Gentherm Inc. — Q2 2020 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. The filing is unaudited.
Business context and reporting period
Gentherm develops thermal-management products, principally automotive climate-comfort and battery thermal-management systems, and medical patient-temperature-management products. Automotive sales depend substantially on vehicle production and customer demand. The quarter was sharply affected by COVID-19-related customer and factory closures, particularly in North America and Europe. The company’s North American and European facilities remained closed until the last week of May; by June-end, production had returned to near full capacity in North America and approximately 70% in Europe. Asia had recovered to near full capacity by the end of Q1.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Product revenue | $136.1 | $243.3 | $364.7 | $501.2 |
| Gross margin | $26.7; 19.6% | $72.7; 29.9% | $92.8; 25.4% | $148.0; 29.5% |
| Operating income (loss) | $(9.9) | $20.1 | $8.8 | $41.9 |
| Net income (loss) | $(10.3) | $2.8 | $1.6 | $11.2 |
| Diluted EPS | $(0.32) | $0.08 | $0.05 | $0.33 |
- Q2 revenue fell 44.1% year over year; first-half revenue fell 27.2%. Automotive revenue declined 45.8% in Q2 and 27.8% in the first half. Medical revenue grew 18.2% in Q2 and 31.8% in the first half.
- Q2 gross margin fell to 19.6%, reflecting lower volume and weaker manufacturing productivity associated with the pandemic. Cost reductions and lower factory, labor, and material costs partly offset the decline.
- First-half operating cash flow was $50.2, versus $40.4 a year earlier. Investing activities used $9.6, compared with providing $19.1 in 2019; financing provided $116.0, versus using $63.2. Financing included substantial net borrowing.
- At June 30, cash and cash equivalents were $209.2, with $2.5 of restricted cash. Current assets were $479.8 and current liabilities $136.0. Total debt was $200.6, compared with $80.6 at December 31, 2019; shareholders’ equity was $469.3.
- Debt included $193.1 outstanding under the revolving credit agreement and a $7.5 DEG Vietnam loan. The company reported $159.3 of additional borrowing availability at June 30, subject to conditions and financial covenants. Revolving debt matures June 27, 2024.
Material changes versus the prior comparable period
- Global light-vehicle production, according to IHS Markit, declined 44.3% in Q2 and 33.3% in the first half. North American and European Q2 production fell 69.0% and 62.5%, respectively; China production rose 9.1%.
- Lower automotive volumes drove most of the revenue decline. Revenue also reflected foreign-exchange impacts, customer pricing, and the absence of divested businesses. Medical growth, including demand for Blanketrol products supporting COVID-19 patient care, partly offset declines.
- Operating expenses decreased, including lower R&D, selling and administrative expenses, variable compensation, travel, and costs following divestitures. These reductions did not offset the sharp fall in gross profit.
- First-half 2020 results included a $3.4 expense for settlements and closure of multi-year international tax audits. Q2 other income included a $2.0 gain on sale of patents. The prior-year comparison included a $5.0 gain on the CSZ-IC sale and $20.4 of impairment losses related to GPT.
Outlook, management commentary, risks and unusual items
- The company did not provide specific full-year revenue or earnings guidance. IHS Markit’s July 2020 forecast cited by Gentherm projected 69.5 million global light-vehicle units for 2020, down 21.8% from 2019; this is an industry forecast, not company guidance.
- Management expected a short-term cash-flow decline during the production ramp-up as working capital increases before customer payments are collected. It expected borrowing availability at the end of Q3, and potentially thereafter, to be below the June-end level as trailing EBITDA and covenant capacity could decline.
- Management stated that available cash, operating cash flows, and borrowing capacity were expected to meet operating, capital-expenditure, and debt-service needs for at least 12 months, while warning that prolonged disruption could require additional capital and that access to financing was not assured.
- In March, Gentherm borrowed an additional $169.5 to bolster liquidity; it repaid a net $32.8 during Q2. It reduced expenses, inventory, and capital spending, deferred employee base salaries from May through year-end, and suspended share repurchases. The company had repurchased $9.1 of shares in the first half, all before Q2.
- A manufacturing-footprint plan will consolidate North American electronics manufacturing in Celaya, Mexico and reduce the number of plants by two. Expected total costs are $16–$19, including $13–$16 of cash expenditures; completion is expected by the end of 2021. Timing, costs, and savings may differ materially from estimates.
- The principal risks include further pandemic effects on automotive demand, production, suppliers, customer collections, operations, liquidity, and covenant compliance; foreign exchange and variable interest rates; and potential asset impairment if revenue expectations deteriorate. The company reported no material pending litigation and no material off-balance-sheet arrangements.
- A $2.5 CSZ-IC sale-proceeds escrow remained restricted after claims were made; Gentherm could not estimate any potential loss. The company also cautioned that warranty or product-liability claims could result in significant future costs.
Important facts for investors to verify
- Subsequent automotive production, customer demand, and Gentherm’s revenue and margins after the Q2 shutdowns.
- Actual covenant headroom and borrowing availability as trailing EBITDA changes, including compliance with the revolving-credit agreement.
- Cash conversion during the production ramp-up, including working-capital needs and customer payment timing.
- Progress, revised costs, expected savings, and completion timing for the manufacturing-footprint restructuring.
- Resolution of the $2.5 escrow claims, and the effects of the $3.4 international tax-audit settlement and patent-sale gain on comparisons.
- Whether the approximately $300 of Q2 automotive new-business awards convert into customer orders and eventual revenue; the filing says these lifetime-value estimates are not firm orders and do not reflect the pandemic’s potential future impact.