, industrial and other markets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $471.9m | $474.3m | $1,468.6m | $1,373.6m |
| Operating profit | $71.2m | $77.4m | $235.8m | $234.5m |
| Net income/(loss) | $41.5m | $26.2m | $106.5m | $(17.9)m |
| Diluted EPS | $0.23 | $0.14 | $0.59 | $(0.10) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $284.7m | $222.4m |
Q3 operating margin was 15.1%, versus 16.3% a year earlier; cost of revenue rose to 65.4% of sales from 64.6%. Nine-month operating margin was 16.1%, versus 17.1%. Net margin was 8.8% for Q3 and 7.3% for the nine months; the prior-year nine-month period reported a net loss.
At September 30, cash and cash equivalents were $348.2m, compared with $92.1m at December 31, 2011. Current assets were $877.7m and current liabilities $290.1m. Gross debt, including capital leases and other financing obligations, was $1,831.3m; approximate net debt after cash was $1,483.1m. The company had no revolver borrowings and $244.7m of revolver availability, net of letters of credit. Nine-month capital expenditures were $36.6m.
Material changes and operating drivers
- Q3 revenue declined 0.5% year over year. Management attributed the change to unfavorable foreign exchange and pricing, partly offset by higher volumes. Sensors revenue fell 1.2% to $339.8m; controls revenue rose 1.5% to $132.1m.
- Nine-month revenue rose 6.9%, principally from higher volumes, including the HTS and MSP acquisitions and content growth. Sensors revenue increased 11.2% to $1,059.5m; controls revenue decreased 2.8% to $409.0m.
- Despite higher nine-month sales, operating profit was nearly flat. Higher cost of revenue, acquisition-related dilution and integration costs, R&D, and restructuring charges weighed on margins. SG&A fell, reflecting cost reductions and lower integration costs.
- Q3 net income increased year over year while operating profit declined, helped by a $10.8m currency translation and other gain, including $11.5m of gains on commodity forward contracts. Nine-month 2012 results also benefited from comparison with $118.5m of currency translation and other losses in 2011, which included debt-related currency losses and a debt repurchase loss.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and revolver availability were expected to fund operations, capital expenditures and debt service for at least the next 12 months. It forecast 2012 capital expenditures of approximately $50m–$55m. The filing provides no revenue or earnings guidance.
- A September 30 fire damaged part of the JinCheon, South Korea facility. The company recorded an estimated $2.9m loss, anticipated further cleanup and related costs into 2013, and expected some Q4 2012 revenue loss. Insurance recovery was uncertain. The facility produced approximately 3%–4% of 2011 worldwide output by revenue.
- After quarter-end, the company agreed to cease manufacturing at JinCheon and move production to other facilities, with actions expected to be completed in 2013. This expanded the 2011 restructuring plan, for which total expected costs were approximately $48m–$53m; $26.1m had been incurred cumulatively as of September 30, 2012.
- Debt includes a $1.086bn term loan and $700m of 6.5% senior notes due 2019; the term loan matures in 2018 and bears floating-rate interest. Credit agreements include covenants and may require excess-cash-flow prepayments. The company reported covenant compliance at September 30 and cited its highly leveraged position and potential limits on access to overseas cash as liquidity risks.
- In October 2012, the board approved a $250m share repurchase program, to be funded from available cash and operating cash flows. The filing does not establish the timing or extent of repurchases.
- Contingencies include Ford speed-control-switch litigation (a $0.2m reserve; potential TI indemnification subject to agreement terms), product claims including Venmar matters, and an SEC inquiry related to a voluntary FCPA disclosure. The DOJ had closed its inquiry but could reopen it; the company had no updated SEC status and had not accrued a provision.
- Management cited automotive-market conditions, customer pricing pressure and demand fluctuations, foreign operations, competition, labor disruption, and raw-material cost or supply volatility as risks. Commodity hedges may not be economically successful and their fair-value changes can affect reported earnings.
Most important facts for investors to verify
- Whether the South Korea fire and facility closure cause greater-than-expected production disruption, revenue loss, restructuring expense or unrecovered costs.
- Whether volume growth and acquisition contributions can offset pricing, foreign exchange, softer controls demand and margin pressure.
- Cash generation, floating-rate interest exposure, debt covenant headroom, and any excess-cash-flow repayment requirements.
- How much of reported earnings reflects operating performance versus derivative and currency gains or losses.
- Progress and costs of the restructuring plan, execution of the $250m buyback authorization, and developments in material litigation and the SEC inquiry.