Gentherm Incorporated — 2013 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Gentherm designs and manufactures automotive thermal-comfort products, electronics and cable systems, and conducts research into thermoelectric technologies. Its reportable segments are Climate Controlled Seats (CCS), Advanced Technology and W.E.T. Gentherm completed its acquisition of the remaining W.E.T. shares in 2013 and owned 100% at year-end. Unless otherwise noted, dollar figures below are in millions.
Financial results and liquidity
- Revenue: $662.1 million, up 19% from $555.0 million in 2012. CCS revenue rose 8.3% to $143.3 million; W.E.T. revenue rose 23% to $518.8 million. W.E.T. climate-controlled seat products grew 33% to approximately $141 million.
- Profit and margins: Gross profit was $174.8 million versus $141.9 million; gross margin improved to 26.4% from 25.6%. Operating income was $49.6 million, up from $36.1 million; operating margin was approximately 7.5% versus 6.5%. Net income was $35.1 million versus $24.3 million. Net income attributable to Gentherm was $33.8 million versus $17.9 million; earnings per diluted share were $0.94 versus $0.39.
- Segment operating income: CCS reported $40.5 million versus $11.5 million; W.E.T. reported $41.8 million versus $51.0 million; Advanced Technology recorded a $6.6 million loss, broadly unchanged. Reconciling items were a $26.2 million expense, compared with $19.8 million.
- Cash flow: Operating cash flow was $59.8 million, up from $36.9 million. Investing used $84.7 million, including $48.6 million to acquire W.E.T. minority shares and $35.9 million of property and equipment purchases. Financing provided $18.9 million. Cash declined $3.3 million to $54.9 million.
- Liquidity and debt: Working capital was $116.8 million, down 7% year over year. Current assets were $269.9 million and current liabilities $153.1 million. Total debt was $82.3 million, including $21.4 million current maturities; cash less total debt was approximately negative $27.4 million. The company reported compliance with its credit-facility covenants and no revolving borrowings at year-end; available revolving capacity was $29.6 million and €20.0 million.
- Other metrics: Research and development expense, net of reimbursements, rose 22% to $49.9 million. Capital expenditures were $35.9 million. The effective tax rate was 24%, including a $1.3 million benefit recognized in 2013 for tax-law changes relating to 2012.
Material changes versus 2012
- Revenue growth reflected stronger automotive volumes in North America and Asia, expanded cable-business penetration, and new or increased vehicle programs. Favorable product mix and fixed-cost absorption lifted gross margin; higher reported Euro revenue also contributed.
- Net income attributable to Gentherm increased substantially, including as W.E.T.’s non-controlling interest fell during the year and was eliminated after Gentherm acquired all remaining shares. The company issued approximately 954,000 common shares upon conversion of its Series C preferred stock; that preferred stock was no longer outstanding at year-end.
- W.E.T. operating income declined despite revenue growth. Gentherm cited termination payments of approximately $1.8 million to W.E.T.’s former CEO, higher legal, audit, travel and personnel costs, and ongoing expansion and integration spending among its increased expenses.
- Capital spending and debt rose, including borrowing to fund the W.E.T. share purchase and investment in production capacity, the Shenzhen electronics facility and headquarters buildings.
Outlook, risks and unusual items
- Outlook: No formal financial guidance is provided. Management said cash on hand and expected operating cash flow should cover operating needs, capital spending and debt service for the foreseeable future. It expected integration-enabled cost initiatives over the next three years. A cooling-only thermal storage bin was expected to become commercially available in a vehicle introduced in 2014. These are expectations, not guarantees.
- Integration and investment: The company is still integrating W.E.T.; the segment remains separately reported until integration plans are substantially implemented. The Shenzhen electronics facility required startup spending and was expected to support existing products and future revenue streams. Research programs include automotive waste-heat recovery and other potential applications, whose commercial timing and success are uncertain.
- Customer and industry concentration: Automotive demand drives most revenue and is cyclical. Johnson Controls, Lear and Bosch represented 27%, 18% and 10% of 2013 revenue, respectively. Automotive programs generally require lengthy development and may not generate significant revenue for two to three years; customers may cancel programs or demand price reductions.
- Geographic and supply risks: Approximately 24% of revenue came from products manufactured in Ukraine. The filing flags political unrest and the risk of disruption to production or cross-border shipments to Hungary. The company also depends on global operations, foreign currencies, suppliers with no guaranteed supply arrangements, and certain limited-source components.
- Debt and contingencies: A €10 million currency-related interest-rate swap (CRS) associated with W.E.T. had a reported fair-value liability of $11.8 million. A German court ruled in W.E.T.’s favor against UniCredit and ordered the bank to bear future CRS obligations, but UniCredit appealed; Gentherm cautioned that recovery was uncertain. Certain former W.E.T. shareholders also sought higher compensation in German appraisal proceedings after the squeeze-out. The filing states there was no current material pending litigation, while describing these specific matters and other patent-enforcement proceedings.
- Other risks and policies: Risks include variable-rate debt, foreign exchange, raw-material price changes, competition and technological obsolescence, intellectual-property disputes, environmental compliance, and execution of new products. Bank facilities restrict common dividends; Gentherm did not anticipate paying dividends in the near future. Management and Grant Thornton reported effective internal controls, and the auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Whether W.E.T. integration improves its operating performance and delivers the anticipated cost efficiencies, given its lower 2013 operating income.
- Ukraine production and shipment continuity, including the exposure represented by approximately 24% of revenue.
- The status and potential financial impact of the UniCredit appeal, CRS obligations and W.E.T. shareholder appraisal proceedings.
- Debt repayment and refinancing needs, particularly 2014 maturities and the W.E.T. euro-denominated term tranche due September 30, 2014, as well as compliance with credit covenants.
- Whether higher working-capital requirements and substantial capital investment can be sustained while funding research, growth and debt service.
- Customer concentration, automotive program launches, pricing pressure, and the commercial viability and timing of new non-automotive and thermoelectric products.