Gentherm Incorporated — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Gentherm develops thermal management products for automotive, industrial, and medical applications. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $240.1 million | $261.5 million | $741.3 million | $792.5 million |
| Gross margin | $74.7 million; 31.1% | $75.7 million; 28.9% | $222.7 million; 30.0% | $234.0 million; 29.5% |
| Operating income | $20.3 million | $15.7 million | $62.2 million | $52.0 million |
| Net income (loss) | $15.9 million | $(0.4) million | $27.1 million | $29.3 million |
| Diluted EPS | $0.48 | $(0.01) | $0.81 | $0.80 |
| Operating cash flow | Not stated for the quarter | $84.0 million | $70.5 million |
- Revenue and segments: Q3 revenue fell 8.2%; Automotive declined 4.4% to $228.2 million and Industrial declined 47.9% to $11.8 million. For nine months, revenue fell 6.5%, with Automotive down 3.3% and Industrial down 39.8%.
- Margins and costs: Gross margin improved year over year in both comparisons despite lower revenue. Management cited operational improvements and favorable currency effects; Q3 cost of sales also benefited by about $1 million from release of a warranty accrual.
- Cash flow and investment: Nine-month capital expenditures were $18.3 million. Cash from operating activities increased $13.5 million year over year. Investing cash flow was positive $14.5 million, including $47.5 million in CSZ-IC sale proceeds, offset partly by the $14.8 million Stihler acquisition and capital spending.
- Liquidity and debt: September 30 cash and cash equivalents were $45.2 million, plus $2.5 million restricted cash. Debt was $99.6 million, versus $139.9 million at December 31, 2018. The company reported $385.1 million of undrawn revolving capacity and compliance with material debt covenants. Its amended revolver capacity is $475 million and matures in June 2024.
- Capital returns: Gentherm repurchased $58.0 million of stock in the first nine months. The repurchase authorization had $88.6 million remaining at September 30 and expires December 16, 2020.
Material changes and unusual items
- Gentherm sold its Cincinnati Sub-Zero industrial chamber business and former headquarters on February 1 for $47.5 million, including $2.5 million held in escrow, and recorded a $5.0 million pretax gain. The sale reduced Industrial revenue compared with 2018.
- It acquired Stihler Electronic GmbH on April 1 for total purchase consideration of $15.5 million, including contingent consideration. Stihler’s results are included in Industrial.
- Gentherm recorded $21.2 million of impairment losses in the first nine months, primarily related to its planned divestiture of Gentherm Global Power Technologies (GPT) and also an equity investment. The GPT divestiture closed October 1; the company expected to record an additional approximately $6.0 million pretax loss in Q4, including about $4.0 million from releasing accumulated foreign currency translation losses.
- A manufacturing footprint rationalization announced in September will reduce the number of plants by two. Expected total costs are $20–$24 million, including $17–$21 million in cash expenditures; actions are expected to be substantially completed by the end of 2021. Q3 included $5.2 million of employee separation costs and $1.6 million of accelerated depreciation and asset impairment under the plan.
- Q3 results included a $4.1 million foreign currency gain. The nine-month effective tax rate was 41.5%, or 28.5% excluding the nondeductible impairment loss; management attributed the elevated rate mainly to foreign statutory rates and U.S. tax-reform effects.
- Shares outstanding declined to 32.7 million from 33.9 million at year-end 2018, largely reflecting repurchases. The company adopted new lease accounting in 2019, adding $12.1 million of operating lease right-of-use assets and $11.9 million of lease liabilities at September 30.
Outlook, risks, and controls
- No specific revenue, earnings, or margin guidance is provided in the supplied filing text. Management said cash, operating cash flows, and available borrowing capacity should be sufficient for operating and capital needs and debt service for at least the next 12 months, based on its current operating plan.
- Management cautioned that weaker operating cash flow could require alternative financing or reductions or delays in capital spending, acquisitions, or investments. Significant acquisitions may require additional debt or equity financing, which may not be available on acceptable terms.
- Key pressures cited include unfavorable automotive volumes, foreign exchange, customer pricing, U.S. tariffs, and higher labor costs in Mexico, Macedonia, and China. The Q3 General Motors strike reduced revenue by approximately $3 million. Restructuring costs, timing, and expected savings may differ materially from estimates.
- The amended credit agreement is secured, contains leverage and interest-coverage covenants, and restricts dividends. Gentherm reported no material change to previously disclosed risk factors and no material pending legal proceeding.
- A previously disclosed IT general-controls material weakness at Gentherm Medical was reported as remediated by September 30, 2019; management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the revenue decline reflects automotive demand and pricing versus currency, and whether BTM growth can offset declines in established product categories.
- The final GPT sale loss and proceeds, including the foreign currency translation amount, and whether other disposal-related charges arise.
- Actual cash costs, timing, and realized savings from the plant consolidation and broader Fit-for-Growth actions.
- How operating cash flow, working capital, and the $58.0 million of repurchases affect liquidity and debt levels.
- The final purchase accounting and performance contribution for Stihler, as well as progress against debt covenants and the company’s stated liquidity outlook.