Gentherm Incorporated — 2013 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited financial statements; amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context
Gentherm supplies thermal seat-comfort and cable systems to global automotive manufacturers, with Climate Control Seats (CCS), Advanced Technology and W.E.T. reported as segments. Gentherm held more than 99% of W.E.T. at quarter-end; a squeeze-out completed after quarter-end resulted in 100% ownership. W.E.T. contributed $133.5 million of Q3 revenue, making year-over-year comparisons reflect its substantial contribution.
Financial performance and liquidity
- Q3 revenue: $171.2 million, up 21% from $141.1 million. CCS revenue rose 11% to $37.7 million; W.E.T. revenue rose 25% to $133.5 million.
- Q3 profitability: Gross profit was $45.9 million (26.8% margin), versus $36.9 million (26.1%) a year earlier. Operating income was $14.6 million (8.5% margin), versus $10.0 million (7.1%). Net income attributable to common shareholders was $8.5 million, or $0.25 basic and $0.24 diluted per share, versus $2.5 million, or $0.08 per share.
- Nine-month results: Revenue was $479.8 million, up 18%; gross profit was $125.1 million (26.1% margin), operating income $32.8 million, and net income attributable to common shareholders $21.2 million ($0.64 basic and $0.63 diluted per share). The comparable 2012 amounts were $406.7 million, $103.6 million, $27.1 million and $8.6 million, respectively.
- Cash flow: Nine-month operating cash flow was $28.6 million, versus $28.5 million. Investing used $77.1 million, including $46.8 million to buy W.E.T. minority shares and $30.0 million of capital expenditures. Operating cash flow less capital expenditures was approximately negative $1.4 million. Financing provided $25.0 million; cash declined $22.1 million to $36.0 million.
- Balance sheet and debt: At September 30, cash was $36.0 million, current assets $251.0 million and current liabilities $137.7 million; working capital was $113.4 million. Total debt was $87.4 million, including $22.2 million current and $65.3 million long-term, up from $57.0 million at year-end 2012. Revolving facilities were undrawn, with $29.6 million and €20.0 million available. The company reported compliance with applicable debt and lease covenants.
Material changes and management commentary
- Q3 sales growth reflected W.E.T. expansion, new and ramping Gentherm vehicle programs, higher North American and Asian production, and W.E.T. cable-market penetration. Euro translation added approximately $2.6 million to Q3 reported revenue.
- Gross margin improved on product mix and better fixed-cost absorption at higher volume, partly offset by costs to establish an electronics facility in Shenzhen, China.
- Research and development expense rose 24% in Q3 to $12.7 million, driven by engineering and new-product work, facility start-up costs, and development of next-generation seat-comfort products.
- Nine-month SG&A increased 16% to $53.5 million. It included approximately $1.8 million in termination payments to W.E.T.’s former CEO and higher legal, audit, hiring and integration costs. Management expected SG&A to level off as integration proceeds and cost-reduction initiatives are implemented over the next three years.
- Nine-month income tax expense included an approximately $1.3 million benefit from retroactive tax-law changes; management said the effective rate would have been about 25% without that benefit, versus the reported 21%.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said available cash and expected operating revenues should fund operating needs for the foreseeable future. It expected the Shenzhen facility to support existing products in coming quarters and potentially generate new revenue streams later.
- W.E.T.’s lawsuit against UniCredit concerns a currency-related interest-rate swap. A German court ruled in W.E.T.’s favor, ordering €144,000 payment and requiring UniCredit to bear future swap obligations; UniCredit appealed. Gentherm cautioned that realization of the ruling is uncertain. The related derivative liability was approximately $12.0 million at quarter-end.
- The company is exposed to foreign-exchange, interest-rate and commodity-price risks. Q3 included a $1.6 million foreign-currency loss; the nine-month period included a $1.5 million loss. Management reported no material changes to previously disclosed risk factors.
- Approximately $18.5 million of cash was held outside the U.S.; repatriation could incur U.S. taxes. Management intended to permanently reinvest those funds abroad.
- On October 31, 2013, Gentherm announced the W.E.T. squeeze-out; remaining minority shareholders were entitled to €90.05 per share. The filing says the transaction followed quarter-end.
Important facts for investors to verify
- Whether W.E.T. integration delivers the anticipated operating efficiencies and whether consolidated growth and margins remain sustainable.
- W.E.T. performance, customer and geographic concentration, and exposure to automotive production cycles, including weakness noted in Japan and Korea.
- Debt repayment capacity, covenant headroom, facility availability and the implications of higher debt following the W.E.T. share purchases.
- Outcome and financial exposure from the UniCredit appeal and related swap obligations.
- Execution, costs and revenue contribution of the Shenzhen facility and other product-development investments.
- Effects of foreign-currency movements, foreign cash repatriation taxes, and the nonrecurring tax benefit on reported results.