Gentherm Incorporated (NASDAQ: THRM) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts below are in millions of U.S. dollars unless otherwise noted.
Business context and reporting period
Gentherm supplies automotive thermal-management and comfort products, including climate-control seats, heaters, battery-performance solutions, and lumbar and massage systems. Its Medical segment provides patient temperature-management products. The company acquired automotive supplier Alfmeier in July 2022 and medical-equipment manufacturer Dacheng in July 2022; both acquisitions are included from their respective acquisition dates.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Product revenue | $333.0 | $243.4 | $861.3 | $797.9 |
| Gross margin | $80.4; 24.1% | $69.4; 28.5% | $203.8; 23.7% | $236.3; 29.6% |
| Operating income | $22.8 | $20.7 | $44.7 | $93.1 |
| Net income | $9.8 | $15.7 | $28.6 | $73.4 |
| Diluted EPS | $0.29 | $0.47 | $0.86 | $2.19 |
- Cash flow: Nine-month operating cash flow was $13.0, versus $117.1 in 2021. Capital expenditures were $25.7, and acquisitions used $224.1; investing cash outflow totaled $247.8. Financing provided $191.6, including net debt borrowings of approximately $195.4.
- Liquidity and debt: Cash was $139.2 at September 30. Total debt was $235.5, including $232.0 drawn on the revolving facility. The $500.0 secured facility matures in June 2027; reported additional borrowing availability was $264.5, subject to conditions. Factoring availability was $38.0. The company reported compliance with credit-agreement covenants.
- Working capital: Inventory was $233.9, up from $159.5 at year-end 2021; accounts receivable was $248.6, up from $183.0. Cash declined from $190.6 at year-end.
Material changes versus prior comparable periods
- Q3 revenue rose 36.8%; the company attributed $68.0 of the increase to automotive volume and $42.5 to acquisitions, partly offset by $18.4 of unfavorable foreign exchange and $2.5 of pricing/other effects. Nine-month revenue increased 7.9%.
- Despite higher sales, gross margin fell 4.4 percentage points in Q3 and 5.9 points year to date. Management cited inflation in materials, wages and freight, as well as acquisition mix and operational performance pressures.
- Q3 operating income increased modestly, but nine-month operating income fell 52.0% and net income fell 61.0%. The nine-month decline reflects weaker gross margin and higher operating expenses, including acquisition-related costs.
- Q3 included an $8.3 foreign-currency loss, compared with a $0.1 gain in Q3 2021. Nine-month foreign-currency loss was $1.5 versus a $0.4 gain.
- Comprehensive loss was $17.6 in Q3 and $30.5 for nine months, primarily reflecting foreign-currency translation losses; accumulated other comprehensive loss reached $96.1.
Outlook, management commentary, risks and unusual items
- Management said it expects cash, available credit and factoring arrangements to cover anticipated requirements for at least the next 12 months. It also expects inflationary pressures and supply-chain instability to persist and may materially affect performance and operating cash needs.
- Semiconductor shortages and other supply disruptions have caused volatile customer production schedules. The company had $37.3 of commitments under semiconductor supply-reservation agreements, which provide priority access but do not guarantee delivery.
- The company’s Ukraine facility was operating at filing time and represented approximately 11% of 2021 revenue. Gentherm was preparing contingency plans and coordinating possible production and equipment relocations amid the continuing conflict.
- S&P Global Mobility forecast 2022 light-vehicle production in Gentherm’s key markets of 67.6 million units, up 4.5% from 2021. This is an external industry forecast, not company revenue guidance. Gentherm reported $430 million of Q3 automotive awards, measured as projected lifetime revenue; awards are not firm orders or revenue forecasts.
- Alfmeier contributed Q3 revenue of $41.3 and an operating loss of $3.1; Dacheng contributed revenue of $1.2 and an operating loss of $0.2. Acquisition purchase-price allocations remained preliminary. Up to $3.0 of future Dacheng payments are contingent on performance and continued employment and will be recorded as compensation expense.
- Other risks include foreign-exchange and floating-rate debt exposure, customer and supplier concentration or disruption, product-liability and warranty claims, and execution/integration of acquisitions. Management disclosed no material pending litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether volume growth and acquired revenue can offset continued cost inflation and the substantial year-to-date gross-margin decline.
- Progress in integrating Alfmeier and Dacheng, final purchase-price adjustments and valuations, and whether acquired businesses improve profitability.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside acquisition-related debt and borrowing availability.
- Actual semiconductor availability, customer production levels, and the status and contingency plans for the Ukraine facility.
- Whether the external vehicle-production outlook and lifetime award figures translate into realized Gentherm sales; neither constitutes company guidance or guaranteed orders.