Gentherm Incorporated — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in millions of U.S. dollars, except per-share data. Gentherm develops thermal-management technologies and automotive cable systems; its reportable segments are Automotive and Industrial.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $232.6 | $223.8 | $681.1 | $644.2 |
| Gross profit | $76.7 | $74.9 | $216.4 | $207.2 |
| Gross margin | 33.0% | 33.5% | 31.8% | 32.2% |
| Operating income | $27.4 | $37.4 | $79.7 | $91.2 |
| Net income | $20.2 | $27.7 | $50.6 | $67.0 |
| Diluted EPS | $0.55 | $0.76 | $1.38 | $1.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $71.0 | $66.3 |
Q3 revenue rose 4%, while net income fell 27%. Nine-month revenue increased 6%, but net income declined 25%. Operating income and margins contracted in both comparisons, reflecting higher operating expenses, lower GPT sales, and acquisition-related and other costs. Q3 selling, general and administrative costs included $4.7 million for CSZ; R&D expense increased 32% year over year. Nine-month results included a $4.0 million CSZ inventory purchase-accounting charge in cost of sales.
Automotive revenue growth was led by seat heaters and steering-wheel heaters. GPT revenue fell 76% in Q3 and 65% year to date, amid weak oil-industry-related demand and shipment timing for large custom systems. Foreign exchange reduced nine-month reported revenue by an estimated $3.3 million. Q3 gross margin was also affected by the lower share of higher-margin GPT revenue; year-to-date gross margin excluding the CSZ inventory charge was 32.3%.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $132.8 million at September 30, down $11.7 million from year-end 2015. Nine-month operating cash flow was $71.0 million; investing cash outflow was $124.3 million, including the CSZ acquisition and capital spending; financing cash inflow was $41.5 million.
- Working capital was $262.9 million, versus $276.8 million at December 31, 2015. Current assets were $465.0 million and current liabilities $202.1 million.
- Total debt was $141.6 million, including $123.9 million drawn on the revolving facility; $140.7 million was long-term debt. The amended facility provides $250 million of revolving capacity, with $125.3 million available at quarter-end. The revolving balance is due March 17, 2021. Gentherm reported compliance with its debt covenants.
- The March 2016 credit amendment replaced prior term loans with an expanded revolver and imposes financial covenants and restrictions on dividends. Management said cash and expected operating cash flow were sufficient for foreseeable operating, capital-spending, and debt-service needs, while noting that lower cash generation could require alternative financing or delayed spending.
- Capital expenditures were $50.7 million in the first nine months, supporting capacity expansion and equipment, including facilities in Mexico, Vietnam, and Macedonia.
Acquisition, outlook, and other material items
- Gentherm acquired Cincinnati Sub-Zero Products (CSZ) on April 1, 2016, for approximately $74.6 million including acquired cash. CSZ adds patient temperature-management products and industrial testing equipment. Since acquisition, it contributed $31.9 million of revenue and a $1.6 million net loss. The purchase-price allocation remained preliminary and could change materially.
- Management estimated that two awarded product programs—battery thermal management and an automotive electronic control module—could add over $50 million in annual revenue at full run rate in 2019. The filing does not provide formal company-wide revenue or earnings guidance. Management expected R&D reimbursements and some related expenses to decline as a U.S. Department of Energy research program expired.
- The North American reorganization generated $9.6 million of Canadian withholding-tax expense. A separate approximately $32 million income-tax payment was accrued and is due in 2017; an offsetting deferred charge was recorded because the payment is expected to generate future tax deductions. The filing states this payment is not expected to materially affect earnings.
- Brexit-related currency and economic uncertainty could affect exchange rates and global vehicle production. Gentherm said it has no British-pound-denominated revenue and did not expect the pound’s depreciation to significantly affect sales. Other previously disclosed risk factors were unchanged.
- Foreign exchange, interest rates, copper prices, automotive customer/program timing, and weakness in GPT’s oil-and-gas-related markets remain relevant risks. The company uses currency and commodity derivatives for risk management, not speculation.
- No material pending litigation was reported. Management concluded disclosure controls were effective and reported no material quarter-specific changes in internal control over financial reporting.
Important facts for investors to verify
- Whether automotive growth and margins can offset continuing weakness and shipment volatility in GPT.
- How much of the earnings decline reflects recurring cost growth versus CSZ integration, acquisition accounting, and other unusual items.
- Final CSZ purchase-price allocation, acquired business performance, and the expected contribution of the awarded product programs.
- Cash-flow and working-capital trends, including collection of increased receivables and the planned 2017 tax payment.
- Revolver utilization, borrowing costs, covenant headroom, and the effect of foreign-exchange and commodity movements.