Gentherm Incorporated — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts below are in millions of dollars unless noted. Gentherm develops and manufactures thermal-management products and automotive cable systems. Its reportable segments are Automotive and Industrial.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $232.7 | $213.4 | $448.4 | $420.4 |
| Gross margin | $71.5; 30.7% | $65.7; 30.8% | $139.7; 31.2% | $132.3; 31.5% |
| Operating income | $22.4 | $26.7 | $52.2 | $53.7 |
| Net income | $18.4 | $19.5 | $30.3 | $39.3 |
| Diluted EPS | $0.50 | $0.53 | $0.83 | $1.08 |
| Operating cash flow | — | $51.2 | $39.8 |
Q2 operating margin was approximately 9.6%, versus 12.5% a year earlier. First-half operating margin was approximately 11.6%, versus 12.8%. First-half reported income tax expense was $21.6 million, including $6.3 million of reorganization withholding tax and $3.3 million of other reorganization-related adjustments. Excluding those amounts, management reported a 23% effective tax rate.
At June 30, cash and equivalents were $132.0 million; current assets were $449.9 million and current liabilities $203.3 million, yielding working capital of $246.5 million. Total debt was $142.0 million, including $123.9 million drawn on the revolving facility; cash less debt was approximately negative $10.0 million. Revolver availability was $125.4 million. Capital expenditures were $30.8 million in the first half. Cash declined $12.5 million to $132.0 million.
Material changes versus comparable periods
- Revenue grew 9% in Q2 and 7% in the first half. The CSZ acquisition contributed $17.0 million of revenue; automotive seating products also grew.
- GPT revenue declined 67% in Q2 and 53% in the first half, amid weak North American oil and gas-related customer investment and shipment timing for custom systems.
- Q2 net income fell 5%; first-half net income fell 23%. Higher R&D and operating costs, acquisition-related expenses, and reorganization tax charges weighed on results.
- Gross margin excluding the $4.0 million CSZ inventory purchase-accounting charge was 32.4% in Q2 and 32.0% for the first half, according to management. Favorable production-cost currency effects also supported margins.
- Operating cash flow increased to $51.2 million from $39.8 million in the first half, while investing cash outflow rose to $104.5 million, principally reflecting the CSZ acquisition and capital spending.
- Debt increased from $97.7 million at year-end 2015 to $142.0 million, following the credit-agreement refinancing and additional revolver borrowing.
Outlook, commentary, and risks
- Management said existing cash and expected operating cash flows should fund operating needs, capital expenditures, and debt service for the foreseeable future. No specific revenue or earnings guidance was provided.
- Management expects R&D reimbursements and related expenses to decrease during the year following expiration of a U.S. Department of Energy research program.
- The April 1 CSZ acquisition was an all-cash transaction with a preliminary purchase-price allocation; final valuation was expected by December 31, 2016. CSZ contributed a $1.6 million net loss in the reported period. Its purchase accounting included a one-time $4.0 million inventory charge.
- The North American reorganization included $9.6 million of withholding taxes, including an estimated unpaid $2.0 million amount, and an approximately $32.0 million income tax payment accrued for 2017. The latter was offset by a deferred charge and was not expected to materially affect earnings.
- Risks highlighted include continued weakness in GPT markets, foreign-exchange volatility and potential effects of Brexit on global economic conditions and vehicle production. First-half foreign currency movements reduced reported revenue by approximately $4.1 million versus prior-year exchange rates.
- The amended credit agreement restricts shareholder dividends and requires compliance with leverage and interest-coverage covenants. The company reported compliance with debt covenants at June 30, 2016. No material pending litigation was reported; disclosure controls were deemed effective.
Investor verification priorities
- Track whether automotive growth offsets continued GPT weakness and whether GPT’s custom-product shipment timing normalizes.
- Assess CSZ’s ongoing revenue, profitability, integration costs, and final purchase-price allocation.
- Verify the timing and funding of the approximately $32 million 2017 tax payment and the ultimate reorganization-related tax expense.
- Monitor revolver borrowings, interest costs, covenant headroom, and liquidity after acquisition spending and capital investment.
- Compare reported margins with management’s figures excluding the one-time CSZ inventory charge, and evaluate whether favorable currency effects persist.