Sensata Technologies Holding plc — Q1 2018 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. Sensata supplies sensing and control products through Performance Sensing and Sensing Solutions. On March 28, 2018, the company completed a common-control merger that moved its place of incorporation from the Netherlands to England and Wales; management said the business itself did not change.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $886.3 million | $807.3 million |
| Operating profit / margin | $147.7 million / 16.7% | $121.6 million / 15.1% |
| Net income / margin | $90.5 million / 10.2% | $71.7 million / 8.9% |
| Diluted earnings per share | $0.52 | $0.42 |
| Operating cash flow | $123.3 million | $119.7 million |
| Capital expenditures | $30.9 million | $33.1 million |
- Revenue increased 9.8%; management reported organic growth of 6.4%, excluding foreign exchange and other defined effects. Performance Sensing revenue rose 10.4% and Sensing Solutions 7.9%.
- Gross margin was approximately 34.3%, versus 34.0%. Management attributed the improvement mainly to operating efficiencies and acquisition synergies, partly offset by foreign exchange and higher integration costs.
- Operating cash flow less capital expenditures was approximately $92.3 million. Cash and cash equivalents were $828.3 million at quarter-end, up from $753.1 million at December 31, 2017.
- At March 31, total assets were $6.783 billion and shareholders’ equity was $2.451 billion. Current assets were $2.019 billion and current liabilities $665.9 million.
- Gross indebtedness, including capital leases and other financing obligations, was $3.301 billion. Long-term debt, net of discounts and financing costs, was $3.222 billion. The $420 million revolving facility had $415.3 million available, net of letters of credit.
Changes and notable items
- Net revenue growth reflected organic growth of 6.4% and a 3.4% contribution from foreign exchange. Management cited automotive content growth, truck and construction market growth, and strength across Sensing Solutions end-markets.
- Research and development expense rose to $36.0 million from $31.8 million, primarily due to development work supporting new business wins and foreign exchange. SG&A increased to $81.3 million from $70.1 million, reflecting foreign exchange, merger-related costs, selling costs, and share-based compensation.
- Restructuring charges fell to $3.8 million from $11.1 million. Q1 2018 charges primarily reflected severance and transfers of certain roles to lower-cost locations; management expects about $3 million of annual pretax savings when fully implemented, with an approximately two-year payback.
- Other, net shifted to a $4.6 million loss from a $4.7 million gain. It included currency and commodity hedge effects and a $2.4 million loss on lender-consent costs associated with the merger.
- Revenue recognition guidance was adopted January 1, 2018, with no material financial-statement impact or cumulative adjustment. The company had not yet recorded incremental accounting adjustments for U.S. tax reform as it continued evaluating its application.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management anticipated 2018 capital expenditures of approximately $150–$160 million, expected to be funded from operating cash flow.
- Management believed available cash, operating cash flows, and borrowing capacity would fund operations, capital expenditures, share repurchases, and debt service for at least 12 months, while cautioning that future cash generation and financing availability are not assured. The company was in compliance with debt covenants at March 31.
- Key disclosed risks include automotive-market weakness, competition and customer pricing pressure, supply interruptions, tariffs and other regulatory changes, foreign exchange, labor costs, acquisitions and integration, product liability and warranty claims, tax challenges, high indebtedness, and information-technology security incidents. The filing reported no changes to the risk factors in the 2017 Form 10-K.
- Ordinary-course litigation includes product-related property-damage and other claims, including some personal-injury or wrongful-death allegations. Management did not expect the matters, individually or in aggregate, to materially adversely affect results, financial position, or cash flows.
- The prior share-repurchase authorization lapsed upon the merger; repurchases were contingent on U.K. court proceedings and renewed shareholder approval expected to be sought at the May 31, 2018 annual meeting.
Important facts for investors to verify
- Whether organic revenue growth and segment trends continued, particularly in automotive and truck markets, and how much future growth depends on foreign exchange.
- Progress in realizing the restructuring savings and the effect of integration costs and higher R&D and SG&A spending on margins.
- Cash conversion, working-capital movements, planned capital expenditures, and the availability of cash held across foreign subsidiaries.
- Debt servicing capacity, covenant compliance, refinancing needs, and sensitivity to interest rates, currencies, and commodity prices.
- The eventual accounting impact of U.S. tax reform and the status of U.K. share-repurchase proceedings and shareholder authorization.