Gentherm Inc. — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019; quarterly figures below refer to the three months ended December 31. Gentherm develops thermal-management products, principally for automotive customers, with a smaller patient-temperature-management business. It reports Automotive and Industrial segments. The company divested its CSZ-IC business in February and GPT in October 2019, and acquired patient-temperature-management company Stihler in April.
Financial performance and liquidity
Amounts are in U.S. dollars; annual amounts are in millions unless noted.
| Metric | 2019 | 2018 |
|---|---|---|
| Product revenue | $971.7 | $1,048.5 |
| Gross profit / margin | $288.3 / 29.7% | $304.9 / 29.1% |
| Operating income / margin | $84.3 / 8.7% | $72.8 / 6.9% |
| Net income | $37.5 | $41.9 |
| Diluted EPS | $1.13 | $1.16 |
| Operating cash flow | $118.8 | $118.4 |
| Capital expenditures | $23.7 | $41.5 |
| Cash and cash equivalents at year-end | $50.4 | $39.6 |
| Working capital at year-end | $217.2 | $267.7 |
| Total debt at year-end | $80.6 | $139.9 |
2019 free cash flow, calculated as operating cash flow less capital expenditures, was approximately $95.1 million. Cash used in financing was $108.6 million, including $97.0 million of debt repayments net of new borrowings and $63.3 million of share repurchases. The $475 million revolving facility matures in 2024; undrawn capacity was $403.4 million. Management said cash, operating cash flows and available borrowing were expected to cover operating, capital and debt-service needs for at least 12 months.
Automotive revenue was $920.2 million, down 3.9%; Industrial revenue was $51.5 million, down 43.3%, reflecting the business disposals. CCS revenue fell 3.9%, seat heaters 6.9%, and automotive cables 11.0%; battery thermal-management revenue rose 45.8% to $41.5 million. Automotive represented 95% of product revenue.
Fourth-quarter 2019 revenue was $230.4 million, versus $256.0 million in fourth-quarter 2018. Gross profit was $65.6 million versus $70.8 million; operating income was $22.0 million versus $20.8 million; net income was $10.5 million versus $12.6 million; diluted EPS was $0.32 versus $0.36.
Material changes versus 2018
- Revenue declined 7.3%, primarily due to lower automotive volumes, unfavorable foreign exchange and lower customer pricing, as well as divestitures. The General Motors strike reduced revenue by an estimated $12.4 million.
- Despite lower revenue, gross margin improved to 29.7% from 29.1%, and operating income increased 15.8%, aided by lower R&D, selling, general and administrative expenses, and operational improvements.
- Net income and diluted EPS declined. The effective tax rate increased to 36.6% from 27.9%; Gentherm said the 2019 rate was 25.1% excluding the nondeductible impairment loss.
- Cash from operations was broadly stable. Debt fell by $59.3 million, while cash rose $10.8 million. Working capital decreased, partly due to divestitures and impairment of held-for-sale assets.
Outlook, commentary, risks and unusual items
- Management cited an IHS Markit forecast of 87.2 million global light-vehicle units for 2020, down 1.9% from 2019, with the coronavirus outbreak a stated source of uncertainty. This is an industry forecast, not company revenue guidance.
- Gentherm reported an estimated $1.5 billion of 2019 automotive new-business awards based on projected lifetime revenue; awards are not firm orders and may not be realized.
- The manufacturing-footprint restructuring is expected to reduce the number of plants by two and be substantially completed by the end of 2021. Estimated total costs are $20–$24 million, including $17–$21 million of expected cash expenditures; actual cost, timing and savings may differ.
- GPT’s divestiture resulted in $27.1 million of impairment and sale-related losses; CSZ-IC generated a $4.3 million gain. Claims were made after year-end against $2.5 million held in escrow for the CSZ-IC sale; the company could not estimate any potential loss.
- Key risks include automotive cyclicality, customer concentration (Lear and Adient represented 16% and 15% of revenue), supplier and raw-material constraints, foreign exchange, tariffs, global operations, medical-device regulation, product liability, restructuring execution and debt covenants. The filing also discussed possible coronavirus disruption to operations and supply chains.
- The company reported no material pending litigation. Management and the auditor reported effective internal controls at year-end; Stihler was excluded from the internal-control assessment during its first year after acquisition. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether lower vehicle production, customer pricing and foreign exchange continue to pressure automotive revenue and margins.
- Whether the $1.5 billion of estimated new-business awards convert into production and revenue on expected schedules.
- Actual restructuring spending, plant-consolidation progress and resulting cost savings through 2021.
- Any escrow liability arising from claims relating to the CSZ-IC sale, and the financial impact of GPT’s disposal.
- Customer and supplier exposure, available revolver capacity, covenant compliance and the company’s ability to sustain cash generation while funding buybacks and investment.
- Effects of coronavirus-related disruption and the company’s integration and growth of the Stihler medical business.