Gentherm Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Amounts are in U.S. dollars, in thousands, except per-share data.
Business context and results
Gentherm designs and manufactures thermal-management technologies, primarily for automotive customers. Automotive is its principal reportable segment; the advanced-technology segment conducts research and development. The company reported strong demand for climate-controlled seat systems and other automotive products.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Product revenue | $193,938 | $148,090 |
| Gross profit / margin | $57,025 / 29.4% | $39,051 / 26.4% |
| Operating income / margin | $24,816 / 12.8% | $9,791 / 6.6% |
| Net income | $16,579 | $9,909 |
| Net income attributable to Gentherm common shareholders | $16,579 | $7,728 |
| Basic and diluted EPS | $0.47 | $0.24 |
| Cash from (used in) operating activities | $(3,156) | $10,039 |
| Capital expenditures | $6,769 | $6,116 |
Material changes and drivers
- Revenue increased 31% year over year. Climate-controlled seat-system revenue rose about $26 million (46%) to $81.9 million; seat-heater revenue rose about $16 million (25%) to $80.9 million; heated-steering-wheel revenue increased about $3.2 million (58%) to $8.8 million.
- Management attributed growth to new program launches, strong vehicle production—particularly certain GM and Jeep platforms—improved sales to Japan-based customers, and stronger European sales.
- Gross margin improved from approximately 26% to 29%, reflecting product mix, higher volume and fixed-cost absorption, foreign-exchange effects, and the China electronics facility. Management said insourcing savings exceeded that facility’s added overhead for the first time and expected further margin improvement as production ramped.
- Operating expenses rose 10% to $32.2 million, including higher R&D spending and $1.1 million of acquisition transaction expenses. The effective tax rate was 27%, versus 7% in Q1 2013; the prior-year rate included an approximately $1.3 million one-time tax benefit.
- Net income attributable to Gentherm common shareholders in Q1 2013 was reduced by non-controlling interest and preferred-stock dividends; those items were absent in Q1 2014.
Cash, liquidity and debt
- Cash and equivalents were $57.7 million at March 31, 2014, versus $54.9 million at year-end 2013. Working capital was $144.8 million, up $28.0 million since year-end.
- Operating cash flow was negative $3.2 million despite net income of $16.6 million, largely because of a $21.2 million increase in accounts receivable and higher prepaid and other assets. The filing attributes the receivables increase mainly to higher sales and sales timing.
- Total debt was $90.3 million, up from $82.3 million at year-end; current maturities were $20.6 million and long-term debt was $69.8 million. Cash exceeded total debt by approximately $32.7 million. The company reported compliance with its debt covenants.
- Credit-facility principal is due in full on March 30, 2016. At quarter-end, $16.5 million remained available on the U.S. revolver and €20.0 million on the W.E.T. revolver. Management said cash and operating cash flows should cover operating, capital-spending and debt-service needs for the foreseeable future, while cautioning that acquisitions or weaker cash flows could require additional financing or spending reductions.
Outlook, acquisitions and risks
- No numerical earnings or revenue guidance is provided. Management identified potential additional margin gains as the China electronics facility increases production.
- On February 12, Gentherm acquired the remaining shares of its North American electronics manufacturing joint venture; the step acquisition generated a $785,000 gain.
- On April 1, 2014, after quarter-end, Gentherm acquired privately held Global Thermoelectric Inc. in an all-cash transaction. The purchase price is not stated in the provided filing text. GTE reported 2013 revenue of approximately C$34 million and Q1 2014 revenue of C$14.464 million. Gentherm borrowed $13.455 million in March to partially finance the acquisition.
- Ukraine operations are a significant exposure: approximately 24% of revenue came from products manufactured there. Management warned that unrest or closure of the Ukraine-Hungary border crossing could materially disrupt the business.
- A dispute concerning a currency-related interest-rate swap remains contingent. A Munich court ruled in W.E.T.’s favor against UniCredit, including future swap obligations reported at $11.8 million and past-due amounts of approximately $7.4 million; UniCredit appealed, with a hearing scheduled for July 9, 2014. Gentherm said recovery was uncertain and had entered into offsetting derivatives.
- The company uses derivatives to manage currency and interest-rate exposure and does not use them for speculative purposes. Foreign-exchange losses and derivative revaluation affected quarterly results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and improved margins persist, and whether China facility ramp-up delivers the anticipated savings.
- Cash conversion and working-capital trends, particularly receivables and the effect of further growth.
- Debt, covenant headroom and acquisition funding needs following the GTE purchase; the filing text does not provide GTE’s purchase price.
- Developments in Ukraine and the operational and logistics exposure associated with the company’s manufacturing footprint.
- The UniCredit appeal outcome, potential swap obligations and related derivative exposures.