Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report") contains forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
represent our goals, beliefs, plans and expectations about our prospects for the
future and other future events, such as the impact of the COVID-19 pandemic on
our financial statements, liquidity, and business as well as the global economy,
global supply chain and automotive and medical industries, the impact of the
conflict in Ukraine on our operations, the timing of closing of the acquisition
of the Alfmeier transaction described herein (the "Acquisition"), the expected
sources of funds to be used for as consideration to be paid in the Acquisition,
the nature of the closing conditions for the Acquisition, the expected synergies
and growth prospects following the closing of the Acquisition, the significant
supply disruptions and shifts in the labor market currently faced by the
automotive and medical industries, our ability and our customers' ability to
maintain production levels, the amount of borrowing availability under the
Credit Agreement and the sufficiency of our cash balances and cash generated
from operating, investing and financing activities for our future liquidity and
capital resource needs and our ability to finance sufficient working capital.
Reference is made in particular to forward-looking statements included in this
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations". Such statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "believe", "estimate",
"anticipate", "intend", "continue", or similar terms, variations of such terms
or the negative of such terms. The forward-looking statements included in this
Report are made as of the date hereof or as of the date specified herein and are
based on management's current expectations and beliefs. Such statements are
subject to a number of assumptions, risks, uncertainties and other factors,
which are set forth in "Item 1A. Risk Factors" and elsewhere in our Annual
Report on Form 10-K for the year ended December 31, 2021, Part II "Item 1A. Risk
Factors" in this Report and subsequent reports filed with the Securities and
Exchange Commission, and which could cause actual results to differ materially
from that described in the forward-looking statements. In addition, except for
the Acquisition, such forward-looking statements do not include the potential
impact of any other business combinations, acquisitions, divestitures, strategic
investments and other significant transactions that may be completed after the
date hereof, each of which may present material risks to the Company's business
and financial results. Except as required by law, we expressly disclaim any
obligation or undertaking to update any forward-looking statements to reflect
any change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
The following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, our consolidated condensed financial statements
and related notes thereto included elsewhere in this Report and our consolidated
financial statements and related notes included in our Annual Report on Form
10-K for the year ended December 31, 2021.
Overview
Gentherm Incorporated is a global developer, manufacturer and marketer of
innovative thermal management technologies for a broad range of heating and
cooling and temperature control applications in the automotive and medical
industries. Within the automotive industry, our products provide solutions for
passenger climate comfort and convenience, battery thermal management and cell
connecting systems. Within the medical industry our products provide patient
temperature management solutions. Our automotive products can be found on
vehicles manufactured by nearly all the major OEMs operating in North America
and Europe, and several major OEMs in Asia. We operate in locations aligned with
our major customers' product strategies to provide locally enhanced design,
integration and production capabilities. The Company is also developing a number
of new technologies and products that are expected to enable improvements to
existing products and to create new product applications for existing and new
markets.
Our sales are driven by the number of vehicles produced by the OEMs, which is
ultimately dependent on consumer demand for automotive vehicles, our product
content per vehicle, and other factors that may limit or otherwise impact
production by us, our supply chain and our customers. Historically, new vehicle
demand and product content (i.e. vehicle features) have been driven by
macro-economic and other factors, such as interest rates, automotive
manufacturer and dealer sales incentives, fuel prices, consumer confidence,
employment levels, income growth trends and government and tax incentives.
Vehicle content has also been driven by trends in consumer preferences, such as
preferences for smart devices and features, personalized user experience, and
comfort, health and wellness. Economic volatility or weakness, as well as
geopolitical factors, in North America, Europe or Asia, have had and could
result in a significant reduction in automotive sales and production by our
customers, which have and would have an adverse effect on our business, results
of operations and financial condition. In 2020 and 2021, and continuing into
2022, the automotive industry has experienced fluctuating demand and production
disruptions related to supply chain challenges, facility closures, labor
shortages, work stoppages and inflationary pressures, as a result of the
COVID-19 pandemic and associated macroeconomic conditions, as described below.
We believe our diversified OEM customer base and geographic revenue base, along
with our flexible cost structure, have well positioned us to withstand the
impact of industry downturns, including the ongoing impact of the COVID-19
pandemic and associated
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economic conditions, and benefit from industry upturns in the ordinary
course. However, shifts in the mix of global automotive production to higher
cost regions or to vehicles with less of our product content as well as
continuing production challenges and inflationary pressures could adversely
impact our profitability. In addition, we may be adversely impacted by
volatility, weakness or accelerated growth in markets for hybrid or electric
vehicles specifically. We believe our products offer certain advantages for
hybrid and electric vehicles, including improved energy efficiency, and position
us well to withstand changes in the volume mix between vehicles driven by
internal combustion engines and hybrid and other electric vehicles. We also
believe that products we are developing, such as ClimateSense®, position us well
to address trends in consumer preferences such as personalized user experience,
comfort, health and wellness.
Recent Trends
General Economic Conditions
The COVID-19 pandemic that began around December 2019 introduced significant
volatility to the global economy, disrupted supply chains and had a widespread
adverse effect on the global automotive industry in the first half of 2020, with
various direct and indirect adverse impacts continuing throughout 2021 and into
2022.
Beginning in February 2020 and continuing into June 2020, substantially all of
the Company's major OEM and Tier 1 customers temporarily ceased or significantly
reduced production as a result of restrictions that were requested or mandated
by governmental authorities. As a result, substantially all of our manufacturing
facilities either temporarily suspended production or experienced significant
reductions in volumes during this period. By the end of the second quarter of
2020, the Company had reopened all of its manufacturing facilities, in line with
industry demand, and in accordance with local government requirements. Although
global automotive industry production has improved relative to the first half of
2020, production remains below recent historic levels.
The lingering impacts of COVID-19 throughout 2021 and into 2022 have impeded
global supply chains, resulted in longer lead times and delays in procuring
component parts and raw materials, and resulted in inflationary cost increases
in certain raw materials, labor and transportation. These broad-based
inflationary impacts have negatively impacted the Company's financial condition,
results of operations and cash flows throughout 2021 and into 2022. We expect
these inflationary impacts to continue for the foreseeable future.
Supply shortages of semiconductor chips and other components have resulted in
decreases in global automotive vehicle production and significant volatility in
customer vehicle production schedules. The Company's semiconductor suppliers,
along with most automotive component supply companies that use semiconductors,
including Gentherm, have been unable to fully meet the vehicle production
demands of the OEMs due to events which are outside the Company's control,
including but not limited to, the COVID-19 pandemic, the global semiconductor
shortage, fires at suppliers' facilities, significant weather events impacting
semiconductor supplier facilities in the southern United States, and other
extraordinary events. The Company was able to mitigate the impacts of supply
chain disruptions in order to satisfy customer orders during the first three
quarters of 2021; however, during the fourth quarter of 2021 and continuing into
2022 we have experienced and may continue to experience direct adverse impacts
of ongoing shortages of semiconductors. Our ability to meet customer orders
without significant delay and/or expense for 2022 and beyond remains subject to
significant uncertainty.
In response to the global supply chain instability and inflationary cost
increases the Company has taken several actions to minimize any potential and
actual adverse impacts by working closely with its suppliers and customers to
closely monitor the availability of semiconductor microchips and other component
parts and raw materials, customer vehicle production schedules and any other
supply chain inefficiencies that may arise. We expect global supply chain
instability will continue to have an adverse impact on our business and
financial performance for the foreseeable future, and such adverse impact may be
material. The consequences of the pandemic, global supply chain instability and
inflationary cost increases and their adverse impact to the global economy
continue to evolve. Accordingly, the significance of the future adverse impact
on our business and financial statements remains subject to significant
uncertainty as of the date of this filing.
In addition to the direct and indirect impacts of COVID-19, the United States
and global markets are experiencing volatility and disruption following the
escalation of geopolitical tensions and the start of the military conflict
between Russia and Ukraine. In February 2022, Russia launched a full-scale
military invasion of Ukraine. As a result of the conflict, the United States,
United Kingdom, European Union and other countries have levied economic
sanctions and bans on Russia and Russia has responded with its
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own retaliatory measures. These measures have impacted the availability and
price of certain raw materials and could have a lasting impact on regional and
global economies.
Our facility in Vynohradiv is on the far western corner of Ukraine near the
Hungary border. In 2021, products manufactured at our Ukraine facility
represented approximately 11% of the Company's total revenue, including
automotive cables, seat heaters and steering wheel heaters. At this time, our
Ukraine facility is operating at normal levels and we have begun executing
contingency plans and, in coordination with certain customers, specific
equipment and production relocations leveraging our flexible global
manufacturing footprint. Our response to the escalating situation is based on a
severity level contingency response plan that has been developed with certain
customers. As the situation in Ukraine is very fluid, we continue to monitor its
effects on our business and we continue to work closely with our customers to
adjust our contingency response as necessary. See Part II, Item. 1A., "Risk
Factors" in this Report for additional information on risks and uncertainties
related to the Ukraine conflict.
Alfmeier Acquisition
On May 4, 2022, the Company entered into a definitive purchase agreement to
acquire the automotive business of Alfmeier Präzision SE ("Alfmeier"), the
global leader in automotive lumbar and massage comfort solutions and a leading
provider of advanced valve systems technology, integrated electronics and
software.
Under the terms of the agreement, the Company will acquire all shares in
Alfmeier for €177.5 million, net of cash and debt, subject to customary
adjustments related to Alfmeier's net working capital as of the closing and may
be increased by up to €4.0 million at or post-closing upon resolution of certain
Alfmeier tax matters. The transaction will be funded through a combination of
the Company's existing cash balances and revolving credit facility. The
transaction is expected to close during the third quarter of 2022 subject to the
receipt of regulatory approvals and the satisfaction or waiver of other
customary closing conditions.
Also on May 4, 2022, the Company entered into a put and call option agreement
for the real property in Germany on which Alfmeier's headquarters is located.
Pursuant to this agreement, the seller will have a put to sell the headquarters
and the Company will have an option to purchase the headquarters post-closing of
the acquisition of Alfmeier. See Part II, Item 5, "Other Information" in this
Report for more information about the acquisition of Alfmeier.
Light Vehicle Production Volumes
Our sales are driven by the number of vehicles produced by the automotive
manufacturers, which is ultimately dependent on consumer demand for automotive
vehicles, and our content per vehicle, and other factors that may limit or
otherwise impact production by us, our supply chain and our customers. According
to the forecasting firm IHS Markit (April 2022 release), global light vehicle
production in the first quarter of 2022 in the Company's key markets of North
America, Europe, China, Japan and Korea, as compared to the first quarter of
2021, are shown below (in millions of units):
Three Months Ended March 31,
2022 2021 % Change
North America 3.6 3.6 0.0 %
Europe 3.9 4.7 (17.0 )%
Greater China 6.2 5.9 5.1 %
Japan / South Korea 2.7 3.1 (12.9 )%
Total light vehicle production volume in key
markets 16.4 17.3 (5.3 )%
The IHS Markit (April 2022 release) forecasted light vehicle production volume
in the Company's key markets for full year 2022 to increase to 67.2 million
units, a 4.0% increase from full year 2021 light vehicle production volumes.
Forecasted light vehicle production volumes are a component of the data we use
in forecasting future business. However, these forecasts generally are updated
monthly, and future forecasts may be significantly different from period to
period due to changes in macroeconomic conditions or matters specific to the
automotive industry, such as the fluctuations that occurred in 2020 and remain
ongoing due to the COVID-19 pandemic. Further, due to differences in regional
product mix at our manufacturing facilities, as well as material production
schedules from our customers for our products on specific vehicle programs, our
future forecasted results do not directly correlate with the global and/or
regional light vehicle production forecasts of IHS Markit or other third-party
sources.
New Business Awards
We believe that innovation is an important element to gaining market acceptance
of our products and strengthening our market position. During the first quarter
of 2022, we secured an estimated $170 million of automotive new business awards.
Automotive new
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business awards represent the aggregate projected lifetime revenue of new awards
provided by our customers to Gentherm in the applicable period, with the value
based on the price and volume projections received from each customer as of the
award date. Although automotive new business awards are not firm customer
orders, we believe that new business awards are an indicator of future revenue.
New business awards are not projections of revenue or future business as of
March 31, 2022, the date of this Report or any other date. Customer projections
regularly change over time and we do not update our calculation of any new
business award after the date initially communicated. Automotive new business
awards in the first quarter 2022 also do not reflect, in particular, the impact
of the COVID-19 pandemic and related macroeconomic challenges on future
business. Revenues resulting from automotive new business awards also are
subject to additional risks and uncertainties that are included in this Report
or incorporated by reference in "Forward-Looking Statements" above.
Stock Repurchase Program
On December 11, 2020, the Board of Directors authorized a new stock repurchase
program (the "2020 Stock Repurchase Program") to commence upon expiration of the
prior stock repurchase program on December 15, 2020. Under the 2020 Stock
Repurchase Program, the Company is authorized to repurchase up to $150 million
of its issued and outstanding Common Stock over a three-year period, expiring
December 15, 2023. Repurchases under the 2020 Stock Repurchase Program may be
made, from time to time, in amounts and at prices the Company deems appropriate,
subject to market conditions, applicable legal requirements, debt covenants and
other considerations. During the three months ended March 31, 2022, we did not
make any repurchases under the 2020 Stock Repurchase Program and have a
remaining repurchase authorization of $130.0 million as of March 31, 2022.
Reportable Segments
The Company has two reportable segments for financial reporting purposes:
Automotive and Medical.
See Note 14, "Segment Reporting", to the consolidated condensed financial
statements included in this Report for a description of our reportable segments
as well as their proportional contribution to the Company's reported product
revenues and operating income. The financial information used by our chief
operating decision maker to assess operating performance and allocate resources
is based on these reportable segments.
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