Sensata Technologies Holding plc — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited interim results. Sensata operates through Performance Sensing and Sensing Solutions, serving automotive, heavy vehicle off-road (HVOR), appliance and HVAC, industrial, aerospace, and other markets.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $873.6m | $819.1m | $2,673.7m | $2,466.2m |
| Operating profit | $222.3m | $140.3m | $548.1m | $401.9m |
| Operating margin | 25.5% | 17.1% | 20.5% | 16.3% |
| Net income | $149.1m | $88.0m | $344.9m | $239.2m |
| Diluted EPS | $0.88 | $0.51 | $2.01 | $1.39 |
| Operating cash flow | Not presented separately for quarter | Not presented separately for quarter | $420.1m | $372.3m |
- Q3 revenue rose 6.7% year over year; reported nine-month revenue increased 8.4%. Management reported organic growth of 7.9% for Q3 and 6.9% for the nine-month period, excluding the stated divestiture and currency effects.
- Q3 segment revenue was $649.6m for Performance Sensing and $223.9m for Sensing Solutions. Nine-month segment revenue was $1,988.7m and $685.0m, respectively.
- Cost of revenue was 63.9% of revenue in Q3 versus 64.4% a year earlier, and 64.5% for the nine months versus 64.9%. Management attributed the improvement mainly to favorable currency effects, partly offset by higher tariffs.
- Q3 operating profit includes a $63.7m gain on the Valves Business sale, partly offset by $5.9m of sale costs. The resulting operating-margin comparison is not solely reflective of underlying operations.
- Nine-month operating cash flow improved by $47.9m year over year. Capital expenditures were $111.3m; 2018 full-year capex was expected to be approximately $155m–$160m.
Balance sheet, debt and liquidity
- At September 30, 2018, cash and cash equivalents were $811.4m, compared with $753.1m at December 31, 2017. Current assets were $2,027.2m and current liabilities $654.7m.
- Gross indebtedness, including capital lease and other financing obligations and before debt discounts and financing costs, was $3,298.5m. Long-term debt, net, was $3,220.4m; capital lease and other financing obligations totaled $30.7m. Cash less gross indebtedness was approximately $2,487.1m.
- $416.0m was available under the $420.0m revolving credit facility, net of letters of credit; no amounts were drawn. The company said it expected available liquidity to fund operations, capex, repurchases, and debt service for at least the next 12 months, while noting that future cash generation and financing availability were not assured.
- Cash was concentrated in the Netherlands ($437.4m) and China ($246.2m); cash in the U.S. was $7.8m. The filing notes that cash by region fluctuates and that some unremitted earnings may give rise to deferred tax liabilities.
Material changes and unusual items
- On August 31, 2018, Sensata sold its Valves Business for approximately $165.5m net of cash sold, recognized a $63.7m pretax gain, and recorded a $16.4m liability for the off-market element of a nearly five-year supply agreement. It also committed to minimum purchases from the buyer under that agreement.
- On September 24, Sensata agreed to acquire GIGAVAC for $233m in cash, subject to adjustments, with closing expected in Q4 2018. The company intended to fund the purchase from cash on hand.
- Sensata repurchased $399.4m of ordinary shares during the first nine months under a $400m program. In October, the board authorized a further $250m repurchase program.
- Other, net was a loss of $10.6m in Q3 and $26.3m for the nine months, compared with gains in the prior-year periods. The change principally reflected currency movements and commodity hedges; the nine-month figure also included a $2.4m debt-consent fee loss related to the corporate merger.
- Revenue-standard adoption had no material impact. The company planned to adopt the new lease standard on January 1, 2019 and expected to recognize right-of-use assets and lease liabilities for certain operating leases; operating-lease commitments were $68.6m at December 31, 2017.
Management commentary, risks and contingencies
- Management cited automotive content growth, particularly in North America and China, and production/content growth in HVOR markets. Sensing Solutions growth reflected industrial sensing content and production growth in industrial and aerospace markets. R&D spending increased to support design wins and emerging market trends.
- Risks identified include trade tariffs, automotive-market conditions, pricing pressure, supplier interruptions, foreign-exchange and commodity exposure, acquisition integration, regulatory and tax uncertainty, cybersecurity, and the company’s leverage. Management reported no significant change in market risk since year-end and no changes to the risk factors in the 2017 Form 10-K.
- A patent-infringement case involving TPMS products remains in discovery. The patent has expired; the claimant seeks past damages, interest, and costs that could be material if the claimant prevails. Sensata denied liability, said a loss was not probable, and recorded no accrual.
- Management concluded disclosure controls were effective as of September 30, 2018, and reported no material change in internal control over financial reporting during Q3. The company reported compliance with debt covenants.
Key facts for investors to verify
- How much of reported profit and margin growth reflects the one-time Valves Business sale gain, and how are underlying segment trends developing?
- Whether the GIGAVAC acquisition closed on expected terms and how it affects cash, leverage, and integration costs.
- Cash conversion and working-capital trends, including receivables and inventory growth, alongside planned capex and further share repurchases.
- Exposure to tariffs, currency and commodity movements, and the potential outcome and financial exposure of the TPMS patent litigation.
- The eventual tax-accounting impact of U.S. tax reform and the expected balance-sheet effect of adopting the lease standard.