Sensata Technologies Holding Plc quarterly report, Q2 FY2017

Sensata Technologies Holding N.V. — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. The filing reports unaudited U.S. GAAP results. Sensata operates through Performance Sensing and Sensing Solutions.

Key financial results

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Revenue	$839.9m	$827.5m	$1,647.1m	$1,624.1m
Operating profit	$139.2m	$128.1m	$260.4m	$241.7m
Operating margin	16.6%	15.5%	15.8%	14.9%
Net income	$79.5m	$65.5m	$151.2m	$126.1m
Diluted EPS	$0.46	$0.38	$0.88	$0.74
Operating cash flow	Not separately stated	Not separately stated	$233.8m	$246.6m

Q2 gross margin, calculated from reported revenue and cost of revenue, was approximately 35.6%, versus 35.1% a year earlier; the comparable six-month figures were approximately 34.8% and 34.4%. Net margin was 9.5% for Q2 versus 7.9%, and 9.2% for the first half versus 7.8%.

Business trends and changes versus prior year

Q2 revenue increased 1.5% reported; management cited 3.6% organic growth, excluding a 2.1% foreign-exchange decline. First-half revenue rose 1.4% reported, with 3.6% organic growth excluding a 2.2% FX decline. Organic growth is a non-GAAP measure.
Q2 Performance Sensing revenue grew 1.0% reported and Sensing Solutions grew 2.9%. Management attributed organic growth to automotive content growth, particularly in China, stronger HVOR demand, market strength across Sensing Solutions end-markets, and new design wins.
Operating margin improved as cost of revenue fell as a share of sales, primarily due to lower material costs, and intangible amortization declined. Restructuring charges increased significantly and partly offset these improvements.
Q2 restructuring and special charges were $6.4m versus $1.5m; first-half charges were $17.4m versus $2.3m. The 2017 charges primarily related to closing the acquired CST facility in Minden, Germany, other line moves and exits, and employee terminations.
Segment profit for Q2 was $169.1m in Performance Sensing and $70.1m in Sensing Solutions, compared with $152.5m and $68.2m, respectively, in Q2 2016.

Cash, debt and liquidity

Cash and equivalents were $511.5m at June 30, 2017, up from $351.4m at year-end 2016. First-half operating cash flow was $233.8m; investing outflow was $61.5m and financing outflow was $12.3m, producing a $160.1m increase in cash.
Operating cash flow declined $12.8m year over year. Management cited inventory build to support anticipated line moves, higher cash interest and severance payments, partly offset by improved operating profitability.
Gross indebtedness, including capital leases and other financing obligations, was $3,314.6m. Long-term debt, net of discounts and financing costs, was $3,225.3m. Net interest expense was $40.0m for Q2 and $80.3m for the first half.
The $420.0m revolving facility had $415.2m available, net of letters of credit; no revolver borrowings were outstanding. A further $230.0m was available under the credit agreement’s accordion feature.
Capital expenditures were $67.2m in the first half. Management expected 2017 capital expenditures of approximately $130m–$150m, funded from operating cash flow, and believed available liquidity would cover operations, capital expenditures, ordinary share repurchases and debt service for at least 12 months. The filing cautions that cash generation and future financing cannot be assured. The company reported compliance with debt covenants at quarter-end.

Outlook, risks and notable disclosures

Management described North American Class 8 truck demand as recovering and off-road construction and agriculture demand as improving. It cited vehicle safety, fuel efficiency, emissions regulation, and operator productivity requirements as demand drivers. No full-year revenue or earnings guidance is provided in the filing text.
Key stated risks include automotive-market weakness, competition and pricing pressure, acquisition integration and realization of synergies, foreign-exchange and international operating risks, product liability, warranty and recall claims, tax challenges, labor disruption, high leverage and debt-service capacity, and IT security risks. The filing says there were no changes to previously disclosed risk factors.
Foreign-currency and commodity movements affected reported results; the company uses forward contracts to manage exposures. It estimated $11.1m of net hedge losses would be reclassified into earnings over the following 12 months.
Management said pending litigation, including product-related and intellectual-property matters, was not expected to have a material effect on financial condition or results. No additional goodwill or indefinite-lived intangible impairment review was triggered through June 30, 2017.
The company planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method and had not identified a likely material financial-statement impact based on its assessment to date. The impact of the new lease standard remained undetermined; operating lease commitments at December 31, 2016 were $69.8m.
Disclosure controls were judged effective at the reasonable-assurance level, and no materially affecting change in internal control over financial reporting was reported for the first half.

Important facts for investors to verify

Whether organic growth and improving demand trends persist, particularly in China automotive markets and North American Class 8 trucks, and how currency movements affect reported sales.
Whether the Minden closure and other restructuring activities deliver expected savings, and whether restructuring charges remain elevated.
Cash conversion and working-capital needs, including inventory supporting line moves, against planned $130m–$150m annual capital expenditures.
Leverage, interest burden, covenant headroom and access to liquidity; assess refinancing and debt-service risks against the company’s cash-generation outlook.
Potential earnings volatility from foreign exchange and commodity hedges, and the implementation impacts of the revenue and lease accounting standards.