Gentherm Incorporated — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Gentherm designs and manufactures thermal-management products, principally for automotive customers, with Automotive and Industrial reportable segments. Amounts below are in millions of U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $263.8 | $243.4 | $525.7 | $492.6 |
| Gross margin | $74.5; 28.2% | $78.3; 32.2% | $153.0; 29.1% | $163.5; 33.2% |
| Operating income | $15.6 | $25.1 | $36.2 | $60.0 |
| Net income | $16.7 | $8.5 | $29.6 | $33.9 |
| Diluted EPS | $0.45 | $0.23 | $0.81 | $0.92 |
- Q2 revenue grew 8%; first-half revenue grew 7%. Q2 operating margin was approximately 5.9% versus 10.3% a year earlier; first-half operating margin was 6.9% versus 12.2%.
- Q2 net income increased despite lower operating income, principally reflecting a $5.2 million foreign-currency gain versus a $13.3 million loss in Q2 2017. First-half foreign-currency results likewise improved, to a $0.6 million gain from a $14.6 million loss.
- First-half operating cash flow was $32.5 million, up from $6.1 million. The comparison includes $35.1 million of tax payments related to the North American reorganization in first-half 2017; working-capital movements affected both periods.
- Cash was $65.4 million at June 30, down from $103.2 million at year-end 2017. Capital expenditures were $22.1 million. Financing used $47.9 million, including $46.7 million of debt repayments and $20.2 million of share repurchases, partly offset by $15.0 million of borrowings and option proceeds.
- Total debt was $112.9 million, down from $144.7 million at December 31, 2017; net debt was approximately $47.5 million. The $350 million revolving facility had $250.9 million of unused capacity. The company reported compliance with debt covenants. Working capital was $274.9 million.
Material changes versus comparable periods
- Automotive revenue rose 12% in Q2 to $240.8 million, including $15.2 million from Etratech and $6.5 million of favorable currency translation. Excluding both, automotive revenue increased 2%. First-half automotive revenue rose 10%, but was unchanged excluding Etratech and currency effects.
- Industrial revenue fell 17% in Q2 to $23.0 million and 19% in the first half to $44.8 million. Lower GPT custom-project revenue and CSZ climate-chamber sales contributed; first-half CSZ medical sales also declined.
- Gross margin contracted in both comparison periods. Management cited annual customer price reductions preceding supplier cost savings, unfavorable product mix, manufacturing cost inflation, launch costs and lower initial margins on actively cooled battery thermal-management products and Etratech products.
- Industrial operating loss widened to $7.9 million in Q2 from $2.7 million, and to $14.6 million for the first half from $5.1 million. The segment includes advanced R&D, restructuring costs and costs for CSZ’s direct sales force.
Outlook, management commentary and risks
- On June 25, 2018, Gentherm announced its Fit-for-Growth strategic plan to improve growth and profitability through purchasing initiatives, R&D rationalization, lower SG&A, reduced non-core investment and a revised manufacturing footprint. Planned exits include furniture, aviation, battery-management electronics, industrial battery packs, automotive thermoelectric generators and other non-core electronics. GPT and CSZ’s Industrial Chamber business were identified as potential divestiture areas.
- Management expects the strategy to reduce R&D spending and expects remaining advanced-technology projects and CSZ’s direct sales force to generate profitable revenue over time. These are expectations, not guaranteed outcomes. No consolidated earnings or revenue guidance is stated in the provided filing text.
- The company estimated $3–$5 million of higher raw-material expense in the second half of 2018 from U.S. tariffs on specified China-origin imports; that estimate also included a further proposed 10% duty that had not taken effect. Gentherm was seeking mitigation with suppliers and customers.
- Management said actively cooled battery thermal-management products were expected to generate annual revenue of $50–$60 million, while noting the programs remained in launch phase and carried near-term launch and overhead costs.
- Q2 restructuring expense was $6.2 million; first-half expense was $7.1 million. Costs included employee terminations, consulting, facility consolidation and asset disposal. Further consulting, facility termination and employee costs were expected; total termination costs and potential divestiture costs were not reasonably estimable.
- The board increased the share-repurchase authorization to $300 million, expiring December 31, 2020; approximately $274 million remained at June 30. The credit agreement restricts dividends.
- Key exposures include tariffs and input costs, automotive production and customer concentration, foreign-exchange movements, execution of the strategic plan, and persistent Industrial segment losses. The company reported no material pending litigation and said disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth persists after separating Etratech contributions and currency effects, and whether automotive production or price reductions pressure sales.
- Whether margins recover as supplier savings, production volumes and battery thermal-management launches offset mix, inflation and launch costs.
- Actual tariff costs and any pass-through or mitigation, including whether proposed additional duties take effect.
- Restructuring cash costs, realized savings, divestiture progress and the Industrial segment’s path to profitability.
- Cash conversion, capital spending, share repurchases and debt repayment; confirm continued covenant compliance and revolving-credit availability.
- Tax estimates remain subject to refinement under the Tax Act. First-half adoption of the intra-entity transfer tax standard produced a $31.6 million favorable adjustment directly to retained earnings, not reported net income.