Gentherm Inc. (then Amerigon Incorporated) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing is under Amerigon Incorporated, the company now known as Gentherm. Financial amounts below are in U.S. dollars; “millions” is abbreviated as “m.”
Business context and reporting period
The company develops and sells automotive comfort and electronic products, including climate-control seats. On May 16, 2011, it acquired 76.28% of German automotive supplier W.E.T. Automotive Systems AG. W.E.T. contributed substantially to reported results, but was consolidated only from the acquisition date; reported comparisons with 2010 are therefore not like-for-like.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $125.6m | $30.5m | $238.6m | $83.5m |
| Gross profit / margin | $30.8m / 24.5% | $8.8m / 28.9% | $60.9m / 25.5% | $24.2m / 28.9% |
| Operating income | $5.8m | $4.0m | $11.1m | $9.7m |
| Net income | $1.5m | $2.6m | $1.7m | $6.2m |
| Net income (loss) attributable to common shareholders | $(1.6)m | $2.7m | $(3.9)m | $6.6m |
| Basic EPS attributable to common shareholders | $(0.07) | $0.12 | $(0.17) | $0.31 |
- Revenue increased 312% in Q3 and 186% year to date, principally from W.E.T. Revenue attributed to W.E.T. was $95.1m in Q3 and $140.3m from acquisition through September 30. Excluding W.E.T., the filing reports historical Amerigon revenue of $30.5m for Q3 and $98.3m year to date.
- Gross margin declined as W.E.T. had lower margins, purchase-accounting inventory adjustments increased cost of sales, and Amerigon faced higher material costs, unfavorable sales mix, and lower prices on some programs. Q3 W.E.T. inventory fair-value step-up added $0.4m to cost of sales; the year-to-date amount was $1.5m.
- Operating expenses rose with W.E.T. consolidation and acquisition costs. Nine-month acquisition transaction expenses were $5.4m; reported interest expense was $2.5m, and derivative revaluation losses were $5.6m.
- Cash from operating activities was $6.6m for the first nine months, versus $8.7m in 2010. Investing activities used $108.4m, including $113.4m for the W.E.T. acquisition, partly offset by investment maturities. Financing activities provided $96.4m.
- Cash and cash equivalents were $17.1m at September 30, down from $26.6m at year-end 2010; no short-term investments remained. Working capital was $64.9m, compared with $47.2m at year-end.
- Total debt was $81.3m, including $15.3m current and $66.0m long-term; there was no debt at year-end 2010. No amounts were drawn on the $25m U.S. or €10m W.E.T. revolving facilities at quarter-end. The company reported compliance with its credit covenants.
- Series C preferred stock had a $56.6m balance-sheet carrying amount at quarter-end and an 8% cumulative dividend. Preferred dividends reduced income attributable to common shareholders; the company paid the first scheduled installment partly in common stock.
Material changes, outlook, and risks
- W.E.T. expanded the company’s product range, customer base, and global operations. Integration and purchase-price allocation remained in progress; the preliminary allocation included substantial goodwill and intangible assets and could change materially.
- W.E.T. shareholders approved a domination and profit-and-loss transfer agreement, expected to become effective after registration, then anticipated in Q1 2012. Minority shareholders may elect annual compensation or tender shares for €44.95 each; if all eligible holders tendered, the potential obligation was approximately €33.1m. An October 28, 2011 credit amendment provided a $45m term facility, including financing to replace the remaining Europe Term Note, for the potential tender.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said existing cash was expected to fund working-capital and operating needs for the foreseeable future; results were not necessarily indicative of full-year results.
- Key risks include execution and cost of integrating W.E.T.; minority-shareholder restrictions under German law; acquisition-related debt service, variable interest rates, and covenant constraints; foreign-exchange and derivative volatility; possible impairment of acquired goodwill and intangibles; automotive demand, customer concentration, supply-chain disruption, raw-material costs, and international operating risks. The filing also notes that Japan’s 2011 earthquake and tsunami disrupted some customers’ vehicle production.
- Management concluded disclosure controls were effective at September 30, 2011 and reported no material quarterly change in internal control over financial reporting.
- Reported-value inconsistency: MD&A gives income-tax expense of $1.357m for Q3 and $4.501m year to date, while the financial statements show $0.973m and $4.117m, respectively. MD&A also cites operating cash flow of $6.512m, versus $6.635m in the cash-flow statement. Use the filed statements as presented, but verify these discrepancies against the original filing.
Important facts for investors to verify
- How much of future revenue and margin performance comes from W.E.T., and whether the acquisition’s preliminary purchase-price allocation changes.
- Cash generation, working-capital needs, debt amortization, variable-rate exposure, and compliance with credit-facility covenants.
- The timing, financing, and ultimate cost of the W.E.T. minority-shareholder tender rights and domination agreement.
- The effect of the 8% preferred dividend, scheduled redemptions, conversion terms, and potential common-share dilution.
- The Q3 and year-to-date tax and operating-cash-flow figures that differ between MD&A and the financial statements.