Business context and reporting period
Gentherm Incorporated’s unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the first quarter of 2019. The company develops thermal-management products, primarily for automotive applications, and also serves medical markets. All dollar amounts below are in USD millions unless noted.
Financial performance and liquidity
- Revenue: $228.6, down 11.4% from $257.9. Management attributed an estimated $28 million of the decrease to COVID-19-related automotive volume declines. Automotive revenue fell 10.7% to $216.5; Industrial revenue declined 22.0% to $12.1, reflecting prior divestitures, partly offset by higher medical sales.
- Profitability: Gross profit was $66.1 versus $75.3; gross margin was 28.9% versus 29.2%. Operating income was $18.7 versus $21.8. Net income rose to $11.9 from $8.4, and diluted EPS was $0.36 versus $0.25. The 2019 comparison included a $5.0 gain on the CSZ-IC sale and a $10.5 impairment loss, so reported earnings are affected by unusual prior-year items. The filing does not provide a clear adjusted earnings comparison.
- Cash flow: Operating cash flow was $29.4 versus $6.9. Management attributed the year-over-year increase in part to working-capital movements, notably accounts payable. Investing activities used $6.3; capital expenditures were $3.2. Financing provided $149.8, principally from additional revolver borrowings.
- Cash and debt: Cash and cash equivalents were $222.9 at March 31, up from $50.4 at year-end; including restricted cash, the total was $225.4. Debt was $234.2, including $225.4 outstanding under the amended credit agreement, compared with total debt of $80.6 at December 31. The company reported $226.7 of additional borrowing availability, subject to conditions and covenants.
- Other balance-sheet measures: Current assets were $547.0 and current liabilities $171.3. Shareholders’ equity was $470.4. The company reported $12.5 of other comprehensive loss for the quarter, primarily from currency translation and foreign-currency hedges.
Material changes versus the prior comparable period
- COVID-19-related shutdowns and reduced vehicle production drove a substantial part of the revenue decline; global light-vehicle production fell 23% year over year in Q1, according to IHS Markit.
- Cost of sales declined with lower volumes and operational improvements. R&D expense fell to $17.8 from $18.9, and SG&A fell to $25.8 from $32.7. Restructuring expense rose to $3.8 from $1.9.
- Automotive product trends were mixed: climate-control seats and seat heaters declined, while steering-wheel heaters and battery thermal management increased. Medical revenue rose 48.3% to $12.1, including demand for Blanketrol products used in COVID-19 patient temperature management.
- Revenue comparisons also reflect the 2019 CSZ-IC sale and the 2019 GPT divestiture, as well as the 2019 acquisition of Stihler. The 2019 quarter included CSZ-IC and GPT revenue.
Outlook, risks, contingencies and unusual items
- COVID-19 outlook: Management said the pandemic’s impact materially worsened in Q2, with production reductions and temporary partial facility closures in North America and Europe. The duration and financial effects remain uncertain. IHS Markit’s cited full-year 2020 light-vehicle production forecast was 69.3 million units, down 22% from 2019; this is an industry forecast, not company guidance.
- Liquidity actions and risk: Gentherm borrowed $169.5 million in March as a precaution, reduced expenses, inventory and capital spending, deferred salaried-employee base pay, and suspended share repurchases. Management believed available cash, operating cash flow and borrowing capacity would cover operating and capital needs and debt service for at least 12 months, but warned that falling EBITDA could materially reduce borrowing availability and that further capital may be needed.
- Restructuring: The manufacturing-footprint plan is expected to consolidate operations, close two plants, and be substantially completed by the end of 2021. Estimated total costs are $20–24 million, including $17–21 million of cash expenditures; actual costs, timing and savings may differ.
- Contingency: Claims were made against the $2.5 million CSZ-IC sale escrow in January 2020. The company could not estimate any potential loss. The filing reports no material pending litigation and says ordinary-course legal matters are not expected to have a material adverse effect.
- Other items: A $3.1 million purchase of automotive patents and technology was recorded as an asset acquisition. The company expects to defer 2020 payroll taxes under the CARES Act. No formal company revenue or earnings guidance is provided in the filing.
Most important facts for investors to verify
- How Q2 and subsequent production shutdowns, customer demand and supplier disruptions affected revenue, cash flow and facility utilization.
- Whether EBITDA and credit-agreement covenants reduced the stated $226.7 million of borrowing availability, and whether lenders granted any amendment or waiver.
- Whether the company maintained sufficient liquidity after its salary deferrals, spending reductions and suspension of share repurchases.
- The outcome of claims against the $2.5 million escrow and any resulting loss.
- Actual restructuring costs, plant-consolidation progress and realized savings relative to management’s estimates.