Sensata Technologies Holding N.V. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone Q4 report; quarterly figures are identified below. Sensata develops and sells sensors and controls through Performance Sensing and Sensing Solutions.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $2,975.0 million | $2,409.8 million | +23.5% |
| Gross profit | $996.2 million | $842.5 million | +18.2% |
| Gross margin | 33.5% | 35.0% | Down 1.5 percentage points |
| Operating income | $393.6 million | $371.6 million | +5.9% |
| Operating margin | 13.2% | 15.4% | Down 2.2 percentage points |
| Net income | $347.7 million | $283.7 million | +22.5% |
| Diluted EPS | $2.03 | $1.65 | +23.0% |
| Operating cash flow | $533.1 million | $382.6 million | +39.4% |
| Capital expenditures | $177.2 million | $144.2 million | +22.9% |
Revenue growth primarily reflected acquisitions, especially Schrader and DeltaTech, and a weaker U.S. dollar comparison was not the driver: adverse currency translation reduced Performance Sensing revenue by 3.6% and Sensing Solutions revenue by 1.2%. Organic Performance Sensing revenue grew 3.4%, while Sensing Solutions organic revenue declined 6.9%. Operating income rose more slowly than revenue as acquisition-related cost dilution and higher expenses weighed on margins.
- Segments: Performance Sensing revenue was $2,346.2 million, up 33.6%; segment operating income was $598.5 million, with a 25.5% margin versus 27.1%. Sensing Solutions revenue was $628.7 million, down 3.9%; segment operating income was $199.7 million, with a 31.8% margin versus 30.9%.
- Q4 2015: Revenue was $726.5 million versus $705.3 million in Q4 2014; gross profit was $249.8 million versus $235.5 million. Net income was $218.3 million versus $69.5 million, including a $180.0 million tax benefit in Q4 2015, primarily from releasing part of the U.S. valuation allowance after the CST acquisition.
- Liquidity: Cash and equivalents were $342.3 million at year-end, up from $211.3 million. Working capital was $412.7 million, down from $441.3 million. Operating cash flow less capital expenditures was approximately $355.9 million.
- Debt: Gross indebtedness was $3,659.5 million, up from $2,848.1 million, mainly reflecting financing for CST. Net carrying debt, including capital leases and other financing obligations, was $3,639.3 million. Interest expense was $137.6 million, up from $106.1 million. Revolver borrowings were $280.0 million, with $134.5 million available.
- Non-GAAP measure: Adjusted net income was $472.0 million versus $410.3 million. This management-defined measure excludes specified items and is not a substitute for GAAP net income.
Material changes and unusual items
- Sensata acquired CST on December 1, 2015, for approximately $1,008.8 million. CST contributed $19.9 million of 2015 revenue; its earnings, excluding specified transaction, integration, and financing costs, were not material. Purchase accounting remained preliminary.
- FY2015 operating results included $21.9 million of restructuring and special charges, including integration and Brazil facility-closure costs. Cost of revenue also included $4.0 million related to a U.S. automaker warranty settlement, $6.0 million for Bridgestone litigation, and approximately $5.0 million of asset write-downs associated with closing the acquired Schrader Brazil facility.
- Other, net was a loss of $50.3 million, compared with a $12.1 million loss in 2014; it included $25.5 million of debt-financing losses and $18.5 million of commodity-contract losses.
- The $142.1 million income-tax benefit included the $180.0 million U.S. valuation-allowance release. Accordingly, the increase in GAAP net income materially reflects a tax benefit rather than operating growth alone.
Outlook, risks, and contingencies
- Management expected HVOR markets to remain weak in 2016. It also anticipated weakness in industrial, semiconductor, and communications markets, and adverse currency effects: an estimated 2%–3% reduction in Performance Sensing revenue and 1%–2% in Sensing Solutions revenue versus 2015. These are stated market and currency expectations, not consolidated revenue or earnings guidance.
- Planned 2016 capital expenditures were approximately $150 million–$175 million, expected to be funded from operating cash flow. Management said available liquidity was expected to support operations, capital expenditures, share repurchases, and debt service for at least twelve months, while cautioning that cash generation and future borrowing availability were not assured.
- Principal risks include dependence on automotive markets (about 67% of 2015 revenue), annual customer pricing pressure, acquisition integration and assumed liabilities, foreign currency and commodity exposure, supply disruption, product liability and recalls, tax disputes, cybersecurity, and substantial leverage. Goodwill and other intangible assets totaled $4.28 billion, about 68% of assets; impairment could reduce earnings.
- The company reported compliance with debt covenants at year-end. It also disclosed pending matters, including a Korean supplier dispute and a Brazilian tax claim of approximately $26 million; management did not consider losses probable and recorded no accrual for those matters. For certain newer automotive customer complaints, the potential exposure could exceed recorded accruals, and the total affected vehicles were not known.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The control assessment excluded CST, which represented approximately 2.2% of year-end assets and 0.7% of 2015 revenue.
Investor verification priorities
- Separate acquisition-driven growth from organic growth, and track post-acquisition revenue, margins, integration costs, and realized synergies.
- Assess the sustainability of earnings after removing the $180.0 million tax benefit and considering elevated interest, amortization, and restructuring costs.
- Reconcile reported debt, current maturities, revolver availability, covenant headroom, and refinancing requirements against cash flow and the $5.14 billion of disclosed contractual payments.
- Monitor 2016 end-market and currency assumptions, planned capital expenditures, and whether operating cash flow supports investment and debt service.
- Review the final CST purchase-price allocation, goodwill and intangible-asset assumptions, and the status of warranty, litigation, supplier, and tax contingencies.