Gentherm Incorporated (NASDAQ: THRM) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts below are in millions of U.S. dollars unless noted. The filing was signed August 2, 2022.
Business context and financial performance
Gentherm develops and manufactures thermal-management products, primarily for automotive and medical markets. Automotive demand is tied to vehicle production, customer schedules and product content.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $260.7 | $266.0 | $528.4 | $554.5 |
| Gross margin | $59.4 (22.8%) | $79.2 (29.8%) | $123.5 (23.4%) | $166.9 (30.1%) |
| Operating income | $7.7 | $31.7 | $21.9 | $72.4 |
| Net income | $7.1 | $24.8 | $18.8 | $57.7 |
| Diluted EPS | $0.21 | $0.74 | $0.56 | $1.72 |
Q2 revenue fell 2.0%; first-half revenue fell 4.7%. Automotive revenue declined 2.3% in Q2 and 5.1% in the first half, while Medical revenue increased 6.1% and 6.4%, respectively. Automotive operating income was $24.0 million in Q2 versus $43.5 million; Medical reported an operating loss of $0.2 million versus income of $0.1 million. Corporate operating costs were $16.1 million versus $12.0 million.
Cash flow, balance sheet and debt
- Operating cash flow was negative $3.7 million in the first half, versus positive $84.4 million a year earlier. The filing attributes the 2022 cash use largely to working-capital changes, including higher receivables and inventory.
- Investing cash outflow was $15.7 million, including $15.4 million of capital expenditures. Financing cash outflow was $5.1 million. Cash decreased $33.3 million to $157.3 million.
- At June 30, cash was $157.3 million; total debt was $37.5 million, comprising $35.0 million under the revolving facility and a $2.5 million Vietnam loan. Total liabilities were $303.9 million and shareholders’ equity was $643.2 million.
- Before the July acquisitions, reported borrowing availability under the amended $500 million revolver was $357.0 million; factoring availability was $32.4 million. The revolver matures June 10, 2027. The company reported compliance with its credit covenants at June 30.
- In July, Gentherm drew $202.0 million on the revolver and paid approximately $232.6 million, including escrow amounts, to fund acquisitions. The filing does not provide a post-acquisition cash and debt balance.
Material changes, outlook and risks
- Profitability deteriorated sharply: Q2 gross margin declined 7.0 percentage points and operating income fell $23.9 million year over year. Management cited inflation in materials, freight and wages, operational performance, and lower automotive volume; customer price recoveries only partly offset cost pressure. SG&A also rose, primarily due to acquisition costs.
- Foreign-currency movements reduced reported revenue, but generated a $4.6 million Q2 gain and $6.8 million first-half gain in earnings. Currency translation contributed to a $22.9 million Q2 comprehensive loss; accumulated other comprehensive loss was $68.6 million at June 30.
- Management said supply-chain instability, semiconductor shortages, labor constraints and inflation were expected to continue adversely affecting results, with the magnitude uncertain. The Ukraine conflict added risk: the Ukraine facility represented approximately 11% of 2021 company revenue, although it was operating normally at the filing date and contingency production relocations were underway.
- The filing gives no company earnings or revenue guidance. IHS Markit’s July 2022 forecast projected 2022 light-vehicle production in Gentherm’s key markets to rise 3.9% from 2021; management cautioned that forecasts change and do not directly predict Gentherm results. Second-quarter automotive awards totaled $600 million in projected lifetime revenue, including $190 million awarded by Alfmeier before its acquisition; the company cautioned awards are not firm orders or revenue projections.
- Subsequent to quarter-end, Gentherm acquired Dacheng/IOB on July 13 for $34.3 million, with up to $3.0 million of additional milestone payments. It acquired Alfmeier’s automotive business on July 29 for €181.5 million (approximately $184.9 million at closing exchange rates), plus a €10.5 million headquarters purchase; the Alfmeier price included a €4.0 million increase for resolved tax matters. Both were funded with existing cash and revolver borrowings.
- Semiconductor reservation agreements carried $40.4 million of commitments at June 30, but do not guarantee suppliers will meet requested timing or quantities. The company disclosed ordinary-course legal matters and said no material pending litigation was identified; it also said risk factors had not materially changed from prior filings.
Most important facts for investors to verify
- Whether automotive production and customer demand recover, and whether semiconductor and other supply constraints ease.
- Whether pricing and cost-recovery actions can offset material, freight and wage inflation and restore gross margins.
- Post-acquisition cash, debt, leverage, covenant headroom, integration costs and realized benefits from Alfmeier and Dacheng.
- Whether working-capital requirements improve and operating cash flow returns to positive levels.
- The ongoing operational and financial effects of currency movements and the Ukraine situation.