Sensata Technologies Holding N.V. — Q3 2017 Form 10-Q
Business context and period. The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Sensata reports two segments: Performance Sensing and Sensing Solutions. The filing registrant is Sensata Technologies Holding N.V.; the board approved a proposed move of the parent’s incorporation to the U.K. through a merger, subject to shareholder approval, with completion expected in Q1 2018.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $819.1 million | $789.8 million | $2,466.2 million | $2,413.9 million |
| Operating profit | $140.0 million | $122.8 million | $400.4 million | $364.5 million |
| Operating margin | 17.1% | 15.5% | 16.2% | 15.1% |
| Net income | $88.0 million | $69.8 million | $239.2 million | $195.9 million |
| Diluted EPS | $0.51 | $0.41 | $1.39 | $1.14 |
- Revenue and segments: Revenue rose 3.7% in Q3 and 2.2% year to date. Management reported organic growth of 3.6% in both periods, excluding currency and acquisition/exited-business effects. Q3 Performance Sensing revenue increased 3.3% and Sensing Solutions 4.9%; nine-month increases were 1.6% and 3.9%, respectively.
- Profitability: Q3 cost of revenue was 64.4% of revenue, unchanged year over year; nine-month cost of revenue improved to 64.9% from 65.2%. Lower intangible amortization supported operating-margin expansion. Nine-month restructuring and special charges rose to $18.8 million from $3.2 million, primarily reflecting the Minden, Germany facility closure and other restructuring.
- Cash flow: Nine-month operating cash flow was $372.3 million, down from $396.4 million. Capital expenditures were $103.5 million, implying approximate operating cash flow less capital expenditures of $268.7 million. Cash increased to $613.0 million from $351.4 million at year-end 2016.
- Debt and liquidity: Gross indebtedness was $3.314 billion, including capital leases and other financing obligations. Long-term debt, net, was $3.225 billion. The company had $415.3 million available on its revolving credit facility and $230 million of incremental accordion capacity; it reported covenant compliance and stated liquidity should cover at least the next 12 months, subject to operating and financing risks.
- Balance sheet: Current assets were $1.731 billion and current liabilities $627.9 million at September 30. Total assets were $6.538 billion and shareholders’ equity $2.183 billion.
Changes, outlook, and risks
- Management attributed growth to heavy-vehicle off-road content and market growth, including construction, agriculture, and on-road trucks, as well as broad end-market strength and content growth in HVAC and industrial markets. It also cited recovery in certain heavy-vehicle markets and growth in Asian automotive markets, particularly China.
- Operating cash flow declined year over year, primarily due to inventory buildup to support anticipated line moves, higher interest payments, and severance payments, partly offset by improved operating profitability.
- Management expected 2017 capital expenditures of approximately $130–$150 million, to be funded from operating cash flow. The filing provides no specific revenue or earnings guidance.
- Key exposures include automotive and other end-market demand, pricing competition, materials and supplier availability/costs, foreign exchange and commodity prices, high leverage and debt covenant restrictions, global operating conditions including Brexit, litigation, and regulatory and cybersecurity risks. The company uses currency and commodity derivatives; it estimated $18.4 million of hedge losses would be reclassified to earnings over the following 12 months.
- Ordinary-course litigation includes product-related property damage, patent, personal injury, and wrongful-death claims. Management did not expect these matters, individually or collectively, to have a material adverse financial effect. No significant change in market risk or risk factors was reported.
- Management planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method and said its assessment to date indicated no expected material financial-statement impact. Lease-standard effects remained under evaluation.
Important facts for investors to verify
- Whether organic growth and reported segment momentum persist, particularly in heavy vehicles, China, HVAC, and industrial markets.
- Whether working-capital needs, restructuring, and capital spending affect future operating cash flow and the pace of cash accumulation.
- Debt-service capacity, covenant headroom, revolving-facility availability, and sensitivity to interest rates or credit-rating changes.
- Progress, shareholder approval, timing, and potential implications of the proposed U.K. parent-company merger.
- Actual adoption effects of revenue recognition and lease accounting standards, and the earnings impact of currency and commodity hedges.