Gentherm(THRM) - 2023 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) Unaudited statements show a Q2 net loss of $1.6M due to a goodwill impairment, despite a 42.8% revenue increase Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $168,671 | $153,891 | | Accounts receivable, net | $258,157 | $247,131 | | Inventory, net | $207,940 | $218,248 | | Goodwill | $100,885 | $119,774 | | Total assets | $1,244,047 | $1,239,300 | | Accounts payable | $207,655 | $182,225 | | Long-term debt, less current maturities | $217,441 | $232,653 | | Total liabilities | $573,487 | $567,027 | | Total shareholders' equity | $670,560 | $672,273 | Consolidated Statement of (Loss) Income Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Product revenues | $372,323 | $260,715 | $735,948 | $528,372 | | Gross margin | $87,988 | $59,377 | $169,118 | $123,490 | | Operating income | $4,321 | $7,735 | $21,995 | $21,925 | | Impairment of goodwill | $19,509 | $— | $19,509 | $— | | Net (loss) income | $(1,551) | $7,072 | $6,412 | $18,819 | | Diluted (loss) earnings per share | $(0.05) | $0.21 | $0.19 | $0.56 | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $58,612 | $(3,686) | | Net cash used in investing activities | $(6,776) | $(15,717) | | Net cash used in financing activities | $(39,356) | $(5,145) | | Net increase (decrease) in cash | $14,780 | $(33,348) | Notes to Unaudited Consolidated Condensed Financial Statements Notes detail key accounting events including acquisitions, a $19.5M goodwill impairment, and restructuring activities - On August 1, 2022, the Company acquired 100% of Alfmeier Präzision SE for a total consideration of $170.7 million to expand its automotive lumbar, massage, and valve system solutions[28][29][30] - On July 13, 2022, the Company acquired 100% of Jiangmen Dacheng Medical Equipment Co Ltd for a total consideration of $35.0 million to gain a local presence in China's patient warming device market[33][34] - In Q2 2023, the company recorded a $19.5 million goodwill impairment charge for its Medical reporting unit, triggered by the unit's underperformance relative to forecasts[46][50] - The company is winding down its non-automotive electronics business and recorded inventory impairment charges of $0.6 million and $2.1 million in the three and six months ended June 30, 2023, respectively[44][45][120] - The company has entered into agreements to purchase semiconductor chips, with total commitments of $34.6 million as of June 30, 2023, to ensure priority access amidst supply shortages[67] - The effective tax rate for Q2 2023 was 147.1%, significantly different from the U.S. statutory rate of 21%, primarily due to the tax impact of the $19.5 million impairment loss[99] Product Revenues by Segment (in thousands) | Segment | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Automotive | $361,533 | $249,152 | $714,225 | $507,016 | | Medical | $10,790 | $11,563 | $21,723 | $21,356 | | Total | $372,323 | $260,715 | $735,948 | $528,372 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 42.8% from automotive strength, but a medical goodwill impairment led to a net loss - The company launched 'Fit-for-Growth 2.0' in early 2023, a profitability improvement initiative aiming for a high teens Adjusted EBITDA margin rate by 2026[115] - In Q2 2023, the company secured $670 million in new automotive business awards, which represent the projected lifetime revenue of new programs[124] - The company repurchased $10.0 million of its common stock in Q2 2023, with $110.0 million remaining under the current authorization which expires in December 2023[125] Light Vehicle Production Volume Change in Key Markets (YoY) | Region | Q2 2023 vs Q2 2022 | 6 Months 2023 vs 6 Months 2022 | | :--- | :--- | :--- | | North America | +14.9% | +12.2% | | Europe | +14.3% | +16.1% | | Greater China | +20.4% | +7.1% | | Japan / South Korea | +25.3% | +21.0% | | Total Key Markets | +18.4% | +12.7% | Consolidated Results of Operations Q2 revenue rose 42.8%, but a goodwill impairment drove operating income down and resulted in a net loss Q2 2023 vs Q2 2022 Results (in thousands) | Line Item | Q2 2023 | Q2 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product revenues | $372,323 | $260,715 | $111,608 | 42.8% | | Gross margin | $87,988 | $59,377 | $28,611 | 48.2% | | Operating income | $4,321 | $7,735 | $(3,414) | -44.1% | | Net (loss) income | $(1,551) | $7,072 | $(8,623) | -122.0% | - The $111.6 million increase in Q2 2023 revenue was primarily due to $67.0 million from acquisitions and $49.0 million from increased automotive volume[130] - Cost of sales in Q2 2023 increased by 41.2% YoY, driven by higher volumes, expenses from acquired businesses, wage inflation, and an inventory charge[133] - Net R&D expenses increased 27.8% in Q2 2023, primarily due to the inclusion of expenses from the Alfmeier acquisition[135] - SG&A expenses increased 20.3% in Q2 2023, mainly due to expenses from acquired businesses and higher compensation costs[137] Liquidity and Capital Resources The company maintains a solid liquidity position with $168.7M in cash and improved operating cash flow of $58.6M - As of June 30, 2023, the company had $168.7 million in cash and cash equivalents and $282.7 million of availability under its credit facility[157] - Cash used in financing activities for the first six months of 2023 included $20.0 million for common stock repurchases and $17.0 million for debt repayments[163] Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $58,612 | $(3,686) | | Net cash used in investing activities | $(6,776) | $(15,717) | | Net cash used in financing activities | $(39,356) | $(5,145) | Debt Summary (in thousands) | Debt Component | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Revolving Credit Facility | $217,000 | $232,000 | | Other loans & Finance leases | $1,125 | $3,096 | | Total debt | $218,125 | $235,096 | Quantitative and Qualitative Disclosures About Market Risk The company manages foreign currency and interest rate risks using derivative instruments like swaps and forward contracts - The company is exposed to market risks from foreign currency exchange rates and interest rates, and uses derivative contracts to manage these exposures[175][176] - A hypothetical 100 basis point change in interest rates would impact annual interest expense by $2.2 million[180] - The company has a floating-to-fixed interest rate swap with a notional amount of $100.0 million to hedge against interest rate fluctuations[180] - The company uses foreign currency forward contracts to hedge its exposure, with outstanding contracts to sell Mexican Pesos for U.S. Dollars having a notional value of $54.9 million[182] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023[185] - There were no changes in internal control over financial reporting during the three months ended June 30, 2023, that have materially affected the company's internal controls[186] Part II. Other Information Legal Proceedings The company is not a party to any material pending legal proceedings as of the end of the second quarter - There is no material pending litigation to which the company is a party as of June 30, 2023[188] Risk Factors No material changes to risk factors have occurred since the last Annual Report on Form 10-K - The Company's risk factors have not materially changed from those previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[189] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased $10.0 million of its common stock in Q2 2023 under its existing repurchase program - As of May 31, 2023, approximately $110.0 million remained available for repurchase under the 2020 Stock Repurchase Program, which expires on December 15, 2023[91][190] Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | April 2023 | — | $— | $— | | May 2023 | 167,406 | $59.71 | $10,000,000 | | June 2023 | — | $— | $— | Other Information No directors or Section 16 officers adopted or terminated Rule 10b5-1 trading plans during the quarter - During Q2 2023, no directors or Section 16 officers adopted or terminated a Rule 10b5-1 trading plan or any other trading arrangement[191] Exhibits This section lists all exhibits filed with the Form 10-Q, including required certifications and XBRL data