Gentherm Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Gentherm develops and manufactures thermal-management products, primarily for automotive customers, with Automotive and Industrial reportable segments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $261.9m | $249.3m | +5.1% |
| Gross profit / margin | $78.6m / 30.0% | $85.2m / 34.2% | Margin down 4.2 pts |
| Operating income / margin | $20.7m / 7.9% | $34.8m / 14.0% | Down 40.7% |
| Net income | $13.0m | $25.4m | Down 49.0% |
| Diluted EPS | $0.35 | $0.69 | Down $0.34 |
| Operating cash flow | $5.6m | $(21.3)m | Improved $26.9m |
| Capital expenditures | $8.4m | $13.6m | Down $5.2m |
- Segments: Automotive revenue was $240.0m, up 8.2%, including $15.2m from Etratech and a $10.5m favorable currency effect; excluding those contributions, revenue declined 2.2%. Automotive operating income was $41.3m versus $50.8m. Industrial revenue fell 20% to $21.9m and the segment operating loss widened to $6.8m from $2.5m.
- Margins and costs: Management attributed lower gross margin to annual price reductions, manufacturing-cost increases, unfavorable product mix and currency effects. R&D expense rose 19% to $23.3m; SG&A rose 12% to $34.6m.
- Liquidity and debt: Cash was $70.5m at quarter-end, down from $103.2m at December 31, 2017. Working capital was $281.3m. Total debt was $109.2m, including $94.0m on the revolving facility; undrawn revolver availability was $255.9m. The company repaid $35.0m on the revolver during the quarter and reported compliance with its debt covenants.
- Tax: Income-tax expense was $3.0m, a 19% effective rate versus $7.2m and 22% in Q1 2017. Tax Act calculations remained provisional; management reported no first-quarter change to the provisional amounts booked in 2017.
Material changes and unusual items
- Revenue growth was more than accounted for by Etratech and favorable currency translation; underlying Automotive revenue excluding those effects declined. Management cited weaker auto production in important markets, including North America, and lower production at major customers. GM represented 15% and Hyundai 8% of product revenue.
- Automotive price reductions totaled $5.0m. Management expected supplier and other cost reductions to offset annual price reductions as the year progressed, but gave no numerical full-year guidance.
- Foreign-currency loss increased to $4.6m from $1.3m, primarily from U.S.-dollar cash held at euro-functional subsidiaries and intercompany balances. Management said further unrealized losses or gains could result if the dollar continued to weaken or strengthened, respectively.
- Adoption of the new revenue standard increased Q1 revenue by $0.7m and net income by $0.5m. It also resulted in $3.4m of Automotive unearned revenue; the filing says 55% is expected to be recognized within 12 months. A separate tax-accounting standard adoption generated a favorable $31.6m adjustment directly to retained earnings. These adoption effects are distinct from reported quarterly operating performance.
- Etratech, acquired in November 2017, contributed $15.2m in revenue and a $0.3m net loss in Q1 2018. Its purchase-price allocation was finalized during the quarter.
- Operating cash flow was positive in Q1 2018 compared with an outflow in Q1 2017, partly because Q1 2017 included $35.1m in tax payments related to the earlier North American reorganization. Q1 2018 cash flow also reflected working-capital movements, including a $10.8m cash outflow from accrued liabilities.
- Industrial losses reflected advanced R&D spending, costs for CSZ’s new direct sales force, and lower revenues against fixed costs. Management expected some R&D projects and the expanded sales effort to support future revenue, but did not quantify expected returns or timing.
Outlook, risks and other disclosures
- Management stated that available cash, operating cash flows and revolver availability were expected to cover operating, capital and debt-service needs for at least the next 12 months. It cautioned that lower operating cash flow could require alternative capital or cuts or delays to investment, and significant acquisitions could require additional financing.
- Key exposures include automotive production and customer concentration, pricing pressure, product mix, manufacturing costs, foreign exchange, interest rates and commodity prices. The company used foreign-currency derivatives with $32.2m notional value; no copper swaps were outstanding at quarter-end. Derivatives were not used for speculation.
- The company reported effective disclosure controls, no material pending litigation, and no material changes to previously disclosed risk factors. No numerical revenue or earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether automotive production and underlying sales recover, and whether annual pricing reductions are offset by cost savings.
- Whether Etratech integration and the Industrial segment’s investments translate into improved operating results.
- How much of the Q1 operating-cash-flow improvement is sustainable after considering the prior-year reorganization tax payments and working-capital movements.
- The final effects of Tax Act accounting and the timing and realization of the reported tax-related adjustments.
- Exposure to currency movements, major customers and debt covenants, including continued revolver availability and repayment obligations.