Gentherm Incorporated — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. Gentherm supplies thermal-management and comfort products to automotive and medical markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $372.3m | $260.7m | $735.9m | $528.4m |
| Gross margin | $88.0m; 23.6% | $59.4m; 22.8% | $169.1m; 23.0% | $123.5m; 23.4% |
| Operating income | $4.3m | $7.7m | $22.0m | $21.9m |
| Net income (loss) | $(1.6)m | $7.1m | $6.4m | $18.8m |
| Diluted EPS | $(0.05) | $0.21 | $0.19 | $0.56 |
Q2 revenue grew 42.8%; first-half revenue grew 39.3%. Automotive revenue increased 45.1% in Q2 and 40.9% in the first half. Acquisitions, particularly Alfmeier, contributed materially to growth; higher automotive volumes also helped. Medical revenue declined 6.7% in Q2 and rose 1.7% for the first half.
Q2 operating results included a $19.5m non-cash goodwill impairment in Medical. Q2 income tax expense was $4.8m, producing a 147.1% effective tax rate; management reported a 31.9% rate excluding the impairment’s tax effects. First-half interest expense rose to $6.1m from $2.0m, while foreign currency results swung to a $1.7m loss from a $6.8m gain.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $58.6m, compared with $3.7m used in the prior-year period. Investing cash use was $6.8m; financing cash use was $39.4m, including $20.0m of share repurchases and $17.0m of debt repayments.
- Cash and equivalents were $168.7m at June 30, 2023, versus $153.9m at year-end 2022. Total debt was $218.1m, including $217.0m outstanding on the revolving facility; the facility’s stated borrowing availability was $282.7m. The revolver rate was 6.58%.
- Working capital totaled $401.9m, based on current assets of $709.5m less current liabilities of $307.6m. The company reported compliance with credit agreement covenants. Management said cash, available borrowings, factoring arrangements and operating cash flows should cover anticipated needs for at least the next 12 months.
- Capital expenditures were $13.7m in the first half. Semiconductor purchase commitments totaled $34.6m. The company had $110.0m remaining under its share repurchase authorization, which expires December 15, 2023.
Material changes, outlook and risks
- Medical goodwill was written down by $19.5m after slower-than-forecast revenue growth; the reporting unit’s carrying value exceeded estimated fair value by $17.1m. Management warned that weaker-than-expected growth or lower estimates could lead to further impairment.
- The company plans to wind down its non-automotive electronics business by the end of 2023, subject to customer and supplier discussions. First-half inventory impairment charges related to this exit were $2.1m.
- Fit-for-Growth 2.0, launched in the first half, targets high-teens adjusted EBITDA margins and revenue above $2bn by 2026, through productivity, footprint optimization, value engineering, sourcing and acquisition synergies. These are management targets, not guaranteed results.
- Gentherm reported $670m of automotive new business awards in Q2. Awards represent projected lifetime revenue, are not firm orders, and may change with customer forecasts and market conditions.
- S&P Global Mobility’s July 2023 forecast cited by the company projected 2023 light-vehicle production growth of 6.2% in its key markets. This is an external industry forecast, not company revenue guidance.
- Management cited persistent inflation in materials, labor and transportation, and macroeconomic, geopolitical, supply-chain, customer-production and foreign-exchange uncertainties. Cost mitigation and customer recoveries had not fully offset inflation. A 100-basis-point interest-rate change would affect annual interest expense by an estimated $2.2m before considering hedging.
- The company reported no material pending litigation and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether Medical revenue and forecasts recover, and whether further goodwill impairment is required.
- How much reported revenue growth reflects acquisitions versus organic volume, pricing and currency effects.
- Whether gross-margin improvement can be sustained despite inflation, quality costs and planned business wind-downs.
- Progress toward the 2026 revenue and adjusted EBITDA margin targets, including the assumptions and costs underlying Fit-for-Growth 2.0.
- Revolver availability, covenant headroom, borrowing costs and cash-flow needs alongside the $34.6m semiconductor commitments and remaining buyback authorization.
- Execution of the non-automotive electronics exit by year-end 2023 and any resulting charges or customer/supplier impacts.