Business context and reporting period
Sensata Technologies Holding plc filed this Form 10-K for the fiscal year ended December 31, 2018. It develops and sells sensors, controls, and related products through Performance Sensing, serving primarily automotive and heavy vehicle/off-road markets, and Sensing Solutions, serving industrial, aerospace, appliance, and other markets. The annual figures below are for the full fiscal year; fourth-quarter figures are identified separately. Sensata completed its move of incorporation from the Netherlands to the U.K. in March 2018, with no change to its operating business.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $3,521.6 million | $3,306.7 million |
| Operating profit / margin | $710.4 million / 20.2% | $555.8 million / 16.8% |
| Net income / diluted EPS | $599.0 million / $3.53 | $408.4 million / $2.37 |
| Operating cash flow | $620.6 million | $557.6 million |
| Capital expenditures and capitalized software | $159.8 million | $144.6 million |
| Cash and cash equivalents at year-end | $729.8 million | $753.1 million |
| Working capital | $1,277.2 million | $1,218.8 million |
| Debt, net of discounts and financing costs, including capital leases and other financing | $3,264.9 million | $3,270.3 million |
Gross profit was approximately $1,254.8 million, or 35.6% of revenue, compared with approximately 35.3% in 2017. Operating cash flow less capital expenditures and capitalized software was approximately $460.8 million. The company reported $3,303.3 million of gross outstanding indebtedness and $416.1 million of available revolving-credit capacity at year-end; it was in compliance with debt covenants.
Performance Sensing revenue rose 6.8% to $2,627.7 million, with segment profit of $712.7 million (27.1% margin). Sensing Solutions revenue rose 5.7% to $894.0 million, with segment profit of $293.0 million (32.8% margin). Automotive represented 60.4% of revenue; HVOR represented 15.6%.
Fourth-quarter 2018 revenue was $847.9 million versus $840.5 million in Q4 2017. Net income was $254.1 million versus $169.1 million. The Q4 2018 result included a $122.1 million income-tax benefit from releasing part of the U.S. deferred-tax-asset valuation allowance.
Material changes versus the prior comparable period
- Full-year revenue grew 6.5% as reported and 6.0% organically, compared with 3.3% reported and 4.0% organically in 2017. Management attributed Performance Sensing growth mainly to automotive content growth in China and North America and stronger HVOR markets; Sensing Solutions growth reflected industrial sensing, aerospace, and semiconductor demand.
- Operating margin increased to 20.2% from 16.8%. Cost of revenue declined to 64.4% of revenue from 64.7%, which management attributed mainly to favorable currency effects, partly offset by higher tariffs. Lower intangible amortization and the net gain on the Valves Business sale also affected operating profit.
- Net income growth included significant tax benefits: a $122.1 million benefit in 2018 from valuation-allowance release; 2017 included a $73.7 million benefit from U.S. tax-law changes. Other, net shifted from a $6.4 million gain in 2017 to a $30.4 million loss in 2018, including currency-remeasurement and commodity-hedge losses.
- Operating cash flow increased $62.9 million. Investing cash use rose to $237.6 million, including the GIGAVAC acquisition, partly offset by Valves Business sale proceeds. Financing cash use was $406.2 million, primarily reflecting $399.4 million of share repurchases.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2019 capital expenditures and capitalized software of approximately $165 million to $185 million, funded from operating cash flow; estimated 2019 intangible amortization was approximately $142.2 million. It stated that cash, operating cash flows, and available borrowing capacity should 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.
- In October 2018 Sensata acquired GIGAVAC for $233.0 million of cash consideration, subject to adjustments; it contributed $12.6 million of Q4 revenue. The acquisition expands products for electrification. In August 2018 Sensata sold its Valves Business, received approximately $165.5 million net of cash sold, and recorded a $64.4 million pretax gain and $5.9 million of sale costs. A related long-term supply agreement requires minimum purchases from the buyer for nearly five years; Sensata recorded a $16.4 million liability for its off-market terms.
- Principal risks include automotive and other end-market cyclicality, customer pricing pressure, supply and raw-material costs, tariffs and U.S.-China trade tensions, foreign-exchange volatility, Brexit uncertainty, acquisition integration, cybersecurity, and substantial leverage. Approximately 16% of revenue was generated in China. Goodwill and other intangible assets totaled about $4.0 billion, approximately 59% of total assets, making valuations and impairment assumptions relevant.
- Sensata disclosed two notable unaccrued lawsuits: a patent case involving tire-pressure-monitoring products, for which the company said a loss was not probable but damages could be material; and a supplier dispute whose plaintiff’s damages expert claimed losses up to $51.0 million, with possible treble damages and attorneys’ fees. Sensata said it did not consider a loss probable in either matter and had recorded no accrual. It did not expect its other ordinary-course litigation to have a material adverse effect.
- The company had never paid a dividend and did not plan to do so in the foreseeable future. Its auditor issued unqualified opinions on the financial statements and internal controls; GIGAVAC was excluded from the year-end internal-control assessment.
Most important facts for investors to verify
- How much of 2018 earnings growth reflects recurring operating performance versus the $122.1 million tax benefit and the $64.4 million Valves Business gain; compare GAAP results with the company’s non-GAAP adjusted net income of $619.4 million.
- Whether organic revenue growth and segment margins can be sustained amid automotive exposure, customer price reductions, and changing production trends.
- GIGAVAC integration, realized growth and synergies, final purchase-price allocation, and the economics of the Valves Business minimum-purchase agreement.
- Debt-service capacity, variable-rate exposure, refinancing needs, covenant headroom, and the extent to which cash held across jurisdictions is accessible to the parent.
- Developments in the Wasica and Metal Seal cases, including any changes to the company’s probability assessments, potential damages, or accruals.
- Whether valuation-allowance assumptions, goodwill forecasts, trade tariffs, Brexit, and foreign-exchange movements change materially in 2019.