Sensata Technologies Holding plc — Q3 2019 Form 10-Q
Business context and reporting period. Sensata designs and manufactures sensors and electrical protection components, reported through Performance Sensing and Sensing Solutions. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $849.7 million | $873.6 million | $2,603.9 million | $2,673.7 million |
| Operating income | $146.1 million | $222.3 million | $436.2 million | $548.1 million |
| Operating margin | 17.2% | 25.5% | 16.8% | 20.5% |
| Net income | $70.7 million | $149.1 million | $229.2 million | $344.9 million |
| Diluted EPS | $0.44 | $0.88 | $1.41 | $2.01 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $433.5 million | $420.1 million |
- Cost of revenue was $554.9 million in Q3 and $1,711.0 million year to date; the corresponding gross margins were approximately 34.7% and 34.3%, versus 36.1% and 35.5% in 2018.
- Year-to-date capital expenditures were $123.2 million. Operating cash flow less capital expenditures was approximately $310.3 million, compared with $308.9 million in 2018 (calculated from reported figures).
- At September 30, cash was $721.4 million; current assets were $1,949.6 million and current liabilities $620.5 million. Gross indebtedness, including finance leases and other financing obligations, was $3,294.5 million. The $420 million revolving facility had $416.1 million available, net of letters of credit.
Material changes and drivers
- Reported revenue declined 2.7% in Q3 and 2.6% for the first nine months. Organic revenue declined 2.8% and 1.2%, respectively, excluding currency and acquisition/divestiture effects.
- Performance Sensing revenue declined 3.2% in Q3 and 3.8% year to date; Sensing Solutions declined 1.3% in Q3 but grew 0.8% year to date. Industrial-market weakness and weaker automotive/HVOR demand weighed on results; aerospace content growth and selected China growth provided offsets.
- Operating income fell 34.3% in Q3 and 20.4% year to date. Comparisons were affected by the 2018 Valves Business divestiture and its $63.7 million gain, as well as lower volume, productivity headwinds, new-product ramp costs, tariffs and higher severance. The 2019 periods also included GIGAVAC-related effects.
- Q3 net income was also affected by higher income-tax expense and a $4.4 million debt-financing loss. Interest expense was $39.6 million in Q3 and $118.4 million year to date.
- Year-to-date share repurchases were $265.8 million. Sensata issued $450 million of 4.375% notes due 2030 and used the proceeds to partially repay its term loan; the term-loan maturity was extended to 2026.
Outlook, risks and unusual items
- Management expected global automotive production to remain under pressure through 2019 and aggregate HVOR markets to weaken further in Q4. It cited continued expected content growth from clean-and-efficient and electrification initiatives. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management anticipated 2019 capital expenditures of approximately $160–$170 million, expected to be funded from operating cash flow, and said available liquidity should fund operations, capital spending, repurchases and debt service for at least 12 months. This assessment is subject to cash generation, borrowing availability and debt restrictions.
- Risks highlighted include global economic and automotive weakness, industrial contraction, trade tariffs, customer pricing pressure, supply interruptions, foreign exchange, indebtedness and covenant compliance, product/IP claims, cyber risks, tax matters, and UK/EU political developments. Management reported compliance with debt covenants at September 30 and no material change to previously disclosed risk factors.
- Two lawsuits had no loss accrual because management did not consider loss probable: a patent case involving tire-pressure-monitoring products, with trial expected February 2020, and a supplier dispute with claimed damages up to $51 million, with trial expected December 2019. Sensata disputed both claims.
- A small acquisition was completed in September for approximately $30 million net of cash acquired. The filing also adopted lease accounting on January 1, 2019, recognizing operating-lease liabilities of $56.5 million at quarter-end.
Important facts for investors to verify
- Whether the reported earnings decline reflects persistent operating pressure after adjusting for the prior-year Valves Business sale gain and related comparability effects.
- Automotive, HVOR and industrial demand trends, including the expected Q4 HVOR weakening, and progress converting electrification and other content growth into revenue and margins.
- Cash conversion, planned capital expenditures, continuing share repurchases and leverage relative to the company’s liquidity and debt covenants.
- Outcomes and potential financial exposure from the patent and supplier litigation, and the final purchase-price allocation for the 2019 acquisition.