Gentherm Incorporated — Q3 2015 Form 10-Q
Business and period: Gentherm designs and manufactures automotive thermal-management products and automotive cable systems, as well as industrial products. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in millions of U.S. dollars except per-share data.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $223.8 | $206.0 | $644.2 | $606.1 |
| Gross margin | $74.9; 33.5% | $61.6; 29.9% | $207.2; 32.2% | $179.4; 29.6% |
| Operating income | $37.4 | $24.1 | $91.2 | $73.7 |
| Net income | $27.7 | $17.3 | $67.0 | $50.3 |
| Diluted EPS | $0.76 | $0.48 | $1.84 | $1.40 |
| Cash from operating activities | — | $66.3 | $45.5 | |
| Capital expenditures | — | $35.7 | $27.0 |
Q3 operating margin was approximately 16.7%, versus 11.7% a year earlier; nine-month operating margin was approximately 14.2%, versus 12.2%. The filing reports income tax expense of $9.8 million for Q3 (26.1% effective rate) and $22.9 million year to date (25.5%); the comparable 2014 rates were 28.4% and 28.1%.
Cash and cash equivalents were $129.2 million at September 30, up from $85.7 million at year-end 2014. Reported working capital was $250.9 million, versus $187.4 million. Total debt was $99.3 million, including $4.5 million current; cash exceeded debt by approximately $29.9 million. The company reported compliance with its credit and loan covenants.
Changes and operating trends
- Reported revenue rose 9% in Q3 and 6% year to date. Management estimated that, at prior-year exchange rates, revenue would have been $236.9 million in Q3 (+15%) and $683.1 million year to date (+13%). Currency translation, particularly the weaker euro, reduced reported sales.
- Q3 growth reflected higher Gentherm Global Power Technologies (GPT) revenue and continued climate-controlled seat (CCS) shipments. CCS revenue increased 6% to $93.3 million; seat-heater revenue declined 7% to $74.1 million, primarily due to currency translation. Heated steering wheel and automotive cable sales also grew.
- Gross-margin expansion reflected favorable product mix, higher volume and fixed-cost absorption, and lower production costs associated with weaker Mexican peso and Ukrainian hryvnia exchange rates. GPT and CCS historically carry stronger margins.
- Nine-month R&D expense rose 4% to $44.5 million, while SG&A rose 16% to $71.5 million, including GPT costs, higher incentive compensation, and increased legal, audit, wage and travel costs. 2014 included $1.1 million of acquisition transaction expense; 2015 did not.
- Q3 GPT revenue was unusually strong partly because several large programs were delivered during the quarter. Management anticipated lower sequential GPT revenue in Q4 2015.
Liquidity, outlook and risks
- Operating cash flow was $66.3 million; investing cash use was $35.5 million, primarily reflecting $35.7 million of property and equipment purchases for capacity expansion, equipment replacement, and Vietnam and Macedonia facilities. Management expected the new facilities to begin expanding capacity by year-end 2015.
- Financing cash flow was $17.1 million. The company drew a $15.0 million DEG Vietnam loan at a fixed 5.21%, intended to fund its Vietnam production facility. Management stated that cash and expected operating cash flows were sufficient for operating, capital expenditure and debt-service needs for the foreseeable future, while warning that weaker operating cash flow or significant acquisitions could require additional financing or spending changes.
- Market exposures include foreign exchange, variable interest rates and copper prices. Gentherm uses derivatives to manage exposures and says it does not use them for speculative or trading purposes. Currency weakness affected reported revenue; derivative revaluations also affected earnings.
- A German court ruled in Gentherm GmbH’s favor in its dispute with UniCredit over a currency-related interest-rate swap, but the bank appealed and the outcome remains uncertain. The swap liability was reported at $9.8 million; an offsetting derivative was intended to limit market risk through 2018.
- The company wrote off $0.3 million of patent-related intangible assets after certain patent claims were found unpatentable; management said projected cash flows were not significantly affected and no other impairment resulted. No other material pending litigation or material changes to previously disclosed risk factors were reported.
- No quantified full-year revenue or earnings guidance was provided in the supplied filing text. Management cautioned that nine-month results are not necessarily indicative of full-year results. Disclosure controls were reported effective, with no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether reported growth and margin gains persist after separating underlying volumes and mix from foreign-exchange effects and production-cost currency benefits.
- How Q4’s anticipated sequential decline in GPT revenue affects consolidated sales and margins.
- Execution, spending and capacity ramp-up at the Vietnam and Macedonia facilities, alongside the higher capital investment level.
- Cash conversion and working-capital trends, particularly receivables growth, and the company’s capacity to fund investment while servicing debt.
- The outcome and financial implications of the UniCredit appeal and related swap obligations, as well as future effects of derivative revaluations.