Gentherm Incorporated — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Gentherm develops and manufactures thermal-management products, primarily automotive seat comfort systems, alongside industrial and medical applications.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $917.6 million | $856.4 million | +7% |
| Gross profit / margin | $295.0 million / 32.2% | $276.4 million / 32.3% | Gross profit +7%; margin slightly lower |
| Operating income / margin | $106.1 million / 11.6% | $121.3 million / 14.2% | Operating income -13% |
| Net income | $76.6 million | $95.4 million | -20% |
| Diluted EPS | $2.09 | $2.62 | -20% |
| Cash from operations | $108.4 million | $104.7 million | +4% |
- FY2016 revenue growth reflected the CSZ acquisition and automotive product growth, partly offset by a 59% decline in GPT revenue. CSZ contributed $51.5 million of revenue and a $1.1 million net loss after its April 1 acquisition.
- Automotive revenue was $847.4 million; Industrial revenue was $70.2 million. Automotive segment operating income was $174.0 million, while Industrial reported a $16.7 million operating loss; corporate and acquisition-related reconciling costs were $51.9 million.
- Climate Control Seat revenue was $412.1 million, heated-seat revenue $293.5 million, and steering-wheel-heater revenue $49.7 million. Automotive remained the dominant business.
- Cash and cash equivalents were $177.2 million at year-end, up from $144.5 million. Working capital was $295.1 million. Investing activities used $144.3 million, including $73.6 million for CSZ and $66.3 million for property and equipment.
- Total debt was $171.5 million, versus $97.7 million at year-end 2015; $154.0 million was outstanding on the revolving note. The amended revolving facility increased to $350 million, with $195.4 million available. The company reported compliance with debt covenants.
- Operating leases totaled $31.5 million in future commitments. No material pending litigation was reported. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Material changes and unusual items
- Operating income declined despite higher revenue, principally as research and development expense rose 22% to $72.9 million and selling, general and administrative expense increased. R&D investment included next-generation seat comfort, battery thermal management, and automotive electronics.
- Gross margin was 32.2%; excluding a $4.0 million CSZ inventory purchase-accounting charge, management said it would have been 32.5%. Higher-margin CSZ revenue and favorable currency effects were partly offset by lower GPT sales.
- FY2016 included a $7.8 million foreign-currency gain, largely unrealized and associated with U.S.-dollar cash held by euro-functional subsidiaries. FY2015 included a $9.9 million one-time gain from settling litigation over a currency swap; this did not recur.
- The North American reorganization generated $7.6 million of withholding-tax expense and $2.5 million of income-tax expense in 2016. A further approximately $32.6 million tax payment was accrued, with an offsetting deferred charge; the $2.5 million and $32.6 million payments were expected in the first half of 2017.
- CSZ’s acquisition added $24.6 million of goodwill and $21.3 million of identifiable intangible assets. Gentherm authorized a three-year, $100 million share-repurchase program in December 2016; the authorization does not require repurchases. Credit facilities restrict dividends, and the company did not expect to pay them in the foreseeable future.
Fourth-quarter results
For the three months ended December 31, 2016, revenue was $236.5 million, gross profit $78.6 million, operating income $26.5 million, and net income $26.0 million. Diluted EPS was $0.71. In fourth-quarter 2015, revenue was $212.3 million, gross profit $69.2 million, operating income $30.1 million, net income $28.4 million, and diluted EPS $0.78. Thus, fourth-quarter revenue and gross profit rose, while operating income and net income declined.
Outlook, commentary, and risks
- Management said cash, operating cash flow, and borrowing availability should be sufficient for operating needs, capital expenditures, and debt service for at least the next 12 months, based on its current plan. No formal company-wide revenue or earnings guidance is stated in the supplied filing text.
- Management estimated that awarded battery thermal-management and electronic-control-module programs could add more than $50 million in annual revenue at full run rate in 2019, based on current awards; the filing describes this as an estimate, not a guarantee.
- Key risks include dependence on automotive production and customer programs, customer concentration (Adient and Lear each represented 21% of revenue), pricing pressure, long product-launch cycles, supplier and raw-material constraints, foreign exchange, and manufacturing or political disruptions in countries including Mexico and Ukraine.
- Additional uncertainties include weak oil-and-gas investment affecting GPT, medical-device regulation, the integration and returns of acquisitions, possible trade-policy changes affecting Mexican production, and the execution and cost of new-product investments. Management also noted that future significant acquisitions may require additional financing.
Important facts for investors to verify
- Whether automotive program launches and awarded battery-management and electronics projects achieve anticipated timing, margins, and revenue scale.
- Whether Industrial losses improve as CSZ integrates and whether GPT demand recovers from oil-and-gas market weakness.
- The cash impact and tax treatment of the North American reorganization payments expected in 2017.
- Debt repayment and refinancing exposure: the $154.0 million revolving note was scheduled to mature in 2021, subject to facility terms, covenants, and refinancing conditions.
- Customer and supplier concentration, foreign-currency exposure, and the effect of trade, geopolitical, and raw-material developments on costs and production.
- Whether repurchases occur under the $100 million authorization and how capital allocation balances buybacks, investment, acquisitions, and debt reduction.