Gentherm Incorporated — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Gentherm designs and manufactures thermal-management technologies, principally for automotive customers. It acquired Global Thermoelectric Inc. (GTE) on April 1, 2014.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $206.2 | $160.5 | $400.1 | $308.6 |
| Gross profit / margin | $60.8 / 29.5% | $40.2 / 25.0% | $117.8 / 29.4% | $79.2 / 25.7% |
| Operating income | $24.2 | $8.4 | $49.1 | $18.2 |
| Net income attributable to Gentherm | $16.4 | $5.5 | $33.0 | $14.2 |
| Diluted EPS | $0.46 | $0.15 | $0.92 | $0.37 |
- Q2 revenue rose 28% year over year; first-half revenue rose 30%. Management attributed growth chiefly to climate-controlled seat systems (CCS), seat heaters, and stronger automotive production, with $8.2 million of GTE revenue included from its acquisition date.
- Q2 CCS revenue increased 37% to approximately $85.2 million; seat-heater revenue increased 16% to approximately $81.7 million. First-half increases were 42% for CCS and 19% for seat heaters.
- Gross margin improved as sales mix shifted toward higher-margin CCS, higher volumes absorbed fixed costs, and the China electronics facility began generating net insourcing savings. Management expected further margin improvement as that facility’s volume increased.
- Q2 operating expenses were $36.5 million, including $14.6 million of R&D and $22.0 million of SG&A. First-half R&D was $27.6 million and SG&A was $40.1 million. SG&A included $2.1 million of GTE costs since acquisition.
- Effective tax rate was 28% in Q2 and the first half, versus 26% in Q2 2013 and 15% for the first half of 2013. The 2014 rate included unfavorable adjustments for previously unrecognized tax expenses; management estimated 25.8% excluding those adjustments. The prior-year first-half rate included a reported $1.3 million tax benefit.
Cash flow, liquidity, and debt
- First-half operating cash flow was $24.4 million, compared with $26.4 million in 2013. Investing cash use was $47.2 million, including $31.7 million for GTE and a joint-venture interest and $15.5 million of capital expenditures. Financing provided $8.5 million. Cash declined $11.7 million to $43.2 million.
- At June 30, cash was $43.2 million, current assets $297.2 million, and current liabilities $156.3 million; reported working capital was $140.9 million. Total debt was $85.2 million, including $19.5 million current and $65.7 million long-term. Cash less total debt was approximately $42.1 million.
- Management said cash and operating cash flows were expected to fund operations, capital expenditures, and debt service for the foreseeable future, while noting that weaker operating cash flow could require alternative financing or spending reductions.
- On June 3, Gentherm received a commitment for a proposed refinancing that would increase revolving credit availability and extend maturity to 2019; completion was expected in Q3 2014. Existing facilities matured in March 2016. The company reported compliance with its debt covenants at June 30.
Material changes, outlook, and risks
- GTE was acquired for approximately $34.2 million, net of cash acquired. Its preliminary purchase-price allocation included $6.6 million of goodwill and $9.9 million of intangible assets; management cautioned that the allocation could change materially and expected to finalize it by December 31, 2014. GTE reported $8.2 million of revenue and a $0.04 million operating loss for the period included.
- Gentherm agreed to purchase an unoccupied industrial property in Vietnam to expand Asian manufacturing. Construction was expected to begin in Q4 2014, production in 2015, and estimated facility cost was $10–$15 million.
- Management highlighted Ukraine operating and logistics exposure: approximately 24% of revenue came from products manufactured at its Ukraine facility, and closure of the Ukraine-Hungary border could materially affect operations. The filing cited political unrest and international tensions.
- A German court had ruled that UniCredit must pay W.E.T. €144,000 and bear future obligations under a currency-related interest-rate swap. UniCredit appealed; Gentherm stated it could not be certain any award would be realized. The company reported $10.9 million of swap obligations and approximately $8.2 million of accrued past-due amounts, and said offsetting derivatives were intended to limit swap market risk through 2018.
- Foreign exchange and interest rates remain exposures; the company uses derivatives for risk management, not speculation. It reported no hedge ineffectiveness for the first half. The filing reported no material pending litigation other than the referenced dispute and no material change in previously disclosed risk factors.
- No specific revenue or earnings guidance was provided. Management’s stated expectations included further savings from the China facility, the refinancing in Q3 2014, and the Vietnam facility schedule. These are forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- How much of reported growth and margin improvement is organic, and how the preliminary GTE purchase accounting is finalized.
- Whether the proposed refinancing was completed on expected terms and how much additional revolving capacity became available.
- Developments affecting the Ukraine facility and border logistics, given the stated revenue exposure.
- The status and accounting consequences of the UniCredit appeal, swap obligations, and related offsetting derivatives.
- Cash conversion and working-capital trends, including receivables, as revenue and production volumes grow.
- Execution, cost, and timing of the Vietnam expansion and expected returns on planned capital investment.