Sensata Technologies Holding N.V. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The unaudited filing covers Sensata’s sensors and controls businesses, serving automotive, heavy-vehicle, industrial, aerospace, and other markets. Unless noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $498.9 million | $471.9 million | $1,475.7 million | $1,468.6 million |
| Operating profit | $100.1 million | $71.2 million | $265.5 million | $235.8 million |
| Operating margin | 20.1% | 15.1% | 18.0% | 16.1% |
| Net income | $66.0 million | $41.5 million | $121.1 million | $106.5 million |
| Diluted EPS | $0.37 | $0.23 | $0.67 | $0.59 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $308.8 million | $284.7 million |
- Q3 revenue rose 5.7%; sensors revenue increased 5.4%, with management citing strength in heavy vehicle and off-road markets. Controls revenue grew 6.5%, including a 5% contribution from a fourth-quarter 2012 acquisition, 2% organic growth, and a 1% foreign-exchange headwind.
- Nine-month revenue was nearly flat, up 0.5%: sensors declined 0.7%, while controls increased 3.6%, primarily due to the acquisition.
- Cost of revenue fell to 62.0% of Q3 revenue from 65.4%. Management attributed the improvement to cost reductions, favorable metal pricing, lower integration costs, and $5.0 million of fire-related insurance proceeds. Nine-month cost of revenue also improved as a share of revenue, to 63.7% from 65.4%, including $6.7 million of insurance proceeds.
- Q3 net income and operating margin improved substantially year over year. Nine-month net income increased despite near-flat sales; lower restructuring and amortization costs and lower taxes contributed, while a large year-to-date loss in “Other, net” was a significant offset.
Balance sheet, liquidity, and debt
- At September 30, 2013, cash and cash equivalents were $348.2 million, down from $413.5 million at year-end 2012. Total current assets were $880.1 million and current liabilities were $347.8 million.
- Gross outstanding indebtedness, including capital leases and other financing obligations, was $1.628 billion. The company had $245.0 million available on its $250.0 million revolving facility, net of letters of credit, and no revolver borrowings.
- In April, Sensata issued $500 million of 4.875% senior notes due 2023 and used the proceeds, with cash on hand, to repay $700 million of term loans and pay related costs. The transaction reduced the term loan but resulted in $7.1 million of refinancing loss and lower outstanding cash after financing activity.
- Nine-month capital expenditures were $55.5 million. The company projected 2013 capital expenditures of approximately $75–$85 million, funded from operating cash flow.
- Financing cash outflow was $324.9 million, principally reflecting debt refinancing and $126.2 million of share repurchases. The company said cash, operating cash flow, and revolver availability were expected to fund operations, capital spending, repurchases, and debt service for at least the next 12 months, while cautioning that future cash generation and borrowing availability are not assured.
Changes, outlook, and notable items
- Interest expense declined year over year, which management attributed primarily to net repayment of $200 million of long-term debt in the second quarter.
- Year-to-date “Other, net” was a loss of $25.4 million versus a gain of $4.2 million in 2012, primarily reflecting losses on commodity forward contracts and debt refinancing. Commodity and foreign-exchange derivative gains and losses can therefore materially affect reported results.
- Restructuring and special charges were $0.5 million in Q3 and $4.5 million for nine months, down from $6.5 million and $14.9 million, respectively, in the comparable 2012 periods. Sensata expected to complete the 2011 restructuring plan in Q4 2013.
- Management gave no specific revenue or earnings guidance in the provided filing text. Its stated outlook included the capital expenditure range and expectation of adequate liquidity for at least 12 months. On October 28, 2013, the board reset the remaining authorization under the share repurchase program to $250 million; the company said repurchases would be funded from operating cash flow.
- Key risks include highly leveraged finances, automotive and customer-demand fluctuations, customer pricing pressure, foreign operations and currency exposure, and export-control restrictions. Sensata also highlighted risk of disruption, cost overruns, or control and reporting issues as it upgrades its Oracle ERP system, expected to be completed in 2014.
- Contingencies include product and other litigation. Sensata accrued $0.3 million for the SGL Italia product-defect claim, which alleges €4.2 million in damages and for which the company considered a loss probable. Two Venmar-related lawsuits claim $0.9 million and $6.2 million; loss was considered reasonably possible, but no range could be estimated and no accrual was recorded. The SEC had not updated Sensata on its inquiry into a previously disclosed FCPA matter; potential penalties could not be estimated, and no provision was recorded. Sensata reported that TI indemnification applies to certain Ford switch claims, subject to contractual terms and limits.
Important facts for investors to verify
- Whether the Q3 margin improvement is sustainable after excluding fire insurance recoveries, restructuring changes, metal-price effects, and other unusual items.
- How the derivative-related losses and gains—especially the nine-month commodity-contract loss—may affect future earnings and cash flows.
- Debt-service capacity, covenant headroom, refinancing terms, and the balance between debt reduction and share repurchases.
- Progress and remaining costs for the 2011 restructuring plan, ERP upgrade, and fire-related insurance recoveries.
- Developments in the SGL Italia, Venmar, Ford-related, FCPA/SEC, and customer-termination matters, including any changes in accruals or indemnification recoveries.