Sensata Technologies Holding N.V. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited results are presented under U.S. GAAP; dollar amounts below are in millions unless stated otherwise. The filing identifies the registrant as Sensata Technologies Holding N.V.
Business context
Sensata makes sensors and controls for automotive, industrial, commercial, aerospace and other markets. It reports Sensors and Controls segments. In 2011, it acquired Magnetic Speed and Position (MSP) in January and High Temperature Sensing (HTS) in August, both integrated into Sensors.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $474.3 | $383.3 | $1,373.6 | $1,152.2 |
| Operating income | $77.4 | $63.1 | $233.1 | $158.4 |
| Operating margin | 16.3% | 16.5% | 17.0% | 13.8% |
| Net income/(loss) | $26.2 | $(48.4) | $(17.9) | $61.4 |
| Diluted earnings/(loss) per share | $0.14 | $(0.28) | $(0.10) | $0.36 |
| Operating cash flow | Not provided by quarter | $222.4 | $201.7 |
Cost of revenue was 64.6% of revenue in Q3 and 63.2% for the nine-month period, versus 62.3% and 61.8%, respectively, a year earlier. Cash and cash equivalents were $77.8 at September 30, 2011, versus $493.7 at December 31, 2010. Current assets were $623.1 and current liabilities $360.4.
Gross debt was approximately $1,878.8, including capital leases and other financing obligations. Debt consisted principally of a $1,097.3 term loan, $700.0 of 6.5% senior notes due 2019, and $35.0 drawn on the revolving facility; the term loan matures in 2018. Revolver availability was $209.1, net of borrowings and letters of credit. The company reported compliance with its debt covenants at quarter-end.
Material changes versus prior comparable periods
- Q3 revenue increased 23.7%; nine-month revenue increased 19.2%. Management attributed growth to higher volumes and favorable foreign exchange, partly offset by pricing declines. Acquisitions contributed to Sensors growth; Controls revenue fell 6.7% in Q3 and 3.4% year to date.
- Q3 returned to net income from a prior-year loss, when a $78.5 foreign currency and other loss was recorded. For the first nine months, net income turned to a loss, largely reflecting $118.5 of currency translation losses and other items, including $60.4 of losses from remeasuring foreign-currency debt and a $44.0 debt-repurchase loss.
- Operating income rose year to date and operating margin improved, while cost of revenue as a share of sales increased. Management attributed cost pressure partly to the acquired businesses’ dilutive effect.
- Operating cash flow rose to $222.4, but investing outflows increased to $521.2, including $457.8 for the HTS and MSP acquisitions and $64.0 of capital expenditures. Financing activities used $117.0; cash declined by $415.8 over the nine months.
- The May refinancing replaced prior debt with the new term loan and senior notes. The company paid down or redeemed the 8% and 9% notes and recognized associated extinguishment and currency-related costs.
Outlook, commentary, risks and unusual items
- Management expected 2011 capital expenditures of approximately $80–$85 and said available cash, operating cash flow and credit facilities should fund operations, capital expenditures and debt service for at least the next 12 months. This assessment is subject to the company’s ability to generate cash and access financing; no formal revenue or earnings guidance is provided in the supplied filing text.
- Management cited demand fluctuations, automotive-industry conditions, customer pricing pressure, competition, international operations and acquisition integration as risks. MSP and HTS integration, expected synergies and performance are not assured. Planned MSP facility closures were expected to affect 195 employees, with actions and payments extending through 2012.
- Whirlpool litigation is a major contingency: the company believed plaintiffs sought $550 million plus unspecified exemplary damages; trial began October 11, 2011. Sensata recorded a $5.9 reserve and stated that TI indemnification may apply above $30 million of aggregate costs, up to a $300 million cap, subject to the acquisition agreement and potential disputes. The filing warns the reserve may be insufficient.
- Sensata was also a defendant in a Ford-related wrongful-death case and 17 additional vehicle-fire suits; it estimated aggregate claims of $5–$6 million and recorded a $0.2 reserve. Other disclosed matters include appliance-related litigation and an FCPA voluntary disclosure concerning a China business relationship; potential penalties were not estimable and no provision was recorded.
- Other notable items include acquisition purchase-price allocations that remained preliminary, substantial goodwill and intangible assets, and a $45.6 deferred tax expense for the nine months. Management reported no goodwill impairment trigger through September 30 and no significant change in market risk from year-end 2010.
Important facts for investors to verify
- Whether operating cash flow and available revolver capacity remain adequate as acquisition integration, working-capital needs and debt service continue.
- How much of sales growth reflects underlying volume/content versus acquisitions and foreign exchange, and whether Controls weakness persists.
- The status and potential exposure of the Whirlpool and Ford litigation, the adequacy of recorded reserves, and the enforceability and scope of TI indemnification.
- Final purchase-price allocations and realized performance, synergies and integration costs for HTS and MSP.
- Debt terms, floating-rate exposure, covenant headroom and the effects of currency movements and refinancing-related charges.