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 sustained price increases for various material components and shipping costs, the impact of the conflict inUkraine on our operations, the expected synergies and growth prospects following the closing of recent acquisitions, 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 Second Amended and Restated 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 endedDecember 31, 2021 , as amended by Part II "Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2022 and subsequent reports filed with theSecurities 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 recently consummated acquisitions, 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 endedDecember 31, 2021 .
Overview
Gentherm Incorporated is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, valve system technologies, and other electronic devices. Medical products include patient temperature management systems. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and to create new product applications for existing and new markets. Our automotive products can be found on vehicles manufactured by nearly all the major OEMs operating inNorth America andEurope , and several major OEMs inAsia . 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. 25 -------------------------------------------------------------------------------- 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, inNorth America ,Europe orAsia , 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 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 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® and our acquisition of Alfmeier's pneumatic comfort solutions, 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 aroundDecember 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 inFebruary 2020 and continuing intoJune 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, includingGentherm , 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 southernUnited 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 the remainder of 2022 and beyond remains subject to significant uncertainty. 26 -------------------------------------------------------------------------------- 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 military conflict betweenRussia andUkraine . InFebruary 2022 ,Russia launched a full-scale military invasion ofUkraine . As a result of the conflict,the United States ,United Kingdom ,European Union and other countries have levied economic sanctions and bans onRussia andRussia has responded with its own retaliatory measures. These measures have impacted the price of certain raw materials and energy and could have a lasting impact on regional and global economies. Our facility in Vynohradiv is on the far western corner of Ukraine near theHungary border. In 2021, products manufactured at ourUkraine facility represented approximately 11% of the Company's total revenue, including automotive cables, seat heaters and steering wheel heaters. At this time, ourUkraine facility is operating and we are in process of 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 inUkraine 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.
Acquisitions
OnJuly 29, 2022 , the Company transferred consideration to acquire 100% of the equity interests of Alfmeier Präzision SE ("Alfmeier") a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. The acquisition further expands the Company's current value proposition beyond thermal in comfort, health, wellness, and energy efficiency and aligns well with global consumer demand for expanded offerings in vehicle passenger comfort. The total consideration for this acquisition was$164.9 million . On the closing date, the Company made cash payments of approximately$188.9 million , net of cash acquired. We expect to receive cash from the seller of$24.1 million ("Purchase Consideration Receivable") in connection with the finalization and settlement of post-closing adjustments in accordance with the purchase agreement. Substantially all of the adjustments known as of this filing relate to lower cash on hand as of the closing date than estimated and a pre-closing reorganization transaction. We expect additional adjustments for actual working capital, cash and cash-like items and debt and debt-like items as of the closing date. All post-closing adjustments are expected to be finalized within 120 days of the closing date, provided there are no disputes. Potential disputes shall be resolved in accordance with the purchase agreement. The Purchase Consideration Receivable is recorded in Other current assets in the consolidated condensed balance sheets as ofSeptember 30, 2022 . OnJuly 13, 2022 , the Company completed the acquisition ofJiangmen Dacheng Medical Equipment Co. Ltd ("Dacheng") and its wholly owned subsidiary,IOB Medical, Inc. ("IOB"). Dacheng, a privately held manufacturer of medical materials and medical equipment, including patient temperature management solutions, for numerous local and international customers. The acquisition provides Gentherm Medical a local presence inChina's high-growth market for patient warming devices and other medical device products, while also expanding overall manufacturing capacity to include a low-cost manufacturing site. The total consideration for this acquisition was$35.0 million , which is comprised of cash payments, net of cash acquired. The purchase agreement also includes future cash payments of up to$3.0 million , contingent upon the achievement of certain performance metrics and continued employment of the former majority shareholder through a series of defined dates. These contingent payments will be accounted for as compensation expense and will be recorded as a component of selling, general and administrative.
See Note 3, "Acquisitions" of the consolidated condensed financial statements included in this Report for additional information.
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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 S&P Global Mobility (October 2022 release), actual light vehicle production in the three and nine months endedSeptember 30, 2022 in the Company's key markets ofNorth America ,Europe ,China ,Japan andKorea , as compared to the three and nine months endedSeptember 30, 2021 , are shown below (in millions of units): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change North America 3.7 3.0 24.2 % 10.8 9.8 10.6 % Europe 3.6 3.0 20.3 % 11.5 11.9 (3.3 )% Greater China 7.2 5.5 31.2 % 19.0 17.2 10.9 % Japan / South Korea 2.8 2.3 22.0 % 8.0 8.1 (0.8 )% Total light vehicle production volume in key markets 17.3 13.7 25.8 % 49.3 46.9 5.1 % The S&P Global Mobility (October 2022 release) forecasted light vehicle production volume in the Company's key markets for full year 2022 to increase to 67.6 million units, a 4.5% 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 direct and indirect impacts of 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 S&P Global Mobility 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 third quarter of 2022, we secured new automotive business awards totaling$430 million in the quarter. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by our customers toGentherm 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 ofSeptember 30, 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 third 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
OnDecember 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 onDecember 15, 2020 . Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to$150.0 million of its issued and outstanding Common Stock over a three-year period, expiringDecember 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 nine months endedSeptember 30, 2022 , we did not make any repurchases under the 2020 Stock Repurchase Program and have a remaining repurchase authorization of$130.0 million as ofSeptember 30, 2022 . 28 --------------------------------------------------------------------------------
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
See Note 15, "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 (loss). 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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