Business context and reporting period
Gentherm Incorporated designs and manufactures thermal-management products, principally automotive seat-comfort systems, along with automotive cable systems and industrial products. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $213.4m | $206.2m | $420.4m | $400.1m |
| Gross margin | $65.7m; 30.8% | $60.8m; 29.5% | $132.3m; 31.5% | $117.8m; 29.4% |
| Operating income | $26.7m | $24.5m | $53.7m | $49.6m |
| Net income | $19.5m | $16.4m | $39.3m | $33.0m |
| Diluted EPS | $0.53 | $0.46 | $1.08 | $0.92 |
For the first half, operating cash flow was $39.8m, capital expenditures were $23.0m, and cash increased $15.9m to $101.6m. At June 30, cash and cash equivalents were $101.6m, total debt was $85.6m (including $4.5m current), and working capital was $216.6m. Total assets were $599.8m and shareholders’ equity was $326.8m.
Material changes versus prior comparable periods
- Reported revenue rose 4% in Q2 and 5% for the first half. Management estimated that, at prior-year exchange rates, revenue would have been 10% higher in Q2 and 11% higher for the first half. Currency translation reduced reported revenue by $13.7m and $25.3m, respectively.
- Climate-controlled seat revenue increased 12% in Q2 and 13% for the first half, supported by program launches and vehicle volumes. Seat-heater revenue declined 10% in reported dollars, primarily due to the weaker euro; management said it increased after adjusting for currency. Gentherm Global Power Technologies (GPT) also contributed to growth; it was acquired in April 2014, affecting the year-over-year comparison.
- Gross margin improved, which management attributed to product mix, higher volume and lower production costs from weaker Mexican peso and Ukrainian hryvnia exchange rates. Management estimated those currency effects reduced production costs by $4.3m in Q2 and $9.8m in the first half.
- First-half SG&A increased 24% to $49.0m, including $6.5m of stock-appreciation-rights compensation expense, up $4.3m year over year. R&D increased 7% to $29.5m. First-half 2014 included $1.1m of acquisition transaction expenses; none were recorded in first-half 2015.
- Automotive generated Q2 revenue of $201.0m and operating income of $42.1m. Industrial revenue was $12.5m and its operating loss was $1.8m; corporate and other reconciling costs were $13.6m.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said cash and expected operating cash flow should cover operating needs, capital spending and debt service for the foreseeable future, while cautioning that weaker operating cash flow could require financing or reduced/delayed spending or investment.
- The company expects to draw a $15m DEG loan in Q3 2015 to finance its Vietnam production facility. The rate is set when drawn at 3.65% plus six-month LIBOR; principal payments are scheduled from November 2017 through May 2023. Construction and capacity expansion in Vietnam and Macedonia were among the period’s capital projects.
- Gentherm GmbH’s dispute with UniCredit over a currency-related interest-rate swap remains on appeal. A German court had ruled in Gentherm’s favor, including an award requiring the bank to bear future swap obligations; the company said it cannot be certain that any portion of the ruling will stand. The swap liability was valued at $14.0m, with approximately $10.1m in additional accrued past-due liabilities described in the filing. An offsetting derivative is intended to limit market exposure through 2018.
- Key exposures include foreign exchange, interest rates and copper prices. The filing also notes credit-agreement and loan covenant requirements; Gentherm reported compliance at June 30, 2015. Management said there were no material changes to previously reported risk factors, no other material pending legal proceedings, and disclosure controls were effective.
Important facts for investors to verify
- How much reported growth and margin performance depends on currency movements, product mix and production-cost benefits, and whether those effects persist.
- Automotive program launches, climate-controlled seat demand, seat-heater trends and GPT’s contribution to comparable-period growth.
- The UniCredit appeal’s status, potential swap payments and accrued liabilities, and the effectiveness of the offsetting hedge.
- Timing and terms of the Vietnam loan draw, facility spending, and compliance with debt covenants as investment ramps up.
- Working-capital and cash-flow trends, particularly receivables, inventory and capital expenditures.