Business context and reporting period
Gentherm Incorporated designs and manufactures thermal-management products, principally automotive seat and steering-wheel comfort systems, with additional industrial and medical businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $235.9 | $232.6 | $728.5 | $681.1 |
| Gross margin | $70.2; 29.8% | $76.7; 33.0% | $233.8; 32.1% | $216.4; 31.8% (32.4% excluding 2016 acquisition inventory charge) |
| Operating income | $16.2 | $27.4 | $76.2 | $79.7 |
| Net income | $6.6 | $20.2 | $40.5 | $50.6 |
| Diluted EPS | $0.18 | $0.55 | $1.10 | $1.38 |
| Operating cash flow | Not separately provided for the quarter | $15.4 | $71.0 |
- Q3 revenue increased 1.4% year over year; nine-month revenue rose 7.0%. Automotive revenue was $215.2 million in Q3 and $652.8 million year to date. Industrial revenue was $20.7 million and $75.7 million, respectively.
- Q3 operating margin was approximately 6.9%, versus 11.8% a year earlier; nine-month operating margin was approximately 10.5%, versus 11.7%. Q3 gross margin fell 3.2 percentage points.
- At September 30, cash and equivalents were $147.6 million, total debt was $145.9 million, and working capital was $332.5 million. Current assets were $481.8 million and current liabilities $149.3 million. Debt included a $129.0 million revolving-note balance and $16.9 million of DEG loans.
- Nine-month capital expenditures were $37.2 million. Cash declined $29.6 million from year-end, reflecting operating cash flow of $15.4 million, investing outflows of $39.1 million, and financing outflows of $29.9 million, partly offset by currency effects.
Changes versus prior period
- Despite revenue growth, Q3 net income fell to $6.6 million from $20.2 million. The quarter included a $7.3 million foreign-currency loss, compared with a $0.9 million loss in Q3 2016. For nine months, the currency loss was $21.9 million versus a $0.1 million gain.
- Q3 cost of sales rose 6.2%, faster than revenue, and SG&A rose 16%. Nine-month R&D expense increased 11% and SG&A increased 19%.
- Nine-month revenue growth benefited from CSZ, acquired April 1, 2016, as well as automotive growth and recovery in GPT. CSZ contributed $56.3 million of nine-month 2017 revenue versus $31.9 million in the comparable period, which included only six months of CSZ.
- Nine-month operating cash flow decreased $55.6 million from 2016, reflecting lower net income and $35.1 million of 2017 tax payments related to the 2016 North American reorganization, among other factors.
Outlook, commentary and risks
- Management stated that cash, expected operating cash flow, and available credit were expected to cover operating needs, capital expenditures, and debt service for at least the next 12 months. It cautioned that weaker operating cash flow could require alternative financing or reduced/delayed investment. No specific revenue or earnings guidance was provided.
- Management cited global automotive production softness, customer plant shutdowns to adjust inventories, and shifts from higher-priced active-cooling seats to heated/ventilated systems. Seat heaters and steering-wheel heaters grew, while climate-controlled seat products were disproportionately affected.
- Q3 gross margin was affected by a $2.0 million customer rebate, $2.3 million of unfavorable inventory adjustments (mainly a reserve for the heated-and-cooled mattress line), factory overtime and labor inflation, battery-product launch costs, CSZ chamber cost overruns, and lower-margin product mix.
- The company recorded $2.5 million of Q3 CEO-transition-related costs; nine-month costs were $2.9 million. CEO Daniel Coker announced his planned retirement, and Phillip Eyler was named successor.
- Foreign-exchange exposure is material: management attributed most of the nine-month unrealized currency loss to U.S.-dollar cash held by euro-functional European subsidiaries and intercompany exposures. Further dollar weakening could produce additional unrealized losses. Derivatives are used to manage, not speculate on, currency and copper-price exposures.
- Management expected adoption of the new intra-entity asset-transfer tax standard in 2018 to increase the 2018 effective tax rate by approximately 3%–5%. The company was evaluating the impact of other accounting standards, including leases and derivatives guidance.
- The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether automotive demand, customer production adjustments, and the mix shift away from active-cooling seats continue to affect revenue and margins.
- Whether the Q3 inventory reserve, rebate, launch costs, and other manufacturing pressures recur, and whether gross margins recover.
- How much of the foreign-currency loss is noncash and whether currency movements or cash positioning create further earnings volatility.
- Operating cash flow and working-capital trends, including the effects of reorganization-related tax payments and ongoing capital investment.
- Debt-facility availability and covenant headroom: the filing gives differing availability figures—approximately $221 thousand in a note and $203.8 million in MD&A—so the exact available borrowing amount is unclear from the filing text.
- The financial effects of the CEO transition, 2018 tax-accounting changes, and the planned adoption of new revenue-recognition and lease standards.