Business context and reporting period
Amerigon Incorporated, doing business as Gentherm, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. It supplies thermal-management and comfort systems to automotive OEMs. Results include W.E.T. Automotive AG, acquired in 2011; the prior-year comparison includes only about six weeks of W.E.T. revenue in each comparable period, versus the full period in 2012.
Key financial metrics
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $136.2m | $77.1m | $265.7m | $112.9m |
| Gross profit / margin | $34.2m / 25.1% | $19.2m / 24.9% | $66.7m / 25.1% | $29.7m / 26.3% |
| Operating income | $8.9m | $4.0m | $17.6m | $4.9m |
| Net income | $7.0m | $0.8m | $13.3m | $0.2m |
| Net income (loss) attributable to common shareholders | $3.7m | ($1.6m) | $6.4m | ($2.2m) |
| Diluted EPS | $0.12 | ($0.07) | $0.23 | ($0.10) |
- For the first six months, operating cash flow was $17.6m, investing cash outflow was $16.9m, and financing cash inflow was $54.5m. Cash rose $53.5m to $77.3m.
- At June 30, cash was $77.3m; working capital was $127.8m, up from $66.0m at year-end 2011. The filing says $13.1m of cash was held abroad and would incur U.S. tax if repatriated.
- Total debt was $60.4m, including $15.1m current and $45.4m long-term, down from $76.2m at December 31, 2011. The company reported compliance with credit-facility covenants. Debt facilities mature March 30, 2016.
- Series C preferred stock carrying amount was $36.6m at quarter-end. Remaining scheduled principal and dividends were approximately $41.2m through 2013, assuming no earlier conversion.
Material changes versus prior comparable periods
- Reported revenue rose 77% in Q2 and 135% for the first half, primarily because 2012 included full-period W.E.T. results, compared with only about six weeks in 2011. W.E.T. contributed $103.0m of Q2 revenue and $203.5m for the first half of 2012.
- Management said historical Gentherm revenue, excluding W.E.T. and adjusting for a vehicle program transferred to a W.E.T. facility, increased 26% in Q2 and 13% in the first half. Growth reflected new vehicle launches and customer expansion of existing programs; euro weakness partly offset growth.
- Q2 reported gross margin improved to 25.1% from 24.9%; first-half margin declined to 25.1% from 26.3%. Historical Gentherm’s Q2 margin improved on product mix, while its first-half margin fell on unfavorable mix.
- Research and development and selling, general and administrative expenses increased substantially, reflecting the full-period W.E.T. contribution as well as increased spending at historical Gentherm. Prior-year acquisition transaction expenses were $1.4m in Q2 and $5.2m in the first half; none were recorded in 2012.
- The March 2012 public offering of 5.29m common shares generated $75.5m net proceeds. Shares outstanding increased to 29.58m from 23.52m at year-end 2011.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management stated that cash on hand and expected future revenue should fund operating needs for the foreseeable future.
- Management expected a further $0.3m–$0.4m of W.E.T.-related Sarbanes-Oxley implementation costs in the second half of 2012.
- A German court voided W.E.T. shareholder approval of the Domination and Profit and Loss Transfer Agreement (DPLTA); W.E.T. appealed. Until the agreement is registered and effective, Gentherm does not have direct management control of W.E.T., and W.E.T. profits can be distributed only through declared dividends. If all minority shareholders tendered under the proposed arrangement, the payment obligation would be approximately EUR 33.1m.
- Disclosure controls were deemed ineffective because of a material weakness in accounting for significant, non-routine transactions. Management said it was hiring additional skilled accountants to address the weakness and performed additional procedures for this filing.
- Market exposures include foreign exchange, variable interest rates and commodity prices. The company uses derivatives to manage exposures, not for trading; derivative valuations and currency movements affected reported results. Euro weakness reduced reported revenue, and management estimated Q2 revenue would have been about $3.3m higher at the 2011 average exchange rate.
- Management reported no goodwill impairment at June 30, 2012. It also stated that no material changes had occurred in the previously disclosed risk factors.
Important facts for investors to verify
- Separate organic growth from acquisition-driven growth and confirm the comparability of W.E.T. periods and the transferred vehicle program.
- Track W.E.T. integration, the DPLTA appeal and any resulting minority-shareholder payment or financing needs.
- Monitor preferred-stock installments, dilution from equity issuance, debt repayments and covenant compliance.
- Assess whether revenue growth converts into sustained margins and operating cash flow, given higher R&D and administrative costs and working-capital demands.
- Follow remediation of the material weakness and the effectiveness of disclosure controls.