Sensata Technologies Holding N.V. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Sensata makes sensors and control products across automotive, heavy vehicle, industrial, aerospace and other markets. Its reportable segments are Performance Sensing and Sensing Solutions.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net revenue | $796.5 million | $750.7 million | Up 6.1% |
| Gross profit margin | 33.7% | 32.5% | Improved; cost of revenue fell to 66.3% of sales from 67.5% |
| Operating income / margin | $113.6 million / 14.3% | $102.4 million / 13.6% | Improved |
| Net income / net margin | $60.6 million / 7.6% | $35.4 million / 4.7% | Improved |
| Diluted EPS | $0.35 | $0.21 | Increased |
| Operating cash flow | $136.2 million | $103.1 million | Higher, reflecting improved profitability and inventory and supply-chain management, partly offset by receipt timing |
| Capital expenditures | $34.2 million | $37.9 million | Company expected $150–$175 million for full-year 2016 |
Cash and liquidity: Cash and equivalents were $348.0 million at March 31, versus $342.3 million at year-end 2015. The revolving credit facility had $164.5 million available, net of letters of credit; a further $230 million remained available under the credit agreement’s accordion. Management said these sources should fund operations, capital expenditures, share repurchases and debt service for at least 12 months, while cautioning that future cash generation and borrowing availability are not assured.
Debt: Gross outstanding indebtedness, including capital leases and other financing obligations, was $3.62 billion. Long-term debt net of discount and financing costs was $3.26 billion, with $259.9 million of debt classified as current. The company was in compliance with its credit covenants. Net interest expense rose to $42.3 million from $34.8 million, mainly due to debt issued for the CST acquisition, partly offset by refinancing benefits.
Changes versus the prior-year quarter
- Performance Sensing revenue rose 1.0% to $597.2 million. Organic growth was 0.8%; currency reduced growth by 2.1%. Higher automotive production and content growth were partly offset by pricing pressure and weakness in heavy-vehicle markets.
- Sensing Solutions revenue increased 25.1% to $199.4 million, primarily because of the CST acquisition. Organic revenue declined 7.0%, amid weaker global conditions, particularly in China; management noted sequential organic growth in China versus Q4 2015.
- Net income benefited from a $5.5 million gain in “Other, net,” compared with a $21.8 million loss in Q1 2015. The prior-year amount included a $19.6 million debt-financing loss; commodity and currency-related items also affected the comparison.
- Comprehensive income was $44.1 million versus $56.5 million, as Q1 2016 included a $16.5 million other comprehensive loss, largely from derivative instruments.
- Q1 2016 investing cash outflow included a $50 million investment in Quanergy preferred stock. The CST acquisition was completed in December 2015, so its sales contributed to Q1 2016 but not the comparable 2015 reported results.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance was provided. Management expected Performance Sensing revenue to grow in 2016 with automotive production and content, partly offset by price declines, foreign exchange and continued weak heavy-vehicle markets.
- Management anticipated cost of revenue as a percentage of sales would decline further as acquired businesses are integrated. Integration of CST and Schrader was expected to take up to three years.
- Management expected full-year 2016 capital expenditures of approximately $150–$175 million, funded with operating cash flow.
- Key stated risks include substantial leverage and debt-service needs; automotive-industry conditions, competition and pricing; foreign-exchange exposure and international operations; integration and synergy execution for acquisitions; product liability, warranty, recall and intellectual-property claims; and tax uncertainty.
- Contingencies include an automotive customer claim for which Sensata accrued $1.5 million as its estimated minimum loss, with no upper range estimated, and another customer matter accrued at $0.4 million and settled for that amount on April 15, 2016. A Brazilian tax dispute involved approximately $26 million claimed, which the company contested and for which it recorded no accrual; certain subsidiaries had an indemnity from a former owner.
- Sensata entered a strategic partnership with Quanergy to develop, manufacture and sell solid-state LiDAR sensors, with exclusivity for component-level sensors in transportation. No earnings were recorded from the partnership in the quarter. The $50 million preferred-stock investment had no readily determinable fair value and was not estimated for impairment indicators at quarter-end.
Important facts for investors to verify
- Whether organic growth in Sensing Solutions recovers, and how much reported growth depends on CST rather than underlying demand.
- Progress integrating CST and Schrader, including the expected effect on costs, margins and anticipated synergies.
- Debt-service capacity, covenant headroom, refinancing exposure and access to revolving-credit liquidity given $3.62 billion of gross indebtedness.
- Cash conversion and working-capital trends, especially customer collections, alongside the planned $150–$175 million of 2016 capital spending.
- Developments and potential exposure from customer claims and the Brazilian tax dispute, as well as the commercial and valuation outlook for Quanergy.