Sensata Technologies Holding N.V. — FY 2013 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2013, with unaudited quarterly data. Sensata manufactures customized sensors and controls for automotive, industrial, appliance, HVAC, aerospace, and other markets. Sensors generated 71.7% of 2013 revenue and controls 28.3%. Automotive accounted for approximately 61% of revenue.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $1,980.7 million | $1,913.9 million |
| Gross profit / gross margin | $724.5 million / 36.6% | $656.4 million / 34.3% |
| Operating profit / margin | $363.5 million / 18.4% | $277.5 million / 14.5% |
| Net income / net margin | $188.1 million / 9.5% | $177.5 million / 9.3% |
| Diluted EPS | $1.05 | $0.98 |
| Operating cash flow | $395.8 million | $397.3 million |
| Capital expenditures | $82.8 million | $54.8 million |
| Cash and cash equivalents at year-end | $317.9 million | $413.5 million |
| Total debt, including leases and other financing obligations | $1,724.0 million | $1,824.7 million |
Q4 2013: Revenue was $505.0 million versus $445.4 million in Q4 2012; gross profit was $189.2 million versus $147.9 million; net income was $67.1 million versus $70.9 million. Diluted EPS was $0.38 versus $0.39.
Year-end working capital was $537.1 million. The company had $245.0 million available under its revolving facility, net of letters of credit, with no revolving borrowings outstanding. Net debt was approximately $1.41 billion, calculated as reported debt less cash.
Material changes versus prior year
- Revenue increased 3.5% year over year. Sensors revenue rose 3.3% and controls revenue rose 4.0%.
- Operating profit rose 31.0%; operating margin improved by 3.9 percentage points, primarily reflecting lower cost of revenue as a share of sales and lower restructuring charges.
- Net income increased 6.0%, while operating cash flow was essentially flat. Working-capital changes were a use of cash, including higher receivables and inventory.
- Other, net was a $35.6 million loss, compared with a $5.6 million loss in 2012. The 2013 figure included $23.2 million of commodity-derivative losses and $9.0 million of debt-transaction losses.
- The 2012 tax benefit included an approximately $66.0 million release of a Netherlands deferred-tax valuation allowance; this benefit did not recur in 2013.
- In April 2013, Sensata issued $500 million of 4.875% notes due 2023 and used the proceeds, with cash, to repay $700 million of term loans. A December amendment added $100 million to the term loan facility, reduced its pricing, and extended maturity to 2019.
Outlook, management commentary, risks, and unusual items
- Management expected 2014 capital expenditures of approximately $100 million to $120 million, funded from operating cash flow. The filing does not provide specific 2014 revenue or earnings guidance.
- Management cited automotive demand, safety and emissions regulation, vehicle sensor content, and HVOR design wins as growth drivers. Pricing pressure continued: organic sensors revenue included a 2.0% reduction from pricing.
- On January 2, 2014, Sensata acquired Wabash Technologies for $60 million in cash, subject to adjustments. The acquisition was subsequent to the reporting period.
- Sensata reported $1,726.3 million of gross outstanding indebtedness, substantial interest obligations, and restrictive debt covenants. It said it expected liquidity sources to cover operations, capital expenditures, share repurchases, and debt service for at least the next 12 months, subject to risks and restrictions. It was in compliance with debt covenants at year-end.
- Key exposures include automotive cyclicality and customer pricing demands, foreign exchange, commodity costs, rare-earth magnet supply concentration in China, supplier and manufacturing interruptions, product-liability and recall claims, and goodwill/intangible impairment risk. Goodwill and other intangible assets represented approximately 65% of total assets; no impairment was recorded in 2013.
- Unusual items included $9.2 million of insurance proceeds recognized in cost of revenue in 2013 related to the 2012 South Korea facility fire. The company also recorded a $1.3 million accrual for alleged non-safety-related sensor defects raised by an automotive customer.
- In an Italian product-defect lawsuit, Sensata considered a loss probable and accrued $0.3 million against a claimed €4.2 million. Venmar-related claims were considered reasonably possible, but no loss range could be estimated and no accrual was recorded.
- A 2010 voluntary disclosure concerning a possible FCPA matter in China remained under SEC review; the DOJ had closed its inquiry in 2012 but reserved the ability to reopen it. Sensata said it could not estimate possible penalties and recorded no provision.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that internal controls were effective.
Important facts for investors to verify
- Whether revenue and margin improvement can continue despite automotive concentration and ongoing customer price reductions.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside planned higher 2014 capital spending.
- Debt-service capacity, floating-rate exposure, covenant headroom, and the effects of the 2013 refinancing and share repurchases on liquidity.
- The scale and timing of Wabash integration, acquisition costs, and any related purchase accounting or returns.
- Potential outcomes of product claims, the FCPA/SEC inquiry, tax positions, and the company’s large deferred-tax valuation allowance.
- The basis and recurring nature of adjusted net income of $384.8 million, a non-GAAP measure substantially above GAAP net income of $188.1 million.