Gentherm Incorporated — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Gentherm designs and manufactures thermal-management technologies and automotive cable systems. Unless noted otherwise, financial figures below are in U.S. dollars and millions.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Product revenue | $206.9 | $193.9 | +7% |
| Gross profit | $66.6 | $57.0 | +17% |
| Gross margin | 32.2% | 29.4% | +2.8 percentage points |
| Operating income | $27.1 | $25.0 | +8% |
| Net income | $19.8 | $16.6 | +20% |
| Diluted EPS | $0.55 | $0.47 | +17% |
| Operating cash flow | $8.8 | $(3.2) | Improved |
| Capital expenditures | $10.4 | $6.8 | Higher |
Revenue growth reflected higher volumes across most markets and products, including continued strong climate-controlled seat shipments and $7.5 million of revenue from Gentherm Global Power Technologies (GPT), acquired April 1, 2014. At constant Euro exchange rates, management said revenue would have been $217.1 million, up 12%; reported revenue was reduced by an estimated $10.2 million from Euro translation.
Climate-controlled seat revenue increased 15% to $94.4 million. Seat-heater revenue decreased 9% to approximately $73.7 million as reported, primarily due to currency translation; management said it increased after adjusting for the Euro decline. Heated steering-wheel revenue rose 11% to $9.8 million.
Gross margin improvement reflected favorable product mix, higher fixed-cost absorption and lower production costs associated with weaker Mexican peso and Ukrainian hryvnia exchange rates. Operating expenses rose to $39.5 million from $32.0 million. SG&A increased 40% to $24.9 million, including GPT costs, higher compensation and other expenses; higher stock-appreciation-rights compensation included $3.7 million of expense, up $2.7 million year over year. R&D increased 12% to $14.5 million. Q1 2014 included $1.1 million of GPT acquisition expenses, versus none in Q1 2015.
Effective tax rate was 24.3%, compared with 27.5%, primarily reflecting lower statutory rates in foreign jurisdictions. Segment operating income was $40.7 million for Automotive and a $1.1 million loss for Industrial; reconciling items were a $12.5 million loss.
Financial position and liquidity
- Cash and cash equivalents were $79.6 million at March 31, 2015, down from $85.7 million at December 31, 2014. Working capital was $197.2 million, versus $187.4 million at year-end.
- Operating cash flow was $8.8 million, with working-capital movements absorbing cash, including increases in receivables and inventory. Investing activities used $10.3 million, mainly for property and equipment. Financing activities used $0.1 million.
- Total debt was $85.8 million, down from $90.8 million at year-end; $4.7 million was current and $81.1 million long-term. Debt included U.S. and European term loans, a $12.0 million revolver balance, the DEG loan and capital leases. The company reported compliance with debt covenants.
- Management said available cash and operating cash flows were expected to cover operating needs, capital expenditures and debt service for the foreseeable future. The company cautioned that lower operating cash flows could require alternative financing or cuts or delays to spending and investments.
Material changes, outlook and risks
- Foreign exchange had significant effects: the average Euro rate fell from $1.37 to $1.13, reducing reported revenue; weaker Mexican peso and Ukrainian hryvnia lowered production costs by $3.7 million. Foreign currency translation contributed to a $19.3 million net-of-tax comprehensive loss, largely reflected in accumulated other comprehensive loss.
- Gentherm was constructing production facilities in Vietnam and Macedonia. The estimated combined construction cost was $15–20 million; the facilities were expected to begin expanding capacity by the end of 2015. Q1 capital spending also supported capacity expansion and equipment replacement.
- No quantified full-year earnings or revenue guidance was provided. Management described ongoing development of next-generation seat-comfort products and other thermal-management applications. It noted that automotive program development costs precede related revenue, often by two to three years.
- Gentherm GmbH’s dispute with UniCredit over a currency-related interest-rate swap remained on appeal. A Munich court had ruled in Gentherm’s favor, including that UniCredit bear future swap obligations; the company said it could not be certain the award would be upheld. The reported swap liabilities were $13.3 million for future obligations and approximately $9.6 million for accrued past-due payments. An offsetting derivative was intended to limit exposure through 2018.
- The company uses derivatives to manage foreign-exchange, interest-rate and copper-price exposures, not for trading. It hedges foreign-currency exposures for up to one year. Management reported no material changes to previously disclosed risk factors and no other material pending litigation.
- Management stated that disclosure controls were effective as of March 31, 2015, and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification priorities
- Verify the durability of revenue growth and margin improvement, including the effects of foreign exchange, product mix, CCS volumes and GPT contribution.
- Assess whether increased SG&A, especially incentive compensation, and ongoing R&D and facility investment affect future profitability and cash generation.
- Monitor working-capital requirements, capital spending and liquidity against management’s stated funding expectations.
- Track debt balances, covenant compliance and the UniCredit appeal, including potential consequences if the court ruling is not upheld.
- Review the company’s assessment of the forthcoming revenue-recognition standard; Gentherm said its implementation impact was still under evaluation.