Sensata Technologies Holding plc — Q3 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. Sensata reports two segments: Performance Sensing and Sensing Solutions. Comparative segment figures were recast following the April 2023 transfer of material handling products from Performance Sensing to Sensing Solutions.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,001.3 million | $1,018.3 million | $3,061.6 million | $3,014.6 million |
| Operating income (margin) | $116.3 million (11.6%) | $252.9 million (24.8%) | $383.1 million (12.5%) | $517.8 million (17.2%) |
| Net income | $62.8 million | $140.3 million | $198.3 million | $197.5 million |
| Diluted GAAP EPS | $0.41 | $0.91 | $1.30 | $1.26 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $351.6 million | $235.7 million |
| Free cash flow (non-GAAP) | Not separately reported for quarter | Not separately reported for quarter | $215.4 million | $125.3 million |
- Q3 revenue declined 1.7% year over year; organic revenue declined 0.7%, excluding a 1.0% foreign-exchange headwind. Nine-month revenue rose 1.6%; organic growth was 2.4%.
- Q3 Performance Sensing revenue rose 2.0% and Sensing Solutions fell 11.3%. Nine-month segment revenue rose 3.5% for Performance Sensing and fell 3.4% for Sensing Solutions.
- Q3 cost of revenue was 68.7% of revenue versus 68.2% a year earlier, implying gross margin of 31.3% versus 31.8%. Management cited currency, restructuring actions, mix, inflation and volume leverage among the factors affecting costs.
- Q3 segment operating income was $257.4 million, compared with $262.2 million; corporate and other costs were $75.1 million. GAAP operating income also reflects amortization and restructuring and other charges.
- Q3 adjusted diluted EPS, a non-GAAP measure, was $0.91 versus $0.85. Nine-month adjusted diluted EPS was $2.80 versus $2.45; adjusted operating margin was 19.3% versus 19.0%.
Cash, debt and liquidity
- Cash and cash equivalents were $889.7 million at September 30, 2023, down from $1,225.5 million at December 31, 2022. Nine-month cash flow was $351.6 million from operations, $117.6 million used in investing and $569.8 million used in financing.
- Capital expenditures and capitalized software were $136.2 million for the first nine months. The company expects fiscal 2023 capital expenditures of approximately $170 million to $180 million.
- Gross indebtedness was $3.825 billion, net debt was $2.936 billion, and net leverage was 3.1x at quarter-end, compared with 3.4x at year-end 2022. The company repaid its $446.8 million term loan during the first half of 2023.
- The $750 million revolving credit facility had $746.1 million available, net of letters of credit; no amounts had been drawn. The company also reported approximately $1.2 billion of accordion availability.
- Management said existing liquidity sources should be sufficient for operations, capital expenditures, dividends, repurchases and debt service for at least the next 12 months, while cautioning that future cash generation and borrowing availability are not assured.
Material changes, outlook and notable items
- Operating income fell 54.0% in Q3, primarily reflecting the absence of the prior-year Qinex business sale gain, Q3 2023 restructuring costs and foreign-exchange effects. Q3 2022 included a $135.1 million pretax Qinex sale gain. Nine-month results also include $39.2 million of charges related to exiting the Spear marine energy storage business.
- In Q3, Sensata recorded $21.4 million of charges under a restructuring plan involving an expected 451 positions. Total plan charges are estimated at $20.5 million to $25.5 million; most actions are expected to be completed by June 30, 2024. Management expects annualized savings of approximately $40 million to $50 million and personnel-cost savings of $4 million to $6 million in Q4 2023.
- Management expects the UAW strike to reduce Q4 revenue by approximately $35 million to $40 million sequentially from Q3. It cited weaker demand and economic uncertainty in some end markets, while noting continued focus on electrification and new business wins.
- Cash dividends paid in the first nine months were $53.4 million. The board approved a quarterly dividend of $0.12 per share for payment in November 2023. A new $500 million repurchase authorization became effective October 1, replacing the prior program.
- An August 2023 credit agreement amendment released certain foreign guarantors, subject to potential reinstatement, and modified terms to provide greater flexibility. Sensata reported covenant compliance at September 30.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material change in risk factors or market risk since year-end 2022, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the Q4 UAW-related revenue headwind and weaker-market conditions affect reported revenue, margins and cash generation as expected.
- Progress and actual costs, timing and realized savings from the restructuring plan, and any further actions needed to restore margins.
- Performance in Sensing Solutions, particularly industrial, appliance, HVAC and IT/Telecom markets, versus strength in aerospace and automotive.
- Cash conversion, capital expenditure levels, leverage reduction and the company’s ability to maintain shareholder returns while servicing debt.
- The significance of non-GAAP adjustments when comparing adjusted results with GAAP results, especially restructuring, acquisition-related items, amortization and prior-period divestiture gains.
- Potential tax effects, including the timing and amount of any release of the valuation allowance on U.S. interest carryforwards; the filing states these remain uncertain.