Sensata Technologies Holding N.V. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results are presented against the comparable 2012 periods. The company makes sensors and controls for automotive, heavy-vehicle, industrial, aerospace, and other markets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $506.4 million | $504.6 million | $976.8 million | $996.6 million |
| Operating profit | $90.6 million | $86.4 million | $165.4 million | $164.6 million |
| Operating margin | 17.9% | 17.1% | 16.9% | 16.5% |
| Net income | $20.4 million | $26.1 million | $55.0 million | $65.0 million |
| Diluted earnings per share | $0.11 | $0.14 | $0.31 | $0.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $180.1 million | $189.8 million |
Q2 gross margin was approximately 36.3%, up from 35.4%; first-half gross margin was approximately 35.4%, up from 34.6%. Operating cash flow less capital expenditures was approximately $146.3 million for the first half, versus $162.3 million in 2012. First-half capital expenditures were $33.9 million.
At June 30, cash was $234.3 million, down from $413.5 million at year-end 2012. Current assets were $768.2 million and current liabilities $328.8 million. Gross debt and financing obligations totaled approximately $1.631 billion; cash-adjusted debt was approximately $1.397 billion. The company had no revolving-credit borrowings and reported $244.7 million of availability, net of letters of credit.
Changes and drivers
- Q2 revenue rose 0.4% year over year, while first-half revenue fell 2.0%. First-half organic revenue declined approximately 3%, partly offset by about 1% from a 2012 Controls acquisition.
- First-half Sensors revenue decreased 3.6%, reflecting weaker light-vehicle production in Asia excluding China and weaker North American heavy and commercial truck markets. Controls revenue rose 2.1%, with acquisition contribution offset in part by organic and foreign-exchange declines.
- Management cited cost reductions, production-line moves, and favorable gold and silver pricing for improved cost of revenue as a share of sales. SG&A increased, primarily due to higher compensation for non-production headcount; R&D spending also rose.
- Net income declined despite higher operating profit, primarily because “Other, net” losses increased to $32.2 million in Q2 and $34.8 million for the first half. These included commodity-forward losses of $23.8 million and $26.2 million, respectively, and first-half debt-refinancing costs of $7.1 million.
Debt, outlook, and notable items
- In April, the company 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 cover related costs. The transaction reduced term-loan principal but used substantial cash; first-half financing cash outflow was $326.5 million.
- Management said cash on hand, operating cash flow, and revolver availability should fund operations, capital expenditures, share repurchases, and debt service for at least the next 12 months, while cautioning that cash generation and future borrowing availability are not assured. No full-year earnings or revenue guidance was provided.
- Management anticipated 2013 capital expenditures of $70–$90 million, funded from operating cash flow, and expected further insurance reimbursements related to the September 2012 South Korea facility fire. The fire constrained capacity and may cause additional costs.
- The $250 million share-repurchase program had approximately $109.6 million remaining at June 30; $125.2 million had been spent in the first half. The company reported compliance with debt covenants.
- Restructuring charges declined year over year; the company expected the 2011 and MSP plans, including South Korea facility actions, to be completed and remaining payments made in 2013.
- Reported risks include customer and industry demand, pricing and competition, non-U.S. operations, export controls, and leverage. Disclosed matters include product-related litigation, an unquantifiable South Korean customer dispute, and an unresolved SEC inquiry following a voluntary FCPA disclosure; no provision was recorded for the FCPA matter. The SGL Italia matter was described as a probable loss, with $0.2 million accrued.
Key investor verification points
- Assess whether weak first-half organic sales and South Korea fire-related capacity constraints persist, and how demand recovers across Sensors end markets.
- Reconcile the large derivative-related “Other, net” losses with underlying commodity exposures and future cash or earnings effects.
- Track cash conversion, working-capital movements, capital spending, and the reduction in cash following debt repayment and share repurchases.
- Review refinancing terms, debt maturities, covenant headroom, and the company’s ability to sustain repurchases while highly leveraged.
- Monitor insurance recoveries and costs from the facility fire, along with legal and regulatory matters whose ultimate exposure is uncertain.