Gentherm Incorporated — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in millions of dollars except per-share data, percentages, and where otherwise noted. The company designs and manufactures thermal-management products, primarily for automotive customers, and reports Automotive and Industrial segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $243.4 | $232.7 | $492.6 | $448.4 |
| Gross margin | $78.4; 32.2% | $71.5; 30.7% | $163.6; 33.2% | $139.7; 31.2% |
| Operating income | $25.2 | $22.4 | $60.1 | $52.2 |
| Foreign currency gain (loss) | $(13.3) | $2.8 | $(14.6) | $1.0 |
| Net income | $8.5 | $18.4 | $33.9 | $30.3 |
| Diluted EPS | $0.23 | $0.50 | $0.92 | $0.83 |
| Cash from operating activities | Not presented by quarter | $6.1 | $51.2 |
- Revenue and segments: Q2 revenue rose 5%; first-half revenue rose 10%. Automotive revenue increased 2% in Q2 and 4% in the first half. Industrial revenue was $27.6 million in Q2 and $55.0 million in the first half, including the acquired Cincinnati Sub-Zero business (CSZ). First-half comparisons include CSZ for only three months in 2016.
- Margins and expenses: Q2 gross margin was 32.2%, versus 30.7% reported in 2016; excluding a $4.0 million CSZ purchase-accounting inventory charge in 2016, the prior-year margin was 32.4%. First-half margin was 33.2%, versus 31.2% reported and 32.0% excluding that charge. R&D expense increased 12% in Q2 and 18% in the first half. First-half SG&A rose $10.6 million, including higher CSZ costs and stock-appreciation-right compensation.
- Cash flow and investment: First-half operating cash flow was $6.1 million, down from $51.2 million. The decline included $35.1 million of tax payments related to the 2016 North American reorganization and working-capital movements. Investing used $27.7 million, including $25.8 million of capital expenditures and a $2.0 million CSZ-related payment. Financing used $7.5 million, primarily debt repayments. Cash decreased $13.0 million to $164.2 million; foreign-exchange effects increased cash by $16.1 million.
- Liquidity and debt: At June 30, cash was $164.2 million, current assets were $494.5 million, current liabilities were $153.1 million, and working capital was $341.4 million. Total debt was $163.3 million, including $146.0 million outstanding on the revolving facility. Approximately $203.4 million remained available under the U.S. revolver. The company reported compliance in all material respects with its debt covenants.
Material changes, outlook, and risks
- Q2 net income fell to $8.5 million from $18.4 million, mainly reflecting a $13.3 million foreign-currency loss versus a $2.8 million gain a year earlier. The 2017 loss included a $12.0 million unrealized loss, primarily associated with U.S.-dollar cash held by euro-functional subsidiaries and intercompany exposures. Management noted that further dollar weakening could cause additional unrealized losses.
- Management cited customer vehicle-production shutdowns intended to reduce inventories, which disproportionately affected climate-controlled-seat products. It also noted that some vehicle programs shifted from active cooling to heated and ventilated seat technology. Seat heaters and steering-wheel heaters grew, partly offsetting those pressures.
- Management expects battery thermal-management products to begin shipping at the end of 2017 and an automotive electronic control module in early 2019. Based on awarded programs, it estimates the two products together could exceed $50 million in annual revenue at full run rate in 2019, with further growth anticipated. This is an estimate, not a guarantee.
- The company said cash, expected operating cash flows, and available borrowing capacity should cover operating, capital-expenditure, and debt-service needs for at least 12 months. It cautioned that weaker operating cash flow could require alternative financing or reduced/delayed investment, and significant acquisitions could require additional debt or equity financing.
- Other considerations include planned production-capacity expansion, increased R&D spending, and expected reductions in R&D reimbursements and related expenses following expiration of a U.S. Department of Energy research program. The filing reports no material pending litigation and no material change to previously disclosed risk factors.
- Management was evaluating the impact of new accounting standards, including revenue recognition. It identified customer options to purchase additional goods under long-term supply agreements as a likely significant area of assessment; the ultimate impact was not yet determined.
Important facts for investors to verify
- Whether foreign-exchange movements and intercompany/cash exposures continue to drive material earnings volatility.
- Automotive customer production trends, climate-controlled-seat demand, and the mix and profitability of CSZ and GPT products.
- Timing, customer awards, costs, and realized revenue from the battery thermal-management and electronic-control-module programs.
- Operating cash conversion and working-capital needs, particularly following the reorganization-related tax payments and capital investment.
- Revolver availability, covenant compliance, debt maturities, and the company’s ability to fund expansion without additional financing.