Gentherm Reports 2018 Fourth Quarter and Full Year Results

Company Achieved Record Annual Revenues Despite Industry Headwinds

Secured Record $1.6 Billion in Automotive Awards in 2018

2019 Guidance Established

NORTHVILLE, Mich., Feb. 21, 2019 (GLOBE NEWSWIRE) -- Gentherm THRM, the global market leader and developer of innovative thermal management technologies, today announced its financial results for the fourth quarter and full year ended December 31, 2018.

Fourth Quarter Highlights

  • Product revenues of $253.7 million decreased 1.4% from $257.2 million in the 2017 fourth quarter. Excluding the impact of acquisitions and foreign currency translation, product revenues declined 2.2% year over year
  • Automotive revenues, excluding the impact of acquisitions and foreign currency translation, increased 0.9% year over year
  • GAAP diluted earnings per share was $0.36 as compared with a loss per share of $0.14 for the prior-year period
  • Adjusted diluted earnings per share, excluding restructuring expenses, unrealized currency loss, and expenses and other impacts related to acquisitions (see table herein), was $0.50.  Adjusted diluted earnings per share in the prior-year period was $0.61
  • Secured automotive new business awards totaling approximately $350 million in the quarter
  • Repurchased $84 million of the Company's stock

Full Year Highlights

  • Record product revenues of $1,038.3 million increased 5.3% from $985.7 million in 2017.  Excluding the impact of acquisitions and foreign currency translation, product revenues declined 0.7% year over year
  • Automotive revenues, excluding the impact of acquisitions and foreign currency translation, increased 1.0% year over year
  • GAAP diluted earnings per share was $1.16 as compared with $0.96 for the prior-year period
  • Adjusted diluted earnings per share, excluding impairment loss, restructuring expenses, unrealized currency loss, and expenses and other impacts related to acquisitions (see table herein), was $2.12.  Adjusted diluted earnings per share in the prior-year period was $2.31
  • Secured record automotive new business awards totaling approximately $1.6 billion, of which 40% represents Climate Control Seat (CCS®)
  • Repurchased $148 million of the Company's stock

"I am pleased with the continued momentum we are achieving with our focused growth strategy, evidenced by a record $1.6 billion of new awards from automakers around the world in 2018. Excluding assets held for sale, our product revenues grew 7.6% in 2018, surpassing our expectations of 7%. Despite a challenging automotive industry environment, we delivered year-over-year organic revenue growth in automotive in the fourth quarter, outperforming our key markets by over 600 basis points," said Phil Eyler, Gentherm's President and Chief Executive Officer.  "In addition, we made significant progress in lowering operating expenses through the ‘Fit-for-Growth' program. Excluding assets held for sale, we delivered a better-than-expected EBITDA margin rate. There are still more opportunities ahead to improve gross margin through manufacturing efficiencies, footprint rationalization, the expansion of our purchasing excellence program and value engineering. We expect industry headwinds to continue in 2019; however, the momentum in new awards and our relentless focus on cost structure position us well to achieve our 2019 guidance and 2021 outlook."

2018 Fourth Quarter Financial Review

Product revenues for the fourth quarter of 2018 decreased $3.5 million, or 1.4%, as compared with the prior-year period.  The year-over-year decline was comprised of a $4.5 million increase in the Automotive segment and a $8.1 million decrease in the Industrial segment.  Adjusting for the Etratech acquisition and foreign currency translation, organic product revenues decreased 2.2% year over year. 

Revenue growth in Automotive was driven by higher sales in climate-controlled seats ("CCS"), steering wheel heaters and battery thermal management, partially offset by lower sales of seat heaters and automotive cables, as well as the contribution of the Etratech acquisition for the entire quarter. Adjusting for the Etratech acquisition and foreign currency translation, organic automotive revenues increased 0.9% year over year.

Automotive revenues grew despite lower than expected automotive production in the Company's key markets which include North America, Europe, Japan, Korea and China. When compared with IHS Markit's mid-October forecast for the fourth quarter of 2018, actual light vehicle production was approximately 6 percentage points below forecast. In addition, when compared to the fourth quarter of 2017, actual light vehicle production declined by approximately 6% in the Company's key markets.

The revenue decline in Industrial resulted primarily from lower revenues from the Cincinnati Sub-Zero ("CSZ") industrial chambers business and Global Power Technologies ("GPT"), which were classified as assets held for sale in the quarter. On February 1, 2019, the Company announced the completion of the sale of the CSZ industrial chambers business to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million.

See the "Revenues by Product Category" table enclosed herein for additional detail.

Gross margin rate declined to 27.0% in the current-year period, as compared with 30.0% in the prior-year period, primarily as a result of lower than expected sales volume, late-quarter tier one customer order adjustments, higher labor costs and lower margin on Battery Thermal Management ("BTM") associated with the launch phase of the new actively cooled technology programs. These were partially offset by Fit-for-Growth cost reduction initiatives.

Net research and development expenses of $16.5 million in the 2018 fourth quarter decreased $5.3 million, or 24.4%. R&D expenses declined year over year, as a direct result of the Company's focused portfolio and Fit-for-Growth cost reduction initiatives. Additionally, R&D expenses declined year over year due to higher-than-normal customer reimbursements.   

Selling, general and administrative expenses of $29.2 million in the 2018 fourth quarter decreased $4.4 million, or 13.1%, versus the prior-year period. The year-over-year decline was primarily driven by the impact of the Fit-for-Growth cost reduction initiatives and the non-recurrence of $3.8 million in CEO transition expenses that occurred in the fourth quarter of 2017.    

During the quarter, the Company recognized $1.9 million in restructuring expenses which resulted from completed actions associated with its Fit-for-Growth initiatives. Total implemented actions to date are expected to deliver annualized savings of approximately $37 million. The Company has identified a total of $65 million of savings against its annualized target of $75 million by 2021.

As described more fully in the table included below, "Reconciliation of Net Income to Adjusted EBITDA," the Company recorded Adjusted EBITDA less CEO transition expenses of $34.5 million in the 2018 fourth quarter compared with $39.0 million in the prior-year period, a decrease of $4.5 million or 11.4%.

Income tax expense in the 2018 fourth quarter was $6.4 million, as compared with $23.8 million in the prior-year period, which included $20.2 million associated with the required adjustments under the U.S. Tax Cut and Jobs Act. 

GAAP diluted earnings per share for the fourth quarter of 2018 was $0.36 compared with a loss per share of $0.14 for the prior-year period.  Adjusted diluted earnings per share, excluding restructuring expenses, unrealized currency loss, and expenses and other impacts related to acquisitions (see table herein), was $0.50.  Adjusted diluted earnings per share in the prior-year period was $0.61.

Full Year Revenue and Earnings Per Share Discussion

For full-year 2018, the Company reported record product revenues of $1,038.3 million, a 5.3% increase over the prior year. Adjusting for the Etratech acquisition and foreign currency translation, the year-over-year decline was 0.7%.  An increase in the Automotive segment was more than offset by a decrease in the Industrial segment.

In the Automotive segment, 2018 full-year revenues were $948.6 million, a $69.1 million, or 7.9% increase compared to the prior year. The year-over-year growth was primarily due to increases in steering wheel heaters, automotive cables and BTM, as well as the acquisition of Etratech.  Due to the impact of the shift from CCS active to CCS vent that continued into the first half of 2018, CCS product revenues declined by $13.1 million, or 3.4%.

The Company's Industrial Segment revenues decreased $16.6 million, or 15.6%, to $89.7 million.  The decline was primarily due to lower revenues from the CSZ industrial chambers and GPT businesses, which were classified as assets held for sale.

GAAP diluted earnings per share was $1.16, as compared with $0.96 for the prior-year period.  Adjusted diluted earnings per share, excluding impairment loss, restructuring expenses, unrealized currency loss, and expenses and other impacts related to acquisitions (see table herein), was $2.12.  Adjusted diluted earnings per share in the prior-year period was $2.31.

Guidance

The Company is providing the following guidance for 2019, excluding divested assets and assets held for sale:

  • Product revenues are expected to grow between 4% and 6% to a range of $1.01 billion to $1.04 billion
  • Operating expenses between 19% and 20% of product revenues
  • Gross margin rate between 28% and 30%
  • Adjusted EBITDA between 14% and 15% of product revenue
  • Full-year effective tax rate between 28% and 30%
  • Capital expenditures between $40 and $50 million

Based on 2018 results and 2019 guidance, the Company is reaffirming the following outlook for 2021:

  • Product revenue growth of high single-digit CAGR for the 2018 to 2021 period
  • Operating expenses between 15% and 17% of product revenues
  • Gross margin rate between 30% and 32%
  • Adjusted EBITDA margin of high teens
  • ROIC of greater than 20%

Conference Call

As previously announced, Gentherm will conduct a conference call today at 8:00 AM Eastern Time to review these results. The dial-in number for the call is 1-877-407-4018 (callers in the U.S.) or +1-201-689-8471 (callers outside this U.S.). The passcode for the live call is 13686834. 

A live webcast and one-year archived replay of the call can be accessed on the Events page of the Investor section of Gentherm's website at www.gentherm.com.

A telephonic replay will be available at approximately 2 hours after the call until 11:59 PM Eastern Time on March 7, 2019. The replay can be accessed by dialing 1-844-512-2921 (callers in the U.S.), or +1-412-317-6671 (callers outside the U.S.). The passcode for the replay is 13686834.

Investor Relations Contact

Yijing Brentano

investors@gentherm.com

(248) 308-1702

Media Contact

Melissa Fischer

media@gentherm.com

248.289.9702

About Gentherm

Gentherm THRM is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery thermal management systems, cable systems and other electronic devices. Medical products include patient temperature management systems. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and to create new product applications for existing and new markets. Gentherm has over 13,000 employees in facilities in the United States, Germany, Canada, China, Hungary, Japan, Korea, Macedonia, Malta, Mexico, United Kingdom, Ukraine, and Vietnam.  For more information, go to www.gentherm.com.

Except for historical information contained herein, statements in this release are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Gentherm Incorporated's goals, beliefs, plans and expectations about its prospects for the future and other future events.  The forward-looking statements included in this release are made as of the date hereof or as of the date specified and are based on management's current expectations and beliefs.  Such statements are subject to a number of important assumptions, risks, uncertainties and other factors that may cause the Company's actual performance to differ materially from that described in or indicated by the forward-looking statements. Those risks include, but are not limited to, risks that new products may not be feasible, sales may not increase, additional financing requirements may not be available, new competitors may arise or customers may develop their own products to replace the Company's products, currency exchange rates may change unfavorably, pricing pressures from customers may increase, the Company's workforce and operations could be disrupted by civil or political unrest in the countries in which the Company operates, free trade agreements may be altered in a manner adverse to the Company, cost-savings measures may not be achievable or may need to be reversed, assets held for sale may not be sold quickly or at all, the Company may be unable to repurchase its shares of common stock at favorable prices or at all, due to market conditions, applicable legal requirements, debt covenants or other restrictions, compliance with covenants and other restrictions under the Company's credit facility, medical device regulations could change in an unfavorable manner, oil and gas prices could fluctuate causing adverse consequences, and other adverse conditions in the industries in which the Company operates may negatively affect its results.  In addition, such forward-looking statements do not include the potential impact of any business combinations, acquisitions, divestitures, strategic investments and other significant transactions that may be completed after the date hereof.

The foregoing risks should be read in conjunction with other cautionary statements included herein, as well as in the Company's annual report on Form 10-K for the year ended December 31, 2017 and subsequent reports filed with the Securities and Exchange Commission. Except as required by law, the Company expressly disclaims any obligation or undertaking to update any forward-looking statements to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

TABLES FOLLOW



GENTHERM INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME 

(In thousands, except per share data) 

(Unaudited)

  Three Months Ended

December 31,
  Year Ended

December 31,
  
  2018  2017  2018  2017  
Product revenues $253,652  $257,185   1,038,259  $985,683  
Cost of sales  185,195   179,953   743,647   674,796  
Gross margin  68,457   77,232   294,612   310,887  
Operating expenses:                 
Net research and development expenses  16,518   21,845   79,900   82,478  
Acquisition transaction expenses     789      789  
Selling, general and administrative expenses  29,232   33,610   127,152   130,522  
Restructuring expenses  1,874      14,772     
Total operating expenses  47,624   56,244   221,824   213,789  
Operating income  20,833   20,988   72,788   97,098  
Interest expense  (1,281)  (1,252)  (4,942)  (4,885) 
Foreign currency (loss)gain  (99)  (1,188)  622   (23,108) 
Impairment loss        (11,476)    
Other income (loss)  (411)  5   1,127   150  
Earnings before income tax  19,042   18,553   58,119   69,255  
Income tax expense  6,413   23,795   16,220   34,028  
Net income (loss) $12,629  $(5,242) $41,899  $35,227  
Basic earnings (loss) per share $0.37  $(0.14) $1.17  $0.96  
Diluted earnings (loss) per share $0.36  $(0.14) $1.16  $0.96  
Weighted average number of shares – basic  34,551   36,743   35,921   36,721  
Weighted average number of shares – diluted  34,743   36,869   36,177   36,814  





 

GENTHERM INCORPORATED

REVENUE BY PRODUCT CATEGORY  

(Unaudited, in thousands)  

  Three Months Ended

December 31,
      

 Year Ended

December 31,
 

 
  2018  2017  %

Diff.


   2018  

2017
  %

Diff.


Climate Control Seat (CCS)  $98,033  $93,397   5.0 % $374,816  $387,961 (3.4)%
Seat Heaters  70,173   78,067   (10.1)%  305,337   307,309 (0.6)%
Steering Wheel Heaters  16,653   16,142   3.2 %  69,845   62,125 12.4 %
Automotive Cables   21,460   24,764   (13.3)%  98,931   92,093 7.4 %
Battery Thermal Management (BTM) (1)  9,609   2,862   235.7 %  28,472   10,043 184 %
Etratech  11,840   8,398   (13.2)%(2)  54,267   8,398 (1.3)%(2)
Other Automotive  3,406   3,007   13.3 %  16,924   11,528(3)46.8 %
Subtotal Automotive  $231,174  $226,637   2.0 % $948,592  $879,457 7.9 %
Remote Power Generation (GPT)   5,209   12,486   (58.3)%  19,222   31,891 (39.7)%
Cincinnati Sub-Zero Products (CSZ)  17,269   18,062   (4.4)%  70,445   74,335 (5.2)%
Subtotal Industrial  $22,478  $30,548   (26.4)% $89,667  $106,226 (15.6)%
Total Company $253,652  $257,185   (1.4)% $1,038,259  $985,683 5.3 %



(1)Battery Thermal Management or BTM product revenues include Gentherm's automotive grade, low cost, heat resistant fans and blowers used by customer for battery cooling through ventilation and production level shipments of the advanced TED based active cool system which began during the fourth quarter of 2017.
(2)Amount represents the pro-forma growth for Etratech by comparing the amount of revenue during the 2018 period to Etratech's revenue during the prior year period which totaled $13,641 and $54,987, respectively, which is not included in Gentherm's revenue since the acquisition did not occur until November 1, 2017.
(3)Includes $2.0 million rebate to customer during the third quarter of 2017.



GENTHERM INCORPORATED

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA 

(Unaudited, in thousands)

  Three Months Ended

December 31,
  Year Ended

December 31,
  
  2018  2017  2018  2017  
Net income (loss) $12,629  $(5,242) $41,899  $35,227  
Add Back:                 
Income tax expense   6,413   23,795   16,220   34,028  
Interest expense  1,281   1,252   4,942   4,885  
Depreciation and amortization   11,845   12,238   50,350   44,685  
Adjustments:                 
Restructuring expenses   1,874      14,772     
Impairment of assets held for sale        11,476     
Acquisition transaction expense     789      789  
Unrealized currency loss  488   2,393   589   21,819  
Adjusted EBITDA   34,530   35,225   140,248   141,433  
CEO transaction expenses      3,757      6,694  
Adjusted EBITDA less CEO transition expenses $34,530  $38,982  $140,248  $148,127  



Use of Non-GAAP Financial Measures


In evaluating its business, Gentherm considers and uses Adjusted EBITDA as a supplemental measure of its operating performance.  The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, deferred financing cost amortization, transaction expenses, debt retirement expenses, impairment of assets held for sale, unrealized currency gain or loss and unrealized revaluation of derivatives.  Management believes that Adjusted EBITDA is a meaningful measure of liquidity and the Company's ability to service debt because it provides a measure of cash available for such purposes. Management provides an Adjusted EBITDA measure so that investors will have the same financial information that management uses with the belief that it will assist investors in properly assessing the Company's performance on a period-over-period basis.

The term Adjusted EBITDA is not defined under GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP.  Adjusted EBITDA has limitations as an analytical tool, and when assessing the Company's operating performance, investors should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP.  Gentherm compensates for these limitations by relying primarily on its GAAP results and using Adjusted EBITDA only supplementally.



GENTHERM INCORPORATED

ACQUISITION TRANSACTION EXPENSES, PURCHASE ACCOUNTING IMPACTS

AND OTHER EFFECTS

(Unaudited and in thousands, except per share data)

  Three Months Ended  Full Year                 
  December 31,  December 31,  Future Full Year Periods (estimated)
  2018  2017  2018  2017  2019  2020  2021  Thereafter 
Transaction related current expense     789      789             
Acquisition transaction expenses                                
Non-cash purchase accounting impacts                                
Customer relationships amortization  2,528   2,412   10,363   8,197   7,986   6,728   6,192   28,072 
Technology amortization   968   844   2,984   2,943   2,406   2,406   2,179   2,547 
Trade name amortization      45      132             
Inventory fair value adjustment  30   20   118   20   39          
Other effects                                
Unrealized currency loss   488   2,393   589   21,819                 
Restructuring expenses  1,874      14,772                    
Impairment of assets held for sale        11,476                    
CEO transition expenses      3,757      6,694             
Total acquisition transaction expenses, purchase

  accounting impacts and other effects 
 $5,888  $10,260  $40,302  $40,594  $10,431  $9,134  $8,371  $30,619 
Tax effect of above   (1,112)  (2,625)  (5,462)  (10,855)  (1,517)  (1,226)  (1,067)  (2,937)
U.S. Tax Reform      20,153      20,153                 
Net income effect  $4,776  $27,788  $34,840  $49,892  $8,914  $7,908  $7,304  $27,682 
                                 
Earnings per share - difference                                
Basic $0.14  $0.76  $0.97  $1.36                 
Diluted $0.14  $0.76  $0.96  $1.36                 
Adjusted earnings per share                                
Basic $0.50  $0.61  $2.14  $2.32                 
Diluted $0.50  $0.61  $2.12  $2.31                 



GENTHERM INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 December 31,

2018
  December 31,

2017
 
ASSETS       
Current Assets:       
Cash and cash equivalents$39,620  $103,172 
Accounts receivable, less allowance of $851 and $973, respectively 166,858   185,058 
Inventory:       
Raw materials  61,679   64,175 
Work in process 5,939   16,139 
Finished goods  44,917   41,095 
Inventory, net  112,535   121,409 
Derivative financial instruments 92   213 
Prepaid expenses and other assets  54,271   51,217 
Assets held for sale 69,699    
Total current assets  443,075   461,069 
Property and equipment, net  171,380   200,294 
Goodwill 55,311   69,685 
Other intangible assets, net  56,385   83,286 
Deferred financing costs 647   936 
Deferred income tax assets 64,024   30,152 
Other non-current assets 12,225   37,983 
Total assets $803,047  $883,405 
LIABILITIES AND SHAREHOLDERS' EQUITY       
Current Liabilities:       
Accounts payable $93,113  $89,596 
Accrued liabilities  65,808   77,209 
Current maturities of long-term debt  3,413   3,460 
Derivative financial instruments     1,050 
Liabilities held for sale  13,062    
Total current liabilities  175,396   171,315 
Pension benefit obligation  7,211   7,913 
Other liabilities 3,087   2,747 
Long-term debt, less current maturities  136,477   141,209 
Deferred income tax liabilities 1,177   6,347 
Total liabilities  323,348   329,531 
Shareholders' equity:       
Common Stock:       
No par value; 55,000,000 shares authorized, 33,856,629 and 36,761,362 issued and

outstanding at December 31, 2018 and December 31, 2017, respectively
 140,300   265,048 
Paid-in capital 14,934   15,625 
Accumulated other comprehensive loss (39,500)  (20,444)
Accumulated earnings  363,965   293,645 
Total shareholders' equity  479,699   553,874 
Total liabilities and shareholders' equity$803,047  $883,405 



GENTHERM INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 Year Ended December 31, 
 2018  2017 
Operating Activities:       
Net income$41,899  $35,227 
Adjustments to reconcile net income to cash provided by operating activities:       
Depreciation and amortization 50,638   44,972 
Deferred income taxes 6,699   5,135 
Stock compensation 9,047   12,507 
Defined benefit plan (income) expense 82   (23)
Provision of doubtful accounts (1)  (469)
Loss on sale of property and equipment 2,602   1,042 
Impairment loss 11,476    
Changes in operating assets and liabilities:       
Accounts receivable 3,024   6,033 
Inventory (7,689)  (4,348)
Prepaid expenses and other assets (4,428)  (12,334)
Accounts payable 12,380   (7,691)
Accrued liabilities (7,295)  (30,171)
Net cash provided by operating activities 118,434   49,880 
Investing Activities:       
Proceeds from the sale of property and equipment 799   91 
Investment in subsidiary, net of cash acquired (15)  (66,994)
Purchases of property and equipment (41,541)  (50,785)
Net cash used in investing activities (40,757)  (117,688)
Financing Activities:       
Borrowing of debt 94,679    
Repayments of debt (99,460)  (27,156)
Cash paid for the cancellation of restricted stock (1,188)  (1,837)
Proceeds from the exercise of Common Stock options 14,777   2,755 
Cash paid for the repurchase of restricted stock (148,074)  (5,326)
Net cash used in financing activities (139,266)  (31,564)
Foreign currency effect (1,963)  25,357 
Net decrease in cash and cash equivalents (63,552)  (74,015)
Cash and cash equivalents at beginning of period 103,172   177,187 
Cash and cash equivalents at end of period$39,620  $103,172 
Supplemental disclosure of cash flow information:       
Cash paid for taxes$23,159  $76,741 
Cash paid for interest$5,027  $4,540 
Supplemental disclosure of non-cash transactions:       
Common Stock issued to Board of Directors and employees$5,759  $6,298 

 

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