Gentherm Incorporated — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context
Gentherm develops thermal-management products for automotive comfort, battery systems and medical applications. Automotive demand is closely tied to vehicle production. The filing describes ongoing COVID-19-related supply-chain disruption, semiconductor shortages and inflation in materials, labor and transportation.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $243.4m | $259.5m | $797.9m | $624.2m |
| Gross margin | $69.4m; 28.5% | $82.6m; 31.8% | $236.3m; 29.6% | $175.4m; 28.1% |
| Operating income | $20.7m | $38.5m | $93.1m | $47.3m |
| Net income | $15.7m | $24.1m | $73.4m | $25.7m |
| Diluted EPS | $0.47 | $0.73 | $2.19 | $0.78 |
| Operating cash flow | Not separately provided | Not separately provided | $117.1m | $73.3m |
Q3 revenue declined 6.2% year over year, primarily from lower automotive volumes; operating income fell 46%. For the first nine months, revenue rose 27.8% and net income increased substantially from the pandemic-affected 2020 comparison. Nine-month operating margin was approximately 11.7%, versus 7.6% in 2020; Q3 operating margin was approximately 8.5%, versus 14.8%.
- Cash and liquidity: Cash was $195.1m at September 30, 2021, down from $268.3m at year-end 2020. Current assets were $573.7m and current liabilities $215.4m.
- Debt: Total debt was $40.0m, down from $192.4m at December 31, 2020, following repayment of the prior COVID-related credit-facility draw. Net cash, excluding leases, was approximately $155.1m. The company reported $440.0m of additional borrowing availability, subject to facility conditions, and compliance with debt covenants.
- Cash uses: Nine-month investing cash outflow was $40.0m, including $29.6m of capital expenditures, $7.6m of technology investments and a $2.8m acquisition. Financing cash outflow was $148.6m, principally debt repayments of $152.0m.
Material changes and operating drivers
- Q3 automotive revenue declined 6.7%; Medical revenue increased 5.9%. Nine-month automotive revenue rose 29.9%, while Medical revenue fell 9.4%.
- Q3 gross margin contracted by 3.3 percentage points, reflecting weaker manufacturing productivity and higher material and freight costs amid supply disruption. Nine-month gross margin improved 1.5 points versus 2020.
- Q3 global light-vehicle production in Gentherm’s key markets fell 22.6% year over year, according to IHS Markit data cited in the filing. The company’s Q3 automotive revenue decline was attributed mainly to industry-wide supply-chain disruption.
- For the nine months, operating cash flow increased to $117.1m. Inventory increased $34.0m and was a significant cash use; lower receivables provided a $26.2m cash benefit.
Outlook, risks and unusual items
- Management expects supply-chain instability and inflationary impacts to continue for the foreseeable future and says the potential impact may be material. Its ability to meet customer orders without significant delay or expense for the remainder of 2021 and 2022 remained uncertain.
- Management stated that cash, operating cash flow, available credit and receivables-factoring capacity should cover operating, capital-expenditure and debt-service needs for at least 12 months. This assessment is subject to evolving pandemic and market conditions.
- The October 2021 IHS Markit forecast cited in the filing projected full-year 2021 key-market vehicle production down 2.1% from 2020; Gentherm cautioned that the forecast might not reflect subsequent supply deterioration.
- Gentherm secured $260m of automotive new-business awards in Q3, with a reported 70% win rate. Awards are not firm orders or revenue forecasts and may change with customer projections.
- The manufacturing-footprint restructuring is expected to be substantially completed by Q1 2022. Expected total costs are $15m–$18m, of which $13m–$16m are expected cash expenditures; $9.9m had been recorded since the program began.
- In July, the company acquired B&E’s medical business unit for $2.8m. It also made technology-related investments in Carrar ($5.2m) and Forciot ($2.4m). The filing says the B&E acquisition did not materially affect reported results.
- There was no material pending litigation reported. The company noted ordinary-course legal claims and potential future warranty or product-liability costs. Its two largest customers represented 15% and 14% of nine-month revenue, respectively.
- No shares were repurchased under the $150m authorization during the first nine months of 2021. The credit agreement restricts certain actions, including dividends, and matures in 2024.
Important facts for investors to verify
- Whether semiconductor and other component shortages, customer production interruptions and inflation continue to pressure revenue, margins and cash conversion.
- Whether Q3’s gross-margin decline persists, and how effectively customer recoveries and supplier actions offset higher material, freight, labor and factory costs.
- Whether the $440m stated borrowing availability remains accessible under credit-facility covenants and whether the company’s 12-month liquidity assessment remains valid.
- How vehicle-production forecasts and customer program volumes evolve, and whether new-business awards convert into firm launches and revenue.
- Actual remaining restructuring costs and timing of completion, alongside the returns and risks of recent acquisitions and technology investments.