Gentherm Incorporated — Q2 2019 Form 10-Q
Business context and period. Gentherm develops thermal-management products for automotive, battery, and healthcare applications. This filing reports the three and six months ended June 30, 2019, compared with the same 2018 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $243.3 | $266.4 | $501.2 | $531.0 |
| Gross profit / margin | $72.7 / 29.9% | $77.1 / 28.9% | $148.0 / 29.5% | $158.3 / 29.8% |
| Operating income / margin | $20.1 / 8.2% | $15.6 / 5.9% | $41.9 / 8.4% | $36.2 / 6.8% |
| Net income | $2.8 | $16.7 | $11.2 | $29.6 |
| Diluted EPS | $0.08 | $0.45 | $0.33 | $0.81 |
| Operating cash flow | Not stated separately | Not stated separately | $40.4 | $32.5 |
- Q2 revenue fell 8.7%; first-half revenue fell 5.6%. Automotive revenue declined 5.5% in Q2 and 2.8% in the first half. Industrial revenue declined 41.4% and 35.7%, respectively, reflecting the CSZ-IC divestiture and lower GPT revenue.
- Q2 operating income increased despite lower revenue, supported by lower operating expenses and cost savings. Net income fell sharply, primarily reflecting a $9.9 million Q2 impairment charge and foreign-currency loss. First-half impairment charges totaled $20.4 million; the company said they are not expected to be tax deductible.
- Q2 automotive revenue headwinds included unfavorable currency of $6.1 million, lower volume of $4.5 million, and pricing of $2.9 million. For the first half, currency reduced automotive revenue by $12.9 million and pricing by $6.1 million, partly offset by $5.2 million of favorable volume. Battery thermal-management revenue grew 22.9% in Q2 and 72.3% in the first half; Gentherm Medical revenue grew 30.7% and 21.7%, respectively.
- At June 30, cash and cash equivalents were $33.7 million, plus $2.5 million of restricted cash. Total debt was $107.3 million, including $104.4 million long-term debt. Current assets were $378.4 million and current liabilities $161.4 million.
- First-half investing cash flow was positive $19.1 million, including $47.5 million of sale proceeds, offset by the $15.5 million Stihler acquisition and $13.0 million of capital expenditures. Financing cash outflow was $63.2 million, including $33.0 million in share repurchases and $61.1 million in debt repayments, partly offset by $28.4 million of borrowing.
Material changes and significant transactions
- Gentherm sold its Cincinnati Sub-Zero industrial chamber business and former headquarters facility on February 1, 2019, for $47.5 million cash, including $2.5 million held in escrow. It recognized a $5.0 million pretax gain and leases back part of the property.
- On June 27, the company amended and restated its credit agreement, increasing revolving capacity from $350 million to $475 million and extending maturity to June 27, 2024. Undrawn capacity was $378.5 million at quarter-end. The facility is secured, has financial covenants and restricts dividends. Gentherm reported compliance with its debt agreements.
- Gentherm acquired Stihler Electronic GmbH on April 1 for $15.5 million, net of cash acquired, including contingent consideration. Stihler’s results are included in the Industrial segment; the preliminary allocation included $9.8 million of goodwill.
- The company repurchased $33.0 million of shares in the first half; $113.6 million remained under its $300 million authorization at June 30, 2020 authorization expiry date December 16, 2020.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities to the balance sheet. At June 30, operating lease right-of-use assets were $13.3 million and lease liabilities totaled $12.8 million.
Outlook, management commentary, and risks
- No specific revenue or earnings guidance is provided in the filing. Management said cash, operating cash flow, and available borrowings should be sufficient for operating, capital-expenditure, and debt-service needs for at least the next 12 months, based on the current operating plan. It cautioned that weaker operating cash flow could require alternative financing or cuts or delays to investment.
- Management cited Fit-for-Growth initiatives, lower headcount, overtime, expedited freight and material costs, and a focused R&D portfolio as sources of cost reduction. Q2 and first-half results also faced higher U.S. tariffs and labor costs in Mexico, Macedonia, and China.
- GPT remained classified as held for sale and was not treated as a discontinued operation. Further fair-value changes could result in additional impairment; management described the estimates as uncertain. The first-half impairment also included a charge related to an equity investment.
- Key exposures include foreign exchange, interest rates on variable-rate debt, commodity prices, customer and automotive production volumes, and execution of restructuring and divestiture plans. Foreign-currency derivative notional was $23.5 million at quarter-end; no commodity swaps were outstanding.
- Disclosure controls were deemed ineffective due to a previously reported material weakness in IT general controls at Gentherm Medical, involving elevated access and segregation-of-duties conflicts. Management expected remediation before year-end 2019, subject to controls operating effectively and successful testing.
- The company reported no material changes to previously disclosed risk factors and no material pending litigation.
Important facts for investors to verify
- Whether automotive demand, pricing, foreign exchange, tariffs, and regional labor costs continue to affect sales and margins.
- Progress and final sale terms for GPT, including any additional impairment or transaction costs.
- Performance of Fit-for-Growth savings and whether they offset continued restructuring costs and lower revenue.
- Revolver utilization, interest expense, covenant headroom, and the implications of the secured credit facility and dividend restrictions.
- Remediation and testing of the Gentherm Medical IT-controls material weakness.
- Final purchase-price allocation and contingent payments for Stihler, and the effect of the acquisition on the Industrial segment.