Gentherm Incorporated — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; dollar amounts below are in millions unless noted. Gentherm supplies automotive thermal seat-comfort and cable systems, including through W.E.T.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $160.5 | $136.2 | $308.6 | $265.7 |
| Gross profit / margin | $40.2 / 25.0% | $34.3 / 25.2% | $79.2 / 25.7% | $66.8 / 25.1% |
| Operating income | $8.4 | $8.6 | $18.2 | $17.1 |
| Net income attributable to Gentherm | $5.5 | $5.4 | $14.2 | $10.1 |
| Net income attributable to common shareholders | $5.0 | $3.6 | $12.7 | $6.1 |
| Diluted EPS | $0.15 | $0.12 | $0.37 | $0.22 |
- Q2 revenue grew 18%; W.E.T. revenue rose 24% to $127.7 million while CCS revenue fell 1% to $32.8 million. First-half revenue grew 16%, with W.E.T. up 19% and CCS up 6%.
- Q2 gross margin was slightly lower year over year, reflecting product mix, material costs, and costs to establish the Shenzhen electronics facility. First-half gross margin improved to approximately 25.7% from 25.1%.
- Q2 operating income was nearly flat despite higher sales, as R&D and SG&A expenses increased. Q2 pretax income declined to $7.5 million from $9.7 million, affected in part by less favorable foreign-currency results and derivative revaluation versus the prior year.
- First-half operating cash flow was $26.4 million, versus $17.0 million. Investing used $64.9 million, including $46.8 million to acquire W.E.T. minority shares and $18.0 million of capital expenditures. Financing provided $29.7 million in the cash-flow statement; the MD&A reports $29.6 million.
Financial position and material changes
- At June 30, cash and equivalents were $49.4 million, down from $58.2 million at year-end 2012. Working capital was $111.4 million, down from $124.9 million.
- Total debt was $92.8 million, up from $57.0 million at December 31, 2012; $22.6 million was current and $70.2 million long term. The increase principally reflects borrowings to purchase W.E.T. shares. Bank of America revolving facilities had no amounts outstanding; availability was $29.6 million and €20.0 million.
- Gentherm’s ownership of W.E.T. exceeded 99% by quarter-end. The company registered a German domination and profit-and-loss transfer agreement, enabling the businesses to be managed as one operational entity, and was developing future integration plans.
- Common shares outstanding increased to 34.1 million from 29.8 million at year-end. Preferred-stock conversions and shares issued in the W.E.T. acquisition contributed to dilution. 739 Series C preferred shares remained outstanding, convertible into approximately 467,000 common shares.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash and expected operating proceeds should meet operating needs for the foreseeable future.
- Management expected the Shenzhen electronics facility to support existing products in coming quarters and potentially generate new product revenue. It also expected SG&A costs to level off as integration proceeds and cost-reduction initiatives are implemented over the next three years.
- First-half income tax expense included an approximately $1.3 million benefit from the retroactive restoration of tax credits and exemptions. Excluding this benefit, management estimated the first-half effective tax rate would have been 22%, rather than 15%.
- W.E.T.’s dispute with UniCredit concerns a currency-related interest-rate swap. A Munich court ruled in W.E.T.’s favor, ordering a €144,000 payment and UniCredit to bear future swap obligations; UniCredit appealed. Gentherm cautioned that it could not be certain the ruling would be realized. The recorded swap liability was approximately $12.3 million.
- Risks include automotive production and program performance, foreign-exchange and interest-rate movements, integration and facility start-up costs, debt covenants, and potential dilution. The company reported compliance with its debt covenants at June 30 and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the MD&A’s $29.6 million financing cash-flow figure with the cash-flow statement’s $29.7 million.
- Track W.E.T. integration, Shenzhen facility ramp-up, and whether new products and cost-reduction initiatives deliver the anticipated benefits.
- Monitor debt balances, near-term maturities, revolving-credit availability, and compliance with financial covenants.
- Follow the UniCredit appeal and the potential financial effect of the swap obligations and related derivative liability.
- Assess continuing dilution from preferred-stock conversion and share issuance, alongside revenue and margin trends in CCS and W.E.T.