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ST > SEC Filings for ST > Form 10-Q on 29-Jul-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-Jul-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 tables below present our results of operations in millions of dollars and as a percentage of net revenue for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012. We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the tables below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add due to the effect of rounding. Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30,
2012

                                                       For the three months ended
                                             June 30, 2013                    June 30, 2012
                                                    Percent of Net                   Percent of Net
(Dollars in millions)                   Amount          Revenue          Amount          Revenue
Net revenue:
Sensors                              $    361.3           71.4  %     $    360.1           71.4  %
Controls                                  145.1           28.6             144.5           28.6
Net revenue                               506.4          100.0             504.6          100.0
Operating costs and expenses:
Cost of revenue                           322.7           63.7             326.2           64.6
Research and development                   14.3            2.8              12.5            2.5
Selling, general and administrative        42.8            8.5              35.5            7.0
Amortization of intangible assets          33.7            6.6              36.2            7.2
Restructuring and special charges           2.4            0.5               7.9            1.6
Total operating costs and expenses        415.8           82.1             418.2           82.9
Profit from operations                     90.6           17.9              86.4           17.1
Interest expense, net                     (23.6 )         (4.7 )           (24.7 )         (4.9 )
Other, net                                (32.2 )         (6.4 )           (10.8 )         (2.1 )
Income before taxes                        34.8            6.9              50.9           10.1
Provision for income taxes                 14.5            2.9              24.8            4.9
Net income                           $     20.4            4.0  %     $     26.1            5.2  %

Net revenue. Net revenue for the three months ended June 30, 2013 increased $1.8 million, or 0.4%, to $506.4 million from $504.6 million for the three months ended June 30, 2012. Net revenue increased by approximately 1% related to an acquisition in the controls segment in the fourth quarter of 2012, largely offset by a decline of approximately 1% in organic revenue (sales excluding the impact of acquisitions and the effect of foreign currency exchange). Sensors business segment net revenue for the three months ended June 30, 2013 increased $1.2 million, or 0.3%, to $361.3 million from $360.1 million for the three months ended June 30, 2012. This increase was primarily due to organic revenue growth.
Controls business segment net revenue for the three months ended June 30, 2013 increased $0.6 million, or 0.4%, to $145.1 million from $144.5 million for the three months ended June 30, 2012. Controls net revenue increased approximately 4% due to the effect of an acquisition completed in the fourth quarter of 2012, partially offset by declines of approximately 3% in organic revenue and approximately 1% related to the effect of unfavorable foreign currency exchange rates. The decline in organic revenue was primarily due to capacity constraints related to the fire at our facility in South Korea.


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Cost of revenue. Cost of revenue for the three months ended June 30, 2013 and June 30, 2012 was $322.7 million (63.7% of net revenue) and $326.2 million (64.6% of net revenue), respectively. Cost of revenue decreased as a percentage of net revenue primarily due to cost reductions, partially resulting from production line moves, and favorable trends in metal pricing, primarily gold and silver. A portion of our production materials contains metals, such as copper, nickel, and aluminum, and precious metals, such as gold, silver, platinum, and palladium, and the costs of these materials may vary with underlying metals pricing.
Research and development expense. Research and development ("R&D") expense for the three months ended June 30, 2013 and June 30, 2012 was $14.3 million (2.8% of net revenue) and $12.5 million (2.5% of net revenue), respectively. R&D expense consists of costs related to direct product design, development and process engineering. The level of R&D expense is related to the number of products in development, the stage of development process, the complexity of the underlying technology, the potential scale of the product upon successful commercialization and the level of our exploratory research. These factors may impact our level of R&D expense in the future.
Selling, general and administrative expense. Selling, general and administrative ("SG&A") expense for the three months ended June 30, 2013 and June 30, 2012 was $42.8 million (8.5% of net revenue) and $35.5 million (7.0% of net revenue), respectively. SG&A expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs. These costs may be fixed or variable in nature, and we may at times experience increased or decreased variable costs for reasons other than increased or decreased net revenue. As a result, SG&A expense will not necessarily remain consistent as a percentage of net revenue. During the three months ended June 30, 2013, SG&A expense increased as a percentage of net revenue primarily due to increased compensation related to non-production headcount in the second quarter of 2013 compared to the second quarter of 2012. Amortization of intangible assets. Amortization expense associated with definite-lived intangible assets for the three months ended June 30, 2013 and June 30, 2012 was $33.7 million and $36.2 million, respectively. Amortization expense decreased primarily due to the completion of amortization during the first quarter of 2013 of certain intangible assets initially recognized upon the acquisition of the Sensors and Controls business in 2006.
Restructuring and special charges. Restructuring and special charges for the three months ended June 30, 2013 and June 30, 2012 was $2.4 million and $7.9 million, respectively. Restructuring and special charges decreased from the prior period as we are approaching the completion of actions attributable to the execution of the 2011 Plan and the MSP Plan, each of which began in 2011. The remaining charges relate primarily to actions associated with ceasing manufacturing in our South Korean facility, incurred as part of the 2011 Plan. We expect these actions will be completed and payments will be made in 2013. These actions and events are discussed further in Note 5, "Restructuring and Special Charges," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense, net. Interest expense, net for the three months ended June 30, 2013 and June 30, 2012 was $23.6 million and $24.7 million, respectively. Interest expense, net for the three months ended June 30, 2013 decreased primarily due to the net repayment of $200.0 million on our long term debt during the three months ended June 30, 2013, partially offset by the higher interest rate on our new fixed rate debt versus the variable interest rate on the debt repaid.
Other, net. Other, net for the three months ended June 30, 2013 and June 30, 2012 was $(32.2) million and $(10.8) million, respectively. The loss recognized for the three months ended June 30, 2013 is higher than the three months ended June 30, 2012 primarily due to higher losses on commodity forward contracts, losses related the refinancing of our debt, and the write-off to expense of amounts in Accumulated other comprehensive income due to a portion of the hedged forecasted transactions related to the interest rate cap becoming probable of not occurring. See Note 13, "Other, Net," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details of the gains and losses included within this account. Provision for income taxes. Provision for income taxes for the three months ended June 30, 2013 and June 30, 2012 totaled $14.5 million and $24.8 million, respectively. Our tax provision consists of current tax expense, which relates primarily to our profitable operations in foreign tax jurisdictions, and deferred tax expense, which relates primarily to the 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


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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 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.
Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

                                                        For the six months ended
                                             June 30, 2013                    June 30, 2012
                                                    Percent of Net                   Percent of Net
(Dollars in millions)                   Amount          Revenue          Amount          Revenue
Net revenue:
Sensors                              $    694.0           71.0  %     $    719.7           72.2  %
Controls                                  282.9           29.0             276.9           27.8
Net revenue                               976.8          100.0             996.6          100.0
Operating costs and expenses:
Cost of revenue                           631.4           64.6             651.4           65.4
Research and development                   27.9            2.9              25.8            2.6
Selling, general and administrative        81.1            8.3              74.1            7.4
Amortization of intangible assets          67.0            6.9              72.3            7.3
Restructuring and special charges           4.0            0.4               8.5            0.8
Total operating costs and expenses        811.4           83.1             832.0           83.5
Profit from operations                    165.4           16.9             164.6           16.5
Interest expense, net                     (47.5 )         (4.9 )           (49.7 )         (5.0 )
Other, net                                (34.8 )         (3.6 )            (6.6 )         (0.7 )
Income before taxes                        83.0            8.5             108.3           10.9
Provision for income taxes                 28.0            2.9              43.2            4.3
Net income                           $     55.0            5.6  %     $     65.0            6.5  %

Net revenue. Net revenue for the six months ended June 30, 2013 decreased $19.8 million, or 2.0%, to $976.8 million from $996.6 million for the six months ended June 30, 2012. Net revenue decreased approximately 3% due to organic revenue, partially offset by an increase of approximately 1% related to an acquisition in the controls segment in the fourth quarter of 2012. The decrease in organic revenue reflects weakness in light vehicle production in Asia (excluding China) and the heavy and commercial truck markets in North America and capacity constraints related to the fire at our facility in South Korea, partially offset by market recovery in the controls business.
Sensors business segment net revenue for the six months ended June 30, 2013 decreased $25.7 million, or 3.6%, to $694.0 million from $719.7 million for the six months ended June 30, 2012. Sensors net revenue decreased primarily due to organic revenue, which reflects weakness in light vehicle production in Asia (excluding China) and the heavy and commercial truck markets in North America. Controls business segment net revenue for the six months ended June 30, 2013 increased $5.9 million, or 2.1%, to $282.9 million from $276.9 million for the six months ended June 30, 2012. Controls net revenue increased approximately 4% due to the effect of an acquisition completed in the fourth quarter of 2012, partially offset by declines of approximately 1% in organic revenue and approximately 1% related to the effect of unfavorable foreign currency exchange rates. The decline in organic revenue was primarily due to capacity constraints related to the fire at our facility in South Korea, partially offset by market recovery.


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Cost of revenue. Cost of revenue for the six months ended June 30, 2013 and June 30, 2012 was $631.4 million (64.6% of net revenue) and $651.4 million (65.4% of net revenue), respectively. Cost of revenue decreased primarily due to the reduction in unit volumes sold, and decreased as a percentage of net revenue due to cost reductions, partially resulting from production line moves, and favorable trends in metal pricing, primarily gold and silver. A portion of our production materials contains metals, such as copper, nickel, and aluminum, and precious metals, such as gold, silver, platinum, and palladium, and the costs of these materials may vary with underlying metals pricing.
Research and development expense. R&D expense for the six months ended June 30, 2013 and June 30, 2012 was $27.9 million (2.9% of net revenue) and $25.8 million (2.6% of net revenue), respectively. R&D expense consists of costs related to direct product design, development and process engineering. The level of R&D expense is related to the number of products in development, the stage of development process, the complexity of the underlying technology, the potential scale of the product upon successful commercialization and the level of our exploratory research. These factors may impact our level of R&D expense in the future.
Selling, general and administrative expense. SG&A expense for the six months ended June 30, 2013 and June 30, 2012 was $81.1 million (8.3% of net revenue) and $74.1 million (7.4% of net revenue), respectively. SG&A expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs. These costs may be fixed or variable in nature, and we may at times experience increased or decreased variable costs for reasons other than increased or decreased net revenue. As a result, SG&A expense will not necessarily remain consistent as a percentage of net revenue. During the six months ended June 30, 2013, SG&A expense increased as a percentage of net revenue primarily due to increased compensation related to non-production headcount in the first half of 2013 compared to the first half of 2012.
Amortization of intangible assets. Amortization expense associated with definite-lived intangible assets for the six months ended June 30, 2013 and June 30, 2012 was $67.0 million and $72.3 million, respectively. Amortization expense decreased primarily due to the completion of amortization during the first quarter of 2013 of certain intangible assets initially recognized upon the acquisition of the Sensors and Controls business in 2006.
Restructuring and special charges. Restructuring and special charges for the six months ended June 30, 2013 and June 30, 2012 was $4.0 million and $8.5 million, respectively. Restructuring and special charges decreased from the prior period as we are approaching the completion of actions attributable to the execution of the 2011 Plan and the MSP Plan, each of which began in 2011. The remaining charges relate primarily to actions associated with ceasing manufacturing in our South Korean facility, incurred as part of the 2011 Plan. We expect these actions will be completed and payments will be made in 2013. During the six months ended June 30, 2013, we received insurance proceeds as a result of damage caused by the fire in our South Korean facility in September 2012, a portion of which were recognized in Restructuring and special charges. These actions and events are discussed in further detail in Note 5, "Restructuring and Special Charges," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense, net. Interest expense, net for the six months ended June 30, 2013 and June 30, 2012 was $47.5 million and $49.7 million, respectively. Interest expense, net for the six months ended June 30, 2013 decreased primarily due to the net repayment of $200.0 million on our long-term debt during the six months ended June 30, 2013, partially offset by the higher interest rate on our new fixed rate debt versus the variable interest rate on the debt repaid. Other, net. Other, net for the six months ended June 30, 2013 and June 30, 2012 was $(34.8) million and $(6.6) million, respectively. The loss recognized in the six months ended June 30, 2013 is higher than the six months ended June 30, 2012 primarily due to higher losses on commodity forward contracts, losses related the refinancing of our debt, and the write-off to expense of amounts in Accumulated other comprehensive income due to a portion of the hedged forecasted transactions related to the interest rate cap becoming probable of not occurring. See Note 13, "Other, Net," of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details of the gains and losses included within this account.
Provision for income taxes. Provision for income taxes for the six months ended June 30, 2013 and June 30, 2012 totaled $28.0 million and $43.2 million, respectively. Our tax provision consists of current tax expense, which relates 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.


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Liquidity and Capital Resources
We held cash and cash equivalents of $234.3 million and $413.5 million at June 30, 2013 and December 31, 2012, respectively, of which $101.4 million and $259.1 million at June 30, 2013 and December 31, 2012, respectively, was held in the Netherlands, $52.2 million and $77.2 million at June 30, 2013 and December 31, 2012, respectively, was held by U.S. subsidiaries, and $80.7 million and $77.2 million at June 30, 2013 and December 31, 2012, respectively, was held by other foreign subsidiaries. The amount of cash and cash equivalents held in the Netherlands and in our U.S. and other foreign subsidiaries fluctuates throughout the year due to a variety of factors, including timing of cash receipts and disbursements in the normal course of business. Cash Flows:
The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2013 and June 30, 2012. We have derived the summarized statements of cash flows for the six months ended June 30, 2013 and June 30, 2012 from the condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q. 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 six months ended
(Dollars in millions)                        June 30, 2013      June 30, 2012
Net cash provided by/(used in):
Operating activities:
Net income adjusted for non-cash items      $      198.7       $        201.8
Changes in operating assets and liabilities        (18.6 )              (12.0 )
Operating activities                               180.1                189.8
Investing activities                               (32.9 )              (23.3 )
Financing activities                              (326.5 )                2.2
Net change                                  $     (179.2 )     $        168.7

Operating activities. Net cash provided by operating activities for the six months ended June 30, 2013 was $180.1 million compared to $189.8 million for the six months ended June 30, 2012. The decrease in net cash provided by operating activities was primarily due to the changes in operating assets and liabilities during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, which is primarily due to an increase of $5.1 million in contributions to our defined benefit and retiree healthcare plans during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 and timing of receipts from our customers and payments to our suppliers. Investing activities. Net cash used in investing activities for the six months ended June 30, 2013 was $32.9 million compared to $23.3 million for the six months ended June 30, 2012. Net cash used in investing activities during the six months ended June 30, 2013 and June 30, 2012 consisted primarily of $33.9 million and $27.5 million in capital expenditures, respectively. Capital expenditures primarily relate 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.
During the six months ended June 30, 2013, we received cash reimbursements related to insurance claims associated with the fire in our South Korean Facility in September 2012. We expect to be reimbursed for further amounts in 2013, a portion of which may be included within cash flows from investing activities.
Financing activities. Net cash (used in)/provided by financing activities for the six months ended June 30, 2013 was $(326.5) million compared to $2.2 million for the six months ended June 30, 2012. Net cash used in financing activities for the six months ended June 30, 2013 consisted primarily of $706.7 million in principal payments on our existing $1,100.0 million term loan (the "Term Loan Facility"), $125.2 million in payments to repurchase ordinary shares and $5.7 million in payments of debt issuance costs, partially offset by the issuance and sale of $500.0 million of 4.875% senior notes due 2023 (the "4.875% Senior Notes") and proceeds of $11.2 million from the exercise of stock options. See Indebtedness and Liquidity for further discussion of the issuance and sale of the 4.875% Senior Notes and and the partial repayment of the Term Loan Facility. The payments to repurchase ordinary shares are associated with the $250.0 million share buyback program discussed further in Capital Resources, under which, as of June 30, 2013, there is approximately $109.6 million remaining.


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Indebtedness and Liquidity:
Our liquidity requirements are significant due to our highly leveraged nature.
As of June 30, 2013, we had $1,631.3 million in gross outstanding indebtedness,
including our outstanding capital lease and other financing obligations.
A summary of our indebtedness as of June 30, 2013 is as follows:

                                                                     June 30, 2013
Term Loan Facility                                                  $      378,000
6.5% Senior Notes                                                          700,000
4.875% Senior Notes                                                        500,000
Less: discount                                                              (2,513 )
Less: current portion                                                      (11,000 )
Long-term debt, net of discount, less current portion               $    1,564,487

Capital lease and other financing obligations                       $       53,337
Less: current portion                                                       (2,775 )
Capital lease and other financing obligations, less current portion $       50,562

There were no borrowings outstanding on the Revolving Credit Facility as of June 30, 2013.
Under the Revolving Credit Facility, there was $244.7 million of availability (net of $5.3 million in letters of credit) as of June 30, 2013. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of June 30, 2013, no amounts had been drawn against these outstanding letters of credit, which are scheduled to expire at various dates through 2014.
On April 17, 2013, we completed the issuance and sale of the 4.875% Senior Notes. We used the proceeds from the issuance and sale of the 4.875% Senior Notes, together with cash on hand, to (1) repay $700.0 million of the Term Loan Facility under our senior secured credit facilities (the "Senior Secured Credit Facilities"), (2) pay all accrued interest on such indebtedness and (3) pay all . . .

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