Sensata Technologies Holding plc — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. Unless otherwise stated, financial amounts below are in U.S. dollars.
Business context and reporting period
Sensata develops and sells sensors, electrical protection products, and related technologies for mission-critical applications. Its two reportable segments are Performance Sensing, serving automotive and heavy vehicle/off-road (HVOR) markets, and Sensing Solutions, serving industrial and aerospace markets. Automotive and HVOR together represented approximately 74% of 2020 revenue. The company’s strategic priorities include electrification, connected vehicle solutions, and Industrial IoT.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $3,045.6 million | $3,450.6 million |
| Gross profit / gross margin | $926.5 million / 30.4% | $1,183.2 million / 34.3% |
| Operating income / margin | $337.7 million / 11.1% | $556.9 million / 16.1% |
| Net income / diluted EPS | $164.3 million / $1.04 | $282.7 million / $1.75 |
| Operating cash flow | $559.8 million | $619.6 million |
| Free cash flow (non-GAAP) | $453.1 million | $458.3 million |
| Adjusted EBITDA (non-GAAP) | $685.1 million | $900.1 million |
| Cash and cash equivalents at year-end | $1,862.0 million | $774.1 million |
| Gross debt | $4,036.6 million | $3,291.8 million |
| Net debt / net leverage ratio (non-GAAP) | $2,174.6 million / 3.2x | $2,517.7 million / 2.8x |
| Working capital | $1,484.8 million | $1,330.9 million |
Gross margin is calculated from reported revenue and cost of revenue. Year-end current liabilities rose to $1,495.2 million, largely reflecting classification of the $750 million 6.25% notes as current following the announced plan to redeem them. The company reported $416.1 million available on its revolving facility, net of letters of credit, and said its liquidity sources should fund operations, capital spending, and debt service for at least 12 months. Cash was concentrated in the Netherlands ($1,514.1 million of the $1,862.0 million total).
In fourth-quarter 2020, revenue was $906.5 million versus $846.7 million in fourth-quarter 2019; net income was $121.7 million versus $53.5 million.
Material changes versus the prior comparable period
- Full-year revenue declined 11.7% year over year, primarily due to COVID-19-related end-market contraction. Organic revenue declined 11.9%; management reported 600 basis points of overall market outgrowth.
- Performance Sensing revenue fell 12.7% to $2,223.8 million; segment operating income declined to $532.5 million from $670.5 million. Sensing Solutions revenue fell 9.2% to $821.8 million; segment operating income declined to $241.2 million from $294.0 million.
- Operating income fell 39.4%. Drivers included lower volume and factory utilization, pandemic-related costs, a $29.2 million first-quarter intellectual-property litigation charge, restructuring charges, and higher employee compensation. Cost of revenue rose to 69.6% of sales from 65.7%.
- Net income also reflected a $54.2 million deferred tax benefit from an intangible-property transfer. The effective tax provision was $1.4 million, compared with $107.7 million in 2019.
- Operating cash flow decreased by $59.8 million, while free cash flow was broadly stable as capital expenditures fell to $106.7 million from $161.3 million.
- Cash increased following issuance of $750 million of 3.75% notes due 2031 and other financing activity. The company announced it intended to redeem the $750 million 6.25% notes in March 2021, at 103.125% of principal.
Outlook, management commentary, risks, and unusual items
- Management expected global light-vehicle production to rebound in 2021, but not return to 2019 levels. Its expected 2021 market outgrowth ranges were 400–600 basis points for automotive and 600–800 basis points for HVOR.
- The global semiconductor shortage was expected to increase operating costs in 2021 and could have a larger or longer impact than anticipated. COVID-19 effects, supply-chain interruptions, tariffs, customer demand, and global economic conditions remain significant uncertainties.
- Management forecast 2021 capital expenditures and capitalized software additions of approximately $160–$170 million, and megatrend-related spending of approximately $50–$55 million, mostly R&D.
- The 2020 global restructuring program was expected to affect approximately 880 positions, with most actions completed by June 30, 2021. Expected total charges were $39–$43.7 million; management projected annualized personnel and facility savings of approximately $43 million by 2021.
- During 2020, Sensata recorded $465 million in new business wins, including $180 million in electrification. Management defines these wins as expected incremental revenue at normal program volume, typically in the fifth year after award.
- On February 11, 2021, the company agreed to acquire Xirgo Technologies for $400 million, subject to adjustments and closing conditions. The filing said Xirgo was expected to generate over $100 million of 2021 revenue, with growth above 20% over several years, and the deal was expected to be accretive to 2021 adjusted EPS. Sensata intended to use cash on hand.
- The Wasica patent litigation was settled in September 2020 for $31.6 million; the filing reports no material pending litigation at year-end and says ordinary-course claims are not expected to have a material adverse effect.
- Goodwill was $3.1 billion, approximately 40% of total assets. No goodwill impairment was recorded, but impairment depends on forecasts and valuation assumptions. Unrecognized tax benefits were $201.4 million; the auditor identified goodwill valuation and uncertain tax positions as critical audit matters.
- The company reported compliance with debt covenants at year-end. Moody’s rating was Ba2 with stable outlook; S&P’s BB+ rating carried a negative outlook. The company does not plan to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Whether 2021 automotive and HVOR production rebounds and Sensata achieves the stated market-outgrowth ranges despite semiconductor constraints.
- Whether restructuring delivers the projected annualized savings, and whether those savings offset wage, tariff, logistics, and other cost pressures.
- Completion, funding, integration, and expected earnings contribution of the Xirgo acquisition; verify actual results against management’s projections.
- Cash deployment for the 6.25% notes redemption and Xirgo purchase, and the resulting debt, interest expense, leverage, and liquidity.
- Performance of cash conversion and margins as revenue recovers, including whether free cash flow remains adequate for debt service and planned investment.
- Tax outcomes, including the sustainability of the 2020 tax benefit, uncertain tax positions, and the valuation of substantial goodwill and intangible assets.
The audited financial statements received an unqualified opinion, and management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2020.