Gentherm Reports 2017 Third Quarter Results

Soft Quarter in Revenue and Margins but Fourth Quarter Appears Stronger

NORTHVILLE, Mich., October 26, 2017 /PRNewswire/ -- Gentherm (NASDAQ-GS:THRM), the global market leader and developer of innovative thermal management technologies, today announced its financial results for the third quarter ended September 30, 2017.

Key takeaways from third quarter operating results

“The third quarter revenue was a disappointment.  Production shut-downs at our automotive customers, a slower revenue ramp-up from our medical direct sales force initiative and the deferral of a large GPT product shipment to the fourth quarter all weighed heavily on our short-term revenue growth; however, an improved automotive production outlook and a tail wind from the GPT revenue deferral should lead to a stronger fourth quarter.” said President and CEO Daniel R. Coker.  “Lower gross and operating margins included several special expenses, some of which are not expected to recur.” Coker added.

Coker continued, “We are proceeding with a robust level of investment in new and improved products, advanced technologies and updates in our business applications.  During the third quarter, however, higher net research and development spending was offset with higher customer and government sponsored reimbursements.  We are set to launch our advanced thermoelectric based Battery Thermal Management (“BTM”) solution during the fourth quarter representing the first of these exciting new products.  The advanced BTM revenue will significantly accelerate an already growing product category.”

Third Quarter 2017 Financial Review

Product revenues for the third quarter 2017 increased by $3.2 million, or 1.4% to $235.9 million.  This included an increase in the automotive segment totaling $2.8 million, or 1.3%, to $215.2 million, and an increase in the industrial segment of $422,000, or 2.0%, to $20.7 million.  The increase in the automotive segment occurred despite lower automotive production volumes and a special rebate of $2.0 million.  Similar to the second quarter of 2017, our automotive OEM customers cut production on several vehicle programs through one-time plant shut-downs intended to adjust vehicle inventories.  These shut-downs impacted our CCS programs disproportionately. CCS revenues were also reduced as a result of certain vehicle programs changing technologies from the higher priced active cooling seat application to heated and ventilated seat technology.  Most of our other automotive products had higher revenue despite the weak production volumes.  Steering wheel heaters were particularly strong, growing $3.6 million, or 28%, to $16.4 million.  Seat heaters increased by $3.3 million, or 4.4% to $77.8 million.  Product revenues from GPT, included in the industrial segment, totaled $4.5 million which represented a decrease of $620,000, or 12%.  This decrease, which was even higher when compared to the GPT revenue totaling $7.5 million during the 2017 second quarter, was mainly due to the deferral of a large customer project totaling $4.0 million that has already shipped during the fourth quarter.  Revenue for CSZ totaling $16.2 million, which increased $1.0 million, or 6.9%, offset the lower GPT revenue but was lower than the $20.1 million in revenue during the second quarter of 2017.  This sequentially lower revenue totaling $3.9 million, or 19%, was partly due to $2.8 million in lower environmental chamber revenue and partly due to lower medical product sales of $1.1 million.   The chamber sales were impacted by lower shipments of large custom chambers while the lower medical product revenues were due to lower sales of the blood heater cooler product that was higher during recent quarters due to regulatory issues affecting a competitor’s product.

The special automotive customer rebate is a one-time lump-sum discount that reflects improved productivity gains that we expect to achieve through higher volume from new program awards.

The gross margin percentage decreased to 29.8%, during the third quarter, compared to 33.0% during the prior year third quarter mainly as a result of adjustments to our inventory reserves, the impact of the special rebate, higher production expenses and product mix changes.  The unfavorable inventory adjustments totaled $2.3 million and were mainly comprised of a reserve recorded for inventory held for the heated and cooled mattress product line and is based on a reduced sales outlook.  Increased expenses totaling $1.0 million included overtime and other costs incurred at our Mexico factories, labor expense inflation at our Ukraine factory, and factory launch expenses for the new advanced BTM program in our Macedonia facility.  Other increased expenses include approximately $830,000 in cost overruns in CSZ’s industrial chamber business.  Finally, we had an approximately $2.8 million unfavorable impact from a shift in product mix due to the lower sales of the high margin revenue of GPT and CSZ’s medical products as compared to 2016.

Selling, general and administrative expenses increased by $4.8 million, or 16%, to $34.3 million during the third quarter of 2017.  This increase was partially due to expenses associated with the transition to a new chief executive officer, higher selling costs for CSZ’s medical products business and increased management incentive compensation costs.  On June 28, 2017 we announced the pending retirement of Daniel R. Coker, our CEO, and a related retirement compensation package.  During the 2017 third quarter we recorded expenses totaling $2.5 million, which included accelerated stock compensation amortization and a portion of a cash bonus owed to Mr. Coker upon his retirement.  The amount also includes a signing bonus for Mr. Coker’s successor and fees associated with the recruitment process.  A similar CEO transition expense is expected to be recorded during the 2017 fourth quarter.  CSZ’s selling expenses increased by $1.0 million mainly due to a program of hiring direct sales people for its medical division which began at the end of 2016.  Other increases in selling, general and administrative expenses include business software implementation expenses associated with a new human resource management system and a new product lifecycle management application.  

Income tax expense for the third quarter included a $1.0 million benefit related to our research and development tax credit.  Without the tax credit adjustment the effective tax rate, which was 9%, would have been 23%.  

During the 2017 third quarter, we incurred a net foreign currency loss of $7.3 million which included a net realized loss of $1.3 million and a net unrealized loss of $6.0 million.  The unrealized loss was primarily the result of holding significant amounts of U.S. Dollar (“USD”) cash at our subsidiaries in Europe and due to certain intercompany relationships between these European subsidiaries and our U.S. based companies.

The table below summarizes many of the significant amounts impacting the operating results for the third quarter 2017 as described above:

Our fully diluted earnings per share were $0.18 and $0.55 for the third quarter 2017 and 2016, respectively.  As outlined in the accompanying table below entitled, “Acquisition Transaction Expenses, Purchase Accounting Impacts and Other Effects”, these amounts included certain purchase accounting impacts from acquisitions and the unrealized currency loss.  After adjusting for these impacts and effects, our fully diluted earnings per share would have been $0.36 and $0.61 in 2017 and 2016, respectively.

Total cash as of September 30, 2017 was $147.6 million as compared with total cash of $164.2 million at June 30, 2017.  This decrease was primarily related to $17.5 million in debt repayments and $5.3 million used to repurchase common stock.  The cash combined with $220.7 million in borrowing availability under the Company's credit agreements, provides available liquidity totaling $368.3 million as of September 30, 2017.

Guidance

Stronger fourth quarter revenue is expected to bring the full year growth rate for 2017 to approximately 6-7% over 2016 product revenue.  Our guidance includes the extra quarter of CSZ revenue and assumes a neutral impact from foreign currency translation.

Conference Call

As previously announced, Gentherm is conducting a conference call today to be webcast at 8:00 AM Eastern Time to review these financial results.  The dial-in number for the call is 1-877-407-4018 or, for international callers, 1-201-689-8471.  The live webcast and archived replay of the call can be accessed on the Events page of the Investor section of Gentherm's website at www.gentherm.com.

A telephonic replay will be available at approximately 11:00 a.m. ET and will be accessible for two weeks. The replay can be accessed by dialing 1-844-512-2921, or for international callers, 1-412-317-6671. The passcode for the live call and the replay is 13672687.

Investor Relations Contact
investors@gentherm.com
248-308-1702

About Gentherm

Gentherm (NASDAQ-GS: THRM) is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. Automotive products include variable temperature Climate Control Seats, TrueTherm® cupholder and storage bins, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery thermal management systems, cable systems and other electronic devices. Non-automotive products include remote power generation systems, heated and cooled furniture, patient temperature management systems, industrial environmental test chambers and related product testing services and other consumer and industrial temperature control applications. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and to create new product applications for existing and new markets. Gentherm has over thirteen thousand employees in facilities in the United States, Germany, Canada, China, Hungary, Japan, Korea, Macedonia, Malta, Mexico, United Kingdom, Ukraine, and Vietnam.  For more information, go to www.gentherm.com.

Except for historical information contained herein, statements in this release are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Gentherm Incorporated's goals, beliefs, plans and expectations about its prospects for the future and other future events.  The forward-looking statements included in this press release are made as of the date hereof or as of the date specified and are based on management's current expectations and beliefs.  Such statements are subject to a number of important assumptions, risks, uncertainties and other factors that may cause the Company's actual performance to differ materially from that described in or indicated by the forward looking statements. Those risks include, but are not limited to, risks that new products may not be feasible, sales may not increase, additional financing requirements may not be available, new competitors may arise, currency exchange rates may change, and adverse conditions in the industry in which the Company operates may negatively affect its results. The foregoing risks should be read in conjunction with other cautionary statements included herein, as well as in the Company's annual report on Form 10-K for the year ended December 31, 2016 and subsequent reports filed with the Securities and Exchange Commission. Except as required by law, the Company expressly disclaims any obligation or undertaking to update any forward-looking statements to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

TABLES FOLLOW

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

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GENTHERM INCORPORATED

REVENUE BY PRODUCT CATEGORY

(Unaudited, in thousands)

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GENTHERM INCORPORATED

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

(Unaudited, in thousands)

Use of Non-GAAP Financial Measures

In evaluating its business, Gentherm considers and uses Adjusted EBITDA as a supplemental measure of its operating performance.  The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, deferred financing cost amortization, transaction expenses, debt retirement expenses, unrealized currency gain or loss and unrealized revaluation of derivatives.  Management believes that Adjusted EBITDA is a meaningful measure of liquidity and the Company's ability to service debt because it provides a measure of cash available for such purposes. Management provides an Adjusted EBITDA measure so that investors will have the same financial information that management uses with the belief that it will assist investors in properly assessing the Company's performance on a period-over-period basis.

The term Adjusted EBITDA is not defined under GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP.  Adjusted EBITDA has limitations as an analytical tool, and when assessing the Company's operating performance, investors should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP.  Gentherm compensates for these limitations by relying primarily on its GAAP results and using Adjusted EBITDA only supplementally.

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GENTHERM INCORPORATED

ACQUISITION TRANSACTION EXPENSES, PURCHASE ACCOUNTING IMPACTS

AND OTHER EFFECTS

(Unaudited and in thousands, except per share data)

(1) During the first quarter of 2016, we completed a legal reorganization in North America by shifting certain operations located in Canada to other subsidiaries.  Related to the reorganization we declared intercompany dividends and incurred $9.6 million in withholding taxes payable to the Canadian Revenue Agency.

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GENTHERM INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

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GENTHERM INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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