Gentherm Incorporated — Q1 2016 Form 10-Q
Business context and reporting period. Gentherm designs and manufactures thermal-management technologies and automotive cable systems. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015. Its reportable segments are Automotive and Industrial; Automotive accounted for most revenue.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $215.7 | $206.9 |
| Gross profit / gross margin | $68.2 / 31.6% | $66.6 / 32.2% |
| Operating income / operating margin | $29.9 / 13.9% | $27.1 / 13.1% |
| Net income | $11.9 | $19.8 |
| Diluted EPS | $0.33 | $0.55 |
| Cash provided by operating activities | $6.3 | $8.8 |
| Capital expenditures | $17.0 | $10.4 |
- Revenue increased 4% as reported; management said it would have risen 6% excluding unfavorable currency translation. Automotive revenue rose to $210.4 million from $199.4 million; Industrial revenue declined to $5.3 million from $7.5 million.
- Gross margin fell 0.6 percentage points, reflecting product mix and higher overhead at the new Vietnam facility, partly offset by higher-volume fixed-cost absorption and favorable production-currency effects. Operating expenses declined to $38.4 million from $39.5 million.
- Net income fell despite higher operating income, principally because income-tax expense rose to $15.8 million from $6.4 million and foreign-currency results moved to a $1.8 million loss from a $0.4 million gain. Q1 2016 tax expense included reorganization-related charges; excluding the specified one-time expense and other reorganization adjustments, management reported $6.2 million of tax expense and a 23% effective rate.
- Operating cash flow was $6.3 million. Receivables growth was a significant use of cash; investing activities used $17.0 million, primarily for property and equipment. Cash increased $66.1 million to $210.6 million, substantially reflecting $75.0 million of borrowings.
- At March 31, cash was $210.6 million, total debt was $173.4 million, and working capital was $331.3 million. Long-term debt was $172.5 million. The amended credit agreement raised the U.S. revolving borrowing limit from $100 million to $250 million; the company reported compliance with its debt covenants.
Material changes, outlook, and risks
- Revenue growth reflected new program launches and higher vehicle volumes, particularly in luxury vehicles; seat-heater and steering-wheel-heater sales also increased. Gentherm Global Power Technologies revenue fell $2.2 million amid weakness in oil-related customer investment and lower shipments of larger custom systems.
- Q1 reorganization of the Windsor, Ontario operations included $9.6 million of withholding taxes incurred or accrued. A further approximately $32 million income-tax payment was accrued, with an offsetting deferred charge; it is expected to be paid in 2017 and management said it would not materially affect earnings. The filing attributes much of the reported tax increase to the reorganization.
- On March 17, Gentherm amended its credit agreement, replacing term loans with revolving borrowings and revising financial covenants. Revolving debt is variable-rate, creating interest-rate exposure; the company also faces currency and copper-price risks and uses derivatives to hedge some exposures.
- Management said existing cash and expected operating cash flow should fund operations, capital spending, and debt service for the foreseeable future. It cautioned that lower operating cash flow could require alternative financing or delayed investment. No specific revenue or earnings guidance is provided in the filing.
- Management expected research reimbursements and related costs to decline during the year as a U.S. Department of Energy research program expires. R&D spending had increased for application engineering and new product development.
- After quarter-end, on April 1, Gentherm acquired Cincinnati Sub-Zero Products for approximately $73 million net of cash acquired. CSZ reported 2015 revenue of approximately $63 million. The filing does not provide the acquisition’s financing details or pro forma impact.
- Other relevant exposures include automotive customer and production cycles, foreign-exchange movements, new-facility costs, and the timing of custom Industrial shipments. The company reported no material pending litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Windsor reorganization’s tax charges, accrued $32 million payment, and expected future deductions develop as described.
- How much of the $250 million revolving capacity remains available under the amended agreement and whether the company continues to meet its covenants.
- Whether operating cash flow improves relative to capital spending and the effects of receivables and other working-capital movements.
- Whether Automotive growth offsets Industrial weakness and the Vietnam facility’s impact on gross margins.
- The CSZ acquisition’s funding, integration costs, contribution to results, and effect on debt and liquidity.