Sensata Technologies Holding plc — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; unaudited, compared with Q1 2018. Sensata supplies sensing products and solutions through its Performance Sensing and Sensing Solutions segments.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $870.5 million | $886.3 million | Down 1.8% reported; up 0.8% organic |
| Gross margin | 33.3% | 34.3% | Down 1.0 percentage point |
| Operating income / margin | $142.6 million / 16.4% | $147.7 million / 16.7% | Income down 3.4% |
| Net income / diluted EPS | $85.1 million / $0.52 | $90.5 million / $0.52 | Net income down 6.0% |
| Operating cash flow | $112.7 million | $123.3 million | Down $10.6 million |
| Capital expenditures | $41.7 million | $30.9 million | Up $10.8 million |
Revenue fell as Performance Sensing declined 3.4% while Sensing Solutions grew 3.1%. Organic growth was 1.4% for Performance Sensing and down 0.9% for Sensing Solutions. Management attributed Performance Sensing organic growth to automotive and heavy-vehicle content gains, partly offset by automotive market declines. Sensing Solutions weakness reflected lower industrial demand, including lower housing starts, a declining European PMI, and semiconductor market weakness.
Operating margin pressure reflected unfavorable product mix from new launches and lower supply-chain productivity, partly offset by currency effects. SG&A declined to $70.5 million from $81.3 million, partly due to lower selling costs and variable compensation, the Valves Business divestiture, and favorable currency effects. The tax provision rose to $21.5 million from $14.1 million, predominantly from use of previously unbenefitted U.S. net operating losses; this contributed to lower net income despite higher pretax income.
Cash, debt and liquidity
Cash and equivalents were $649.5 million at March 31, 2019, down from $729.8 million at year-end. Current assets were $1.885 billion and current liabilities $636.3 million. Gross indebtedness, including finance leases and other financing obligations, was $3.300 billion; long-term debt, net of discounts and financing costs, was $3.217 billion. Cash less gross indebtedness implies net debt of approximately $2.651 billion.
Operating cash flow was $112.7 million; capital spending of $41.7 million implies approximate operating cash flow less capital expenditures of $71.0 million. Financing outflows included $150.7 million of share repurchases. The company had $416.1 million available under its $420 million revolver, net of letters of credit, and reported compliance with credit covenants. Management said liquidity sources were expected to fund operations, capital spending, repurchases, and debt service for at least 12 months, while cautioning that future cash flows and financing availability are not assured.
Material changes, outlook and notable items
- Reported revenue was down 1.8%, but organic revenue increased 0.8% after excluding currency and acquisition/divestiture effects. Currency reduced reported revenue by 1.2%; net acquisition and divestiture effects reduced it by 1.4%.
- Q1 capital expenditures were $41.7 million. Management expected full-year 2019 capital expenditures of approximately $155 million to $175 million, funded from operating cash flow.
- The March 27 credit agreement amendment extended the revolver maturity to March 27, 2024, modified certain rates and fees, and changed the utilization threshold for testing a leverage covenant from 10% to 20%.
- The company repurchased approximately $150.2 million of shares under its $250 million program during Q1; the prior $400 million program was completed during the quarter.
- GIGAVAC, acquired in October 2018 for approximately $233 million cash consideration, supports electrification products. Its purchase-price allocation remained preliminary; the acquisition added $122.7 million of identified intangible assets and approximately $113.7 million of goodwill.
- Q1 restructuring and other charges were $5.3 million, including $2.9 million of severance and $2.5 million primarily related to GIGAVAC deferred compensation. Sensata adopted the new lease accounting standard on January 1, 2019; adoption had no cumulative effect on equity.
Risks and contingencies
Management cited risks including global and automotive-market conditions, customer pricing pressure, supplier interruptions, foreign exchange, indebtedness and covenant compliance, acquisitions and restructuring, product and intellectual-property claims, cyber threats, tariffs, regulation, taxes, and Brexit-related uncertainty. No material changes to previously disclosed risk factors were reported.
Sensata is defending a patent lawsuit concerning tire-pressure monitoring products; the patent has expired, but the claimant seeks past damages, interest, and costs that could be material. Trial was expected in February 2020; no accrual was recorded because management did not consider a loss probable. In a separate supplier dispute, a damages expert asserted losses up to $51.0 million; the court dismissed certain claims on April 12, 2019, and no accrual was recorded because management did not consider a loss probable.
Investor facts to verify
- Whether organic growth, segment trends, and the factors behind Performance Sensing’s reported decline persisted in subsequent quarters.
- Whether the $155 million to $175 million capital expenditure outlook and expected liquidity proved achievable.
- Debt service, leverage, covenant headroom, revolver availability, and the impact of ongoing share repurchases.
- Final GIGAVAC purchase-price allocation and realized integration and electrification benefits.
- Developments and potential exposure in the patent and supplier litigation, including the supplier’s asserted damages of up to $51.0 million.