Gentherm(THRM) - 2019 Q2 - Quarterly Report

Part I. Financial Information This section presents the company's financial performance, condition, and cash flows, along with management's analysis, market risk exposures, and internal control effectiveness Financial Statements The company's financial statements for the period ending June 30, 2019, show a decrease in total assets and shareholders' equity compared to year-end 2018, with net income significantly decreasing due to impairment losses and lower product revenues, while cash flow from operations increased Consolidated Condensed Balance Sheets | Account | June 30, 2019 (in millions) | December 31, 2018 (in millions) | | :--- | :--- | :--- | | Total Assets | $751.9 | $803.0 | | Total current assets | $378.4 | $443.1 | | Assets held for sale | $6.7 | $69.7 | | Goodwill | $65.1 | $55.3 | | Total Liabilities | $286.6 | $323.3 | | Total current liabilities | $161.4 | $175.4 | | Long-term debt, less current maturities | $104.4 | $136.5 | | Total Shareholders' Equity | $465.3 | $479.7 | - Total assets decreased from $803.0 million at year-end 2018 to $751.9 million, largely due to a reduction in assets held for sale. Total liabilities also decreased, primarily from a reduction in long-term debt[10] Consolidated Condensed Statements of Income | Metric | Q2 2019 (in millions) | Q2 2018 (in millions) | YTD 2019 (in millions) | YTD 2018 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Product revenues | $243.3 | $266.4 | $501.2 | $531.0 | | Gross margin | $72.7 | $77.1 | $148.0 | $158.3 | | Operating income | $20.1 | $15.6 | $41.9 | $36.2 | | Impairment loss | ($9.9) | $0 | ($20.4) | $0 | | Net income | $2.8 | $16.7 | $11.2 | $29.6 | | Diluted EPS | $0.08 | $0.45 | $0.33 | $0.81 | - Net income for Q2 2019 was $2.8 million, a sharp decline from $16.7 million in Q2 2018. This was primarily driven by a $9.9 million impairment loss and lower product revenues. For the six months ended June 30, net income also fell significantly to $11.2 million from $29.6 million year-over-year, impacted by a $20.4 million impairment loss, though partially offset by a $5.0 million gain on the sale of a business[12] Consolidated Condensed Statements of Cash Flows | Activity | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $40.4 | $32.5 | | Net cash provided by (used in) investing activities | $19.1 | ($21.5) | | Net cash used in financing activities | ($63.2) | ($47.9) | | Net decrease in cash | ($3.4) | ($37.8) | - For the first six months of 2019, cash from operations increased to $40.4 million from $32.5 million in the prior year. Investing activities provided $19.1 million in cash, mainly from the $47.5 million sale of a business, which was partially offset by a $15.5 million acquisition and $13.0 million in capital expenditures. Financing activities used $63.2 million, primarily for debt repayments ($61.1 million) and stock repurchases ($33.0 million)[19] Notes to Financial Statements - 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 pre-tax gain of $5.0 million[27] - On April 1, 2019, Gentherm acquired Stihler Electronic GmbH, a manufacturer of patient and blood temperature management systems, for a purchase price of $15.5 million, net of cash acquired[53] - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, resulting in the recognition of $17.1 million in new operating lease right-of-use assets and $16.7 million in lease liabilities on the balance sheet[108] - The company recorded impairment losses of $9.9 million and $20.4 million for the three and six months ended June 30, 2019, respectively, related to its GPT disposal group and an equity investment, both of which are classified as held for sale[121][153] Management's Discussion and Analysis (MD&A) Management attributes the 8.7% decrease in Q2 2019 revenue to declines in both the Automotive and Industrial segments, driven by unfavorable foreign currency, lower volumes, and the sale of the CSZ-IC business. Despite lower revenue, cost of sales decreased more significantly due to the CSZ-IC sale and operational improvements. The company's liquidity remains sufficient, supported by cash from operations, proceeds from the CSZ-IC sale, and available credit, which funded capital expenditures, an acquisition, and significant stock repurchases Results of Operations: Q2 2019 vs. Q2 2018 | Category | Q2 2019 (in millions) | Q2 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Subtotal Automotive | $229.7 | $243.2 | (5.5)% | | Subtotal Industrial | $13.6 | $23.3 | (41.4)% | | Total Company | $243.3 | $266.4 | (8.7)% | - Automotive segment revenue decreased by $13.5 million (5.5%) due to unfavorable foreign currency ($6.1 million), lower volumes ($4.5 million), and customer pricing pressures ($2.9 million)[133][134] - Industrial segment revenue fell by $9.6 million (41.4%), primarily due to the absence of revenue from the CSZ-IC business, which was sold on February 1, 2019[133][135] - Cost of sales decreased by 9.8% to $170.6 million, driven by the sale of CSZ-IC ($8.1 million), operational performance improvements ($8.4 million), and favorable currency effects ($3.4 million)[136][137] - An impairment loss of $9.9 million was recorded in Q2 2019 related to the planned divestiture of the GPT business[141] Results of Operations: H1 2019 vs. H1 2018 | Category | H1 2019 (in millions) | H1 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Subtotal Automotive | $472.1 | $485.6 | (2.8)% | | Subtotal Industrial | $29.2 | $45.4 | (35.7)% | | Total Company | $501.2 | $531.0 | (5.6)% | - For the first half of 2019, total revenue decreased by 5.6% to $501.2 million. The Automotive segment saw strong growth in Battery Thermal Management (BTM) revenue, up 72.3% YoY, and Other Automotive, up 60.4% YoY[144][145] - A pre-tax gain of $5.0 million was recognized on the sale of the CSZ-IC business during the first half of 2019[152] - An impairment loss of $20.4 million was recorded in H1 2019 associated with the planned divestiture of the GPT business[153] Liquidity and Capital Resources - The company believes its cash on hand, cash from operations, and available borrowings are sufficient to meet its needs for at least the next 12 months[155] - The Board of Directors increased the stock repurchase authorization to $300 million, with $113.6 million remaining available as of June 30, 2019. The program expires in December 2020[155] - Cash provided by operating activities increased to $40.4 million in H1 2019 from $32.5 million in H1 2018, primarily due to favorable changes in working capital, including accounts receivable and prepaid expenses[158][159] - Investing activities in H1 2019 included $47.5 million in proceeds from the sale of CSZ-IC, offset by a $15.5 million acquisition of Stihler and $13.0 million in capital expenditures[161] Market Risk Disclosures The company is exposed to market risks from changes in foreign currency exchange rates, short-term interest rates on its variable-rate debt, and commodity price fluctuations. To manage these risks, Gentherm regularly uses derivative contracts, such as foreign currency forward agreements, for hedging purposes and not for speculation. As of June 30, 2019, the company had foreign currency derivative contracts with a notional value of $23.5 million - Primary market risks include foreign currency exchange rates (Euro, Mexican Peso, Chinese Renminbi, etc.), interest rates on debt under the Amended Credit Agreement, and commodity prices like copper[165] - The company uses derivative contracts to manage financial and operational exposure, with foreign currency hedges extending up to one year. As of June 30, 2019, outstanding foreign currency derivative contracts had a notional value of $23.5 million[166] - The company does not enter into derivative financial instruments for speculative or trading purposes[168] Controls and Procedures As of June 30, 2019, management concluded that the company's disclosure controls and procedures were not effective due to a previously disclosed material weakness in Information Technology General Controls (ITGC) at its subsidiary, Gentherm Medical, LLC, with a remediation plan underway expected to be completed before the end of 2019 - Management concluded that disclosure controls and procedures were not effective as of June 30, 2019[176] - The ineffectiveness is due to a material weakness in IT General Controls at the Gentherm Medical, LLC subsidiary, related to restricting elevated access and segregation of duties[176] - A remediation plan is in progress and is expected to be completed prior to the end of 2019[177] Part II. Other Information This section provides updates on legal proceedings, risk factors, equity security purchases, and a list of exhibits filed with the report Legal Proceedings The company reports that it is not a party to any material pending litigation and no material legal proceedings were resolved during the six-month period ended June 30, 2019 - There is no current material pending litigation to which the company is a party[181] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes in risk factors were reported from the company's 2018 Form 10-K[182] Issuer Purchases of Equity Securities During the second quarter of 2019, the company repurchased a total of 629,559 shares of its common stock for approximately $25.0 million. As of June 30, 2019, approximately $113.6 million remained available for future repurchases under the existing program, which expires in December 2020 Share Repurchases in Q2 2019 | Period | Total Shares Purchased | Average Price Paid per Share | Value of Shares Remaining for Purchase (in millions) | | :--- | :--- | :--- | :--- | | May 2019 | 286,539 | $39.45 | $127.3 | | June 2019 | 343,020 | $39.93 | $113.6 | - The Stock Repurchase Program authorizes up to $300 million in repurchases and expires on December 16, 2020[184] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Credit Agreement, CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL data files - Key exhibits filed include the Amended and Restated Credit Agreement dated June 27, 2019, and CEO/CFO certifications[186]