The situation looked bleak early last year at Sensata Technologies Inc.
The Attleboro company saw first-quarter sales plunge 38 percent as the financial crisis crushed demand for the sensors and controls it makes for machines ranging from cars to thermostats. Sensata was forced to slash costs by halting production, laying off one-third of its employees and cutting research-and-development spending.
What a difference a year can make.
In March, Sensata netted $569 million by selling 31.6 million shares for $18 each in its initial public offering – this year’s largest IPO so far. A month later, the company beat Wall Street analysts’ forecasts with a robust first-quarter profit of $27.3 million, versus a loss of $10.2 million a year earlier. Sales jumped 58 percent to $377 million.
“We’re really excited,” Sensata Chairman and CEO Tom Wroe said in a mid-May interview. “We feel we’ve got the ability to create a great future. We’re in the right places, and this is a good time for Sensata and its products.”
Those products are components of larger machines. Sensata designs and manufactures sensors, which turn physical stimuli into electronic signals, and controls, which protect devices from dangerous levels of heat or current. The company makes 20,000 different custom products and sells more than 800 million individual items per year.
Shockwaves had rippled through the Attleboro area back in 2006 when Texas Instruments Inc. announced it was selling off its locally based sensors and controls division for $3 billion to Boston private equity firm Bain Capital LLC. The newly independent firm was named Sensata, Latin for “those gifted with sense.”
Wroe said breaking away from TI has helped the company by giving it more “strategic focus.” Management is free to pursue its own strategy without worrying about how it fits as part of a much larger semiconductor group, he said.
The IPO was the culmination of Sensata’s first four years as an independent company, but TI had been in Attleboro since 1959, and Sensata’s roots stretch back even further. Its earliest predecessor was founded in 1916 by Rathbun Willard, an industrialist whose name still graces the road to the city’s high school, to serve Rhode Island jewelry makers.
At its height, TI employed about 5,000 people locally at more than two dozen buildings in Attleboro and Mansfield, making it one of the region’s largest employers. But the company’s local presence shrank significantly in the years before Bain’s leveraged buyout.
The numbers tell the story. As recently as a decade ago, before the EMS sale, TI had an estimated 3,150 employees in the Attleboro area. Today, the two successor companies have roughly 1,022 combined – a drop of two-thirds – with 750 at Sensata and 272 at EMS.
Sensata’s global work force is much larger, though, with 9,500 employees, and analysts say TI’s early decision to go where labor costs are lower is one reason Sensata is poised for success. The share of Sensata’s manufacturing done in low-cost nations rose from just 6 percent in 1995 to 85 percent last year, according to Goldman Sachs. Research and development, as well as corporate functions, remain concentrated in Attleboro.
Wroe – who joined TI in 1972, after graduating from the University of Rhode Island, and never left – recalled executives seeing their customers losing business or heading to China in the early 1990s. “That’s when we decided to go there, because we saw the market migration taking place,” he said. “We also saw great consumption potential, based on the saturation level [for consumer goods] in those economies.”
But that prescience could not protect Sensata from the Great Recession – particularly the downturn in the automobile market, which accounts for half the company’s annual sales.
A year ago, General Motors Corp. and Chrysler LLC, two of Sensata’s largest customers, were preparing to file for bankruptcy as car sales hit historic lows. For the full year, sales fell 20 percent to $1.1 billion and the company posted a loss of $27 million.
“Nobody could have gone through that and not been worried,” Wroe said, “but we weathered the storm.” The company has now posted three consecutive quarters of sales growth as it benefits from a strong rebound in the auto sector and inventory restocking worldwide.
That makes it difficult for them to switch suppliers, and because Sensata’s parts are a relatively inexpensive piece of the end product, they have little incentive to do so, analysts at Barclays Capital noted in an April client note. The setup gives Sensata “a significant and sustainable competitive advantage over its peers,” they wrote.
They and others on Wall Street are generally positive about Sensata’s prospects, with one-year price targets for its stock ranging from $22 to $28 a share. Morgan Stanley analysts, who are the most bullish, said Sensata has “the clearest and largest growth opportunity” among companies they cover.
They think the company is likely to benefit as cars and appliances continue to include more electronic content, with automakers in particular adding more sensors to meet rising government standards for safety, emissions and efficiency.
Sensata is also poised to gain from rapid economic growth in emerging markets, particularly China, where its manufacturing presence gives it an early-mover advantage. Analysts at Goldman estimate emerging markets’ share of Sensata’s revenue will rise from 13 percent last year to 25 percent by 2012 as consumers in those countries are buying more cars, refrigerators and washing machines.
Sensata’s health remains heavily tied to the auto industry, and Wroe said he expects the sector’s share of sales to stay at roughly 50 percent, though he emphasized that the company supplies European and Japanese vehicle manufacturers in addition to American ones.
What could slow Sensata’s growth over the coming years is the debt still on its balance sheet from Bain’s takeover in 2006. The company had $2.3 billion in long-term debt as of Dec. 31, against $148 million in cash on hand.
“I’m confident we can handle that,” Wroe said. Management plans to use the IPO’s proceeds to pay down debt, and the free cash flow generated by Sensata’s business will also help, he said. •
