Sensata Technologies Holding plc — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are USD unless noted. Financial statements are unaudited.
Business context
Sensata reports Performance Sensing and Sensing Solutions. Effective April 1, 2023, it moved material handling products from Performance Sensing to Sensing Solutions; prior-period segment figures were recast. Management evaluates segment performance using segment operating income, a non-GAAP measure.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $1,062.1m | $1,020.5m | $2,060.3m | $1,996.3m |
| Operating income | $118.0m | $138.9m | $266.9m | $264.9m |
| Operating margin | 11.1% | 13.6% | 13.0% | 13.3% |
| Net income | $49.1m | $34.8m | $135.5m | $57.3m |
| Diluted EPS | $0.32 | $0.22 | $0.88 | $0.36 |
| Operating cash flow | Not separately stated | Not separately stated | $212.6m | $141.9m |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $128.2m | $67.8m |
Q2 revenue grew 4.1% reported and 3.4% organically; first-half revenue grew 3.2% reported and 4.0% organically. Q2 gross margin, calculated from revenue less cost of revenue, was approximately 31.1%, versus 32.7% a year earlier. First-half reported operating income was nearly flat, while Q2 operating income declined.
Q2 segment revenue was $757.4m for Performance Sensing and $304.7m for Sensing Solutions. Q2 organic revenue increased 5.2% in Performance Sensing but declined 1.2% in Sensing Solutions. Automotive and HVOR growth supported Performance Sensing; appliance and HVAC weakness weighed on Sensing Solutions, partly offset by aerospace growth.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $857.3m at June 30, 2023, down from $1,225.5m at December 31, 2022. First-half net cash decreased $368.2m.
- Gross indebtedness was $3.83bn and net debt was $2.97bn at June 30. Net leverage was 3.2x, compared with 3.4x at year-end 2022. The $446.8m Term Loan was repaid in full during the first half.
- The company had $746.1m available under its $750m revolving credit facility, net of letters of credit, and approximately $1.2bn of additional Accordion availability. No revolving borrowings or letter-of-credit draws were reported.
- First-half uses of cash included $84.4m of capital expenditures, $35.1m of dividends, $25.1m of share repurchases, and $448.4m of debt payments. The company held $199.4m of remaining authorization under its repurchase program.
Changes, unusual items, and management commentary
- Marine Business exit: Sensata decided to exit Spear Power Systems’ marine energy storage business. The exit produced $38.3m of Q2 charges: $13.5m accelerated intangible amortization, $10.5m inventory write-down, and other costs including severance, asset and receivable write-downs, and contract termination costs. The charges were a major contributor to lower Q2 operating income.
- Other, net: Q2 loss was $10.9m, compared with $39.2m in Q2 2022; first-half loss was $9.5m, compared with $89.7m. The improvement primarily reflected nonrecurrence of prior-year mark-to-market losses on equity investments, including Quanergy, as well as lower commodity and currency losses.
- Interest expense, net decreased to $38.1m in Q2 and $78.2m in the first half, partly due to higher interest income and Term Loan repayments. Management cited customer pricing recoveries, inflation in material and logistics costs, and volume leverage as partial offsets to cost and mix pressures.
- Management expects 2023 capital expenditures of approximately $170m–$180m, funded from cash on hand. It said available liquidity should fund operations, investment, shareholder returns, and debt service for at least 12 months, while noting that future operating cash flow and borrowing availability are not assured.
- Management said it expects improving free cash flow to support declining leverage over time and intends to continue dividends and opportunistic repurchases. The quarterly dividend was increased to $0.12 per share; a further payment was announced for August 23, 2023.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management cited market, supplier, acquisition/disposition, competition, labor, product liability, and regulatory risks. It reported no material change in risk factors, no significant change in market risk, and no expected material adverse effect from ordinary-course litigation.
Items investors should verify
- Whether Marine Business exit costs are complete and whether the exit changes future revenue, margins, or cash requirements.
- Whether Performance Sensing growth can offset continued weakness in appliance and HVAC markets and HVOR channel inventory de-stocking.
- How sustainable operating cash flow is, given working-capital movements and the decline in cash balances.
- Debt service, refinancing exposure, covenant headroom, and progress toward lower leverage; management reported covenant compliance at quarter-end.
- The effect of acquisition-related amortization and other exclusions on non-GAAP adjusted results, and the completion of Dynapower’s still-preliminary purchase-price allocation.