Gentherm Incorporated — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Gentherm designs and manufactures thermal-management technologies, principally for automotive customers; it also acquired thermoelectric power-generation business Gentherm Global Power Technologies (GPT) on April 1, 2014. Unless noted, financial figures are in millions of dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Product revenue | $206.0 | $171.2 | $606.1 | $479.8 |
| Gross margin | $61.6; 29.9% | $45.9; 26.8% | $179.4; 29.6% | $125.1; 26.1% |
| Operating income | $24.0 | $14.6 | $73.1 | $32.8 |
| Net income attributable to Gentherm | $17.3 | $8.7 | $50.3 | $22.9 |
| Diluted EPS | $0.48 | $0.24 | $1.40 | $0.63 |
- Q3 revenue grew 20%; nine-month revenue grew 26%. Management attributed growth chiefly to climate-controlled seat systems (CCS), higher vehicle production and new programs, with GPT contributing $8.5 million in Q3 and $16.7 million year to date.
- Gross margin improvement reflected favorable product mix, higher production volumes and fixed-cost absorption, China electronics insourcing, and currency effects on manufacturing costs. Q3 CCS revenue rose 28% to $87.7 million; nine-month CCS revenue rose 37% to $254.9 million.
- Operating expenses increased: Q3 R&D rose 20% to $15.3 million and SG&A rose 22% to $22.3 million. GPT accounted for $2.1 million of Q3 SG&A and $4.0 million year to date. Nine-month acquisition costs were $1.1 million, primarily related to GPT.
- Q3 effective tax rate was 28%; the nine-month rate was also 28%, including unfavorable adjustments for previously unrecognized tax expenses. Management estimated a 27% rate excluding those adjustments. The prior-year nine-month period included a stated $1.3 million tax benefit from the American Taxpayer Relief Act.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $45.5 million, versus $28.6 million in 2013. Investing used $58.6 million, including $31.7 million for GPT and the joint-venture buyout and $27.0 million of capital expenditures. Financing provided $25.0 million; cash increased $10.3 million to $65.2 million.
- At September 30, current assets were $328.7 million and current liabilities $151.4 million; working capital was $177.3 million, up from $116.8 million at year-end 2013. Accounts receivable and inventory increased, in part with higher sales and the GPT acquisition.
- Total debt was $94.8 million, up from $82.3 million at December 31, 2013; cash less debt was approximately negative $29.6 million. On August 7, Gentherm refinanced its facilities with a five-year agreement: $50 million U.S. term loan, €20 million European term loan and $100 million revolving facility. Borrowings outstanding at quarter-end included $13.4 million on the revolver. The agreement permits up to an additional $50 million of secured borrowing, subject to its terms.
- The new facilities are secured, carry variable rates, mature August 7, 2019 and require financial covenant compliance. Gentherm reported compliance with its credit, DEG loan and capital-lease covenants at quarter-end. Management said cash and operating cash flows were expected to cover operating, capital and debt-service needs for the foreseeable future, based on its current plan.
Material developments, outlook and risks
- GPT was acquired for approximately $34.2 million, including cash acquired, and is included in results from April 1. Its purchase-price allocation remained preliminary; the filing cautions that final valuations could differ materially. GPT generated Q3 operating income of $0.6 million and a nine-month operating loss of $0.6 million.
- Management expected further margin improvement as the China electronics facility increased production. It planned to start construction of a Vietnam manufacturing facility in Q4 2014, with production expected in 2015 and estimated cost of $10–15 million. No formal earnings or revenue guidance is provided.
- Automotive results remain exposed to customer production volumes, program launches, and the lead time between development spending and revenue. Management highlighted economic softness in Europe and potential unfavorable revenue effects if the euro weakened further.
- Approximately 26% of revenue came from products manufactured in Ukraine. The filing warns that political unrest or closure of the Ukraine-Hungary border could disrupt production and shipments and materially harm the business. Mexico and China operations also face political, civil and labor uncertainty.
- Foreign exchange and interest-rate exposures are managed with derivatives, not for trading. The UniCredit appeal concerning a currency-related interest-rate swap remained pending. A German court had ordered UniCredit to pay €144,000 and bear future swap obligations; Gentherm said realization of any award was uncertain. The filing reported approximately $9.1 million of future swap obligations and $8.9 million of accrued past-due payments as of September 30, 2014, with offsetting derivatives intended to limit risk through 2018.
- The company recorded $0.7 million of debt-retirement expense for unamortized financing costs on the repaid prior facilities. Comprehensive income was reduced by $16.0 million of nine-month other comprehensive losses, primarily currency translation. Management reported no other material pending litigation, no material changes to previously disclosed risk factors, and effective disclosure controls.
Key facts for investors to verify
- How much of reported growth and margin improvement is sustainable organic performance versus acquisition contribution, product mix, currency and temporary production effects.
- GPT’s finalized purchase-price allocation, ongoing profitability and contribution to the combined business.
- Execution, funding and expected returns for the Vietnam facility and other planned capacity investments.
- Cash conversion and working-capital trends, particularly receivables, inventory and the ability to fund capital spending while servicing debt.
- Credit-agreement leverage and fixed-charge covenants, variable-rate exposure, and the status and accounting impact of the UniCredit appeal and swap obligations.
- Operational continuity in Ukraine and the potential effects of geopolitical developments, border disruption and currency movements.