Gentherm Incorporated — FY2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter results. Gentherm designs and manufactures thermal-management products, principally automotive seat comfort systems, seat heaters, automotive cable systems and related products. Its reportable segments are Automotive and Industrial. The company acquired Global Thermoelectric Inc. (GPT), a thermoelectric generator business, on April 1, 2014; GPT contributed results from that date.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Product revenue | $811.3 | $662.1 | +23% |
| Gross margin | $241.7; 29.8% | $174.8; 26.4% | Margin +3.4 percentage points |
| Operating income | $98.4; 12.1% of revenue | $50.4; 7.6% | +95% |
| Net income | $70.1 | $35.1 | +100% |
| Diluted EPS | $1.95 | $0.94 | +107% |
| Cash from operating activities | $80.3 | $59.8 | +$20.5 |
| Capital expenditures | $38.9 | $35.9 | +$3.0 |
- Revenue drivers: Climate-control seat (CCS) revenue rose 32% to $347.5 million; seat-heater revenue increased 11% to approximately $313.2 million; heated-steering-wheel revenue rose 29% to $36.1 million. Growth reflected program launches and stronger vehicle production. GPT added $24.2 million of revenue and $0.8 million of operating income after acquisition.
- Profitability: Management attributed the higher gross margin to product mix, greater fixed-cost absorption, in-house electronics manufacturing savings and currency effects. A $3.7 million warranty-reserve reversal also reduced cost of sales. Net R&D expense rose 15% to $57.5 million; SG&A increased 17% to $84.6 million.
- Quarterly performance: In Q4 2014, revenue was $205.2 million, gross margin $62.3 million, operating income $24.8 million, net income $19.8 million and diluted EPS $0.55. Q4 2013 figures were $182.3 million, $49.6 million, $17.0 million, $10.9 million and $0.31, respectively.
- Liquidity: Cash and cash equivalents were $85.7 million at year-end, up from $54.9 million. Working capital was $187.4 million, compared with $116.8 million. Cash used in investing was $69.9 million, including $31.5 million for GPT and the remaining interest in the North American electronics joint venture, and $38.9 million of capital spending.
- Debt: Total debt was $90.8 million, including $49.4 million on the U.S. term loan, $24.0 million on the Europe term loan, $12.0 million on the revolving facility, and $4.8 million on the DEG loan. Cash exceeded debt by approximately $4.9 million. The new secured credit agreement matures in August 2019; Gentherm reported compliance with its debt covenants. The filing states that cash and expected operating cash flows should fund operations, capital spending and debt service for the foreseeable future.
Material changes versus prior period
- Revenue growth and margin expansion drove substantial increases in operating income, net income and EPS. Automotive segment revenue rose to $787.1 million from $662.1 million; Industrial revenue was $24.2 million, principally from the newly acquired GPT.
- Operating cash flow increased, while cash also benefited from financing activity. Investing outflows included acquisition and capacity investment.
- Gentherm refinanced its prior credit agreements in August 2014. It repaid the old facilities and entered a new term-loan and revolving-credit arrangement, with a $100 million revolving facility and additional borrowing capacity subject to conditions.
- Foreign-currency translation reduced other comprehensive income by $20.5 million, compared with a $6.0 million gain in 2013; accumulated other comprehensive loss increased to $25.7 million.
- The effective tax rate was 25.6% in 2014 versus 24.0% in 2013. The prior-year rate benefited from a one-time $1.3 million tax benefit related to retroactive tax-law provisions.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management planned to open manufacturing facilities in Vietnam and Macedonia in late 2015; the Vietnam facility was estimated to cost $15–20 million, and the company was seeking up to $15 million in DEG financing for it. Management expected additional margin benefits as electronics manufacturing volumes increased.
- Management identified lower oil prices as a risk to GPT demand because many of its products serve oil and gas exploration, pipelines and wells. Other key risks include automotive production cycles, customer program changes and pricing pressure, customer and supplier concentration, raw-material costs, foreign-exchange exposure, and operational and political risks in countries where Gentherm manufactures, including Ukraine.
- Johnson Controls, Lear and Bosch accounted for 24%, 21% and 9% of FY2014 revenue, respectively. The filing warns that losing a major customer could materially affect the business. Non-automotive revenue remained limited at 3% of total revenue.
- The company reported a $9.2 million liability fair value for a currency-related interest-rate swap (CRS), plus approximately $8.7 million of accrued past-due payments. Gentherm GmbH had won a German trial-court ruling requiring UniCredit to bear future CRS obligations, but UniCredit appealed; the company cautioned that it could not be certain the ruling would be upheld. An offsetting derivative was intended to limit related market exposure through 2018.
- The $3.7 million warranty-accrual reversal increased 2014 gross profit. The company also recorded $1.4 million of debt-retirement expense following refinancing. No material pending litigation was reported apart from the disclosed CRS dispute; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether elevated automotive program volumes and CCS growth persist, and how much margin improvement is repeatable apart from the warranty reversal and currency effects.
- GPT’s subsequent contribution to revenue, operating profit and cash flow, and the impact of lower oil and gas investment on demand.
- Progress, timing, capital needs and utilization of the Vietnam and Macedonia facilities, including whether the planned Vietnam financing is secured.
- The outcome and financial exposure of the UniCredit CRS appeal, including treatment of the accrued past-due amounts and the offsetting derivative.
- Customer concentration, accounts-receivable collectability, working-capital needs, and debt-covenant headroom as the business expands.