Sensata Technologies Holding plc — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Sensata develops and sells sensors, sensor-based solutions, controls, and related products. Its two segments are Performance Sensing (74% of revenue; automotive and heavy vehicle/off-road) and Sensing Solutions (26%; industrial and aerospace).
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $3.451 billion | $3.522 billion |
| Gross profit / gross margin | $1.183 billion / 34.3% | $1.255 billion / 35.6% |
| Operating income / margin | $556.9 million / 16.1% | $710.4 million / 20.2% |
| Net income / diluted EPS | $282.7 million / $1.75 | $599.0 million / $3.53 |
| Cash from operations | $619.6 million | $620.6 million |
| Capital expenditures and capitalized software | $161.3 million | $159.8 million |
| Cash and cash equivalents | $774.1 million | $729.8 million |
| Debt, net of discounts and financing costs | $3.256 billion | $3.265 billion |
Revenue fell 2.0% reported and 1.1% organically. Operating cash flow less capital expenditures was approximately $458.3 million. Working capital was $1.331 billion; current assets were $1.966 billion and current liabilities $634.7 million. Management reported $416.1 million of available capacity on the revolving facility and approximately $1.0 billion of incremental debt capacity under the accordion. The company was in compliance with debt covenants at year-end.
Fourth-quarter revenue was $846.7 million versus $847.9 million in Q4 2018; net income was $53.5 million versus $254.1 million. The prior-year quarter included a substantial income tax benefit from releasing U.S. deferred-tax valuation allowance.
Changes versus prior year
- Performance Sensing revenue declined 3.1% reported and 0.5% organically. Automotive revenue declined 4.3%, but outperformed the 5.6% market decline; HVOR revenue grew 1.6%, despite a 5.5% market decline. Content growth partly offset customer price reductions.
- Sensing Solutions revenue increased 1.2% reported but declined 2.7% organically, reflecting weakness in industrial markets, partly offset by content growth.
- Operating margin declined 4.1 percentage points. Management cited lower volume, tariffs, unfavorable product mix, productivity headwinds during new product launches, and restructuring and other charges.
- GAAP net income fell partly because FY2018 included a $122.1 million deferred-tax benefit from realizing U.S. deferred tax assets. FY2019 tax expense was $107.7 million, compared with a $72.6 million tax benefit in FY2018.
Outlook, commentary, risks, and unusual items
- Management expects content growth from clean-and-efficient technologies and electrification, including sensors and high-voltage electrical protection. It expects FY2020 capital expenditures and capitalized software of approximately $165 million–$175 million, funded from operating cash flow, and amortization expense of approximately $127.8 million. The filing provides no full-year revenue or earnings guidance.
- Management said the early-2020 coronavirus outbreak had disrupted its China operations and expected a material revenue impact in Q1 2020; it did not expect the region, market, and impact to be fully recovered by year-end 2020.
- Automotive demand, global industrial weakness, customer price pressure, tariffs and trade uncertainty, raw-material supply and cost volatility, foreign exchange, and the company’s substantial indebtedness are key risks. Goodwill and other intangible assets totaled approximately $3.9 billion, 57% of total assets; no impairment was recorded in the annual test.
- FY2019 restructuring and other charges were $53.6 million, including $17.8 million relating to the termination of a Metal Seal supply agreement and $6.1 million of GIGAVAC deferred compensation. The Metal Seal litigation was settled and dismissed after Sensata agreed to pay $28.0 million for certain supplier assets and equipment.
- A separate patent lawsuit concerning tire-pressure monitoring products was pending, with trial expected in February 2020. Sensata said a loss was probable but not expected to be material; plaintiffs’ potential damages could be material if they prevailed. The company generally did not expect its litigation matters to have a material aggregate impact.
- Sensata issued $450 million of 4.375% senior notes due 2030 and used the proceeds to repay part of its variable-rate term loan. It repurchased about 7.2 million shares during FY2019 for approximately $350 million. No dividends have been paid, and none were planned for the foreseeable future.
Investor verification points
- Track China operating conditions, coronavirus-related disruption, and the timing and extent of any recovery.
- Assess whether organic growth and segment outgrowth can offset market contraction and annual customer price reductions.
- Reconcile the fall in GAAP earnings with tax effects and the company’s adjusted, non-GAAP measures.
- Monitor gross-margin pressure from tariffs, product mix, launch costs, and productivity, alongside planned capital spending.
- Review leverage, refinancing needs, variable-rate exposure, covenant headroom, and cash available to the parent given subsidiary distribution restrictions.
- Follow the Wasica patent case, the use and integration of assets acquired from Metal Seal, and potential tax exposures, including $117.6 million of unrecognized tax benefits.