Gentherm Incorporated — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. Amounts below are USD millions except per-share data. Gentherm develops thermal-management products, principally for automotive customers, and reports Automotive and Industrial segments.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $985.7 | $917.6 | +7.4% |
| Gross margin | $311.1; 31.6% | $295.0; 32.2% | Margin down 0.6 percentage points |
| Operating income | $97.3; 9.9% of revenue | $106.1; 11.6% | -8.3% |
| Net income | $35.2 | $76.6 | -54.0% |
| Diluted EPS | $0.96 | $2.09 | Down $1.13 |
| Operating cash flow | $49.9 | $108.4 | -54.0% |
| Capital expenditures | $50.8 | $66.3 | — |
| Cash and cash equivalents, year-end | $103.2 | $177.2 | Down $74.0 |
| Total debt, year-end | $144.7 | $171.5 | Down $26.9 |
Working capital was $289.8 at year-end, compared with $295.1 in 2016. The company had $220.9 of undrawn capacity on its $350 million revolving facility and reported compliance with its debt covenants. Debt included $129.0 on the revolving note, at a 3.07% rate, and $15.7 of fixed-rate DEG loans. The revolving-note principal is scheduled for 2021. Operating lease commitments totaled $29.1.
Business and changes versus the prior year
- Automotive generated $879.5 of revenue, up 2.7% on a pro forma basis; Industrial generated $106.2, up 23.4% pro forma. Reported revenue growth also reflected the full-year contribution from CSZ, acquired in 2016, the November 2017 Etratech acquisition, and favorable currency translation.
- Automotive gains included seat heaters (+6.4%), steering-wheel heaters (+25.5%), cable systems (+8.0%) and battery thermal management (+53.4%). Climate Control Seat revenue fell 4.4%, affected by North American production weakness and programs shifting from higher-priced active cooling to heated-and-ventilated seats.
- Industrial operating loss was $14.8, versus $16.7 in 2016. Management attributed the loss to advanced R&D, approximately $2.0 of CSZ project cost overruns, and spending on a new CSZ medical sales force. The company said the cost overruns were not expected to recur.
- Gross margin declined amid a special $2.0 customer rebate, $2.3 of unfavorable inventory adjustments, higher costs and product mix. The inventory reserve included a charge related to a reduced sales outlook for heated-and-cooled mattresses.
- Net R&D expense increased 13% to $82.5. SG&A increased, including CEO-transition-related costs; recorded CEO transition and related amounts totaled $6.7.
Cash flow, earnings items and outlook
- Operating cash flow fell by $58.5, including $35.1 of cash taxes paid in 2017 relating to the 2016 North American reorganization. Other contributors included lower earnings before non-cash adjustments and working-capital movements. Investing cash outflow was $117.7, including the Etratech acquisition and capital spending; financing cash outflow was $31.6, primarily debt repayments.
- A $23.1 foreign-currency loss in 2017 compared with a $7.8 gain in 2016, primarily associated with U.S.-dollar cash held by European subsidiaries and intercompany balances. This materially weighed on pretax results.
- Income tax expense was $34.0 and included a provisional $20.2 net tax-reform charge. Excluding that charge, management reported a 20% effective rate. The company had not completed its Tax Act accounting and expected to refine estimates by no later than Q4 2018.
- Fourth-quarter 2017 revenue was $257.2 and operating income was $21.1, but Gentherm reported a net loss of $5.2, or $0.14 per diluted share. The filing’s selected quarterly table provides these results but does not give a clear quarterly attribution for the loss.
- Management stated that cash, operating cash flow and available borrowing capacity should cover operating, capital and debt-service needs for at least the next 12 months, subject to risks if cash generation declines. No formal revenue or earnings guidance is provided in the filing. Management estimated that awarded battery thermal-management and electronic-control-module programs could add more than $65 of annual revenue at full run rate in 2020, based on current awards.
- Etratech was acquired for a purchase price of $65.7, including cash acquired; its preliminary purchase-price allocation remained subject to finalization. Etratech contributed $8.4 of revenue and a $0.5 net loss in 2017.
Risks, contingencies and governance
- Automotive remained the core exposure: it represented 89% of product revenue, and the business is subject to vehicle-production cycles, customer pricing pressure, competition, and long customer-development and launch cycles. Lear, Adient and Bosch represented 20%, 18% and 8% of revenue, respectively.
- Other material risks include dependence on limited-source components and suppliers; foreign-exchange, raw-material and interest-rate exposure; manufacturing and political disruption in countries including Ukraine, Mexico and China; and uncertainty around trade policy, including NAFTA renegotiation and Brexit.
- Medical products face extensive regulatory requirements. The filing also discusses product liability, warranty, environmental, cybersecurity, privacy and intellectual-property risks. No material pending litigation was reported at year-end.
- Gentherm reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions. Etratech, representing approximately 7% of assets and 1% of revenue, was excluded from the internal-control assessment.
- The company paid no common-stock dividend, and its credit facilities generally restrict dividends. Its $100 million repurchase authorization remained in place; no repurchases occurred in Q4 2017.
Investor verification priorities
- Reconcile the sharp earnings and cash-flow declines, particularly the foreign-currency loss, tax-reform charge, and reorganization-related tax payments.
- Assess whether revenue growth and the margin outlook can improve despite CCS mix shifts, customer rebates, factory costs and price reductions.
- Verify progress and economics for the battery thermal-management and electronic-control-module programs, including the stated 2020 revenue estimate and required investment.
- Review Industrial segment profitability, CSZ’s medical-sales-force ramp, and whether the chamber-project cost overruns were nonrecurring.
- Monitor liquidity, variable-rate borrowing, the 2021 revolving-note maturity, covenant headroom and cash held outside the United States.
- Follow final Tax Act accounting, the Etratech purchase-price allocation, and the expected retained-earnings adjustments from new revenue-recognition and intra-entity tax accounting standards.