Sensata Technologies Holding N.V. — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. Sensata operates Performance Sensing and Sensing Solutions businesses, serving automotive, heavy vehicle, industrial, aerospace, and other markets. Results include the effects of recent acquisitions, particularly Schrader.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $727.4m | $577.1m | $2,248.5m | $1,704.5m |
| Operating income | $106.9m | $92.1m | $302.4m | $295.3m |
| Operating margin | 14.7% | 16.0% | 13.5% | 17.3% |
| Net income | $53.2m | $82.0m | $129.4m | $214.2m |
| Diluted EPS | $0.31 | $0.48 | $0.75 | $1.24 |
| Operating cash flow | Not separately provided | Not separately provided | $363.7m | $280.1m |
| Capital expenditures | Not separately provided | Not separately provided | $130.2m | $101.1m |
Q3 revenue grew 26.0%, while net income fell 35.2%. For the nine-month period, revenue rose 31.9% but net income declined 39.6%. Cost of revenue was 65.5% of Q3 revenue versus 64.5% a year earlier; nine-month cost of revenue was 66.8% versus 64.4%. The corresponding gross margins were 34.5% and 35.5% for Q3, and 33.2% and 35.6% for the nine-month periods.
Cash, debt, and liquidity. At September 30, cash and cash equivalents were $258.2m, versus $211.3m at year-end 2014. Nine-month net cash provided by operating activities was $363.7m; investing activities used $127.2m and financing activities used $189.6m. Cash flow after capital expenditures was approximately $233.5m. Gross indebtedness, including capital leases and other financing obligations, was $2,688.6m. The company reported $359.7m of available revolving credit capacity, net of letters of credit. Current assets were $1,210.4m and current liabilities $651.3m. The company said it was in compliance with debt covenants at quarter-end.
Material changes and drivers
- Performance Sensing revenue increased 40.2% in Q3 and 47.0% for the nine months, primarily reflecting acquisitions; organic growth was 2.3% and 3.7%, respectively. Foreign exchange reduced growth, and weak heavy vehicle, agricultural, construction, and Chinese light vehicle markets partly offset content growth.
- Sensing Solutions revenue declined 9.1% in Q3 and 4.7% for the nine months. Management cited weaker China demand and inventory destocking in industrial, appliance, and HVAC markets, as well as semiconductor and communications weakness.
- Operating income rose in Q3 but was nearly flat for the nine months; margins contracted in both comparisons. Management attributed cost pressure to acquired businesses, a $6.0m Bridgestone settlement accrual, a U.S. automaker warranty accrual, and costs associated with the Brazil facility closure.
- Q3 2014 and nine-month 2014 net income benefited from tax valuation-allowance releases of $32.5m and $40.8m, respectively. This makes year-over-year net income comparisons less directly reflective of operating performance.
Outlook, risks, contingencies, and unusual items
- Management expected agricultural, construction, and Chinese light vehicle markets to remain weak through year-end; it also expected continued weakness in China, semiconductor, and communications markets. No quantified earnings or revenue guidance was provided.
- Management anticipated 2015 capital expenditures of approximately $175m–$200m, expected to be funded from operating cash flows. It stated that available liquidity was expected to fund operations, capital expenditures, debt service, and the planned CST acquisition for at least the next 12 months.
- The planned acquisition of CST’s sensing portfolio for approximately $1.0bn was expected to close in Q4 2015 and to be funded with debt, revolver borrowings, and cash. Moody’s and S&P had revised the relevant credit outlooks to negative following the announcement; ratings were Ba2 and BB+, respectively.
- Debt refinancing and related transactions generated a $25.5m nine-month loss in “Other, net.” Nine-month “Other, net” losses totaled $44.6m, including commodity-derivative and currency-related losses. Interest expense increased to $96.0m from $70.1m.
- Schrader-related Brazil facility closure costs included $4.0m of severance and approximately $5.0m of asset and inventory write-downs. The company said Schrader integration could take up to three years; integration of other recent acquisitions generally takes 18–24 months.
- After quarter-end, on October 15, the parties reached an oral agreement to settle U.S. and German Bridgestone patent matters for $6.0m; Sensata had accrued that amount at September 30. Other disclosed matters include a Korean supplier dispute and government investigation, automotive product claims, and a class action concerning TPMS valve stems. The company did not accrue for matters it assessed as not probable.
- Principal risks include substantial indebtedness and debt-service capacity, acquisition integration and assumed liabilities, end-market weakness, foreign currency exposure, competition, product liability and warranty claims, and tax uncertainty.
Most important facts for investors to verify
- Whether CST closed on the expected timetable and how its financing, integration costs, and synergies affected leverage and results.
- Whether organic demand and margins improved, particularly in Sensing Solutions and weak vehicle and China-related markets.
- How recurring operating cash flow compares with capital spending, debt service, and the company’s acquisition and repurchase plans.
- The final Bridgestone settlement terms and developments in other product, supplier, and regulatory matters, including the Korean investigation.
- The drivers of derivative losses, tax expense, and the gap between revenue growth and net income growth.