Gentherm Incorporated — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Gentherm, formerly Amerigon Incorporated, designs and supplies automotive seat-comfort systems and related technology. Results include majority-owned W.E.T. Automotive Systems AG, acquired in 2011; the prior-year nine-month comparison includes only about four and a half months of W.E.T. unless otherwise noted. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $141.1m | $125.6m | $406.7m | $238.6m |
| Gross profit / margin | $36.8m / 26.1% | $30.8m / 24.5% | $103.5m / 25.4% | $60.9m / 25.5% |
| Operating income | $10.2m | $5.8m | $27.8m | $11.1m |
| Net income | $5.8m | $1.5m | $19.0m | $1.7m |
| Net income attributable to Gentherm | $4.1m | $1.2m | $14.6m | $1.8m |
| Net income (loss) attributable to common shareholders | $2.6m | $(1.6)m | $9.0m | $(3.9)m |
| Diluted earnings (loss) per share | $0.09 | $(0.07) | $0.31 | $(0.17) |
For the nine months, operating cash flow was $29.4m, investing cash outflow was $26.6m, and financing cash inflow was $46.2m. Cash increased $48.4m to $72.3m. Capital expenditures were $15.3m. Working capital was $119.0m at September 30, up from $66.0m at year-end 2011.
Total debt was $60.3m, down from $76.2m at December 31, 2011; $18.2m was current and $42.1m long-term. Debt maturities under the principal bank facilities fall in 2016. The company reported compliance with its credit agreements. Current assets were $252.0m and current liabilities $133.0m. Series C convertible preferred stock was $29.6m, with approximately $32.7m in scheduled principal and dividend payments remaining through 2013, assuming no earlier conversion.
Material changes versus prior periods
- Q3 revenue rose 12% year over year, while reported nine-month revenue rose 70%, substantially reflecting a full nine months of W.E.T. in 2012 versus roughly four and a half months in 2011. Management said historical Gentherm revenue, adjusted for a vehicle program transferred to a W.E.T. facility, increased 16% in Q3 and 14% year to date.
- Q3 gross margin improved to 26.1% from 24.5%, which management attributed to favorable product mix and better fixed-cost absorption. Nine-month consolidated gross margin was broadly flat year over year.
- Q3 operating income increased to $10.2m from $5.8m. Nine-month operating income increased to $27.8m from $11.1m, though comparison is affected by the acquisition-period difference and $5.4m of W.E.T. acquisition transaction costs in 2011.
- Euro weakness reduced reported revenue. Management estimated Q3 revenue would have been about $5.0m higher at the 2011 average exchange rate; the comparable nine-month impact was estimated at about $10.5m.
- A March 2012 public offering of 5.29m common shares generated $75.5m net proceeds. Shares outstanding were 29.7m at September 30, versus 23.5m at year-end 2011.
Outlook, commentary, and risks
- Management said cash and expected revenue were sufficient to meet operating needs for the foreseeable future. No numerical revenue or earnings guidance was provided.
- Management anticipated additional W.E.T. Sarbanes-Oxley implementation costs in Q4 2012, with a significant decline in those costs in Q1 2013 and thereafter.
- The DPLTA, intended to give Gentherm Europe management control of W.E.T. and transfer its profits and losses, remained blocked by litigation. A German lower court nullified W.E.T. shareholder approval in April 2012; W.E.T. appealed. If the agreement is registered, minority holders may elect annual compensation or a one-time tender payment. The potential payment if all minority shares are tendered is approximately €33.1m. A €45.0m facility was available for this specific purpose, with €4.4m drawn at quarter-end and borrowing access through January 1, 2013.
- Disclosure controls were deemed ineffective because of a previously identified material weakness in accounting for significant, non-routine transactions. Management said remediation was underway through hiring skilled accountants; it performed additional procedures and concluded the financial statements were prepared in accordance with U.S. GAAP.
- Key exposures include foreign exchange, variable interest rates, and commodity prices. Derivatives are used for risk management, not speculation. The company also disclosed a legacy W.E.T. currency-related interest-rate swap liability with a reported fair value of $15.6m.
- About $24.4m of cash was held outside the United States and intended to remain permanently reinvested abroad; repatriation for U.S. operations would incur U.S. taxes. Management cited no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Separate underlying organic growth from the acquisition-driven increase in consolidated revenue; confirm segment results and the effect of transferred vehicle programs.
- Track cash conversion and working-capital needs, given receivables, inventory, and other operating assets increased during the period.
- Confirm the timing and funding of remaining Series C preferred-stock installments and any associated dilution.
- Monitor the German appeal and DPLTA outcome, including potential minority-shareholder payments and access to the purpose-restricted credit facility.
- Review remediation progress on the material weakness and the effect of remaining W.E.T. compliance costs.
- Assess foreign-exchange sensitivity, offshore cash availability, debt covenant compliance, and the substantial variable-rate debt exposure.