Sensata Technologies Holding plc — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results are compared with the corresponding 2018 periods; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $883.7 million | $913.9 million | $1,754.2 million | $1,800.2 million |
| Operating income / margin | $147.4 million / 16.7% | $178.1 million / 19.5% | $290.0 million / 16.5% | $325.7 million / 18.1% |
| Net income | $73.4 million | $105.3 million | $158.5 million | $195.8 million |
| Diluted earnings per share | $0.45 | $0.61 | $0.97 | $1.13 |
| Operating cash flow | Not presented by quarter | $252.2 million | $253.9 million |
Q2 revenue fell 3.3% year over year; organic revenue declined 1.6%, with acquisition/divestiture effects reducing reported growth by 0.7 percentage points and foreign exchange by 1.0 point. First-half reported revenue declined 2.6%, while organic revenue declined 0.4%.
Q2 cost of revenue rose to 65.1% of sales from 63.7%, and operating costs were 83.3% of sales versus 80.5%. First-half cost of revenue was 65.9% versus 64.7%. Segment operating income, a company-defined non-GAAP measure, was $245.2 million in Q2 versus $266.4 million; first-half results were $470.7 million versus $507.7 million.
Cash, debt, and liquidity
- Cash and equivalents were $721.1 million at June 30, 2019, compared with $729.8 million at year-end 2018. Current assets were $1,969.6 million and current liabilities $629.1 million.
- First-half investing cash outflow was $82.9 million, including $81.5 million of capital expenditures. Operating cash flow less capital expenditures was approximately $170.6 million.
- First-half financing cash outflow was $178.0 million, including $168.2 million of share repurchases. Cash declined by $8.8 million during the half.
- Gross indebtedness, including finance leases and other financing obligations, was $3,296.9 million. Long-term debt, net of discounts and financing costs, was $3,216.1 million. The $420 million revolving facility had $416.1 million available, net of letters of credit.
- The company reported compliance with debt covenants and stated that available liquidity was expected to cover operations, capital expenditures, repurchases, and debt service for at least 12 months, while cautioning that future cash generation and financing availability were not assured.
Material changes and management commentary
- Performance Sensing Q2 revenue declined 4.7% reported and 0.7% organically; first-half organic revenue grew 0.3%. Automotive market weakness, notably in China and Europe, and pricing pressure were partly offset by content growth. HVOR content gains were offset by weakness in served markets.
- Sensing Solutions Q2 revenue increased 0.7% reported but declined 4.1% organically; first-half organic revenue declined 2.6%. Industrial and semiconductor weakness was partly offset by aerospace growth and industrial sensing content gains.
- Management expected global automotive production to remain under pressure through 2019 and HVOR markets to weaken further in the second half. It continued to expect content growth from clean and efficient, electrification, and smart and connected initiatives.
- Operating income fell 17.2% in Q2 and 11.0% in the first half. Management cited productivity headwinds, higher restructuring charges, the Valves Business divestiture, and increased tariffs; lower variable compensation partly offset these factors.
- Q2 restructuring and other charges were $16.3 million, including a $13.7 million voluntary retirement incentive charge and costs primarily related to GIGAVAC acquisition compensation. Most retirement benefits were expected to be paid in Q3.
- The company forecast 2019 capital expenditures of approximately $150–$170 million. It adopted the new lease accounting standard on January 1, 2019; the filing reports no cumulative equity effect.
Other significant items and risks
- On July 30, 2019, the board authorized a new $500 million share repurchase program, replacing the prior $250 million program. The company repurchased approximately $167.6 million of shares in the first half under the prior program.
- A March 2019 credit agreement amendment extended the revolving facility maturity to March 2024 and adjusted pricing and covenant terms.
- Two disclosed lawsuits had no recorded accrual because management did not consider a loss probable. In a patent case, potential damages could be material; trial was expected in February 2020. A supplier dispute plaintiff’s damages expert claimed losses up to $51 million; trial was expected in December 2019.
- Key stated risks include automotive and industrial market weakness, customer pricing pressure, tariffs, supplier disruption, foreign exchange, litigation and product claims, acquisition and restructuring execution, high indebtedness and covenant compliance, tax matters, and geopolitical or regulatory changes including Brexit.
Important facts for investors to verify
- Whether weaker automotive, HVOR, industrial, and semiconductor demand continued, and whether expected content growth offset market declines.
- How margins and cash generation developed against the cited productivity, tariff, mix, and restructuring headwinds.
- Actual capital expenditures and the effects of share repurchases on cash, leverage, and per-share results.
- Progress and any financial exposure in the patent and supplier litigation, including the supplier’s asserted damages range.
- Debt levels, covenant compliance, access to revolving credit, and the company’s ability to meet its stated liquidity expectations.