x
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-21810
GENTHERM INCORPORATED
(Exact name of registrant as specified in its charter)
Michigan
95-4318554
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
21680 Haggerty Road, Northville, MI
48167
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (248) 504-0500
Securities registered pursuant to Section 12-(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, no par value
THRM
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At July 25, 2019, there were 32,982,600 issued and outstanding shares of Common Stock of the registrant.
TABLE OF CONTENTS
Part I. Financial Information
3
Item 1.
Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Income
4
Consolidated Condensed Statements of Comprehensive Income
5
Consolidated Condensed Statements of Cash Flows
6
Consolidated Condensed Statements of Changes in Shareholders’ Equity
7
Notes to Unaudited Consolidated Condensed Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4.
Controls and Procedures
39
Part II. Other Information
40
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
41
Signatures
43
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30,2019
December 31,2018
ASSETS
Current Assets:
Cash and cash equivalents
$
33,677
39,620
Restricted cash
2,504
—
Accounts receivable, less allowance of $1,399 and $851, respectively
171,640
166,858
Inventory:
Raw materials
66,181
61,679
Work in process
6,660
5,939
Finished goods
39,772
44,917
Inventory, net
112,613
112,535
Derivative financial instruments
1,155
92
Prepaid expenses and other assets
50,128
54,271
Assets held for sale
6,714
69,699
Total current assets
378,431
443,075
Property and equipment, net
169,345
171,380
Goodwill
65,114
55,311
Other intangible assets, net
55,479
56,385
Operating lease right-of-use assets
13,267
Deferred financing costs
1,782
647
Deferred income tax assets
60,071
64,024
Other non-current assets
8,421
12,225
Total assets
751,910
803,047
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
84,009
93,113
Accrued liabilities
62,706
65,808
Current lease liabilities
5,031
Current maturities of long-term debt
2,955
3,413
Liabilities held for sale
13,062
Total current liabilities
161,415
175,396
Pension benefit obligation
6,765
7,211
Non-current lease liabilities
7,741
Long-term debt, less current maturities
104,393
136,477
Deferred income tax liabilities
2,577
1,177
Other non-current liabilities
3,738
3,087
Total liabilities
286,629
323,348
Shareholders’ equity:
Common Stock:
No par value; 55,000,000 shares authorized, 33,147,567 and 33,856,629 issued and
outstanding at June 30, 2019 and December 31, 2018, respectively
115,310
140,300
Paid-in capital
14,020
14,934
Accumulated other comprehensive loss
(39,440
)
(39,500
Accumulated earnings
375,391
363,965
Total shareholders’ equity
465,281
479,699
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months EndedJune 30,
Six Months EndedJune 30,
2019
2018
Product revenues
243,326
266,400
501,247
530,986
Cost of sales
170,612
189,308
353,226
372,652
Gross margin
72,714
77,092
148,021
158,334
Operating expenses:
Net research and development expenses
19,255
21,022
38,152
44,326
Selling, general and administrative expenses
31,829
34,262
64,442
70,686
Acquisition transaction expenses
342
380
Restructuring expenses
1,231
6,215
3,145
7,080
Total operating expenses
52,657
61,499
106,119
122,092
Operating income
20,057
15,593
41,902
36,242
Interest expense
(1,240
(2,608
(2,420
Foreign currency (loss) gain
(804
5,174
(601
596
Gain on sale of business
4,970
Impairment loss
(9,885
(20,369
Other income
171
215
314
1,326
Earnings before income tax
8,299
19,742
23,608
35,744
Income tax expense
5,548
3,083
12,443
6,119
Net income
2,751
16,659
11,165
29,625
Basic earnings per share
0.08
0.46
0.33
0.81
Diluted earnings per share
0.45
Weighted average number of shares – basic
33,441
36,523
33,508
36,560
Weighted average number of shares – diluted
33,574
36,667
33,651
36,663
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Three Months Ended
June 30,
Six Months Ended
Other comprehensive income (loss), gross of tax:
Foreign currency translation adjustments gain (loss)
3,477
(22,994
(597
(11,244
Unrealized gain (loss) on foreign currency derivative securities
297
(1,561
1,063
551
Unrealized loss on commodity derivative securities
(218
Other comprehensive income (loss), gross of tax
3,774
(24,555
466
(10,911
Other comprehensive income (loss), related tax effect:
Cumulative effect of accounting change due to ASU 2018-02
(40
(156
(174
(232
(65
419
(148
(68
Other comprehensive income (loss), related tax effect
(62
263
(406
(488
Other comprehensive (loss) income, net of tax
3,712
(24,292
60
(11,399
Comprehensive income (loss)
6,463
(7,633
11,225
18,226
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
22,217
25,823
Deferred income taxes
3,070
(1,799
Stock compensation
3,291
4,063
Defined benefit plan income
(699
(103
Provision of doubtful accounts
545
204
Loss on sale of property and equipment
227
2,156
Operating lease expense
2,903
20,369
(4,970
Changes in assets and liabilities:
Accounts receivable
(4,021
(17,469
Inventory
1,650
1,631
276
(12,094
(9,528
10,540
(6,087
(10,034
Net cash provided by operating activities
40,408
32,543
Investing Activities:
Proceeds from the sale of property and equipment
82
698
Proceeds from sale of a business
47,500
Acquisition of subsidiary, net of cash acquired
(15,476
(15
Purchases of property and equipment
(13,024
(22,138
Net cash provided by (used in) investing activities
19,082
(21,455
Financing Activities:
Borrowing of debt
28,371
15,000
Repayments of debt
(61,120
(46,742
Cash paid for financing costs
(1,278
Cash paid for the cancellation of restricted stock
(926
(882
Proceeds from the exercise of Common Stock options
4,771
4,966
Repurchase of Common Stock
(33,040
(20,241
Net cash used in financing activities
(63,222
(47,899
Foreign currency effect
293
(1,004
Net decrease in cash, cash equivalents and restricted cash
(3,439
(37,815
Cash, cash equivalents and restricted cash at beginning of period
103,172
Cash, cash equivalents and restricted cash at end of period
36,181
65,357
Supplemental disclosure of cash flow information:
Cash paid for taxes
3,522
18,100
Cash paid for interest
2,712
2,608
Supplemental disclosure of non-cash transactions:
Common Stock issued to Board of Directors and employees
3,019
2,419
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Other
Common Stock
Paid-in
Comprehensive
Shares
Amount
Capital
Income (Loss)
Earnings
Total
Balance at March 31, 2019
33,653
134,486
14,513
(43,152
372,640
478,487
Stock repurchase
(630
(25,000
Exercise of Common Stock options for cash
116
4,936
(379
4,557
Cancellation of restricted stock
(21
(550
Stock option compensation
(114
1,438
Currency translation, net
3,480
Foreign currency hedge, net
232
Balance at June 30, 2019
33,148
Balance at March 31, 2018
36,794
266,812
16,155
(7,551
335,032
610,448
(629
241
5,335
(1,120
4,215
(25
(223
803
20
1,057
(23,150
(1,142
Balance at June 30, 2018
36,401
252,740
15,838
(31,843
351,691
588,426
Balance at December 31, 2018
33,857
Cumulative effect of accounting change due to adoption of ASU 2016-02
261
(830
129
5,957
(1,186
(38
272
(771
831
Balance at December 31, 2017
36,761
265,048
15,625
(20,444
293,645
553,874
Cumulative effect of accounting change due to adoption of ASU 2014-09
(3,264
Cumulative effect of accounting change due to adoption of ASU 2016-16
31,645
Cumulative effect of accounting change due to adoption of ASU 2018-02
298
6,396
(1,430
(49
1,643
Commons stock issued to Board of Directors and employees
(11,476
403
Commodity hedge, net
(286
8
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1 – The Company
Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies. Unless the context otherwise requires, the terms “Gentherm”, “Company”, “we”, “us” and “our” used herein refer to Gentherm Incorporated and its consolidated subsidiaries. Our products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well as patient temperature management within the health care industry. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America, Europe and Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets. We concentrate our research on the development of new technologies and new applications from existing technologies to create product and market opportunities for a wide array of thermal management solutions.
Sale of Cincinnati Sub-Zero Industrial Chamber Business (CSZ-IC)
On February 1, 2019, as part of the Company’s Fit-for-Growth initiative to eliminate investments in non-core businesses, we completed the sale of the Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”) and former Cincinnati Sub-Zero headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47,500, including $2,500 of the cash proceeds were placed into an escrow account for a period of up to one year as partial security for the Company’s obligations under the sale agreement. In connection with the sale, Gentherm entered into an operating lease agreement for a portion of the office and manufacturing building space purchased by Weiss Technik North America, Inc. The Company recognized a $4,970 pre-tax gain on the sale of CSZ-IC during the six-month period ended June 30, 2019.
Restructuring
As part of the Company’s continued efforts to optimize its cost structure, the Company has undertaken several discrete restructuring actions. During the three- and six-month periods ended June 30, 2019, the Company recognized $860 and $1,259 of one-time employee termination costs, respectively, and $349 and $349 of consultant costs, respectively. These restructuring expenses were primarily associated with restructuring actions focused on the rotation of our manufacturing footprint to lower cost locations and the reduction of global overhead costs. These discrete restructuring actions are expected to approximate the total cumulative costs for those actions. The Company will continue to explore opportunities to improve its future profitability and competitiveness. These actions may result in the recognition of additional restructuring charges that could be material.
During the three- and six-month periods ended June 30, 2018, the Company recognized $1,057 and $1,737 of one-time employee termination costs, respectively, and $37 and $1,499 of consultant costs, respectively.
Advanced Research and Development Rationalization and Site Consolidation
In June 2018, Gentherm completed a sale of its battery management systems division located in Irvine, California. A loss on the sale of $1,107 was recognized in restructuring expenses during the three- and six-month periods ended June 30, 2018. An additional loss of $425 was recognized during the six-month period ended June 30, 2019.
During the three- and six-month periods ended June 30, 2018, Gentherm recognized $881 in one-time employee termination costs and $435 in contract termination costs associated with the closure of two leased facilities located in Azusa, California. Upon the adoption of ASU 2016-02, the remaining restructuring reserve related to the contract termination costs was released and an operating lease liability was established in its place.
The Company has recorded approximately $4,669 of restructuring expenses since inception of this program and it is considered substantially complete.
GPT and CSZ-IC
During 2018, Gentherm launched a program to actively market GPT and CSZ-IC and initiated all other actions required to complete the divestiture plan.
During the three- and six-month periods ended June 30, 2019, the Company recognized $0 and $251 of one-time employee termination costs, respectively, and $22 and $861 of consultant costs, respectively.
Note 1 – The Company – Continued
During the three- and six-month periods ended June 30, 2018, the Company recognized $61 and $210 of one-time employee termination costs, respectively.
The Company has recorded approximately $2,173 of restructuring expenses since inception of this program. Management cannot reasonably estimate the total amount of additional costs expected to be incurred. See Note 13 to our consolidated condensed financial statements for additional information regarding the assets and liabilities classified as held for sale.
Restructuring Liability
Restructuring liabilities totaling $649 and $2,547 as of June 30, 2019 and December 31, 2018, respectively, are classified as accrued liabilities on the consolidated condensed balance sheets. A reconciliation of the beginning and ending restructuring liability is as follows:
One-Time
Employee
Termination
Benefit Costs
Contract
Costs
Consulting
Asset
Disposal Costs
Six Months Ended June 30, 2019
Balance, beginning of period
2,079
389
79
2,547
Additions, charged to restructuring expenses
1,510
1,210
425
Payments
(3,003
(139
(1,283
(425
(4,850
Reclassification to lease liability
(193
Balance, end of period
586
57
649
10
The cumulative amount of restructuring expenses incurred and recognized in the automotive and industrial reporting segments during the six-month period ended June 30, 2019 was $1,543 and $1,602, respectively.
Note 2 – Summary of Significant Accounting Policies and Basis of Presentation
Accounting Principles
Our unaudited consolidated condensed financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the audited annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of our results of operations, financial position and cash flows have been included. The balance sheet as of December 31, 2018 was derived from audited annual consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain reclassifications of prior year’s amounts have been made to conform with the current year’s presentation. Notably, $2,621 and $5,318 in customer relationship amortization was reclassified from product revenues to selling, general and administrative expenses for the three- and six-month periods ended June 30, 2018, respectively. Operating results for the six-month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Consolidation
The consolidated condensed financial statements at June 30, 2019 and December 31, 2018 and for the six-month periods ended June 30, 2019 and 2018, reflect the consolidated financial position, the consolidated operating results and the consolidated cash flows of the Company. Investments in affiliates in which Gentherm would not have control, but would have the ability to exercise significant influence over operating and financial policies, would be accounted for under the equity method. All other equity investments are measured at cost, less impairment, with changes in fair value recognized in net income.
Use of Estimates
The presentation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates and assumptions.
11
Note 2 – Summary of Significant Accounting Policies and Basis of Presentation – Continued
Cash, cash equivalents and restricted cash
The Company has cash that is legally restricted as to use or withdrawal. A reconciliation of cash and cash equivalents on the consolidated condensed balance sheets to cash, cash equivalents and restricted cash presented on the consolidated condensed statements of cash flows is as follows:
Year
June 30, 2019
December 31,2017
Cash and cash equivalents presented in the consolidated condensed balance sheets
Cash, cash equivalents and restricted cash presented in the consolidated condensed statements of cash flows
Leases
The Company determines whether a contractual arrangement is or contains a lease at inception. Leases that are operating in nature are recognized in operating lease right-of-use assets, accrued liabilities and non-current lease liabilities on our consolidated condensed balance sheets. While Gentherm is not currently party to any leases that qualify as financing leases, right-of-use assets and liabilities recognized from financing leases would be presented separately from the right-of-use assets and liabilities recognized from operating leases on our consolidated condensed balance sheet.
Lease liabilities are measured initially at the present value of the sum of the future minimum rental payments at the commencement date of the lease. Lease payments that will vary in the future due to changes in facts and circumstances are excluded from the calculation of rental payments, unless those variable payments are based on an index or rate. Rental payments are discounted using an incremental borrowing rate based on the Company’s credit rating, determined on a fully collateralized loan basis from information available at commencement date, and the duration of the lease term (the “reference rate”). Judgement is used to assess the importance of risk factor inputs during the computation of the Company’s credit rating. For significant leases at foreign subsidiaries denominated in U.S. Dollars, a risk premium associated with the borrower subsidiary’s country is added to the reference rate. For significant leases at foreign subsidiaries denominated in a foreign currency, the U.S. Dollar risk free rate with a duration similar to that of the lease term is subtracted from the reference rate and a corresponding foreign currency risk free rate with a duration similar to that of the lease term is added to the reference rate. Judgement is used to determine whether foreign subsidiary leases are significant.
Operating lease right-of-use assets are measured at the amount of the lease liability, adjusted for prepaid or accrued lease payments, lease incentive received, and initial direct costs incurred, as applicable. Periods covered by an option to extend the lease are initially included in the measurement of an operating lease right-of-use asset and lease liability only when it is reasonably certain we will exercise the option. Gentherm’s lease agreements do not contain residual value guarantees or impose restrictions or covenants on the Company.
For all classes of underlying assets, the Company accounts for leases that contain separate lease and nonlease components as containing a single lease component. The Company does not recognize lease right-of-use assets and lease liabilities from leases with an original lease term of 12 months or less and, instead, recognizes rent payments on a straight-line basis over the lease term in the Company’s consolidated condensed statement of income. See Note 11 to our consolidated condensed financial statements for description of the changes made to our accounting policy for leases that resulted from the adoption of a new lease standard.
Impairments of Goodwill and Other Intangible Assets
Whenever events or changes in circumstances indicate that it is more likely than not that a reporting unit’s fair value is less than it’s carrying amount, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The fair value of a reporting unit is estimated by analyzing internal inputs (level 3) to calculate forward values and discounting those values to the present value.
12
There were no events or changes in circumstances which would indicate goodwill or other intangibles were impaired during the six-months ended June 30, 2019.
A rolled forward reconciliation of goodwill from December 31, 2018 to June 30, 2019 is as follows:
Stihler acquisition
9,816
Currency impact
(13)
Assets and Liabilities Held for Sale
The Company classifies assets and liabilities (disposal group) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify as a completed sale within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying value or fair value less cost to sell. A loss resulting from this initial measurement is recognized in the period in which the held for sale criteria are met. The Company assesses the fair value of a disposal group, less cost to sell, each reporting period it remains classified as held for sale and reports any subsequent changes in the disposal group’s fair value less cost to sell (increase or decrease) as an adjustment to the disposal group’s carrying amount. Subsequent increases in fair value less cost to sell are recognized, but not in excess of the carrying amount of the disposal group at the time it was initially classified as held for sale.
The Company reports assets and liabilities of the disposal group in the line items assets held for sale and liabilities held for sale in the consolidated condensed balance sheets as of each period the disposal group meets the criteria to be classified as held for sale. See Note 13 to our consolidated condensed financial statements for information about the assets and liabilities classified as held for sale.
Note 3 – Business Acquisition
On April 1, 2019 Gentherm acquired Stihler Electronic GmbH (“Stihler”), a leading developer and manufacturer of patient and blood temperature management systems, for a purchase price of $15,476, net of cash acquired and including $653 of contingent consideration to be paid upon achievement of a milestone that must be completed by September 2020. In addition, the purchase agreement includes a contingent payment of $653 to be paid if the selling shareholder remains employed by Stihler through December 2020. This amount will be recorded as a component of selling, general and administrative expenses ratably over the service period. The results of operations of Stihler are reported within the Company’s Industrial segment from the date of acquisition. During the three- and six-month periods ended June 30, 2019, the Company incurred acquisition-related costs of approximately $342 and $380, respectively. These amounts were recorded as incurred, within the Company's consolidated statements of income.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available in the second quarter of 2019. The preliminary purchase price and related allocation to the acquired net assets of Stihler, based on their estimated fair values, is shown below:
13
Purchase price, cash consideration, net of cash acquired
14,823
Purchase price, fair value of contingent consideration
653
Total purchase price, net of cash acquired
15,476
883
1,698
Property and equipment
260
Other intangible assets
4,380
Assumed liabilities
(2,065
Net assets acquired
Other intangible assets primarily include amounts recognized for the fair value of customer-related intangible assets, which will be amortized over their estimated useful lives of approximately 9 years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing an income approach. Goodwill recognized in this transaction is primarily attributable to intangible assets that do not qualify for separate recognition. It is estimated that $2,524 of the goodwill recognized will be deductible for income tax purposes.
The purchase price and related allocation are preliminary and could be revised for up to one year as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets, and certain tax attributes.
The pro forma effect of the Stihler acquisition does not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements are presented.
14
Note 4 – Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares of stock outstanding during the period. The Company’s diluted earnings per share give effect to all potential Common Stock outstanding during a period that do not have an anti-dilutive impact to the calculation. In computing the diluted earnings per share, the treasury stock method is used in determining the number of shares assumed to be issued from the exercise of Common Stock equivalents.
The following summarizes the Common Stock included in the basic and diluted shares, as disclosed on the face of the consolidated condensed statements of income:
Three MonthsEnded June 30,
Six MonthsEnded June 30,
Weighted average number of shares for calculation of basic EPS
33,440,764
36,523,742
33,508,479
36,560,193
Stock options, restricted stock awards and restricted stock units under equity incentive plans
132,844
143,257
142,638
103,033
Weighted average number of shares for calculation of diluted EPS
33,573,608
36,666,999
33,651,117
36,663,226
15
Note 4 – Earnings Per Share – Continued
The following table represents Common Stock issuable upon the exercise of certain stock options that have been excluded from the diluted earnings calculation because the effect of their inclusion would be anti-dilutive.
Stock options outstanding for equity incentive plans
630
1,530
1,743
Note 5 – Segment Reporting
Segment information is used by management for making strategic operating decisions for the Company. Management evaluates the performance of the Company’s segments based primarily on operating income or loss.
The Company’s reportable segments are as follows:
●
Automotive – this segment represents the design, development, manufacturing and sales of automotive climate control seat (CCS) products, seat heaters, steering wheel heaters, automotive cables, battery thermal management (BTM), electronics and other automotive products.
•
Industrial – the combined operating results of GPT, Gentherm Medical and Gentherm’s advanced research and development division. We perform advanced research and development on thermal management systems, including those that utilize new proprietary comfort software algorithms, to enhance the efficiency and functionality of our automotive heating and cooling products. Unlike research and development that relates to a specific product application for a customer, advanced research and development activities affect products and technologies that are not currently generating product revenues. The segment includes government sponsored research projects.
Reconciling Items – include corporate selling, general and administrative costs and acquisition transaction costs.
The tables below present segment information about the reported product revenues, depreciation and amortization and operating income (loss) of the Company for three- and six-month period ended June 30, 2019 and 2018. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level. As of June 30, 2019, goodwill assigned to our Automotive and Industrial segments were $37,466 and $27,648, respectively. As of June 30, 2018, goodwill assigned to our Automotive and Industrial segments were $38,072 and $30,773, respectively.
Three Months Ended June 30,
Automotive
Industrial(1)
ReconcilingItems
ConsolidatedTotal
2019:
229,700
13,626
10,327
416
422
Operating income (loss)
37,931
(4,121
(13,753
2018:
Product revenues(1)
243,150
23,250
11,263
1,008
660
12,931
37,240
(7,881
(13,766
(1)
Industrial segment includes $10,418 in product revenue, $635 in depreciation and amortization, and $237 in operating income from CSZ-IC for the three-month period ended June 30, 2018. On February 1, 2019, we completed the sale of CSZ-IC.
16
Note 5 – Segment Reporting – Continued
472,057
29,190
20,490
839
888
77,827
(8,635
(27,290
485,571
45,415
22,368
2,063
1,392
78,404
(14,561
(27,601
Industrial segment includes $3,418 and $20,631 in product revenues, $0 and $1,260 in depreciation and amortization, and $198 and $837 in operating income from CSZ-IC for the six-month periods ended June 30, 2019 and 2018, respectively.
Automotive and Industrial segment product revenues by product category for the three- and six-month periods ended June 30, 2019 and 2018 are as follows:
%
Change
Climate Control Seats (CCS)
88,437
90,395
(2.1
Seat Heaters
73,628
80,176
(8.2
Steering Wheel Heaters
16,029
17,540
(8.6
Automotive Cables
22,205
25,645
(13.4
Battery Thermal Management (BTM)(a)
8,897
7,241
22.9
Electronics
11,454
15,842
(27.6
Other Automotive
9,050
6,311
43.4
Subtotal Automotive
(5.5
Remote Power Generation (GPT)
3,745
5,270
(28.9
Industrial Chambers
10,418
(100.0
Gentherm Medical
9,881
7,562
30.7
Subtotal Industrial
(41.4
Total Company
(8.7
a)
Battery Thermal Management or BTM product revenues include Gentherm’s automotive grade, low cost, heat resistant fans and blowers used by customer for battery cooling through ventilation and production level shipments of the advanced TED based active cool system.
17
182,791
178,613
2.3
147,548
164,396
(10.2
32,999
35,097
(6.0
45,955
52,510
(12.5
Battery Thermal Management (BTM)
19,641
11,402
72.3
24,306
31,819
(23.6
18,817
11,734
60.4
(2.8
7,704
9,932
(22.4
3,418
20,631
(83.4
18,068
14,852
21.7
(35.7
(5.6
Total product revenues information by geographic area is as follows (based on shipment destination):
United States
110,632
45.5
123,512
46.4
Germany
20,300
8.3
23,626
8.9
Japan
20,003
8.2
13,275
5.0
China
16,410
6.7
24,927
9.4
South Korea
15,577
6.4
15,783
5.9
Czech Republic
10,009
4.1
11,106
4.2
Canada
10,102
12,590
4.7
United Kingdom
6,833
2.8
8,467
3.2
33,460
13.8
33,114
12.4
Total Non-U.S.
132,694
54.5
142,888
53.6
100.0
229,086
45.7
243,862
45.9
43,510
8.7
45,988
38,594
7.7
26,848
5.1
32,007
49,131
9.3
30,555
6.1
29,605
5.6
22,151
4.4
22,821
4.3
20,393
25,703
4.8
15,665
3.1
19,312
3.6
69,286
67,716
12.8
272,161
54.3
287,124
54.1
18
Note 6 – Debt
Amended Credit Agreement
As of December 31, 2018, the Company, together with certain direct and indirect subsidiaries, had a credit agreement (the “Credit Agreement”) which included a revolving credit note (“U.S. Revolving Note”) with a maximum borrowing capacity of $350,000.
On June 27, 2019, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Amended Credit Agreement amends and restates in its entirety the Credit Agreement. The outstanding principal and interest of the U.S. Revolving Note under the Credit Agreement continued and constitute obligations under the Amended Credit Agreement.
The Amended Credit Agreement increased the U.S. Revolving Note from $350,000 to $475,000 and extended the maturity from March 17, 2021 to June 27, 2024. Subject to specified conditions, the Company can increase the U.S. Revolving Note or incur secured term loans in an aggregate amount of $175,000.
The U.S. borrowers and guarantors participating in the Amended Credit Agreement have entered into a related amended and restated pledge and security agreement. The amended and restated security agreement grants a security interest to the lenders in substantially all of the personal property of the Company and its U.S. subsidiaries designated as borrowers to secure their respective obligations under the Amended Credit Agreement, including the stock and membership interests of specified subsidiaries (limited to 66% of the stock in the case of certain non-U.S. subsidiaries). In addition to the security obligations, all obligations under the Amended Credit Agreement are unconditionally guaranteed by certain of the Company’s subsidiaries. The Amended Credit Agreement restricts the amount of dividend payments the Company can make to shareholders.
The Amended Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, and contain customary events of default. The Amended Credit Agreement also requires the Company to maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio, as defined in the agreement.
Under the Amended Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate Loans”) or Eurocurrency rate (“Eurocurrency Rate Loans”), plus a margin (“Applicable Rate”). The rate for Base Rate Loans is equal to the highest of the Federal Funds Rate (2.40% at June 30, 2019) plus 0.50%, Bank of America’s prime rate (5.50% at June 30, 2019), or the Eurocurrency rate (0.00% at June 30, 2019) plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (2.40% at June 30, 2019). All loans denominated in a currency other than the U.S. Dollar must be Eurocurrency Rate Loans. Interest is payable at least quarterly.
The Applicable Rate varies based on the Consolidated Leverage Ratio reported by the Company. As long as the Company is not in default of the terms and conditions of the Amended Credit Agreement, the lowest and highest possible Applicable Rate is 1.25% and 2.25%, respectively, for Eurocurrency Rate Loans and 0.25% and 1.25%, respectively, for Base Rate Loans.
In connection with the Amended Credit Agreement, the Company incurred debt issuance costs of $1,278 which have been capitalized and will be amortized into interest expense over the term of the credit facility.
The Company also has two fixed interest rate loans with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank.
DEG China Loan
The first DEG loan, a loan we used to fund capital investments in China (the “DEG China Loan”), is subject to semi-annual principal payments that began March, 2015 and will end September, 2019. Under the terms of the DEG China Loan, the Company must maintain a minimum Debt-to-Equity Ratio, Current Ratio and Debt Service Coverage Ratio, as defined by the DEG China Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Automotive Systems (China) Ltd.
19
Note 6 – Debt – Continued
DEG Vietnam Loan
The Company’s second fixed interest rate loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”). The DEG Vietnam Loan is subject to semi-annual principal payments that began November, 2017 and will end May, 2023. Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum Equity Ratio and Enhanced Equity Ratio, as defined by the DEG Vietnam Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Vietnam Co. Ltd.
Undrawn borrowing capacity under the U.S. Revolving Note was $378,533 as of June 30, 2019. The following table summarizes the Company’s debt at June 30, 2019 and at December 31, 2018.
InterestRate
PrincipalBalance
Credit Agreement:
U.S. Revolving Note (U.S. Dollar Denominations)
3.65
73,000
122,000
U.S. Revolving Note (Euro Denominations)
1.25
23,893
5,727
4.25
455
913
5.21
10,000
11,250
Total debt
107,348
139,890
Current portion
(2,955
(3,413
The scheduled principal maturities of our debt as of June 30, 2019 are as follows:
U.S. RevolvingNote
DEGChinaNote
DEGVietnamNote
Remainder of 2019
1,250
1,705
2020
2,500
2021
2022
2023
2024
96,893
As of June 30, 2019, we were in compliance, in all material respects, with all terms as outlined in the Amended Credit Agreement, DEG China Loan and DEG Vietnam Loan.
Note 7 – Derivative Financial Instruments
We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to our debt obligations under our Amended Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in a location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the European Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.
Note 7 – Derivative Financial Instruments – Continued
The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year. We had foreign currency derivative contracts with a notional value of $23,473 and $33,250 outstanding as of June 30, 2019 and December 31, 2018, respectively.
The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years. No commodity swap contracts were outstanding at June 30, 2019 or at December 31, 2018.
We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts which can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to accumulated other comprehensive loss in the consolidated balance sheet. When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings in the consolidated statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency gain (loss) in the consolidated statements of income. See Note 9 for the amount of unrealized loss associated with foreign currency derivatives previously reported in accumulated other comprehensive loss that was reclassified into earnings during 2019. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.
The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounts such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term.
Information related to the recurring fair value measurement of derivative instruments in our consolidated condensed balance sheet as of June 30, 2019 is as follows:
Asset Derivatives
Liability Derivatives
Net Asset/(Liabilities)
Hedge
Designation
Fair Value
Hierarchy
Balance SheetLocation
FairValue
Foreign currency derivatives
Cash flow hedge
Level 2
Current assets
Current liabilities
Information relating to the effect of derivative instruments on our consolidated condensed statements of income is as follows:
Location
Three Months
Ended
Six Months
435
(524
675
(605
Selling, general and administrative
22
75
Other comprehensive income
(32
(69)
47
Total foreign currency derivatives
700
(2,053
1,669
68
Commodity derivatives
145
Total commodity derivatives
$$
(73)
We did not incur any hedge ineffectiveness during the three- and six-month periods ended June 30, 2019 and 2018.
21
Note 8 – Fair Value Measurements
The Company bases fair value on a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have adopted a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.
Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.
Except for derivative instruments (see Note 7), a corporate owned life insurance policy, and the held for sale disposal group (see Note 13), the Company had no material financial assets and liabilities that are carried at fair value at June 30, 2019 and December 31, 2018. The carrying amounts of financial instruments comprising cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values due to the relatively short maturity of such instruments. The Company uses an income valuation technique to measure the fair values of its debt instruments by converting amounts of future cash flows to a single present value amount using rates based on current market expectations (Level 2 inputs).
As of June 30, 2019, and December 31, 2018, the carrying values of the indebtedness of the Company’s Amended Credit Agreement and Credit Agreement, respectively, were not materially different than their estimated fair values because the interest rates on variable rate debt approximated rates currently available to the Company (see Note 6). Discount rates used to measure the fair value of the DEG Vietnam Loan and DEG China Loan are based on quoted swap rates. As of June 30, 2019, the carrying values of the DEG Vietnam Loan and DEG China Loan were $10,000 and $455, respectively, as compared to an estimated fair value of $10,030 and $462, respectively. As of December 31, 2018, the carrying value of the DEG Vietnam Loan and DEG China Loan were $11,250 and $913, respectively, as compared to an estimated fair value of $11,100 and $900, respectively.
Certain Company assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. Management’s estimates used to record impairment expense are inherently uncertain and may change in future periods.
Note 9 – Reclassifications Out of Accumulated Other Comprehensive Loss
Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the three- and six-month periods ended June 30, 2019 and 2018 are as follows:
Defined Benefit Pension Plans
Foreign Currency Translation Adjustments
Foreign Currency Hedge Derivatives
(2,339
(41,408
595
Other comprehensive income before reclassifications
475
3,952
Income tax effect of other comprehensive income before reclassifications
(104
(101
Amounts reclassified from accumulated other comprehensive loss into net income
(178
a
Income taxes reclassified into net income
Net current period other comprehensive income
(37,928
827
(a)The amounts reclassified from accumulated other comprehensive loss are included in cost of sales.
(2,415
(5,881
745
Other comprehensive loss before reclassifications
(1,392
(24,386
Income tax effect of other comprehensive loss before reclassifications
374
218
(169
45
Net current period other comprehensive loss
(29,031
(397
(a)
The amounts reclassified from accumulated other comprehensive loss are included in cost of sales.
(37,157
(4
Other comprehensive income (loss) before reclassifications
1,192
Income tax effect of other comprehensive income (loss) before reclassifications
(260
(434)
(129
28
Net current period other comprehensive income (loss)
23
Note 9 – Reclassifications Out of Accumulated Other Comprehensive Loss – Continued
Commodity Hedge Derivatives
(2,366
(17,555
277
(800
462
(10,782
(124
(356
89
(24
(92
(277
We expect all of the existing gains and losses related to foreign currency derivatives reported in accumulated other comprehensive loss as of June 30, 2019 to be reclassified into earnings during the next twelve months. See Note 7 for additional information about derivative financial instruments and the effects from reclassification to net income.
Note 10 – Revenue Recognition
The aggregate amount of transaction price allocated to material rights that remain unsatisfied as of June 30, 2019 is $1,567. We expect to recognize into revenue, 55% of this balance in the next 6 months, and the remaining 26%, 11%, 4% and 4% in 2020, 2021, 2022 and 2023, respectively.
Unearned revenue by segment was as follows:
December 31, 2018
1,567
1,597
Industrial
24
Note 10 – Revenue Recognition – Continued
Changes in unearned revenue were as follows:
Additions to unearned revenue
499
Reclassified to revenue
(308
Reclassified to held for sale
(219
Currency impacts
(2
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.
Total costs to obtain a contract that were recognized on the consolidated condensed balance sheets as of June 30, 2019 and December 31, 2018 were immaterial.
Note 11 – New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842).” Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The update and related amendments require lessees to recognize on their balance sheet a liability to make payments and a right-of-use asset representing its right to use the underlying asset for the lease term. Leases are to be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income.
The requirement to recognize the rights and obligations resulting from leases as assets and liabilities by lessees increases transparency and comparability of lease transactions between organizations. New lessee disclosure requirements to provide information about the use of significant assumptions and judgements to identify and measure right-of-use assets and lease liabilities, enhance the representation of leasing transactions in financial statement note disclosures.
We elected to adopt ASU 2016-02 and related amendments on its effective date, January 1, 2019, and recognized a cumulative-effect adjustment to the opening balance in retained earnings. Financial information has not been updated and disclosure under the new standard have not been provided to dates and periods before January 1, 2019. We elected the package of practical expedients provided in ASU 2016-02, which permits companies not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the use-of-hindsight to determine whether lease terms include periods covered by the lessee’s option to extend or terminate a lease, whether to purchase the underlying asset at the end of the lease agreement, and in assessing impairment of operating lease right-of-use assets. Finally, we elected not to assess whether existing or expired land easements that were not previously accounted for as leases are or contain a lease. Land easements previously accounted for as leases are not eligible for this practical expedient.
ASU 2016-02 did not have an impact on our consolidated condensed statements of income for the three- and six-month periods ended June 30, 2019, but had a significant impact on our consolidated condensed balance sheet as of June 30, 2019. Gentherm recognized $17,146 and $16,697 in new operating lease right-of-use assets and lease liabilities, respectively, on our consolidated condensed balance sheet as of the adoption date for the right to use lease assets, a difference of $449. Gentherm recognized $261 of this difference as an adjustment to the 2019 opening balance in retained earnings, net of tax effects totaling $114. The remaining $74 difference between operating lease right-of-use assets and lease liabilities for leases that existed as of the adoption date was recognized as a reduction to prepaid and other current assets.
25
Note 11 – New Accounting Pronouncements – Continued
ASU 2016-02 provides lessees with practical expedients applicable on an ongoing basis, beyond the period of adoption. First, lessees may elect, by class of underlying asset, to not recognize operating lease right-of-use assets and lease liabilities from leases with an original lease term of 12 months or less. For entities that elect this accounting policy for short term leases, lease payments from short term leases are recognized on a straight-line basis over the lease term in the Company’s consolidated condensed statement of income. Second, lessees may elect, by class of underlying assets, to not separate nonlease components that are associated with lease components in a lease agreement and instead to account for them together as a single lease component. The Company elected these ongoing practical expedients and applies them to all classes of leased assets.
Recently Issued Accounting Pronouncements Not Yet Adopted
Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. Financial assets measured at amortized cost basis are to be reported on the balance sheet at the initial acquisition amount less principal repayments, amortization of any discounts or premiums, foreign exchange difference, and impairment losses. The valuation account allowance for credit losses is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset.
Currently, entities with financial assets within the scope of this update use the incurred loss model to measure and recognize credit losses. Under the incurred loss model, past events and current conditions are inputs to measure credit losses and recognize them in the period the likelihood of loss is probable. The expected loss model broadens the amount and type of information, including forecasted information, entities must consider developing its expected credit loss estimate for financial assets. The amendments in this update do not specify a method for measuring expected credit losses and it is anticipated that entities will leverage current systems and methods for recording the allowance for credit losses.
ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments in this update is permitted, including adoption in any interim period for which financial statements have not yet been issued. The amendments in this update should be applied using a modified-retrospective approach and a cumulative-effect adjustment to retained earnings recognized as of the beginning of the first reporting period in which the guidance is effective. We are currently in the process of determining the impact implementation of ASU 2016-13 will have on the Company’s financial statements and note disclosures.
Cloud Computing Arrangements That Are Service Contracts
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 provides guidance on when costs incurred to implement a hosting arrangement that is a service contract are and are not capitalized, aligning with the guidance for capitalizing implementation costs incurred to develop or obtain internal-use software. Entities must first determine the project stage of the implementation activity; depending on their nature, costs for implementation activities in the application development stage are capitalized and costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. Capitalized implementation costs should be amortized over the term of the hosting arrangement on a straight-line basis and presented in the same line items in the statement of income as the expense for fees for the associated hosting arrangements. Similarly, capitalized implementation costs should be presented in same line item in the balance sheet as prepaid fees for the associated hosting arrangement and cash flows from capitalized implementation costs should be classified in the same manner as cash flows for the fees for the associated hosting arrangement.
ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments in this update is permitted, including adoption in any interim period for which financial statements have not yet been issued. ASU 2018-15 permits two methods of adoption: prospectively to costs for activities performed on or after the date the entity first applies the content from the update, or retrospectively to all periods presented. We are currently in the process of determining the impact implementation of ASU 2018-15 will have on the Company’s financial statements and note disclosures.
26
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” The amendments in ASU 2018-14 were developed using the concepts incorporated in the FASB’s Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements, which were finalized in August 2018. The amendments in this update remove the following disclosure requirements, among others, from Subtopic 715-20:
1)
The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
2)
The amount and timing of plan assets expected to be returned to the employer.
The following disclosure requirements were added to Subtopic 715-20:
The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.
An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
ASU 2018-14 is effective for annual periods ending after December 15, 2020. Early adoption of the amendments in this update are permitted. Entities should apply the amendments in this update on a retrospective basis to all periods presented. We are currently in the process of determining the impact implementation of ASU 2018-14 will have on the Company’s financial statement note disclosures.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in ASU 2018-13 were developed using the concepts incorporated in the FASBs Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements, which were finalized in August 2018. The amendments in this update remove the following disclosure requirements from Topic 820:
The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.
The policy for timing of transfer between levels.
3)
The valuation processes for Level 3 fair value measurements.
The following disclosure requirements were added to Topic 820:
The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period.
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption of disclosures that are removed is permitted, but adoption is delayed for the new additional disclosures until their effective date. The amendments in ASU 2018-13 that provide for new additional disclosure should be applied on a prospective basis, while all other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently in the process of determining the impact implementation of ASU 2018-13 will have on the Company’s financial statement note disclosures.
27
Note 12 – Leases
The Company has operating leases for office, manufacturing and research and development facilities, as well as land leases for certain manufacturing facilities that are accounted for as operating leases. We also have operating leases for office equipment and automobiles. Excluding land leases, our leases have remaining lease terms ranging from 1 year to 7 years and may include options to extend the lease for an additional term equal to the original term of the lease. Land leases have remaining lease terms that range from 29 to 44 years and some which specify that the end of the lease term is at the discretion of the lessee. We do not have lease arrangements with related parties.
Information about Gentherm’s total lease costs for the six-month period ended June 30, 2019 is as follows:
Lease cost
Operating lease cost
Short-term lease cost
1,885
Sublease income
(52
Total lease cost
4,736
Supplemental Cash Flow Information
Gain on sale and leaseback transactions, net
207
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
2,966
Right-of-use lease assets obtained in exchange for lease obligations:
Operating leases
3,004
Weighted Average Remaining Lease Term
4.7 years
Weighted Average Discount Rate
5.4
A summary of operating leases as of June 30, 2019, under all non-cancellable operating leases with terms exceeding one year is as follows:
2019 (excluding the six-month period ended June 30, 2019)
2,755
4,489
2,555
1,490
790
2024 or later
2,609
Total future minimum lease payments
14,688
Less imputed interest
(1,916
12,772
Note 13 – Assets and Liabilities Held for Sale
During 2018, the Company determined that GPT met the held for sale criteria and recognized $2,190 in impairment loss.
During 2019, the Company continued to assess the fair value of its GPT disposal group, less costs to sell, at each reporting period. As a result of these fair value measurements, the Company recorded additional impairment losses of $9,885 and $16,883 for the three- and six-month periods ended June 30, 2019, respectively. Additionally, during the first quarter of 2019, the Company determined that an equity investment met the held for sale criteria and recognized impairment losses of $1,000 and $4,486 for the three- and six-month periods ended June 30, 2019, respectively.
See note 2 for information about the Company’s held for sale accounting policy, including a description of the criteria necessary for a disposal group to qualify for classification as held for sale. GPT did not meet the criteria to be classified as a discontinued operation.
The assets and liabilities of the disposal group classified as held for sale as of June 30, 2019 are as follows:
Accounts receivable, net
1,808
5,499
268
4,118
Investment
7,440
1,082
4,572
(18,073
Total assets held for sale
405
2,192
Operating lease liabilities
4,117
Total liabilities held for sale
The equity investment described above, does not have a readily determinable fair value and is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
The fair value of the GPT disposal group was measured based on observable inputs other than Level 1 prices.
Management’s estimates used to record impairment expense are inherently uncertain and may change in future periods.
29
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
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 our ability to execute our strategic plan, our ability to finance sufficient working capital, the amount of availability under the Amended Credit Agreement and other indebtedness, our ability to continue to maintain or increase sales and profits of our operations, and the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs. 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,” and Note 1 to the consolidated condensed financial statements. 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 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, 2018, and subsequent reports filed with or furnished to the Securities and Exchange Commission, and which could cause actual results to differ materially from that described in the forward-looking statements. 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 financial statements and related notes thereto included elsewhere in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2018.
Overview
Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies. Our products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well as patient temperature management within the health care industry. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America, Europe and Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets. We concentrate our research on the development of new technologies and new applications from existing technologies to create product and market opportunities for a wide array of thermal management solutions.
Our automotive products are sold to automobile and light truck OEMs or their tier one suppliers. Inherent to the automotive supplier market are costs and commitments that are incurred well in advance of the receipt of orders and resulting revenues from customers. This is due in part to automotive manufacturers requiring the design, coordination and testing of proposed new components and sub-systems. Revenues from these expenditures are typically not realized for two to three years due to this development cycle.
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Industrial. See Note 5 to the consolidated condensed financial statements 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.
On February 1, 2019, as part of the Company’s Fit-for-Growth initiative to eliminate investments in non-core businesses, we completed the sale of the Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”) and former Cincinnati Sub-Zero headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million, including $2.5 million of the cash proceeds were placed into an escrow account for a period of up to one year as partial security for the Company’s obligations under the sale agreement. In connection with the sale, Gentherm entered into an operating lease agreement for a portion of the office and manufacturing building space purchased by Weiss Technik North America, Inc. The Company recognized a $5.0 million pre-tax gain on the sale of CSZ-IC during the six-month period ended June 30, 2019.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. For discussion of our significant accounting policies, see Note 2, “Summary of Significant Accounting Policies and Basis of Presentation,” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. With the exception of leases, there have been no significant accounting policy changes during the six-month period ended June 30, 2019. See Note 11 for information about the adoption of ASU 2016-02, “Leases”.
Results of Operations Second Quarter 2019 Compared with Second Quarter 2018
Product revenues. Product revenues by product category, in thousands, for the three-month period ended June 30, 2019 (“Second Quarter 2019”) and 2018 (“Second Quarter 2018”) are as follows:
(100
Product revenues for the Second Quarter 2019 were $243.3 million compared with product revenues of $266.4 million during Second Quarter 2018, a decrease of $23.1 million, or 8.7%. The decrease included lower revenues in the automotive segment, which decreased by $13.5 million, or 5.5%, to $229.7 million, and lower industrial segment product revenues which decreased $9.6 million, or 41.4%, to $13.6 million.
Our automotive segment revenues decreased primarily due to unfavorable foreign currency, volumes, and pricing. Unfavorable currency decreased revenues by $6.1 million, primarily attributable to the Euro, Chinese Renminbi and Korean Won. Unfavorable volumes decreased revenues by $4.5 million. Other reductions were primarily associated with customer pricing, decreased revenues by $2.9 million.
Our industrial segment revenues decreased primarily due to the absence of revenue from CSZ-IC, which was sold on February 1, 2019, as well as lower revenue from GPT. These decreases were partially offset by increased revenue from Gentherm Medical.
Cost of Sales. Cost of sales was $170.6 million during Second Quarter 2019 compared to $189.3 million during Second Quarter 2018, a decrease of $18.7 million, or 9.8%. This decrease was primarily associated with the sale of CSZ-IC in the first quarter of 2019, favorable currency impact, decreases in automotive volumes and operational performance improvements, including Fit-for-Growth. These items were offset by increased U.S. tariffs and higher labor costs in Mexico, Macedonia and China.
The sale of CSZ-IC decreased cost of sales by $8.1 million. Operational performance improvements decreased cost of sales by $8.4 million, primarily attributable to decreases in headcount, overtime, expedited freight and material costs. Favorable currency decreased cost of sales by $3.4 million primarily attributable to the Euro, Chinese Renminbi and Mexican Peso.
31
Net Research and Development Expenses. Net research and development expenses were $19.3 million during Second Quarter 2019 compared to $21.0 million during Second Quarter 2018, a decrease of $1.8 million, or 8.4%. The decrease in net research and development expenses is primarily related to the Company’s focused portfolio and Fit-for-Growth cost reduction initiatives.
Reimbursed research and development totaled $5.1 million during Second Quarter 2019 compared to $4.6 million during Second Quarter 2018.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $31.8 million during Second Quarter 2019 compared to $34.3 million during Second Quarter 2018, a decrease of $2.4 million, or 7.1%. The decrease was primarily related to the sale of CSZ-IC on February 1, 2019 and the Company’s focused portfolio and Fit-for-Growth cost reduction initiatives.
Restructuring expenses. The Company recognized $1.2 million in restructuring expenses during Second Quarter 2019 associated with the Fit-for-Growth program. These costs included $0.9 million of severance and termination costs and $0.3 million of consulting costs.
Foreign currency gain (loss). During Second Quarter 2019 we incurred a net foreign currency loss of $0.8 million which included a net realized loss of $0.7 million and a net unrealized loss of $0.1 million.
Impairment loss. During Second Quarter 2019, the Company recorded an impairment loss totaling $9.9 million associated with the Company’s plans to divest GPT. The loss is not expected to be deductible for income tax purposes.
Income Tax Expense. We recorded an income tax expense of $5.5 million during Second Quarter 2019 on earnings before income tax of $8.3 million. The pre-tax earnings amount included the non-deductible impairment loss of $9.9 million. Adjusting for the impairment loss, the effective tax rate was 30.5% for the Second Quarter 2019. During Second Quarter 2018, we recorded an income tax expense of $3.1 million on earnings before tax of $19.7 million, or 15.6%. The effective tax rate for Second Quarter 2018 differed from the Federal statutory rate of 21% primarily due to the impact of discrete adjustments, including favorable excess tax benefits on stock option exercises and certain intercompany transaction which disproportionately benefited lower tax rate jurisdictions which were partially offset by the international provisions from the U.S. tax reform, such as global intangible low-tax income (“GILTI”), enacted in December 2017. The effective tax rate for Second Quarter 2019 was higher than the Federal statutory rate of 21% primarily due to the impact of higher statutory rates for our subsidiaries operating in foreign jurisdictions and effects from the U.S. tax reform, such as GILTI.
Results of Operations First Half 2019 Compared with First Half 2018
Product revenues. Product revenues by product category, in thousands, for the six-month period ended June 30, 2019 (“First Half 2019”) and 2018 (“First Half 2018”) are as follows:
32
Product revenues during First Half 2019 were $501.2 million compared with product revenues of $531.0 million during First Half 2018, a decrease of $29.7 million, or 5.6%. The decrease included lower revenues in the automotive segment, which decreased by $13.5 million, or 2.8%, to $472.1 million and lower industrial segment product revenues which decreased $16.2 million, or 35.7%, to $29.2 million.
Our automotive segment revenues decreased primarily due to unfavorable foreign currency and pricing offset by increased volumes. Unfavorable currency decreased revenues by $12.9 million, primarily attributable to the Euro, Chinese Renminbi and Korean Won. Favorable volumes increased revenues by $5.2 million. Other reductions primarily associated with customer pricing, decreased revenues by $6.1 million
Our industrial segment revenues decreased primarily due to the sale of CSZ-IC on February 1, 2019, as well as lower revenue from GPT. These decreases were partially offset by increased revenue from Gentherm Medical.
Cost of Sales. Cost of sales was $353.2 million during First Half 2019 compared to $372.7 million during First Half 2018, a decrease of $19.4 million, or 5.2%. This decrease was primarily associated with the sale of CSZ-IC in the first quarter of 2019, favorable currency impact and operational improvements, including Fit-for-Growth. These items were offset by increased U.S. tariffs, automotive volumes and higher labor costs in Mexico, Macedonia and China.
The sale of CSZ-IC decreased cost of sales by $13.2 million. Operational performance improvements decreased cost of sales by $10.9 million, primarily attributable to decreases in headcount, overtime, expedited freight and material costs. Favorable currency decreased cost of sales by $8.1 million primarily attributable to the Euro, Chinese Renminbi and Mexican Peso.
Net Research and Development Expenses. Net research and development expenses were $38.2 million during First Half 2019 compared to $44.3 million during First Half 2018, a decrease of $6.1 million, or 13.9%. The decrease in net research and development expenses is primarily related to the Company’s focused portfolio and Fit-for-Growth cost reduction initiatives.
Reimbursed research and development totaled $8.8 million during First Half 2019 compared to $7.0 million during First Half 2018.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $64.4 million during First Half 2019, a decrease of $6.2 million, or 8.8%, from $70.7 million during First Half 2018. The decrease was primarily related to the sale of CSZ-IC on February 1, 2019 and the Company’s focused portfolio and Fit-for-Growth cost reduction initiatives.
33
Restructuring expenses. The Company recognized $3.1 million in restructuring expenses during First Half 2019 associated with the Fit-for-Growth program. These costs included $1.5 million of severance and termination costs, $1.3 million of consulting costs and $0.4 million of asset disposal costs.
Foreign currency gain (loss). During First Half 2019 we incurred a net foreign currency loss of $0.6 million which included a net realized loss of $1.5 million and a net unrealized gain of $0.9 million.
Gain on sale of business. On February 1, 2019, as part of Company’s Fit-for-Growth initiative to eliminate investments in non-core businesses, we completed the sale of the CSZ-IC and former Cincinnati Sub-Zero headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million, including $2.5 million of cash proceeds placed into an escrow account for a period of up to one year. The Company recognized a pre-tax gain of $5.0 million on the sale of CSZ-IC during the six-month period ended June 30, 2019.
Impairment loss. During the First Half 2019, the Company recorded an impairment loss totaling $20.4 million associated with the Company’s plans to divest GPT. The loss is not expected to be deductible for income tax purposes.
Income Tax Expense. We recorded an income tax expense of $12.4 million during First Half 2019 on earnings before income tax of $23.6 million. The pre-tax earnings amount included the non-deductible impairment loss of $20.4 million. Adjusting for the impairment loss, the effective tax rate was 28.3% for the First Half 2019. During First Half 2018, we recorded an income tax expense of $6.1 million on earnings before tax of $35.7 million, or 17.1%. The effective tax rate for First Half 2018 differed from the Federal statutory rate of 21% primarily due to the impact of discrete adjustments, including favorable excess tax benefits on stock option exercises and certain intercompany transaction which disproportionately benefited lower tax rate jurisdictions which were partially offset by the international provisions from the U.S. tax reform, such as GILTI. The effective tax rate for First Half 2019 was higher than the Federal statutory rate of 21% primarily due to the impact of higher statutory rates for our subsidiaries operating in foreign jurisdictions and effects from the U.S. tax reform, such as GILTI.
Liquidity and Capital Resources
Cash and Cash Flows
The Company has funded its financial needs primarily through cash flows from operating activities and equity and debt financings. Our new strategic plan sets forth a capital allocation strategy that includes a targeted debt-to-earnings leverage ratio and allows for some of our cash flows to be paid back to investors through Common Stock repurchases. On June 25, 2018, our Board of Directors increased the Company’s stock repurchase authorization to $300 million, of which $113.6 million of availability remained as of June 30, 2019. This authorization expires on December 16, 2020. Based on its current operating plan, management believes cash and cash equivalents at June 30, 2019, together with cash flows from operating activities, and borrowings available under our credit agreement, are sufficient to meet operating and capital expenditure needs, and to service debt, for at least the next 12 months. However, if cash flows from operations decline, we may need to obtain alternative sources of capital and reduce or delay capital expenditures, acquisitions and investments, all of which could impede the implementation of our business strategy and adversely affect our results of operations and financial condition. In addition, it is likely that we will need to complete one or more equity or debt financings if we consummate any significant acquisition or several smaller acquisitions. There can be no assurance that such capital will be available at all or on reasonable terms, which could adversely affect our future operations and business strategy.
34
The following table represents our cash and cash equivalents and restricted cash:
Six Months Ended June 30,2019
Six Months Ended June 30,2018
Cash provided by operating activities
Cash provided by (used in) investing activities
Cash used in financing activities
Foreign currency effect on cash and cash equivalents
Cash Flows From Operating Activities
We manage our cash, cash equivalents and restricted cash in order to fund operating requirements and preserve liquidity to take advantage of future business opportunities. The following table compares the cash flows from operating activities during First Half 2019 and First Half 2018:
(18,460
Non-cash adjustments to reconcile net income to cash provided by operating activities:
(3,606)
4,869
(772
Defined benefit plan (income) expense
(596
Provision for doubtful accounts
341
(1,929
Net income before changes in operating assets and liabilities
58,118
59,969
(1,851
Changes in operating assets and liabilities:
13,448
12,370
(20,068
3,947
7,865
35
Cash provided by operating activities during First Half 2019 was $40.4 million, representing an increase of $7.9 million from cash provided by operating activities during First Half 2018, which was $32.5 million. The following table highlights significant differences between the operating cash flows for the six-month periods ending June 30, 2019 and 2018, respectively:
Net cash provided by operating activities during First Half 2018
Decrease from lower net income before changes in operating assets and liabilities
Changes in working capital, net
17,842
Changes in other assets and liabilities, net.
(8,126
Net cash provided by operating activities during First Half 2019
Net cash provided by operating activities before changes in operating assets and liabilities increased during First Half 2019 due to non-cash impairment losses of $20.4 million, partially offset by a $5.0 gain recognized on the sale of CSZ-IC. Additionally, working capital, net provided unfavorable cash flows related to accounts payable and favorable amounts related to accounts receivable, inventory, prepaid expenses and other assets, and accrued liabilities.
The following table illustrates changes in working capital during First Half 2019:
Working capital at December 31, 2018
267,679
Decrease in cash, cash equivalents and restricted cash
(6,215
Impairment loss on assets classified as held for sale
Foreign currency effect on working capital
(343
Increase in accounts receivable
4,421
Decrease in tax receivables
(5,077
Decrease in inventory
(1,286
Increase in prepaid expenses and other assets
3,824
Decrease in accounts payable
9,003
Increase in accrued liabilities
(2,726
Decrease in working capital due to the sale of a business
(42,530
Increase in net current assets classified as held for sale
5,432
Increase in working capital from acquisition of new company
5,203
Working capital at June 30, 2019
217,016
The following table highlights significant transactions that contributed to the increase in cash, cash equivalents and restricted cash during the six-month period ended June 30, 2019:
(in Thousands)
Repayments of Debt
Borrowings from U.S. Revolving Note
Cash paid for financing new loans
Stock repurchases
Proceeds from the exercise of common stock options
Proceeds from the sale of CSZ-IC
Cash paid for acquisition of subsidiary
(18,357
Other items
480
Decrease in cash
In addition to these transactions, working capital was impacted by increases in accounts receivable, prepaid expenses and other assets and accrued liabilities, and decreases in inventory, accounts payable, and tax receivables. The changes in current assets and liabilities reflect the classification of additional assets related to GPT (disposal group) as held for sale during First Half 2019. All assets and liabilities of the disposal group are classified as held for sale within current assets and current liabilities, respectively, on the Company’s consolidated balance sheet as of June 30, 2019. See Note 13 to our consolidated condensed financial statement for additional information about the assets and liabilities classified as held for sale.
36
Cash Flows From Investing Activities
Cash provided by investing activities was $19.1 million during First Half 2019, reflecting cash proceeds of $47.5 million related to the sale of CSZ-IC, offset by the acquisition of Stihler for $15.5 million and the purchases of property and equipment related to the expansion of production capacity, totaling $13.0 million.
Cash Flows From Financing Activities
Cash used in financing activities was $63.2 million during First Half 2019, reflecting payments of principal on the U.S. Revolving Note, the DEG China Loan and the DEG Vietnam Loan totaling $61.1 million in aggregate partially offset by additional borrowings on the U.S. Revolving Note totaling $28.4 million. As of June 30, 2019, the total availability under the U.S. Revolving Note was $378.5 million. Cash was also paid in First Half 2019 for the repurchase of Common Stock totaling $33.0 million, financing costs incurred with for the Amended and Restated Credit Agreement totaling $1.3 million and cancellations of restricted stock awards totaling $0.9 million, partially offset by proceeds from the exercise of common stock options totaling $4.8 million.
Off-Balance Sheet Arrangements
We use letters of credit to guarantee our performance under specific construction contracts executed by our subsidiaries, GPT and Gentherm Medical. The expiration dates of the letter of credit contracts coincide with the expected completion date of the contract. Extensions are normally made if performance obligations continue beyond the expected completion date. At June 30, 2019, we had outstanding letters of credit of $11 thousand, a decrease from $455 thousand at December 31, 2018.
37
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to our debt obligations and foreign currency contracts. We have in the past, and may in the future, place our investments in bank certificates of deposits, debt instruments of the U.S. government, and in high-quality corporate issuers.
We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to our debt obligations under our Amended Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in a location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.
The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year. We had foreign currency derivative contracts with a notional value of $23.5 million and $33.3 million outstanding at June 30, 2019 and December 31, 2018, respectively.
We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts which can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to accumulated other comprehensive loss in the consolidated condensed balance sheets. When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings in the consolidated condensed statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency (loss) gain in the consolidated condensed statements of income. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.
The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounts such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term. Information related to the fair values of all derivative instruments in our consolidated condensed balance sheet as of June 30, 2019 is set forth in Note 7 to the consolidated condensed financial statements included herein.
Interest Rate Sensitivity
The table presents principal cash flows and related weighted average interest rates by expected maturity dates for each of the Company’s debt obligations. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency. The instruments actual cash flows are denominated in U.S. dollars ($USD) or Euros (€EUR), as indicated in parentheses.
Expected Maturity Date
(In thousands except rate information)
Liabilities
Long Term Debt:
Fixed Rate (€EUR)
Fixed Interest Rate
Variable Rate ($USD)
$ 96,893
Average Interest Rate
3.06
Fixed Rate ($USD)
10,030
Exchange Rate Sensitivity
The table below provides information about the Company’s foreign currency forward exchange rate agreements that are sensitive to changes in foreign currency exchange rates. The table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates for each type of foreign currency forward exchange agreement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.
Expected Maturity or Transaction Date
Anticipated Transactions And Related Derivatives
Thereafter
$U.S. functional currency
Forward Exchange Agreements:
(Receive MXN/Pay USD$)
Total Contract Amount
23,473
Average Contract Rate
20.45
ITEM 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019, our disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting that was initially disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. This material weakness relates to Information Technology General Controls (“ITGC”) at our wholly owned subsidiary, Gentherm Medical, LLC (formerly, Cincinnati Sub-Zero Products, LLC), which did not operate in a way to appropriately restrict elevated access and address segregation of duty conflicts at both the information technology and end user levels.
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we began implementing a remediation plan to address the material weakness mentioned above. The material weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2019.
(b) Changes in Internal Control over Financial Reporting
Except with respect to the remediation efforts referenced above, there were no changes in the Company’s internal control over financial reporting during the three-month period ended June 30, 2019, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of business, however there is no current material pending litigation to which we are a party and no material legal proceeding was terminated, settled or otherwise resolved during the six-month period ended June 30, 2019.
ITEM 1A.
RISK FACTORS
There were no material changes in our risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. You should carefully consider the risks and uncertainties described therein.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities During Second Quarter 2019
Period
Total Number of Shares Purchased (1)
(b)
Average Price Paid per Share
(c)
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs
(d)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2)
April 1, 2019 to April 30, 2019
138,559,799
May 1, 2019 to May 31, 2019
286,539
39.45
127,255,683
June 1, 2019 to June 30, 2019
343,020
39.93
113,559,838
All shares were purchased on the open-market in accordance with Gentherm’s Stock Repurchase Program, including, in part, pursuant to a plan adopted by the Company in accordance with Rule 10b5-1 promulgated by the U.S. Securities and Exchange Commission.
(2)
The Stock Repurchase Program authorizes Gentherm to repurchase shares up to $300 million. The Stock Repurchase Program expires on December 16, 2020. The authorization of this Stock Repurchase Program does not require that the Company repurchase any specific dollar value or number of shares and may be modified, extended or terminated by the Company’s Board of Directors at any time.
ITEM 6.
EXHIBITS
Exhibits to this Report are as follows:
Incorporated by Reference
ExhibitNumber
Exhibit Description
Filed Herewith
Form
Period Ending
Exhibit /Appendix Number
Filing Date
10.1
Amended and Restated Credit Agreement, dated as of June 27, 2019, by and among Gentherm Incorporated, Gentherm (Texas), Inc., Gentherm Licensing, Limited Partnership, Gentherm Medical, LLC, Gentherm GmbH, Gentherm Enterprises GmbH, Gentherm Licensing GmbH, Gentherm Global Power Technologies Inc. and Gentherm Canada ULC, the lenders party thereto, and Bank of America, N.A., as administrative agent, swing line lender and L/C issuer.(1)
8-K
6/28/2019
10.2
Amended and Restated Pledge and Security Agreement, dated as of June 27, 2019, by and among Gentherm Incorporated, Gentherm Licensing, Limited Partnership, Gentherm (Texas), Inc., Gentherm Medical, LLC, Gentherm Properties I, LLC, Gentherm Properties II, LLC and Bank of America, N.A.(2)
10.3
Separation Agreement and Release between Gentherm Incorporated and Frithjof Oldorff, dated May 6, 2019
5/7/2019
10.4*
Amended and Restated Gentherm Incorporated Deferred Compensation Plan, dated May 20, 2019 (and effective January 1, 2019
X
31.1
Section 302 Certification – CEO
31.2
Section 302 Certification – CFO
32.1**
Section 906 Certification – CEO
32.2**
Section 906 Certification – CFO
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
* Indicates management contract or compensatory plan or arrangement
** Documents are furnished not filed
(1) Schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Gentherm Incorporated agrees to furnish any omitted schedules and exhibits to this agreement is set forth in the agreement.
(2) Schedules to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Gentherm Incorporated agrees to furnish any omitted schedules or exhibits upon the request of the Securities and Exchange Commission. A list of the omitted schedules to this agreement is as follows: Schedule I – Pledged Equity Interests; Schedule II – Primary Location, Filing Locations, Trade Names, Changes in Names, State Organizational Numbers and Taxpayer Identification Numbers; Government Contracts, Deposit Accounts, Letter of Credit Rights and Commercial Tort Claims; Schedule III – Intellectual Property.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Gentherm Incorporated
/s/ PHILLIP EYLER
Phillip Eyler
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 26, 2019
/s/ MATTEO ANVERSA
Matteo Anversa
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)