Gentherm Incorporated — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures are included below where relevant. Amounts are in U.S. dollars.
Business context
Gentherm designs and manufactures thermal-management technologies and automotive cable systems. Its Automotive segment includes seat comfort products, cable systems and thermal convenience products; its Industrial segment includes remote power generation systems and advanced research and development. Automotive accounted for $810.6 million of 2015 revenue; Industrial contributed $45.9 million.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $856.4 million | $811.3 million |
| Gross profit / margin | $276.4 million / 32.3% | $241.7 million / 29.8% |
| Operating income / margin | $121.3 million / 14.2% | $98.4 million / 12.1% |
| Net income | $95.4 million | $70.1 million |
| Diluted EPS | $2.62 | $1.95 |
| Cash from operations | $104.7 million | $80.3 million |
| Capital expenditures | $55.5 million | $38.9 million |
| Cash and cash equivalents at year-end | $144.5 million | $85.7 million |
| Working capital at year-end | $276.8 million | $187.4 million |
| Total debt at year-end | $97.7 million | $90.8 million |
Revenue rose 6% as reported. Management said unfavorable currency translation reduced 2015 reported revenue by approximately $48.3 million; at 2014 exchange rates, revenue would have been approximately $904.8 million, up 12%. Operating income increased 23% and net income increased 36%. Gross-margin improvement reflected product mix, higher volume and lower production costs in certain currencies. Cash from operations less property and equipment purchases was approximately $49.2 million.
At December 31, 2015, $86.1 million was available under the revolving credit facility. Debt included variable-rate U.S. and Europe term loans and revolver borrowings, plus fixed-rate DEG loans. The company reported compliance with its debt covenants and said its leverage ratio qualified it for the lowest applicable credit-agreement margin. The filing reports $67.4 million of scheduled principal maturities in 2019. Dividends are restricted by the credit facilities, and the company does not anticipate paying them in the foreseeable future.
For fourth-quarter 2015, revenue was $212.3 million, operating income $30.1 million, net income $28.4 million and diluted EPS $0.78. The comparable 2014 quarter recorded revenue of $205.2 million, operating income of $24.8 million, net income of $19.8 million and diluted EPS of $0.55.
Material changes versus the prior period
- Climate Control Seat revenue increased 9% to $400.4 million, supported by new program launches and vehicle production. Heated-seat revenue declined 9% to $273.4 million as reported, with currency translation a significant factor; management said sales increased after adjusting for currency.
- Remote power generation revenue rose to $45.9 million from $24.2 million, partly because Gentherm acquired GPT on April 1, 2014 and therefore included a full year of GPT results in 2015.
- Net research and development expense increased 4% to $59.6 million; selling, general and administrative expense increased 13% to $95.5 million, including higher compensation, legal, audit, travel and staffing costs.
- Property and equipment purchases increased to $55.5 million, primarily for production-capacity expansion, including facilities in Vietnam and Macedonia.
- Foreign-currency translation adjustments reduced accumulated other comprehensive income; the company also reported a $25.9 million net-of-tax comprehensive loss from other comprehensive items, largely reflecting currency translation.
Outlook, commentary and risks
Management did not provide a quantified 2016 revenue or earnings forecast in the supplied filing text. It said existing cash and expected operating cash flows should be sufficient for operating needs, capital spending and debt service for the foreseeable future. The company expects a new Celaya, Mexico facility to open in 2016 and the main Macedonia production area to open in the second half of 2016. Expansion carries execution risk, including start-up costs and the possibility of underused capacity.
In January 2016, Gentherm reorganized operations ahead of the expected June 2016 closure of its Windsor, Ontario facility, with activities to move to other facilities. It expects a one-time tax expense of approximately $6 million in first-quarter 2016 and an approximately $30 million tax payment due in first-quarter 2017; the filing says an offsetting deferred charge is expected to prevent a material quarterly earnings impact from that payment.
A December 2015 settlement of litigation concerning a currency-related swap generated a one-time pre-tax gain of $9.9 million in fourth-quarter 2015. Gentherm also made a final cash settlement payment of approximately $7.5 million. This gain increased reported pretax income and should be distinguished from recurring operating performance.
Principal disclosed risks include dependence on automotive production and a small number of customers and Tier 1 suppliers; pricing pressure and customer cancellation rights; foreign-exchange exposure; reliance on limited suppliers for certain components; manufacturing and geopolitical risks, including in Ukraine; the execution and utilization of new facilities; and lower oil prices affecting GPT’s oil-and-gas-related demand. The company also highlighted competition, long product-development cycles, intellectual-property litigation, raw-material availability and cost, and cybersecurity and other global-operation risks. No material pending litigation was reported at year-end apart from the settled swap dispute. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- How much of 2015 earnings growth is sustainable after excluding the $9.9 million one-time settlement gain and considering currency movements?
- Whether CCS growth and the improvement in gross margin continue, and how heated-seat revenue performs on a constant-currency basis.
- Whether planned Vietnam, Macedonia and Mexico capacity ramps on schedule and achieves sufficient utilization.
- How customer and supplier concentration, automotive production trends and lower oil prices affect demand and cash generation.
- Whether the 2019 debt maturity concentration, covenant requirements and the planned 2017 tax payment remain manageable alongside investment needs.
- Whether the Windsor consolidation delivers expected efficiencies and whether the forecast tax expense and cash payment are consistent with subsequent disclosures.