Gentherm Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited figures are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. Gentherm develops thermal-management products for automotive, industrial, and healthcare markets.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior period | Change |
|---|---|---|---|
| Revenue | $257.9 | $264.6 | Down 2.5% |
| Gross profit / margin | $75.3 / 29.2% | $81.2 / 30.7% | Margin down 1.5 percentage points |
| Operating income / margin | $21.8 / 8.5% | $20.6 / 7.8% | Income up 5.8% |
| Net income | $8.4 | $13.0 | Down 35.1% |
| Diluted EPS | $0.25 | $0.35 | Down $0.10 |
| Cash from operating activities | $6.9 | $5.6 | Up $1.3 |
| Capital expenditures | $5.2 | $8.4 | Down $3.2 |
| Cash, cash equivalents and restricted cash | $41.3 | $39.6 at Dec. 31, 2018 | Up $1.6 |
| Total debt | $100.6 | $139.9 at Dec. 31, 2018 | Down $39.3 |
| Working capital | $235.5 | $267.7 at Dec. 31, 2018 | Down $32.2 |
Gross margin contracted despite lower reported cost of sales. Operating income benefited from reduced research and development and selling, general and administrative expenses. Net income included a $5.0 million pre-tax gain on the CSZ-IC sale and a $10.5 million impairment loss; the impairment was not expected to be tax deductible. The reported tax expense was $6.9 million, and management said the effective tax rate excluding the impairment was 26.7%.
At March 31, current assets were $401.9 million and current liabilities $166.4 million. The revolving credit facility had $261.1 million of undrawn capacity. The company reported compliance in all material respects with its debt agreements. Cash-flow statement investing activities provided $42.4 million, chiefly reflecting CSZ-IC sale proceeds; financing activities used $47.4 million, including debt repayments and $8.0 million of share repurchases.
Changes versus the comparable period
- Automotive revenue was essentially flat at $242.4 million. Excluding unfavorable currency translation, it would have risen 2.8%, and outperformed a 6.7% decline in light-vehicle production across Gentherm’s key markets.
- Product trends varied: climate-control seats rose 7.0% and battery thermal management rose 158.2%; seat heaters declined 12.2%, automotive cables 11.6%, and electronics 15.4%.
- Industrial revenue fell 29.8% to $15.6 million, primarily reflecting the February 1 sale of CSZ-IC. Gentherm Medical revenue rose 12.3% to $8.2 million.
- Net R&D expense declined 18.9% to $18.9 million; SG&A declined 10.5% to $32.6 million. Restructuring expense increased to $1.9 million from $0.9 million.
- Foreign currency results shifted from a $4.6 million loss in Q1 2018 to a $0.2 million gain in Q1 2019.
- Debt declined from year-end after $49.6 million of repayments and $10.4 million of additional revolving borrowings. The company repurchased approximately 200,000 shares for $8.0 million.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said available cash, operating cash flow, and borrowing capacity were expected to cover operating and capital needs and debt service for at least 12 months. It cautioned that weaker operating cash flows could require alternative capital, reduced or delayed investment, or capital expenditure cuts.
- The company received $47.5 million in cash proceeds from selling CSZ-IC and the former Cincinnati Sub-Zero headquarters; $2.5 million was placed in escrow for up to one year. The sale produced a $5.0 million pre-tax gain. Gentherm leased back a portion of the facility.
- Gentherm recorded $10.5 million of impairment losses associated with planned divestitures, including GPT and an equity investment. GPT remained classified as held for sale at quarter-end, with $17.0 million of assets and $7.0 million of liabilities classified as held for sale. Management noted impairment estimates are uncertain and may change.
- On April 1, 2019, after quarter-end, Gentherm acquired Stihler Electronic GmbH for approximately $15.0 million net of cash acquired, with up to $1.7 million of additional contingent payments tied to future milestones.
- Management cited tariffs, higher labor costs, and launch-phase costs for actively cooled battery thermal-management programs as cost pressures, partly offset by Fit-for-Growth savings. Foreign exchange movements and automotive production levels are additional business sensitivities.
- Disclosure controls and procedures were deemed ineffective at March 31, 2019 because of a previously reported material weakness in internal control over financial reporting. Management expected remediation before year-end 2019, subject to controls operating and being tested effectively.
- The filing reported no material changes to previously disclosed risk factors and no material pending litigation. Foreign-currency derivative contracts had a $24.1 million notional value; the company reported no commodity swaps outstanding.
Most important facts for investors to verify
- Whether automotive growth excluding currency effects is sustained, and how product-level trends and vehicle production affect future revenue and margins.
- Whether Fit-for-Growth savings offset tariffs, labor and product-launch costs, and whether further GPT impairment or divestiture-related charges arise.
- Progress and testing of the internal-control remediation plan, given the disclosed material weakness and ineffective disclosure controls.
- Cash generation, debt repayments, covenant compliance, and the availability and terms of revolving-credit borrowings.
- Final proceeds and obligations under the CSZ-IC sale, including escrow resolution, and the total cost and milestone outcomes of the post-quarter Stihler acquisition.