Sensata Technologies Holding plc — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Amounts are U.S. dollars. Sensata reports Performance Sensing and Sensing Solutions, serving automotive, heavy vehicle and off-road (HVOR), industrial, appliance and HVAC, aerospace, and other markets.
Financial performance
- Revenue: $942.5 million, up 21.7%; organic growth was 18.8%, with foreign exchange contributing 2.9%. Performance Sensing revenue increased 25.6% and Sensing Solutions increased 10.9%.
- Margins and operating income: Gross margin was approximately 32.6% (revenue less cost of revenue); operating income was $157.5 million, with a 16.7% operating margin, versus $58.6 million and 7.6% a year earlier. Management attributed the improvement mainly to higher volume and improved gross margin.
- Profit: Net income was $53.7 million, or $0.34 per diluted share, compared with $8.4 million, or $0.05 per diluted share. The effective tax rate was approximately 27% based on reported pretax income and tax provision; Q1 2020 included a $7.5 million deferred tax benefit related to the CARES Act.
- Company-reported non-GAAP results: Adjusted operating margin was 21.0% versus 17.7%; adjusted diluted EPS was $0.86 versus $0.53. These measures exclude specified items and are not GAAP results.
- Cash flow: Operating cash flow was $104.5 million versus $98.5 million. Capital expenditures and capitalized software were $27.2 million; company-defined free cash flow was $77.3 million versus $69.0 million.
- Liquidity and debt: Cash was $1.894 billion at quarter-end. Gross indebtedness, including finance lease and other financing obligations, was approximately $4.0 billion; net debt was $2.144 billion. The reported net leverage ratio was 2.9x, using LTM adjusted EBITDA. The $420 million revolving facility had $416.1 million available, net of letters of credit.
Changes from the prior comparable period
- Revenue rose 21.7%, while operating income increased 168.7% and net income increased by $45.3 million. Q1 2020 was affected by COVID-related volume and factory productivity pressures and included a $29.2 million intellectual-property litigation judgment in cost of revenue; that judgment was settled in Q3 2020.
- Other, net was a loss of $39.4 million versus a loss of $12.3 million, primarily reflecting a $30.1 million loss on redemption of the 6.25% senior notes. Interest expense also rose to $44.0 million from $39.4 million.
- Cash from operations improved, but working capital absorbed cash, particularly through higher receivables as revenue increased. Inventories also rose during the quarter.
Outlook, material events, and risks
- Management expected improving and relatively stable business conditions for 2021, while noting continuing uncertainty and a return to normal seasonality. Targets for market outgrowth were 400–600 basis points in automotive and 600–800 basis points in HVOR. These are market-outgrowth targets, not revenue-growth guidance.
- The global semiconductor shortage had affected Q1 margins and was expected to increase operating costs in Q2 and remain a headwind for the rest of 2021. Management cautioned that a more severe or prolonged shortage could further weaken results. Its 2021 automotive production outlook was 12% growth, revised lower than expected in February; HVOR and industrial markets were expected to grow faster than previously communicated.
- In March, Sensata issued $750 million of 4.0% senior notes due 2029 and redeemed $750 million of 6.25% notes due 2026 at a premium. Management said the transactions extended average debt maturity and reduced fixed-debt cost by 80 basis points to 4.5%; it estimated annualized interest expense on fixed-rate debt would be $6.9 million lower than without the transactions. An additional $250 million of 4.0% notes was issued on April 8, after quarter-end.
- The Xirgo acquisition closed April 1 for $400 million cash, after quarter-end. Management expected more than $100 million of annualized 2021 revenue and growth above 20% annually over the following several years; these are expectations, not reported results. Sensata also acquired Lithium Balance during Q1, with $20.4 million of acquisition cash outflow reported.
- The COVID-era restructuring program was expected to affect about 880 positions, incur $31.0–$33.7 million of severance and $6.0–$8.0 million of site-closure charges, and generate approximately $43 million in annual savings. Most remaining actions were expected by June 30, 2021. Q1 savings from this program and ongoing cost controls were approximately $7 million.
- Other risks highlighted include COVID-19 and supply-chain disruption, customer demand and competition, aerospace weakness, foreign-exchange and commodity exposure, acquisitions and restructuring, cybersecurity, tax matters, and substantial indebtedness. The company said it was in compliance with debt covenants and believed liquidity sources were sufficient for at least 12 months, while cautioning that future cash generation and financing availability were not assured. Ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the semiconductor shortage, including production interruptions and procurement costs, materially affects subsequent-quarter margins and 2021 results.
- Whether reported revenue growth and margins persist after the prior-year COVID and litigation effects, and how segment performance develops, particularly in aerospace.
- Whether Xirgo meets its stated revenue and growth expectations, and how the acquisition affects cash, debt, and integration costs.
- Whether restructuring savings materialize as expected and the final costs and timing of remaining actions.
- Debt service, leverage, covenant headroom, and post-quarter liquidity after the $400 million Xirgo payment and the additional $250 million note issuance.