Gentherm Incorporated — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Gentherm develops and manufactures thermal-management technologies, primarily for automotive customers, with additional industrial and medical operations. It reports Automotive and Industrial segments. The results include Etratech, acquired November 1, 2017; prior-year comparisons do not include Etratech.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Product revenue | $258.9 | $235.9 | $784.6 | $728.5 |
| Gross margin | $73.1; 28.2% | $70.2; 29.8% | $226.2; 28.8% | $233.7; 32.1% |
| Operating income | $15.7 | $16.1 | $52.0 | $76.1 |
| Net income (loss) | $(0.4) | $6.6 | $29.3 | $40.5 |
| Diluted EPS | $(0.01) | $0.18 | $0.80 | $1.10 |
| Operating cash flow | Not presented for the quarter | $70.5 | $15.4 |
Q3 operating margin was approximately 6.1%, versus 6.8% a year earlier; nine-month operating margin was approximately 6.6%, versus 10.4%. Nine-month cash capital expenditures were $31.8 million.
At September 30, cash and equivalents were $47.2 million, versus $103.2 million at year-end 2017. Total debt was $101.4 million, including $88.0 million on the U.S. revolving facility; undrawn revolver capacity was $260.8 million. Current assets were $454.5 million and current liabilities $178.4 million, including assets and liabilities held for sale. Management said available cash, operating cash flow and borrowing capacity should meet operating, capital and debt-service needs for at least 12 months.
Changes versus prior comparable periods
- Q3 revenue rose 9.8%; automotive revenue increased 9.9% and industrial revenue 8.1%. Automotive growth included $12.0 million from Etratech. Excluding acquisition and currency effects, automotive revenue increased 3.5% by management’s calculation.
- Nine-month revenue increased 7.7%, including $42.4 million from Etratech and a favorable $16.0 million currency-translation effect. Adjusted for those factors, automotive revenue grew 1.1%.
- Gross margin declined in both comparison periods. Management cited annual customer price reductions outpacing supplier savings, lower-margin Etratech revenue, product mix, early-stage battery thermal management (BTM) launches and tariffs.
- Nine-month operating income fell 31.7% and net income fell 27.7%. Q3 moved to a small net loss, principally reflecting an $11.5 million impairment charge and the related tax impact.
- Nine-month operating cash flow increased to $70.5 million from $15.4 million. The company attributed much of the comparison improvement to the prior-year period’s $35.1 million tax payments related to a business reorganization, as well as improved cash generation before working-capital changes.
Outlook, management commentary and risks
- Strategic plan: The June 2018 Fit-for-Growth program targets $75 million of overall savings. Actions completed to date were expected to produce approximately $30 million in annualized savings; additional identified savings in planning were expected to reduce annual costs by $65 million. The filing does not provide a quantified timetable for achieving the full target.
- Restructuring and portfolio changes: Nine-month restructuring expense was $12.9 million. The company expected another $1.2 million of employee termination costs in Q4 2018. It was marketing Gentherm Global Power Technologies and Cincinnati Sub-Zero’s Industrial Chamber business for sale; those businesses were classified as held for sale, not discontinued operations.
- Impairments: The company recorded $11.5 million of impairment losses: $6.2 million of goodwill, $3.1 million of other intangible assets and $2.2 million on held-for-sale assets. The filing notes that estimates used in the impairment assessment are uncertain and may change.
- BTM opportunity: New actively cooled BTM programs generated $4.6 million of Q3 revenue and $10.5 million for the nine months. Management anticipated annual revenue of $50–$60 million as volumes ramp, and expected higher volumes to offset launch costs and overhead.
- Tariffs: Gentherm estimated approximately $0.5 million of additional raw-material expense in Q3 and a $3–$5 million annualized cost increase beginning in Q4 2018. The estimate included a proposed additional tariff that had not yet taken effect. The company was working with suppliers and customers to mitigate the impact; recovery through pricing was not assured.
- Market and execution risks: Weighted automotive production in the company’s key markets declined 1.2% in Q3 and 0.7% year to date. Management cited European WLTP-related disruption, softer Etratech RV and sedan-related demand, foreign-exchange exposure and uncertain industrial project timing. Gentherm also noted that weaker operating cash flow could require alternative financing or cuts or delays to investment.
- Capital allocation: The board increased the share-repurchase authorization to $300 million, expiring December 2020. Approximately $64.2 million was spent on repurchases during the first nine months; $227.3 million remained available at September 30.
- Other disclosures: Gentherm reported material compliance with its debt agreements, effective disclosure controls and no material pending litigation disclosed in this filing.
Important facts for investors to verify
- Whether the targeted cost savings are achieved, and what further restructuring expense or cash costs are incurred.
- Whether BTM program volumes and margins ramp sufficiently to meet management’s revenue expectations.
- The actual tariff burden, including whether proposed additional tariffs take effect and how much can be mitigated or passed through.
- The timing and proceeds of the GPT and CSZ-IC divestitures, and any subsequent changes to held-for-sale valuations.
- Automotive demand, particularly in Europe and Asia, and Etratech customer/platform trends.
- Cash use, repurchases, debt repayment and headroom under credit-agreement covenants as liquidity declines.