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ST > SEC Filings for ST > Form 10-Q on 29-Apr-2013All Recent SEC Filings

Show all filings for SENSATA TECHNOLOGIES HOLDING N.V. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SENSATA TECHNOLOGIES HOLDING N.V.


29-Apr-2013

Quarterly Report


Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC in February 2013 and the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. All percentage amounts and ratios were calculated using the underlying data in whole dollars and may not reflect rounding adjustments.
Results of Operations
The table below presents our results of operations in millions of dollars and as a percentage of net revenue for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this report. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add due to the effect of rounding.
Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31,
2012

                                                       For the three months ended
                                             March 31, 2013                   March 31, 2012
                                                    Percent of Net                   Percent of Net
(Dollars in millions)                   Amount          Revenue          Amount          Revenue
Net revenue:
Sensors                              $    332.6           70.7  %     $    359.6           73.1  %
Controls                                  137.8           29.3             132.4           26.9
Net revenue                               470.4          100.0             492.0          100.0
Operating costs and expenses:
Cost of revenue                           308.7           65.6             325.2           66.1
Research and development                   13.6            2.9              13.3            2.7
Selling, general and administrative        38.3            8.1              38.6            7.8
Amortization of intangible assets
and capitalized software                   33.4            7.1              36.1            7.3
Restructuring and special charges           1.7            0.4               0.6            0.1
Total operating costs and expenses        395.6           84.1             413.8           84.1
Profit from operations                     74.8           15.9              78.2           15.9
Interest expense, net                     (24.0 )         (5.1 )           (25.0 )         (5.1 )
Currency translation (loss)/gain and
other, net                                 (2.6 )         (0.6 )             4.2            0.8
Income before taxes                        48.2           10.2              57.4           11.7
Provision for income taxes                 13.5            2.9              18.5            3.8
Net income                           $     34.7            7.4  %     $     38.9            7.9  %

Net revenue. Net revenue for the three months ended March 31, 2013 decreased $21.6 million, or 4.4%, to $470.4 million from $492.0 million for the three months ended March 31, 2012. Net revenue decreased 5% due to organic revenue (sales excluding the impact of acquisitions and the effect of foreign currency exchange) partially offset by 1% growth related to an acquisition in the controls segment in the fourth quarter of 2012. The decrease in organic revenue was primarily due to a decline in the production of vehicles in Europe and developed Asia.
Sensors business segment net revenue for the three months ended March 31, 2013 decreased $27.0 million, or 7.5%, to $332.6 million from $359.6 million for the three months ended March 31, 2012. Sensors net revenue decreased 7% due to organic revenue and 1% due to the effect of unfavorable foreign currency exchange rates. The decrease in organic revenue was primarily due to weakness in the European and developed Asia light vehicle and North American heavy and commercial truck markets.
Controls business segment net revenue for the three months ended March 31, 2013 increased $5.4 million, or 4.1%, to $137.8 million from $132.4 million for the three months ended March 31, 2012. Controls net revenue increased primarily due to


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market recovery, share gains and the effect of an acquisition completed in the fourth quarter of 2012 partially offset by capacity constraints related to the fire at our facility in South Korea.
Cost of revenue. Cost of revenue for the three months ended March 31, 2013 and March 31, 2012 was $308.7 million (65.6% of net revenue) and $325.2 million (66.1% of net revenue), respectively. Cost of revenue decreased primarily due to the decrease in unit volumes sold, and decreased as a percentage of net revenue primarily due to a reduction in material costs. Depreciation expense for the three months ended March 31, 2013 and March 31, 2012 was $13.0 million and $14.8 million, of which $12.0 million and $13.8 million, respectively, was included in cost of revenue.
Research and development expense. Research and development expense for the three months ended March 31, 2013 and March 31, 2012 was $13.6 million (2.9% of net revenue) and $13.3 million (2.7% of net revenue), respectively.
Selling, general and administrative expense. Selling, general and administrative expense for the three months ended March 31, 2013 and March 31, 2012 was $38.3 million (8.1% of net revenue) and $38.6 million (7.8% of net revenue), respectively.
Amortization of intangible assets and capitalized software. Amortization expense associated with definite-lived intangible assets and capitalized software for the three months ended March 31, 2013 and March 31, 2012 was $33.4 million and $36.1 million, respectively. Amortization expense decreased due to the completion of amortization during the three months ended March 31, 2013 of certain intangibles recognized upon the acquisition of the Sensors and Controls business in 2006, and a difference in the pattern in which the economic benefit of our intangible assets are consumed over their estimated useful lives for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
Restructuring and special charges. Restructuring and special charges for the three months ended March 31, 2013 and March 31, 2012 was $1.7 million and $0.6 million, respectively. The increase in restructuring and special charges is primarily attributable to the continued execution of the restructuring plan that began in 2011 and includes costs related to workforce reductions and facility exit and other. Restructuring and special charges for the three months ended March 31, 2013 also includes insurance proceeds received as a result of damage caused by the fire in our South Korean facility in September 2012. These actions and events are discussed further in Note 5, "Restructuring and Special Charges." Interest expense, net. Interest expense, net for the three months ended March 31, 2013 and March 31, 2012 was $24.0 million and $25.0 million, respectively. Interest expense, net for the three months ended March 31, 2013 consisted primarily of $21.5 million of interest on our outstanding debt, $1.2 million in amortization of deferred financing costs, $0.8 million of interest associated with our capital lease and other financing obligations and $0.3 million of interest associated with our outstanding derivative instruments. Interest expense, net for the three months ended March 31, 2012 consisted primarily of $22.4 million of interest on our outstanding debt, $1.4 million in amortization of deferred financing costs, $0.9 million of interest associated with our capital lease and other financing obligations, and $0.2 million of interest associated with our outstanding derivative instruments. Currency translation (loss)/gain and other, net. Currency translation
(loss)/gain and other, net for the three months ended March 31, 2013 and March 31, 2012 was $(2.6) million and $4.2 million, respectively. Currency translation (loss)/gain and other, net for the three months ended March 31, 2013 consisted primarily of $(2.8) million in currency translation loss on net monetary assets and a $(2.4) million loss on commodity forward contracts, partially offset by a $2.6 million gain on foreign currency forward contracts. Currency translation (loss)/gain and other, net for the three months ended March 31, 2012 consisted primarily of $3.8 million in net gains associated with our commodity forward contracts. Provision for income taxes. Provision for income taxes for the three months ended March 31, 2013 and March 31, 2012 totaled $13.5 million and $18.5 million, respectively. Our tax provision consists of current tax expense due primarily to our profitable operations in foreign tax jurisdictions and deferred tax expense which relates primarily to amortization of tax deductible goodwill and the use of net operating losses. The decrease in the provision was primarily due to the change in the distribution of income recorded in profitable jurisdictions, changes in the applicable tax rates, and the impact of changes in foreign currency exchange rates. Deferred taxes, in part, involve accounting for differences between the financial statement carrying value of existing assets and liabilities and their respective tax basis. The future related consequences of these differences result in deferred tax assets and liabilities. We assess the recoverability of deferred tax assets by assessing whether it is more likely than not that some or all of the deferred tax asset will be realized. To the extent we believe that a more likely than not standard cannot be met, we record a valuation allowance. Significant management judgment is required in determining the need for a valuation allowance against deferred tax assets. We review the need for valuation allowances jurisdictionally during each reporting period based on information available to us at that time. We have significant valuation allowances in certain jurisdictions where our businesses have historically incurred operating losses. Should our judgment change about the need for a valuation allowance, it may result


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in the recognition of a valuation allowance or the reduction of some or all of the previously recognized valuation allowances, possibly resulting in a material tax provision or benefit in the period of such change.
We believe a change of ownership within the meaning of Section 382 of the Internal Revenue Code occurred in fiscal year 2012. As a result, our U.S. federal net operating loss utilization will be limited to an amount equal to the market capitalization of our U.S. subsidiaries at the time of the ownership change multiplied by the federal long-term tax exempt rate. A change of ownership under Section 382 of the Internal Revenue Code is defined as a cumulative change of fifty percentage points or more in the ownership positions of certain stockholders owning five percent or more of our common stock over a three year rolling period. We do not believe the resulting change will prohibit the utilization of our U.S. federal net operating loss. Liquidity and Capital Resources
Cash Flows:
The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2013 and March 31, 2012. We have derived the summarized statements of cash flows for the three months ended March 31, 2013 and March 31, 2012 from the condensed consolidated financial statements, included elsewhere in this report. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add due to the effect of rounding.

                                                 For the three months ended
(Amounts in millions)                        March 31, 2013       March 31, 2012
Net cash provided by/(used in):
Operating activities:
Net income adjusted for non-cash items      $         94.2       $        101.6
Changes in operating assets and liabilities           (9.3 )               13.3
Operating activities                                  84.8                115.0
Investing activities                                 (13.3 )              (15.5 )
Financing activities                                 (54.1 )                1.5
Net change                                  $         17.5       $        101.0

Operating activities. Net cash provided by operating activities for the three months ended March 31, 2013 was $84.8 million compared to $115.0 million for the three months ended March 31, 2012. This decrease was primarily due to the changes in operating assets and liabilities during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. This decrease is primarily due to timing of payments to our suppliers.
Investing activities. Net cash used in investing activities for the three months ended March 31, 2013 was $13.3 million compared to $15.5 million for the three months ended March 31, 2012. Net cash used in investing activities during the three months ended March 31, 2013 consisted primarily of $14.3 million in capital expenditures, partially offset by insurance proceeds received related to the fire in our South Korean facility in September 2012. Capital expenditures during the three months ended March 31, 2013 primarily related to investments associated with increasing our manufacturing capacity.
Net cash used in investing activities for the three months ended March 31, 2012 consisted primarily of $15.9 million in capital expenditures. Capital expenditures during the three months ended March 31, 2012 primarily related to investments associated with increasing our manufacturing capacity.
In 2013, we anticipate capital expenditures of approximately $70 million to $90 million, which we plan to fund with cash flows from operations.
Financing activities. Net cash (used in)/provided by financing activities for the three months ended March 31, 2013 was $(54.1) million compared to $1.5 million for the three months ended March 31, 2012. For the three months ended March 31, 2013, net cash used in financing activities consisted primarily of $55.1 million in cash paid for the repurchase of approximately 1.7 million ordinary shares, and repayments on our debt of $3.3 million, partially offset by proceeds of $4.3 million from the exercise of stock options. For the three months ended March 31, 2012, net cash provided by financing activities consisted primarily of proceeds of $4.9 million from the exercise of stock options, partially offset by repayments on our debt of $3.2 million.
Subsequent to March 31, 2013, we paid $68.5 million in cash for the repurchase of approximately 2.1 million ordinary shares.


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Indebtedness and Liquidity:
Our liquidity requirements are significant due to our highly leveraged nature.
As of March 31, 2013, we had $1,834.5 million in gross outstanding indebtedness,
including our outstanding capital lease and other financing obligations.
A summary of our indebtedness as of March 31, 2013 is as follows:

                                                                     March 31, 2013
Term Loan Facility                                                  $     1,080,750
Senior Notes                                                                700,000
Less: Term Loan Facility discount                                            (3,956 )
Less: current portion                                                      (210,228 )
Long-term debt, net of discount, less current portion               $     1,566,566

Capital lease and other financing obligations                       $        53,712
Less: current portion                                                        (2,639 )
Capital lease and other financing obligations, less current portion $        51,073

There were no borrowings outstanding on the Revolving Credit Facility as of March 31, 2013.
Under the Revolving Credit Facility, there was $244.7 million of availability (net of $5.3 million in letters of credit) as of March 31, 2013. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of March 31, 2013, no amounts had been drawn against these outstanding letters of credit. These outstanding letters of credit are scheduled to expire at various dates through 2014.
In April 2013, we completed an offering of $500.0 million in aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"). We used the net proceeds from this offering together with $200.0 million of cash on hand to repay $700.0 million of existing term loans under the Senior Secured Credit Facilities. As a result of the use of cash, $199.2 million of the Term Loan Facility, net of discount, has been reclassified to current portion of long term debt as of March 31, 2013. We also used $9.8 million of cash on hand to pay fees related to the offering and accrued interest. Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations and amounts available under the Senior Secured Credit Facilities. We believe, based on our current level of operations as reflected in our results of operations for the three months ended March 31, 2013, these sources of liquidity will be sufficient to fund our operations, capital expenditures, and debt service for at least the next twelve months.
Our ability to raise additional financing and our borrowing costs may be impacted by short-term and long-term debt ratings assigned by independent rating agencies, which are based, in part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of April 10, 2013, Moody's Investors Service's corporate credit rating for Sensata Technologies B.V. was Ba3 with stable outlook and Standard & Poor's corporate credit rating for Sensata Technologies B.V. was BB with stable outlook. We cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness, including the 6.5% Senior Notes and the 4.875% Senior Notes, or to fund our other liquidity needs. Further, our highly leveraged nature may limit our ability to procure additional financing in the future.
As of March 31, 2013, we were in compliance with all the covenants and default provisions under our credit arrangements. For more information on our indebtedness and related covenants and default provisions, see Note 6, "Debt," included elsewhere in this Quarterly Report on Form 10-Q.
In October 2012, we announced that our board of directors approved a $250 million share buyback program. Execution of share repurchases under this program would be funded from available cash and cash flows from operations. For the three months ended March 31, 2013, we paid $55.1 million in cash for the repurchase of approximately 1.7 million shares under this program. Subsequent to March 31, 2013, we paid $68.5 million in cash for the repurchase of approximately 2.1 million ordinary shares.


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New Accounting Standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in a single note, any significant amount reclassified out of accumulated other comprehensive income in its entirety in the period, and the income statement line item affected by the reclassification. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012. We adopted this guidance as of January 1, 2013, as required. The adoption of ASU 2013-02 impacted disclosure only and did not have any impact on our financial position or results of operations.

In February 2013, FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date ("ASU 2013-04"). This guidance changes how an entity measures obligations resulting from joint and several liability arrangements by requiring that when measuring the obligation, an entity will include the amount the entity agreed to pay for the arrangement between the entity and other entities that are also obligated to the liability, and any additional amount the entity expects to pay on behalf of the other entities. ASU 2013-04 also requires additional disclosures surrounding such obligations. ASU 2013-04 is effective for interim and annual reporting periods beginning after December 15, 2013, and is to be applied retrospectively. We expect to adopt this guidance in the first quarter of 2014. This guidance is not expected to have a material impact on our financial position or results of operations, but will require additional disclosures. Critical Accounting Policies and Estimates For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" included in the Annual Report on Form 10-K for the year ended December 31, 2012.


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