Gentherm Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Unaudited figures are in U.S. dollars; financial statement amounts are generally in thousands, except per-share data. Gentherm supplies automotive thermal seat-comfort and cable systems.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Product revenue | $148.1 million | $129.5 million; up 14% |
| Gross profit / margin | $39.1 million / 26.4% | $32.5 million / 25.1% |
| Operating income / margin | $9.8 million / 6.6% | $8.5 million / 6.5% |
| Net income | $9.9 million | $6.1 million |
| Net income attributable to Gentherm | $8.7 million | $4.7 million |
| Net income attributable to common shareholders / EPS | $7.7 million / $0.24 | $2.5 million / $0.10 |
| Operating cash flow | $10.0 million | $6.5 million |
| Investing cash flow | $(46.4) million | $(3.4) million |
| Financing cash flow | $28.5 million | $72.5 million |
| Cash at quarter-end | $48.0 million | $58.2 million at Dec. 31, 2012 |
| Total debt | $91.8 million | $57.0 million at Dec. 31, 2012 |
- At March 31, current assets were $235.7 million and current liabilities $122.3 million; working capital was $113.4 million. The current ratio was approximately 1.9.
- Operating cash flow included a $7.8 million use from accounts receivable growth. Capital expenditures were $6.1 million.
- Debt included $22.5 million current and $69.3 million long-term. Revolving facilities had no borrowings outstanding; approximately $29.6 million and €20.0 million of availability were disclosed. Debt is secured by company assets, and Gentherm reported covenant compliance.
Material changes and business developments
- W.E.T. revenue rose 15% to $115.1 million; Climate Control Seats (CCS) revenue increased 14% to $33.0 million. Advanced Technology reported no product revenue and a $1.8 million operating loss.
- Revenue growth reflected new and ramping CCS vehicle programs, stronger North American and Asian automotive volumes, and W.E.T. cable-market penetration. Management cited weaker production in Japan, particularly on mature platforms expected to be refreshed.
- On February 22, Gentherm acquired about 14% more of W.E.T., paying $7.2 million cash and issuing 3.3 million Gentherm shares. It also registered a German domination and profit-transfer agreement. By May 7, 2013, subsequent purchases raised ownership above 99%; those later purchases cost $35.1 million and were funded with an additional $40.4 million facility borrowing.
- The W.E.T. share purchase drove most of Q1 investing outflow. Gentherm also issued shares upon preferred-stock conversion and to acquire the W.E.T. non-controlling interest. Shares outstanding were 33.4 million at May 7.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management said available cash and expected revenue were sufficient for operating needs for the foreseeable future. It expected SG&A costs to begin leveling off as integration and cost-reduction initiatives proceed over the next three years.
- Q1 R&D expense rose 17% to $11.8 million, reflecting staffing and engineering for new programs and next-generation seat-comfort products. SG&A rose 16% to $16.3 million, including hiring, legal and audit costs, and W.E.T. compliance work.
- The 7% effective tax rate included an approximately $1.3 million one-time benefit from retroactive restoration of U.S. R&D and foreign tax provisions; management estimated a 20% Q1 rate without that benefit. Q1 2012’s rate was 26%.
- W.E.T.’s lawsuit concerning a currency-related interest-rate swap resulted in a favorable Munich court ruling requiring UniCredit to pay €144,000 and bear future swap obligations. Those obligations were valued at $13.0 million, with about $5.1 million of past-due amounts. Gentherm expected an appeal and cautioned that recovery was uncertain and could take years.
- Risks disclosed include foreign-exchange, interest-rate and commodity-price exposure; the filing reported substantial derivative positions, including the disputed swap. Approximately $14.7 million of cash was held abroad and could incur U.S. tax if repatriated. Management said it intended to keep these funds permanently invested abroad.
- Management stated disclosure controls and internal controls were effective as of March 31, 2013, with no material quarterly change in internal control over financial reporting. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether W.E.T. integration, subsequent share purchases and related borrowing deliver the expected operating benefits without straining liquidity or covenant capacity.
- Whether growth and improved gross margin persist, particularly given automotive production cycles and weakness in Japan.
- How much of reported earnings growth reflects recurring operations versus the tax benefit, foreign-currency and derivative revaluations, and acquisition-related costs.
- The appeal and ultimate collectability of the UniCredit judgment, and the accounting and cash consequences if the ruling is reversed or delayed.
- The timing and funding of remaining Series C preferred-stock redemptions and the September 2013 Bank of China loan maturity.