Gentherm Incorporated (NASDAQ: THRM) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited financial figures below are in millions of dollars, except per-share data and percentages. Gentherm develops thermal-management products, primarily for automotive customers, and also serves medical and other industrial markets.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $259.5 | $240.1 | $624.2 | $741.3 |
| Gross profit / margin | $82.6 / 31.8% | $74.7 / 31.1% | $175.4 / 28.1% | $222.7 / 30.0% |
| Operating income / margin | $38.5 / 14.8% | $20.3 / 8.5% | $47.3 / 7.6% | $62.2 / 8.4% |
| Net income | $24.1 | $15.9 | $25.7 | $27.1 |
| Diluted EPS | $0.73 | $0.48 | $0.78 | $0.81 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $73.3 | $84.0 |
- Q3 rebound: Revenue increased 8.1% year over year, reflecting higher automotive volumes and favorable foreign exchange, partly offset by pricing and other factors. Automotive revenue rose 9.4%; Industrial revenue declined 17.2%, including the effect of divestitures.
- Year-to-date impact: Revenue declined 15.8%, principally because of COVID-19-related automotive production disruptions. Lower volumes reduced gross profit; nine-month net income also reflected a $3.4 million tax expense from international audit settlements and a $5.6 million foreign-currency loss.
- Cash and investment: Cash, cash equivalents and restricted cash totaled $229.0 million at September 30, 2020, including $226.5 million of unrestricted cash. Nine-month capital expenditures were $11.6 million; operating cash flow less those expenditures was approximately $61.7 million.
- Debt and liquidity: Total debt was $195.6 million, versus $80.6 million at December 31, 2019; cash exceeded debt by approximately $30.9 million. The company reported $221.5 million of additional revolver availability, subject to conditions and financial covenants. Current assets were $574.9 million and current liabilities $190.6 million.
Material changes versus prior comparable periods
- Q3 revenue and earnings improved year over year as customer plants reopened and production recovered. Management said its own Q3 production volumes were stronger than pre-pandemic levels.
- For the first nine months, revenue and operating income were lower than 2019. The comparison also includes prior-year gains from the CSZ-IC divestiture ($5.0 million) and impairment charges ($21.2 million); neither item recurred in 2020.
- Q3 gross margin increased to 31.8% from 31.1%, supported by manufacturing productivity, higher-volume fixed-cost leverage and lower material costs. Year-to-date gross margin fell to 28.1% from 30.0%.
- Nine-month operating cash flow decreased to $73.3 million from $84.0 million. Cash balances increased substantially, primarily reflecting net borrowing and operating cash generation.
Outlook, commentary, risks and unusual items
- Management anticipated that the higher production level seen in the second half would continue through the remainder of 2020, while emphasizing uncertainty about the pandemic, economic recovery and automotive demand. This was not a formal company revenue or earnings forecast.
- IHS Markit’s October 2020 forecast cited in the filing projected global light-vehicle production of 73.0 million units for 2020, down 17.9% from 2019. Gentherm cautioned that its results may not track industry-wide production forecasts.
- Management said available cash, operating cash flows and borrowing capacity were expected to meet operating, capital-expenditure and debt-service needs for at least 12 months. Further pandemic disruption could reduce cash flows, constrain borrowing availability or require alternative financing; availability depends in part on covenant compliance.
- The company borrowed $169.5 million in March as a liquidity safeguard, then repaid a net $38.7 million in the second and third quarters. It suspended share repurchases in March to preserve liquidity.
- The manufacturing-footprint restructuring is expected to cost $16–$19 million, including $13–$16 million of expected cash expenditures, and be substantially completed by the end of 2021. Costs, timing and savings may differ from estimates.
- Gentherm secured approximately $80 million of automotive new-business awards in Q3, measured as projected lifetime revenue rather than firm orders; customer projections can change and the measure does not incorporate the pandemic’s future impact.
- Other notable items included a $2.0 million gain on patent sales and a $2.9 million Q3 foreign-currency loss. A $2.5 million divestiture escrow remained restricted pending claims; the company did not expect those claims to have a material adverse effect.
- Principal risks include renewed COVID-19 disruption, automotive demand and production, supply-chain constraints, customer collection delays, foreign-exchange exposure, tariffs and covenant-limited borrowing capacity. The filing reported no material pending litigation, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2020.
Important facts for investors to verify
- Whether automotive production and customer demand sustained the Q3 recovery, and how renewed pandemic disruptions affected subsequent periods.
- Revolver availability and covenant headroom under the credit agreement, including the effects of earnings and leverage on borrowing capacity.
- Cash conversion and working-capital trends, particularly receivables, alongside the difference between reported cash and restricted cash.
- Actual restructuring cash costs, completion timing and realized savings compared with the $16–$19 million estimate.
- Whether new-business awards convert into customer programs and revenue, given that the disclosed award value is a changeable lifetime projection, not a firm order.