Gentherm(THRM) - 2019 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) Gentherm's Q1 2019 financial statements reflect decreased revenues and net income, impacted by an impairment loss and a business sale, with new lease accounting standards adopted Consolidated Condensed Balance Sheets Total assets decreased to $763.0 million from $803.0 million, primarily due to reduced assets held for sale and long-term debt, with new operating lease assets recognized Consolidated Condensed Balance Sheet Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $401,881 | $443,075 | | Assets held for sale | $17,009 | $69,699 | | Total assets | $763,046 | $803,047 | | Total current liabilities | $166,354 | $175,396 | | Long-term debt, less current maturities | $97,604 | $136,477 | | Total liabilities | $284,559 | $323,348 | | Total shareholders' equity | $478,487 | $479,699 | - The company adopted a new lease accounting standard (ASU 2016-02), resulting in the recognition of $14.1 million in operating lease right-of-use assets and corresponding current ($4.2 million) and non-current ($9.3 million) lease liabilities[9][87] Consolidated Condensed Statements of Income Q1 2019 product revenues decreased 2.5% year-over-year to $257.9 million, with net income falling to $8.4 million due to an impairment loss, despite higher operating income Q1 2019 vs Q1 2018 Income Statement (in thousands, except per share data) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Product revenues | $257,921 | $264,586 | | Gross margin | $75,307 | $81,242 | | Operating income | $21,845 | $20,649 | | Gain on sale of business | $4,970 | $0 | | Impairment loss | ($10,484) | $0 | | Net income | $8,414 | $12,966 | | Diluted earnings per share | $0.25 | $0.35 | Consolidated Condensed Statements of Comprehensive Income Q1 2019 comprehensive income significantly decreased to $4.8 million, primarily due to a $4.1 million foreign currency translation loss compared to a prior-year gain Q1 2019 vs Q1 2018 Comprehensive Income (in thousands) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net income | $8,414 | $12,966 | | Other comprehensive (loss) income, net of tax | ($3,652) | $12,893 | | Comprehensive income | $4,762 | $25,859 | Consolidated Condensed Statements of Cash Flows Q1 2019 operating cash flow increased to $6.9 million, with investing activities providing $42.4 million from a business sale, while financing used $47.4 million for debt and repurchases Q1 2019 vs Q1 2018 Cash Flows (in thousands) | Activity | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,881 | $5,590 | | Net cash provided by (used in) investing activities | $42,378 | ($8,393) | | Net cash used in financing activities | ($47,401) | ($35,400) | | Net increase (decrease) in cash | $1,649 | ($32,690) | - Key investing and financing activities in Q1 2019 included $47.5 million in proceeds from the sale of a business, $49.6 million in debt repayments, and $8.0 million in common stock repurchases[18] Consolidated Condensed Statements of Changes in Shareholders' Equity Shareholders' equity slightly decreased to $478.5 million, primarily due to stock repurchases and other comprehensive loss, partially offset by net income Reconciliation of Shareholders' Equity for Q1 2019 (in thousands) | Description | Amount | | :--- | :--- | | Balance at December 31, 2018 | $479,699 | | Stock repurchase | ($8,040) | | Net income | $8,414 | | Other comprehensive loss, net | ($3,652) | | Other changes | $1,966 | | Balance at March 31, 2019 | $478,487 | Notes to Unaudited Consolidated Condensed Financial Statements Notes detail the $47.5 million CSZ-IC business sale, $15 million Stihler Electronic acquisition, new lease accounting adoption, and a $10.5 million GPT impairment loss - On February 1, 2019, the company completed the sale of its Cincinnati Sub-Zero industrial chamber business (CSZ-IC) for $47.5 million in cash, recognizing a $5.0 million pre-tax gain[23][120] - On April 1, 2019, the company acquired Stihler Electronic GmbH, a manufacturer of patient and blood temperature systems, for approximately $15 million in cash[28] - The company adopted the new lease accounting standard ASU 2016-02 on January 1, 2019, recognizing $17.1 million in new operating lease right-of-use assets and $16.7 million in lease liabilities[87] - During Q1 2019, the company recognized a $10.5 million impairment loss related to assets held for sale, primarily the GPT business[99][121] Q1 2019 Revenue by Product Category (in thousands) | Product Category | Q1 2019 Revenue | % Change YoY | | :--- | :--- | :--- | | Climate Control Seats (CCS) | $94,354 | 7.0% | | Seat Heaters | $73,920 | (12.2)% | | Battery Thermal Management (BTM) | $10,745 | 158.2% | | Subtotal Automotive | $242,357 | 0.0% | | Subtotal Industrial | $15,564 | (29.8)% | | Total Company | $257,921 | (2.5)% | Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2019 product revenues decreased 2.5% to $257.9 million, driven by the CSZ-IC sale and currency effects, though the automotive segment showed constant currency growth and cost reductions improved operating income - Total product revenues decreased 2.5% YoY. Automotive segment revenue was flat, but after adjusting for foreign currency translation, it would have been $249.1 million, a 2.8% increase over Q1 2018[110] - The Automotive segment's performance outpaced the market, with its revenue growth contrasting a 6.7% decrease in light vehicle production in the company's key markets[111] - Strong growth in Battery Thermal Management (BTM) revenues, which increased 158.2% YoY to $10.7 million, and Climate Control Seats (CCS), which grew 7.0% to $94.4 million[109] - Cost reduction from the 'Fit-for-Growth' initiative resulted in lower operating expenses, with Net R&D down 18.9% and SG&A down 10.5% compared to Q1 2018[115][117] - The company recorded a $10.5 million impairment loss related to its plan to divest the GPT business, which is not expected to be tax-deductible[121] - Cash from operations was $6.9 million. The company received $47.5 million from the sale of CSZ-IC, used funds for $49.6 million in debt repayments, and repurchased $8.0 million of its common stock[128][131] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from foreign currency, interest rates, and commodity prices using derivatives, with $24.1 million in foreign currency contracts as of March 31, 2019 - Key market risks include foreign currency exchange rates (Euro, Mexican Peso, etc.), short-term interest rates on debt, and price fluctuations of commodities like copper[134] - The company uses derivative contracts to manage financial exposure. As of March 31, 2019, it had foreign currency derivative contracts with a notional value of $24.1 million, down from $33.3 million at year-end 2018[135] Debt Obligations by Maturity (as of March 31, 2019, in thousands) | Type | 2019 | 2020 | 2021 | 2022 | 2023 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Fixed Rate (€EUR) | $449 | - | - | - | - | $449 | | Variable Rate ($USD) | - | - | $88,854 | - | - | $88,854 | | Fixed Rate ($USD) | $2,500 | $2,500 | $2,500 | $2,500 | $1,250 | $11,250 | Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness in internal control over financial reporting, with a remediation plan underway and new lease accounting impacting controls - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2019, due to a previously disclosed material weakness in internal control over financial reporting[145] - A remediation plan to address the material weakness is underway and is expected to be completed before the end of 2019[146] - The implementation of new lease accounting processes in Q1 2019 constituted a material change in the company's internal control over financial reporting[147] Part II. Other Information Legal Proceedings The company reports no material pending legal proceedings as of March 31, 2019, in the ordinary course of business - There were no material pending legal proceedings to which the company was a party during the three-month period ended March 31, 2019[151] Risk Factors No material changes were reported to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K - No material changes were reported in the company's risk factors from those disclosed in the 2018 Form 10-K[152] Unregistered Sales of Equity Securities and Use of Proceeds Gentherm repurchased 200,381 shares for $8.0 million in Q1 2019 under its stock repurchase program, with $138.6 million remaining authorization Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2019 | 153,967 | $40.04 | | February 2019 | 46,414 | $40.42 | | March 2019 | 0 | $0.00 | - The stock repurchase program authorizes up to $300 million in repurchases and expires on December 16, 2020[154] Exhibits This section lists filed exhibits, including CEO and CFO certifications and XBRL data files, as required by Sarbanes-Oxley - Exhibits filed include Section 302 and 906 certifications for the CEO and CFO, and various XBRL documents for interactive data[156] Signatures The Form 10-Q was officially signed on May 1, 2019, by President and CEO Phillip Eyler and EVP and CFO Matteo Anversa - The Form 10-Q was signed on May 1, 2019, by Phillip Eyler (President and CEO) and Matteo Anversa (EVP, CFO)[159]