Gentherm Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Gentherm develops and manufactures thermal-management products, principally automotive seat and steering-wheel comfort systems, as well as industrial and other products. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Product revenue | $249.3 | $215.7 | Up $33.6, or 16% |
| Gross margin | $85.2; 34.2% | $68.2; 31.6% | Margin up 2.6 percentage points |
| Operating income | $34.8 | $29.9 | Operating margin approximately 14.0% versus 13.9% |
| Net income | $25.4 | $11.9 | Up 114%; diluted EPS $0.69 versus $0.33 |
| Cash from operations | $(21.3) | $6.3 | Negative, primarily reflecting reorganization-related tax payments and working-capital movements |
| Capital expenditures | $13.6 | $17.0 | Investing cash outflow was $15.6, including a $2.0 CSZ payment |
- At March 31, cash was $133.9, total debt was $163.1, and net debt was approximately $29.2. Debt declined from $171.5 at year-end 2016.
- Current assets were $473.1 and current liabilities $153.2; working capital was $319.9. Approximately $203.0 was available under the $350 million revolving credit facility, net of letters of credit.
- Segment revenue: Automotive $221.8, up 5%; Industrial $27.4, versus $5.3. Automotive operating income was $50.8; Industrial reported a $2.5 loss, with $13.4 of reconciling-item losses.
Material changes versus the prior comparable period
- Revenue growth reflected the CSZ acquisition, continued automotive growth, and a partial GPT recovery. CSZ contributed $20.0 in Q1 2017 and had $15.9 of pro forma revenue in Q1 2016; the filing reports 26% organic CSZ growth.
- Automotive revenue rose 5%. Seat-heater revenue increased 10% to $77.6, and steering-wheel-heater revenue increased 30% to $15.0, supported by program launches, vehicle production, and higher feature adoption/content.
- Gross margin improved with the higher-margin CSZ and GPT revenues, favorable currency effects on production expenses, and better automotive seat-heater content.
- R&D expense rose 24% to $19.5, reflecting program engineering and product development. SG&A increased to $30.8, including $6.1 for CSZ; higher incentive compensation and systems implementation also contributed.
- The effective tax rate was 22%, versus 57% reported in Q1 2016. The prior period included reorganization-related tax expense and other adjustments; excluding these, the company reported a 23% rate for Q1 2016.
Outlook, risks and notable items
- Management said cash, operating cash flow, and available borrowing were expected to cover operating, capital expenditure, and debt-service needs for at least 12 months. It cautioned that lower operating cash flow could require alternative financing or reduced/delayed investment.
- Management estimated that awarded battery thermal-management and next-generation electronic-control-module programs could add more than $50 million in annual revenue at full run rate in 2019. This is an estimate, not formal company-wide revenue guidance. The filing cites approximately $2 million of Q1 R&D expense for these programs.
- The company paid $2.5 million and $32.6 million of reorganization-related income taxes in Q1 2017. Together with other operating-asset and liability changes, these payments contributed to operating cash outflow and lower accrued liabilities.
- Debt agreements impose financial covenants and restrict dividends. The company reported material compliance at quarter-end; the $146 million U.S. revolving balance is due in 2021. Management also identified currency, interest-rate, and copper-price exposure and uses derivatives for hedging, not speculation.
- Revenue-standard implementation remained under review; management identified customer purchase options in long-term supply agreements as a potentially significant area. Lease-standard implementation was also being assessed.
- No material pending litigation or material changes to previously disclosed risk factors were reported. Disclosure controls were considered effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist after separating CSZ acquisition effects, automotive growth, and currency impacts.
- Whether operating cash flow recovers after the one-time reorganization tax payments and whether receivables, inventory, and accrued liabilities normalize.
- Progress, customer awards, spending, and timing for the battery thermal-management and electronic-control-module programs, including the estimated 2019 run-rate revenue.
- Revolver availability, covenant headroom, repayment plans for the 2021 maturity, and the effect of debt and dividend restrictions.
- The eventual accounting and financial-statement impact of the new revenue and lease standards.