Sensata Technologies Holding plc 2026 Q3 Earnings Call

Please go ahead, sir. Thank you operator, and good afternoon, everyone.

I am James Entwistle, Senior Director of Investor Relations for Sensata, and I would like to welcome you to Sensata's third quarter 2026 earnings conference call. Joining me on today's call are Stephan von Schuckmann, Sensata's Chief Executive Officer, and Andrew Lynch, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will reference a slide presentation during today's call. A PDF of this presentation can be downloaded from Sensata's investor relations website. This conference call is being recorded, and we will post a replay on our investor relations website shortly after the call concludes. As we begin, I would like to reference Sensata's Safe Harbor statement on slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties.

The company's actual results may differ materially from the projections described in those statements. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K, as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Much of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release, in the appendices of our presentation materials, and in our SEC filings. Stephan will begin today's call with comments on the overall business. Andrew will then cover our detailed results for the third quarter and our financial outlook for the fourth quarter. Stephan will then return for closing remarks. After that, we will take your questions.

Now, I would like to turn the call over to Sensata's Chief Executive Officer, Stephan von Schuckmann.

Thank you, James, and good afternoon, everyone. Let's begin on slide 4. Sensata delivered an exceptionally strong third quarter with revenue, adjusted operating income, adjusted operating margin, and adjusted earnings per share all exceeding our expectations. These results included a $24 million program termination payment from a customer related to the cancellation of an electric vehicle program. Andrew will clarify the impact of this termination payment in greater detail when he covers our Q3 results. However, given the magnitude of the benefit from this payment, I want to highlight a few points up front. First, our underlying results met or exceeded the midpoints of our guidance ranges across all key metrics without the benefit from this payment. Second, the related program cancellation occurred last year, and there is no impact on our revenue outlook in connection with this payment.

Third, while the recovery stands out in the quarter, it was earned by the hard work of our automotive team to turn a challenging situation into a commercially viable outcome. This is consistent with a broader theme in our automotive business. The team has done an outstanding job of exercising pricing discipline to defend margins in an inflationary environment, much like we did with tariffs last year. With that said, my message for you today is that our core business is stronger, and we have growing conviction in our ability to accelerate long-term organic growth. Third quarter revenue grew approximately 8% year-over-year or 7% organically. Revenue and earnings growth were broad-based, with all three segments delivering year-over-year organic revenue growth, market outgrowth, and operating income growth.

During the quarter, we reduced net leverage to 2.1 times trailing 12-month adjusted EBITDA and completed $33 million of open market debt repurchases during the quarter. Free cash flow was exceptionally strong, with conversion at 119%, and our year-to-date free cash flow of $489 million is in line with 2025 full year free cash flow of $490 million. 2025 was an all-time record for free cash flow, and our extraordinary pace this year puts us on track for another record-breaking year. As our results continue to improve and our business is growing stronger each quarter, we are increasingly focused on cultivating multiple pathways to higher quality organic growth. Let's turn to slide 5 and take a broader look at how we are unlocking value in our business. Our transformation has never been just about improving margins or reducing debt.

It is about converting more of our earnings into cash and allocating that capital effectively so we can invest confidently in future growth. Our disciplined operating model is delivering exactly that improvement. We expect full year 2026 free cash flow conversion to exceed 100% of adjusted net income as our cash conversion cycle shortens and CapEx efficiency improves. Importantly, growth has accelerated alongside these improvements. Stronger cash generation and investment discipline have strengthened our balance sheet, reduced net interest expense, and supported equity value creation. From year-end 2024 through September 2026, we have reduced net debt from $2.6 billion to $1.9 billion. Over the same period, enterprise value grew 18%, while our equity market value grew 48%. While I'm encouraged by the value we have unlocked so far, I'm even more excited about the opportunity ahead of us.

Let's turn to slide six to discuss how we expect to accelerate value creating moving forward. Sensata has a differentiated technology platform built around mission-critical sensing and electrical protection, deep customer integration, leading market positions, and global scale. We see two clear pathways to accelerate growth. First, expanding core products into attractive adjacent markets, and second, innovating to solve increasingly complex customer challenges with our sensing and electrical protection expertise. Turning to slide seven, let's take a look at the first pathway. We are extending motors and actuators into aerospace, contactors and isolation monitoring into high voltage data centers, and pressure and temperature sensing into power generation and liquid cooling. This is a capital efficient approach because it builds on technologies, manufacturing capabilities, and long-standing customer relationships. It requires pathway innovation. On slide eight, our motors and actuators product line illustrates this approach.

Demand for compact, high performance motion control is creating attractive aerospace opportunities. With more than 50 years of aerospace and defense experience, we have the in-flight pedigree that matters to our customers. Alongside that, our BEI Kimco motor brands brings proven designs and technical expertise to support next generation drone and UAV platforms. Rather than fit customer requirements to a commercial or modified off-the-shelf solution, we offer bespoke solutions for our customers, customizing torque, speed, efficiency, and form factor around the application. Our ability to deliver high torque and efficiency in compact, lightweight motors is valuable where space, weight, and power are constrained. With our U.S. engineering and manufacturing footprint, we are able to meet high standards for supply chain risk mitigation.

As we go to market, we engage early in the RFP process, and we draw on proven designs, which enables us to deliver prototypes quickly, shorten development cycles, and reduce customer development risk. In fact, we are finding that speed is the most significant factor in securing new business, and we are meeting the challenge. New motor business wins reached a record this year, doubling our pace of wins from last year, and approximately triple our typical annual win rate from two years prior. These wins support our participation in a global drone and UAV market, which is expected to grow at double digit CAGR over the balance of the decade. Moving ahead to slide nine, let's talk about innovation. As the motors example shows, a key differentiator is our ability to engineer solutions around evolving customer needs rather than rely solely on catalog products.

Sometimes that requires a small modification. Other times, we innovate to develop an entirely new product. Both draw on our technical expertise and close customer relationships. In automotive, we continue to innovate to address evolving efficiency, safety, cost, and weight requirements. For example, replacing actuation with force sensing and advancing contactors for more sophisticated electrical architectures. In aerospace defense and commercial equipment, we innovate to enable commercial vehicle electrification and next generation power systems. In industrials, we develop innovative solutions for new regulatory requirements such as A2L leak detection and for emerging customer needs, such as the ever-expanding need for data center specific sensing and electrical protection solutions. I'll touch more on that in a moment. First, let's move to slide 10 to take a look at flow sensing as a recent example of innovation in our industrials business.

Earlier this year, we discussed our data center sensing portfolio and shared a new flow sensing solution we were developing for liquid cooling applications. Last week, we followed through on that development work and announced the launch of that product. Our FL Series uses ultrasonic sensing to deliver continuous, highly accurate coolant flow measurement. As computing density increases, that measurement becomes mission critical. Too little flow can cause overheating and constrain processor performance, while excess flow wastes energy. Precise flow management helps customers maximize computing performance relative to power consumption, and that is exactly where we differentiate ourselves from competition. Our solution combines proven capabilities with targeted innovation to solve a complex customer problem and add content in an attractive market. We expect initial shipments by mid-2027, subject to final customer timing.