Sensata Technologies Holding N.V. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The filing reports unaudited U.S. GAAP results for Sensata’s sensors and controls businesses.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $504.6 million | $455.0 million | $996.6 million | $899.3 million |
| Operating income | $86.4 million | $78.2 million | $164.6 million | $157.1 million |
| Operating margin | 17.1% | 17.2% | 16.5% | 17.5% |
| Net income/(loss) | $26.1 million | $(34.6) million | $65.0 million | $(44.2) million |
| Diluted EPS | $0.14 | $(0.20) | $0.36 | $(0.25) |
| Operating cash flow | — | $189.8 million | $121.2 million |
Q2 revenue increased 10.9% year over year, reflecting higher volumes, including HTS acquisition contribution and content growth, partly offset by pricing and foreign-exchange headwinds. Sensors revenue rose 17.2% to $360.1 million; controls revenue declined 2.2% to $144.5 million. For the first half, sensors revenue rose 18.2%, while controls fell 4.7%.
Operating margin was broadly flat in Q2 and lower for the first half. Cost of revenue rose to 64.6% of revenue in Q2 from 62.6%, with management citing acquisition-related dilution, volume and depreciation. SG&A declined to 7.0% of Q2 revenue from 9.7%, attributed mainly to cost-reduction initiatives. Restructuring charges increased to $7.9 million in Q2 and $8.5 million for the first half.
Net income improved substantially against prior-year losses, when currency translation and other losses were $74.7 million in Q2 and $115.4 million in the first half, including a $44.0 million debt-extinguishment loss in 2011. 2012 currency translation and other losses were $10.8 million and $6.6 million, respectively. Q2 2012 also included $8.9 million of losses on commodity forward contracts. Interest expense rose year over year, principally due to a higher rate on the refinanced term loan.
Cash, debt and liquidity
- Operating cash flow was $189.8 million for the first half; investing cash outflow was $23.3 million, including $27.5 million of capital expenditures. Financing provided $2.2 million. Cash increased by $168.7 million to $260.8 million.
- Gross debt, including capital leases and other financing obligations, was approximately $1.834 billion. The balance sheet reported long-term debt net of discount and current portion of $1.773 billion, plus $45.1 million of capital lease and other financing obligations. Cash was $260.8 million.
- No revolving-credit borrowings were outstanding; $243.7 million of revolver availability remained, net of letters of credit. The company said it was compliant with debt covenants and believed available liquidity sufficient for operations, capital spending and debt service for at least twelve months.
- Management expected 2012 capital expenditures of approximately $60–$70 million, funded from operating cash flow. The term loan bears floating-rate interest; senior notes carry a 6.5% coupon and mature in 2019. Debt agreements impose restrictive covenants and limit distributions to parent companies.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key stated risks include automotive-market conditions, customer pricing pressure and demand fluctuations, foreign operations and exchange rates, competition, and the cost or availability of components and raw materials. Commodity hedges may not be effective economically and their fair-value changes can add earnings volatility.
- Contingencies include Ford speed-control-switch litigation, with a $0.2 million reserve and potential exposure beyond that reserve; product claims involving appliance controls and pressure sensors; and aircraft product-liability lawsuits for which the company reported no reserve because it did not believe a loss was probable. TI indemnification applies to certain Ford-related claims, subject to contractual limits.
- The DOJ closed its inquiry into a voluntary FCPA disclosure but could reopen it; the SEC inquiry had no reported update. The company said it could not estimate potential penalties and recorded no provision.
- The U.S. defined-benefit pension plans were frozen effective January 31, 2012; the company no longer expected to contribute to them in 2012. The 2011 restructuring plan was expected to cost $24–$29 million in total, with actions and payments continuing through 2013.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether revenue growth and margin trends persist, particularly the strength of sensors versus continued weakness in controls.
- How much growth reflects acquisitions, and whether acquisition-related cost dilution and amortization ease.
- Cash conversion, receivables and working-capital movements, and progress against the $60–$70 million capital-spending plan.
- Debt-service capacity, floating-rate exposure, covenant headroom and continued access to revolver liquidity.
- Updates on the cited litigation, TI indemnification, the SEC’s FCPA inquiry, and commodity costs and hedge-related earnings volatility.