UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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for the fiscal year ended December 31, 20192022
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☐Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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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 | (I.R.S. Employer | |
21680 Haggerty Road, Northville, MI | 48167 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (248) (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 | Nasdaq |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
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, 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 |
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| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such Common Stock on The Nasdaq Global Select Market as of the last business day of the registrant’s most recently completed second fiscal quarter, June 28, 2019,30, 2022, was $1,378,276,957.$2,049,990,444. For purposes of this computation, the registrant has excluded the market value of all shares of its Common Stock reported as being beneficially owned by executive officers and directors; such exclusion shall not, however, be deemed to constitute an admission that any such person is an “affiliate” of the registrant.
As of February 14, 2020,17, 2023, there were 32,803,04133,208,973 issued and outstanding shares of Common Stock of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 20202023 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report to the extent described herein.
TABLE OF CONTENTS
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Item 1B: | 30 | ||||
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Item 4: | 30 | ||||
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Item 6: | 32 | ||||
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 | |||
Item 7A: | 46 | ||||
Item 8: | 48 | ||||
Item 9: | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 48 | |||
Item 9A: | 48 | ||||
Item 9B: | 49 | ||||
Item 9C: |
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Item 10: | 50 | ||||
Item 11: | 50 | ||||
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 50 | |||
Item 13: | Certain Relationships and Related Transactions and Director Independence | 50 | |||
Item 14: | 50 | ||||
Item 15: | 51 | ||||
Item 16: | 54 |
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GENTHERM INCORPORATED
PART I
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Unless otherwise indicated, references to “Gentherm”, “the Company”, “we”, “our” and “us” in thisForward-Looking Statements
This Annual Report on Form 10-K (“thisfor the year ended December 31, 2022 (this “Annual Report”) refer to Gentherm Incorporated and its consolidated subsidiaries.
Except to the extent expressly noted herein, the content of our website or the websites of other third parties noted herein are not incorporated by reference in this Report.
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 asas: the expected light vehicle production in the Company’s key markets; the integration of recent acquisitions; the impact of macroeconomic and geopolitical conditions; the components of and our ability to execute our updated strategic planplan; long-term consumer and Manufacturing Footprint Rationalization restructuring plan (defined below),technological trends in the Automotive industry and our ability to finance sufficient working capital,related market opportunity for our existing and new products and technologies; the amount of availability under the Amended Credit Agreement (defined below), our ability to maintain or increase sales and profitability of our operations, andcompetitive landscape; the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs.needs; and our ability to finance sufficient working capital. Reference is made in particular to forward-looking statements included in “Item 1. Business,”, “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar terms, variations of such terms or the negative of such terms.
The forward-looking statements included in this Annual Report are made as of the date hereof or as of the date specified and are based on management’s reasonable expectations and beliefs. Such forward-looking statements are subject to a number of important assumptions, significant risks and uncertainties (some of which are beyond our control) and other factors that may cause the Company’s actual results or performance to differ materially from that described in or indicated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to those summarized below:
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In addition, with reasonable frequency, we have entered into business combinations, acquisitions, divestitures, strategic investments and other significant transactions. Such forward-looking statements do not include the potential impact of any such transactions that may be completed after the date hereof, each of which could cause actual resultsmay present material risks to differ materially from that described in the forward looking statements.Company’s business and financial results. Except as required by law, we expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
GeneralITEM 1. BUSINESS
Unless otherwise indicated, references to “Gentherm”, “the Company”, “we”, “our” and “us” in this Annual Report refer to Gentherm Incorporated and its consolidated subsidiaries.
Except to the extent expressly noted herein, the content of our website or the websites of other third parties noted herein are not incorporated by reference in this Annual Report.
Overview
Gentherm Incorporated is athe global developer and marketermarket leader of innovative thermal management and pneumatic comfort technologies for a broad range of heatingthe automotive industry. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and coolingother components), battery performance solutions, cable systems, lumbar and temperature control applications. Ourmassage comfort solutions, valve system technologies, and other electronic devices. Medical products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well asinclude patient temperature management within the health care industry.systems. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and will lead to new product applications for existing and new markets. Our automotive products can be found on the vehicles ofmanufactured by nearly all the major automotiveoriginal equipment manufacturers (“OEMs”) operating in North America and Europe, and several major automotive manufacturersOEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. The Company is also developing
On July 13, 2022, Gentherm acquired Jiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”), a numbermanufacturer of new technologiesmedical materials and products that will help enable improvements to existing products and to create new product applications for existing and new markets.
On February 1, 2019, the Company completed the divestiture of its environmental testmedical equipment, business, Cincinnati Sub Zero industrial chamber business (“CSZ-IC”), and on October 1, 2019, the Company completed the divestiture of its remote power generation systems business, Gentherm Global Power Technologies (“GPT”).
The Company has two reportable segments for financial reporting purposes: Automotive and Industrial.
Automotive
The Automotive reporting segment is comprised of the results from our global automotive businesses. Operating results from our climate comfort systems, specialized automotive cable systems, battery thermal management, and automotive electronic and software systems are all reported in the Automotive segment because of their complementary focus on automotive content, passenger thermal comfort and convenience.
Climate and comfort system solutions include seat heaters, blowers and thermoelectric devices for variable temperature Climate Control Seats (“CCS”) designed to provide individualized thermal comfort to automobile passengers, and integrated electronic
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components, such as electronic control units that utilize our proprietary electronics technology and software. Other climate comfort system solutions include steering wheel heaters, neck conditioners and climate control system products for door panels, armrests, cupholders and storage bins.
Battery thermal management system solutions include battery cooling modules for 12V and 48V automotive batteries.
Automotive electronic and software systems solutions include electronic control units for climate and comfort system solutions and new proprietary electronic control units for memory seat modules.
Industrial
The Industrial reporting segment represents the combined results from ourincluding patient temperature management systemssolutions. The acquisition was accounted for as a business combination within our Medical segment.
On August 1, 2022, Gentherm acquired Alfmeier Präzision SE (“Medical”Alfmeier”), GPT (through October 1, 2019), CSZ-IC (through February 1, 2019)a global leader in automotive lumbar and Gentherm’smassage comfort solutions and a leading provider of advanced researchvalve systems technology, integrated electronics and development division.software. The operating results from these businesses and division are presented togetheracquisition was accounted for as one reporting segment because of their historical joint concentration on identifying new markets and product applications based on thermal management technologies.a business combination within our Automotive segment.
Corporate Information4
We are incorporated under the laws of the State of Michigan. We were originally incorporated in California in 1991 and we reincorporated in Michigan in 2005. Our internet website is www.gentherm.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge through our website, www.gentherm.com, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission.Commission (“SEC”). These reports are also available on the Securities and Exchange Commission’sSEC’s website, www.sec.gov.
Business Strategy
AcrossImpact of Supply Chain Disruptions and Other Matters
Our sales are driven by the globe,number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm S&P Global Mobility (February 2023 release), global light vehicle production in 2022 in the Company’s key markets of North America, Europe, China, Japan and Korea, was up 4.7%, as compared to 2021. The production growth in 2022 primarily is due to the significant decrease in vehicle production in 2020 that was driven by the adverse impacts of the COVID-19 pandemic continuing into 2021, and the impacts of the 2021 global supply chain disruptions, including the worldwide semiconductor supply shortage.
In 2022 and 2021, the Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, including Gentherm, were unable to fully meet the vehicle production demands of the OEMs largely due to events outside the control of the Company and its suppliers and customers, as well as the automotive industry generally. Supply shortages of semiconductor chips and other components not only resulted in decreased global automotive vehicle production but also caused significant volatility in customer vehicle production schedules. Sudden changes in the production schedules of OEMs and Tier 1s resulted in operating inefficiencies that adversely affected our profitability and results of operations. In addition, we produceexperienced inflationary cost increases in certain component parts, raw materials, labor and transportation as a result of the supply-constrained environment and general economic conditions. While these broad-based operational and inflationary impacts are easing, they continued to impact the Company’s financial condition, results of operations and cash flows as of this filing.
In response to the global supply chain instability and inflationary cost increases, the Company has taken several actions to reduce any potential and actual adverse impacts by working closely with its suppliers and customers to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise. We expect global supply chain instability will continue to have an adverse impact on our business and financial performance for the foreseeable future, and such adverse impact may be material. The consequences of macroeconomic and geopolitical conditions, global supply chain instability and inflationary cost increases and their adverse impact to the global economy continue to evolve. Accordingly, the significance of the future adverse impact on our business and financial statements remains subject to significant uncertainty.
See further discussion of risks in Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
Automotive
The Automotive reporting segment is comprised of the results from our global automotive businesses, including the design, development, manufacturing and sales of automotive climate comfort systems, automotive cable systems, battery performance solutions, lumbar and massage comfort solutions, valve system technologies, and automotive electronic and software systems.
Climate comfort systems include seat heaters, blowers and thermoelectric devices for variable temperature Climate Control Seats® (“CCS”) and steering wheel heaters designed to provide individualized thermal comfort to automobile passengers, and integrated electronic components, such as electronic control units that utilize our proprietary electronics technology and software. Other climate comfort systems include neck and shoulder conditioners and climate control system products for door panels, armrests, cup holders and storage bins.
Automotive cable systems include ready-made individual cables and ready-to-install cable networks used to connect automotive components to power sources.
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Battery performance solutions consist of cell connecting devices and battery cable technologies used for various types of automotive batteries and thermal management products for heating or cooling 12 volts, 48 volts and high voltage batteries and battery modules.
Lumbar and massage comfort solutions include lumbar support, side bolster adjustment, multi-contour seats and massage systems that can be regulated according to the vehicle occupant.
Valve system technologies consist of applications that offer solutions in fuel management, ranging from the design of tank ventilation and filling functions to the closed-coupled fuel regulation. The modular systems allow for customizable adaptations.
Automotive electronic and software systems include electronic control units for climate comfort systems, electronic control units for memory seat modules and other devices.
Medical
The Medical reporting segment is comprised of the results from the patient temperature management business in the medical industry.
Patient temperature management includes temperature management systems across multiple product categories addressing the needs of hyper-hypothermia therapy in intensive care, normothermia in surgical procedures and additional warming/cooling therapies utilized in acute care, ambulatory, clinics and home health.
Business Strategy
Globally, we develop, manufacture, and deliver advanced thermaldifferentiated solutions for automotive and patient thermal management markets that positively impact lives. To achievemake meaningful differences in everyday life by improving health, wellness, comfort and energy efficiency.
We recently updated our goalsbusiness strategy, which consists of four major pillars:
Leverage World Class Talent and capitalize on opportunities withinCulture
We have built a remarkably talented global team by ingraining throughout the automotiveorganization four Winning Culture Behaviors: Customer Focus, Global Mindset, Employee Engagement & Inclusion, and patient thermal management markets, we launched in mid-2018 and continue to implement four primary strategies:
Focus Growth
The focused growth strategy includes four key goals:
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These areasPerformance & Accountability. Combined with DE&I as a cornerstone of the focusedcompany, we have laid a strong foundation for future growth strategy are underpinned and enabled by our electronics and software systems business.across the company.
Extend Technology Leadership
We will continue to expand our technology leadership with focused investments in key core technologies and competencies, including thermophysiology,advanced sensing, human-centric science-based design, system engineering, and software and electronics, simulation,electronics.
Focused Growth
The focused growth strategy includes four key goals:
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Expand Gross MarginThese areas of the focused growth strategy are underpinned and Return on Invested Capitalenabled by our electronic and software systems.
Deliver Financial Excellence
We are strengthening our operational discipline and executionwill continue to expand gross margin and return on invested capital. This strategy centers around buildingbuild a culture of performance that includes a focus on high-return growth opportunities, and the Fit-for-Growth cost rationalization program. It also included the divestiture of non-core investments, which was completed in 2019. During 2018, we initiated this strategy through the sale of our battery management systems division located in Irvine, California and the site consolidation of its advanced research and development operations, which resulting in vacating two lease facilities in Azusa, California. Further, we exited several product categories including furniture, aviation, battery management electronics, industrial battery packs, automotive thermoelectric generators and other non-core electronics. Additionally,opportunities. In recent years, we undertook restructuring actions to reduce global overhead costs to improve selling,Selling, general and administrative expense.
Optimize Capital Allocation
expenses. We are optimizing
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continuing to strengthen our operational discipline and striving to expand margins and return on invested capital allocation to drive shareholder returns, including through stock repurchases, while also allowing us to reinvest in our business to drive continued growth. We make investments to grow our businesses through capital expenditure projects, focused researchmanufacturing productivity, sourcing excellence and development investments,cash flow generation.
Research, Development and evaluate acquisition opportunities that will enhance other business strategies.Partnerships
Recent Acquisitions and Dispositions
As part of our plan to make strategic acquisitions and dispositions, we have completed the following significant transactions since 2018:
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 $15.5 million, net of cash acquired.
On February 1, 2019, we completed the sale of CSZ-IC and the CSZ headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million. On October 1, 2019, we completed the divestiture of GPT. Both businesses were classified as held-for-sale as of December 31, 2018.
See Note 4 of the consolidated financial statements for information regarding the Company’s recent acquisitions and divestitures.
Research and Development
Our research, development and developmentpartnerships activities are an essential part of our efforts to develop new or improved innovative products. Through both internal and external research and development programs, we are working to develop a comprehensive knowledge of thermal management and pneumatic comfort systems that can demonstratedemonstrates functionality and performance. These activities are critical to optimizingoptimize energy utilization and production efficiencies, improvingimprove effectiveness in our products and minimizingminimize the cost to integrate our products with those of our customers.
We perform advanced research and development on thermal and pneumatic comfort technologies, including 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. We believe there are substantial opportunities to integrate innovativeexpand our human-centric value proposition beyond thermal management systems into currentin comfort, health and future product applications.wellness, through the integration of pneumatic comfort technologies.
To offer our customers cutting-edge products and technologies, our strategy includes partnering with key technology leaders in our industry. Our advanced partnership with global automakers and manufacturers address and work to solve industry preferences of today and tomorrow by leveraging our expertise in human thermophysiology and physiotherapy.
Research and development is conducted around the globe, predominatelyglobally and predominantly at our world headquarters in Northville, Michigan, our Technology Center in Farmington Hills, Michigan, and our European research facilitiesfacility in Odelzhausen, Germany.Germany and our Asian research facility in Shanghai, China.
Additional productProduct design and development also is performed at all of our manufacturing facilities to support our geographically diverse customers. We believe the localized development model employed at our global design and manufacturing facilities improves our ability to effectively serve our customers and increases our innovative capacity.
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Core Technologies
Gentherm’sIn Automotive, Gentherm is the global market leader of innovative thermal management and pneumatic comfort technologies. For our Medical business, our expertise in thermal management is focused on two general areas: managing the thermal conditions of peoplepeople.
ClimateSense®
ClimateSense® is an integrated comfort system we are designing to create a personalized microclimate for passengers using localized convective, conductive and objects. radiative heating and cooling products. Using automatic regulation technology in combination with our unique occupant-centric control algorithm, ClimateSense® offers the ability to personalize and improve overall occupant thermal comfort, improve time to comfort with (all-electric) pre-conditioning, provide comfort with less energy consumption thereby lowering greenhouse gas emissions by conventional internal combustion and hybrid powertrains, and extend range for electrified powertrains through a reduction in central heating, ventilation and air conditioning (“HVAC”) system usage. In July 2021, we received the first production vehicle award for our ClimateSense® technology that will launch on the all-new 2024 Cadillac CELESTIQ. In June 2022, we received our second ClimateSense® technology award on a battery electric version of a popular SUV launching in 2025 and is a strong validation of the progress we are making with General Motors.
Electronics
The electronics in our core climate comfort solution products are manufactured by us. We also supply value-added electronic products to third parties for adjacent areas within the automotive interior. In addition, Gentherm manufacturers and supplies electronic control units for memory seat modules that include electric motor position sensing technology. This technology further applies to other automotive products requiring fine motor controls.
Air Moving Devices
Our highly durable and quiet air moving devices, some of which include our proprietary blower and fan designs, are essential to all of our products that require air movement. We have a broad portfolio of these products that are tailored to various automotive applications, including seat ventilation and electric vehicle battery cooling.
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Thermoelectric Technologies
Many of our thermal products manage the thermal conditions of people and objects using our internally developed advanced thermoelectric device technology (“TED”). A TED is a solid-state circuit that has the capability to produce both hot and cold thermal conditions by use of the Peltier effect. The advantages of advanced TEDsTED over conventional compressed gas systems are that they are environmentally friendlyinclude a reduced environmental impact and less complexcomplexity as they have no moving parts and are compact and light weight. Over the last 18 years, ourOur work on this technology has yielded improvements in areas of functionality, efficiency, durability and performance.
Resistive Heaters
Resistive heater technologies are comprised of wire, carbon fiber or positive thermal coefficient (“PTC”) heating elements whichthat quickly and effectively deliver heat to people and objects. Wire heating elements are designed from stainless steel, copper, our proprietary carbon fiber woven lattice technology called Carbotex® or printed circuit PTC heaters based on the specifications for a particular product application.
ClimateSenseTM Resistive heaters have multiple automotive applications, including seat heating, steering wheel heating, interior panel heating and battery heating.
ClimateSensePneumatic
Pneumatic massage and lumbar operate by inflation and deflation of air bladders to achieve desired comfort effect. Our products' differentiation is that our underlying technology is based on shape memory alloy valves ("SMA"). Gentherm has developed actuators and valves with SMA technology that replace heavy, noisy and less accurate electromagnetic valves. Our innovative control elements produce precise mechanical forces and movements using the finest wires made of memory metals and without the labor-intensive use of additional sensors.
Products
Climate Comfort Solutions – Seat Comfort
CCS
Gentherm offers a range of CCS products utilizing proprietary technologies for regulating temperature and enhancing the comfort of vehicle passengers. Our ventilated CCS products move air through the seat to provide conditioning. Our active CCS products utilize TEDs to heat and cool air used to condition the seat. The conditioning air circulates by one of our specially designed air moving devices through an integratedair distribution system installed in the seat cushion and seat back, so that the seat surface can be heated, ventilated or cooled. Each seat has individual electronic controls to adjust the level of heating, ventilating or cooling. Our CCS products improve comfort system designed to create a personalized microclimate for passengers using localized convective, conductive and radiativecompared with conventional vehicle cabin air conditioners by focusing heating and cooling products. Using automatic regulationdirectly on the passenger through the seat. Our CCS products can be combined with our resistive heating elements to increase heating capacity and reduce time to comfort.
By offering different models of the CCS product, our customers have the opportunity to purchase a wider range of climate control products at different price points. Sales of CCS products, primarily ventilated CCS products, contributed 35%, 38% and 38% to our total product revenues for the years ended December 31, 2022, 2021 and 2020, respectively.
Heated Seat
Heated seats, based on our resistive heater core technology, ClimateSense offersare seamlessly integrated into automotive seat designs, and are constructed using materials that offer the abilitybest capacity, installation characteristics and durability. Our design and manufacturing capabilities allow customers to personalizechoose among a variety of resistive heater materials based on their individual vehicle specifications. Sales of heated seat products contributed 24%, 26% and improve overall occupant27% to our total product revenues for the years ended December 31, 2022, 2021 and 2020, respectively.
Intelligent Neck Conditioner
Intelligent neck conditioning systems ventilate warm or temperature-controlled air directly onto the passenger’s neck and shoulder area. The system combines electronics, air moving device technologies and a heating element into a compact, integrated headrest design that can be adjusted to suit the body size of the passenger.
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Climate Comfort Solutions – Surface Climate Control Systems
Heated Steering Wheel
Heated steering wheels deliver heating comfort to automobile drivers through resistive elements. This product can be applied to both leather and wood steering wheels. A solution for drivers in cold and mild weather climates, the heated steering wheel is designed for the global automotive market.
Heated Surfaces
Gentherm’s thermally conductive or radiative surfaces, such as door panel armrest and center console armrest products, are powered by our core technologies. The system is thermally managed by a heating control system which can be discretely located in the door panel or seat of the vehicle. Heated door panels and armrests complement our climate-controlled seat and steering wheel products and provide a superior level of thermal comfort improve time to comfortthe driving experience.
Pneumatic Seat Massage
Gentherm's seat ergonomics system consists primarily of pneumatic lifting elements (air bladders) which are mounted under the surface of seat cushion and back. Through the cyclical inflation and deflation of the lifting elements, the contour of the seat cushion is selectively modified. The lifting elements are controlled by valves, utilizing software that can be enabled in modes by the vehicle occupant in accordance with (all-electric) pre-conditioning,their preferences and specific body types.
Electronics Solutions
Memory Seat Modules
Gentherm has developed a unique way to control certain electrical motors in a vehicle. Our Intelligent Positioning System, IPS® product suite utilizes proprietary software to determine the position of a power seat and control the memory seat module.
Hands-On Detection
All vehicles manufactured with autonomous driving level 2 or higher capabilities are required to ensure that the driver stays in control of the vehicle during operation. In order to accomplish this task, Gentherm developed PilotSenseTM – a sensor integrated into the steering wheel that monitors whether the driver’s hands are maintaining contact with the steering wheel. This product is available for both heated and non-heated steering wheels.
Battery Performance Solutions
Cell Connecting Systems
Cell connecting systems provide comfort with lesssecure connections between advanced automotive batteries to transmit a continuous flow of information about battery temperature and cell voltage during the charging and discharging process to monitor battery system performance. Gentherm has developed a range of cell connecting system products, including flexible foil cell connecting boards that offer improved packaging, weight and functionality. We offer these products in a variety of materials to cover customers’ requirements.
Thermoelectric Battery Thermal Management
Thermal management is critically important for the long-term operation of advanced automotive batteries. The expansion of electrified vehicle applications, such as electric vehicles, plug-in hybrids and mild hybrids, have increased the demand for battery thermal management(“BTM”) systems that enable wider operating temperature ranges, enhanced driving range and prolonged life of the battery. Gentherm’s BTM system can provide precision battery cooling of 48-volt mild hybrid systems on pack or cell-level using patented TED technology. The BTM system maintains the temperature of the lithium-ion battery or other advanced chemistry battery within an acceptable temperature range without the use of chilled liquids or refrigerant loops, making it a light weight, highly scalable, compact solution ideal for automotive applications. Gentherm’s proprietary BTM system is compact and energy consumption thereby lowering carbon dioxide emissions by conventional internal combustion and hybrid powertrains, and extending rangeefficient, resulting in a minimal energy usage, which is important for an electrified powertrains through a reduction in central HVAC system usage.vehicle.
Electronics
Gentherm manufactures and supplies electronicsAside from battery cooling, Gentherm’s BTM portfolio includes battery heating applications. Based on our proprietary technology, we offer solutions to our core climate comfort solution products.customers that enable efficient heating of lithium-ion batteries for most electrified vehicles.
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Climate Comfort Solutions – Thermal Convenience
TrueThermTM Cup Holder
The TrueThermTM Cup Holder applies Gentherm’s patented TED technologies to keep beverages of automobile drivers and passengers either warm or cool. We also supply value-added electronic productshave developed a range of cup holder models with varying degrees of functionality, designed to third partiesbe manufactured in multiple configurations to accommodate different console environments. Our dual independent design provides separate temperature settings in each holder allowing the driver and passenger to individually maintain a heated or cooled beverage.
TrueThermTM Storage Unit
Gentherm’s TrueThermTM Storage Unit provide for adjacent areas withinfood or beverage cooling for the global automotive interior. Gentherm also manufacturersmarket. Using patented TED or refrigeration technologies, the TrueThermTM Storage Unit provides temperature control independently from a vehicle’s heating and supplies electronic control units for memory seat modules that include electric motor position sensing technology.air conditioning system. It can be custom designed to accommodate tight interior spaces, such as the front floor console of a sport utility vehicle and provide additional cooling capacity to those who have long work commutes or transport multiple passengers.
Automotive Cable Systems
Gentherm producesmanufactures automotive cable systems used to connect automotive components to sources of power.power sources. The automotive cable systems are an important element in the production of many of our products and form a significant component in how we generate value to our customers by being an efficient, low-cost and high-quality manufacturer. We offer cable systems as integrated parts of our products and also as stand-alone components for other automotive applications, such as oxygen sensors. Our cable systems business includes both ready-made individual cables and ready-to-install cable networks. Sales of products that utilize our automotive cable systems technology represented 9% of our total product revenues for years ending December 31, 2019, 2018 and 2017.
Air Moving Devices
Our highly durable and quiet air moving devices, including our proprietary blower and fan designs, are essential to all of our products that require air movement.
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Products
Climate Comfort Solutions – Seat ComfortValve Systems Technology
Climate Control Seat® (“CCS”)
Our CCS products utilize exclusive patented technology to regulate temperature and enhance the comfort of vehicle passengers. The most advanced CCS models use one or more TEDs to generate heating or cooling depending upon the direction of the current applied to the device.
A TED is the heart of a compact heat pump usedGentherm has deep expertise in our active CCS products. Air is forced through the heat pump and thermally conditioned in response to electronic switch input from the seat occupant. The conditioned air circulates by one of our specially designed air moving devices through a proprietary air distribution system installed in the seat cushion and seat back, so that the seat surface can be heated or cooled. Each seat has individual electronic controls to adjust the level of heating or cooling. Active CCS products improve comfort compared with conventional air conditioners by focusing cooling directly on the passenger through the seat rather than waiting until ambient air cools the seat surface beneath the passenger. A heated and ventilated variant of the CCS utilizes ambient cabin air to provide cooling comfort instead of a TED to actively cool the seat. In the heating mode, the vent-only system is supplemented with resistive heating elements.
Heated and ventilated CCS products provide a lower level of cooling capability than our active CCS solution, but at a lower price. By offering different models of the CCS product, our customers have the opportunity to purchase a wider range of climate control products at different price points. Sales of CCS products contributed 37%, 36% and 39% to our total product revenuesautomotive fluid management, providing intelligent solutions for the years ending December 31, 2019, 2018 and 2017, respectively.
Heated Seat
Heated seats, based on our resistive heater core technology, are seamlessly integrated into automotive seat designs, and are constructed using materials that offer the best capacity, installation characteristics and durability. Our capabilities allow customers to choose among a variety of resistive heater materials based on their individual vehicle specifications. Sales of heated seat products contributed 29%, 29% and 31% to our total product revenues for the years ending December 31, 2019, 2018 and 2017, respectively.
Neck Climate Control Systems
Neck climate control systems ventilate warm or temperature-controlled air directly onto the passenger’s neck area. The system combines electronics, air moving device technologies and a heating element into a compact, integrated headrest design that can be adjusted to suit the body size of the passenger.
Climate Comfort Solutions – Surface Climate Control Systems
Heated Steering Wheel
Heated steering wheels deliver heating comfort to automobile drivers through resistive elements. This product can be applied to both leather and wood steering wheels. A solution for drivers in cold and mild weather climates, the heated steering wheel is designed for the global automotive market.
Heated Surfaces
Gentherm’s thermally conductive or radiative surfaces, such as door panel armrest and center console armrest products, are powered by our core technologies. The system is thermally managed by a heating control system which can be discretely located in the door panel or seat of the vehicle. Heated door panels and armrests complement our climate-controlled seat and steering wheel products and provide a superior level of thermal comfort to the driving experience.
7
Battery Sub-Systems
Thermoelectric Battery Thermal Management (BTM)
Thermal management is critically important for the long-term operation of advanced automotive batteries. The expansion of electrified vehicle applications such as 48-volt electrical networks, start-stop systems, regenerative braking systemsfuel supply, servo assistance, flap control, crank case ventilation and other micro-hybrid battery implementations, have drastically increased the demand for BTM systems solutions which enable wider operating temperature ranges, enhanced driving range and prolonged life of the battery. Gentherm’s BTM system can provide precision battery cooling on pack or cell-level using patented TED technology. The BTM system maintains the temperature of the lithium-ion battery or other advanced chemistry battery within an acceptable temperature range without the use of chilled liquids or refrigerant loops, making it a light weight, highly scalable, compact solution ideal for automotive applications. Gentherm’s proprietary BTM system is compact and energy efficient, resulting in a minimal energy budget, which is important for an electrified vehicle. We are currently working with original equipment manufacturers (“OEMs”) to secure more production contracts.
Cell Connecting Systems
Cell connecting systems provide secure connections between advanced automotive batteries to transmit a continuous flow of information about battery temperature and cell voltage during the charging and discharging process to monitor battery system performance. Gentherm has developed a range of cell connecting system products, including flexible foil cell connecting boards that offer improved packaging, weight and functionality.
Climate Comfort Solutions – Thermal Convenience
TrueThermTM Cup Holder
The TrueTherm cup holder applies Gentherm’s patented TED technologies to keep beverages of automobile drivers and passengers either warm or cool.thermal management. We have developed a rangemany years of cup holder models with varying degrees of functionality, designed to be packagedexperience in multiple configurations to accommodate different console environments. Our dual independent design provides separate temperature settings in each holder allowing the driverprecision injection molding and passenger to individually maintain a heated or cooled beverage.
TrueThermTM Storage Unit
Gentherm’s TrueTherm storage units provide for food or beverage cooling for the global automotive market. Using patented TED or refrigerationvalve technology, which include innovative technologies the TrueTherm cool storage unit provides temperature control independently from a vehicle’s heating and air conditioning system. It can be custom designed to accommodate tight interior spaces, such as the front floor console of a sport utility vehicle (SUV)SMA actuating elements. Due to our modular systems, we implement customized adaptations at attractive costs and provide additional cooling capacityare prepared to those who have long work commutes or transport multiple passengers. address future global regulatory emissions requirements.
Patient Temperature Management Systems
Gentherm providesaspires to provide healthcare professionals with superior temperature management solutions and clinical expertise that improve patient outcomes, increase the standard of care and enhance patient satisfaction. We provide a full line of patient temperature management systems that utilizes air, water and resistive technologies across multiple product categories addressing the needs of hyper-hypothermia therapy in intensive care, normothermia in surgical procedures and additional warming/cooling therapies utilized in acute care ambulatory,settings, medical clinics and home health. Our core brands include Blanketrol®/Kool-Kit® hyper-hypothermia system, WarmAir®/FilteredFlo® convective warming system, ASTOPAD® resistive patient warming system (leveraging technology used in our automotive products), Electri-Cool®/Micro-Temp® localized cooling/warming systems, ASTOTHERM®/ASTOFLO® IV fluid and blood warming systems, and Hemotherm® cardiovascular cooling/warming system and our recent launch of our next generation cardiovascular cooling/warming system utilized to deliverthat delivers precise blood temperature control during cardiopulmonary by-pass and other related cardiovascular procedures. We aspire to have innovative patient temperature management product offerings coupled with clinical education enabling our customers to have enhanced patient outcomes and improved efficiencies of care.
In April 2019, Gentherm acquired Stihler to further strengthen our patient temperature management offering in the operating room focused on normothermia. The Stihler core brands include ASTOPADTM patient warming system, ASTOTHERMTM/ASTOFLOTM IV fluid and blood warming systems and ASTODIATM diaphanoscope for transillumination. The ASTOPADTM patient warming system utilizes resistive warming technology which is also used in our automotive products. Gentherm is now focused on globalizing the Stihler portfolio and integrating across key sales channels.
8
Marketing, Customers and Sales
Automotive Customers
Our Automotive segment customers include primarily light vehicle OEMs commercial vehicle OEMs, and first tier (“Tier 1”) suppliers to the automotive OEMs,1s, including automotive seat manufacturers. We also directly supply CCS products to aftermarket seat distributors and installers.
The Company’s automotive marketing is directed primarily at automotive manufacturersthe OEMs and their Tier 1 suppliers1s and focuses on the enhanced value consumers attribute to vehicles with climate comfort products.thermal and pneumatic solutions. In many cases, the manufacturersOEMs direct us to work with their suppliers, primarily their Tier 1s, to integrate our products into the vehicle’s seat or interior design. These customers will sell our product, as a component of an entire seat or seating system, to automotive OEMs.
10
Once the integration work is complete, prototypes are sent to the manufacturerOEMs for evaluation and testing. If a manufacturean OEM accepts our product, a program can then be launched for a particular model on a production basis, but it normally takes twoone to three years from the time a manufactureran OEM decides to include any of our products in a vehicle model to actual production for that vehicle. During this process, we derive funding from prototype sales but obtain no significant revenue until mass production begins. Upon commencement of mass production, our products are sold by Tier 1s to the OEMs. 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.
The volume of products we sell is significantly affected by global and regional automotive production levels and the general business conditions in the automotive industry. Our product revenues are generally based upon purchase orders issued by our customers, with updated production schedules for volume adjustments. As such, we typically do not have a backlog of firm orders at any point in time. Once we are selected to supply products for a particular platform, we typically supply those products for the platform life, which is normally five to seven years, although there is no guarantee that this will occur. In addition, when we are the incumbent supplier to a given platform, we believe we have a competitive advantage in winning the redesign or replacement platform, although there is no guarantee that this will occur.
For 2019,2022, our revenues from sales to our threetwo largest customers, Lear Corporation (“Lear”) and Adient and Bosch Automotiveplc (“Adient”) were $156.9 million, $145.8$189 million and $67.2$179 million, respectively, representing 16%, and 15%, and 7% of our product revenues, respectively. Revenues from AdientLear and LearAdient represent sales of our climate comfort and pneumatic comfort products. Revenues from BoschLear acquired the Interior Comfort Systems business unit of Kongsberg Automotive represent product sales basedASA (“Kongsberg”) in February 2022, and entered into an agreement to acquire I.G. Bauerhin ("IGB") in May 2022, which are both key competitors of the Company’s climate comfort and pneumatic comfort products. In 2022 we believe there was an immaterial impact to our business as a result of the Kongsberg acquisition. Lear has expressed an intent to become a leading provider of thermal comfort solutions as part of a vertical integration strategy, and the magnitude of the future adverse impact on our automobile cable system technologybusiness and is used primarily in the production of automotive oxygen sensors. financial statements remains subject to significant uncertainty.
The loss of any oneor significant reduction of these customersbusiness from Lear or Adient would likely have a material adverse impact on our business, results of operations and cash flows. However, as noted above, in many cases our approach is to market climate comfort solutions, battery thermal management and cable technology products to theautomotive OEMs who then direct their suppliers such as AdientLear and Lear,Adient to work with us.us for our climate comfort solutions, pneumatic comfort solutions, battery performance solutions and cable technology products. It is, therefore, relevant to understand how our revenues are divided among the OEMs, as shown below.
Our total product revenues for each of the past three years were divided among automotivethe OEMs as follows:
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
General Motors |
|
| 15 | % |
|
| 14 | % |
|
| 14 | % |
Hyundai |
|
| 11 | % |
|
| 13 | % |
|
| 12 | % |
Volkswagen |
|
| 9 | % |
|
| 10 | % |
|
| 9 | % |
Ford Motor Company |
|
| 8 | % |
|
| 8 | % |
|
| 9 | % |
Stellantis(a) |
|
| 8 | % |
|
| 8 | % |
|
| 9 | % |
BMW |
|
| 7 | % |
|
| 6 | % |
|
| 6 | % |
Daimler |
|
| 7 | % |
|
| 5 | % |
|
| 6 | % |
Honda |
|
| 4 | % |
|
| 5 | % |
|
| 6 | % |
Mazda |
|
| 3 | % |
|
| 3 | % |
|
| 3 | % |
Jaguar/Land Rover |
|
| 3 | % |
|
| 2 | % |
|
| 3 | % |
Toyota Motor Corporation |
|
| 2 | % |
|
| 3 | % |
|
| 3 | % |
Renault/Nissan |
|
| 2 | % |
|
| 3 | % |
|
| 2 | % |
Other (including Medical) |
|
| 21 | % |
|
| 20 | % |
|
| 18 | % |
Total |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
Automotive Market Trends
The Gentherm automotive product portfolio aligns well with near-term and long-term consumer and technological trends:
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
General Motors |
|
| 14 | % |
|
| 14 | % |
|
| 15 | % |
Ford Motor Company |
|
| 11 | % |
|
| 10 | % |
|
| 11 | % |
Hyundai |
|
| 9 | % |
|
| 7 | % |
|
| 8 | % |
Fiat Chrysler Automobiles |
|
| 8 | % |
|
| 8 | % |
|
| 9 | % |
Volkswagen |
|
| 8 | % |
|
| 9 | % |
|
| 10 | % |
Honda |
|
| 7 | % |
|
| 6 | % |
|
| 6 | % |
Daimler |
|
| 6 | % |
|
| 5 | % |
|
| 4 | % |
BMW |
|
| 6 | % |
|
| 4 | % |
|
| 5 | % |
Mazda |
|
| 4 | % |
|
| 3 | % |
|
| 2 | % |
Toyota Motor Corporation |
|
| 4 | % |
|
| 3 | % |
|
| 4 | % |
Renault/Nissan |
|
| 3 | % |
|
| 4 | % |
|
| 6 | % |
Jaguar/Land Rover |
|
| 3 | % |
|
| 3 | % |
|
| 3 | % |
Other (including Industrial) |
|
| 17 | % |
|
| 24 | % |
|
| 17 | % |
Total |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
11
Battery Performance Solutions products help improve the life and efficiency of batteries, contributing to increased adoption of powertrain electrification. ▪ Increased demand for comfort products – We believe increased consumer demand for personalized comfort in a vehicle is driving increased adoption of our thermal and pneumatic comfort products. We are striving continuously to bring to market products and technologies that improve the well-being of vehicle occupants. From improved performance of our seat heating and cooling devices, to our introduction of the neck climate control system, heated surface products, and pulsating massage treatment – our focus is to make vehicle comfort an integral part of vehicle occupants' experience. In recent years, we are seeing a trend of equipping second, and in some cases, third row seats with thermal management solutions. This trend is accelerating in all major markets where Gentherm is present, including North America, Europe, Japan, Korea and China. ▪ Growth of connected/smart devices – One of the most important objectives in achieving comfort is to create a system that is able to sense the needs of vehicle occupants and make performance adjustments based on personalized needs. We utilize machine learning to create and optimize state of the art algorithms to make our products smarter and more advanced with each generation. ▪ Focus on health and wellness – Consumers have an increased focus on personal health and wellness. Our technologies are at the nexus of health, wellness and comfort, where our solutions adjust to enable vehicle occupants to address their health and wellness needs. ▪ Emergence of shared mobility – As the world transitions from vehicle ownership to mobility as a service model, our focus on individual personalized comfort becomes even more important. Our focus is to create microclimate solutions, in which each vehicle occupant can create a personalized thermal experience tailored to individual needs.
|
|
Outsourcing, Production and Suppliers
Our global manufacturing and distribution facilities are located close to our key customers. In EuropeAutomotive, we operate threefour manufacturing sites in Europe located inwithin North Macedonia, Ukraine, Germany and UkraineCzech Republic and one distribution center located in Hungary. In North America, we operate three manufacturing sites in Mexico and one manufacturing site in the United States and one in Canada.States. In Asia, we operate three productionmanufacturing sites in China and one in Vietnam.Vietnam, and one distribution center in South Korea.
9For Medical, we operate three manufacturing sites within China, Germany and the United States.
We rely on various domestic and foreign vendors and suppliers to supply components forprocure our products through purchase orders, with no guaranteed supply arrangements. Components for certain products, including TEDs, are only availableraw materials from a limited numbervariety of suppliers inaround the world. In the normal course of business, we do not carry substantial inventories of these raw materials in excess of levels reasonably required to meet our near-term production requirements. The lossautomotive industry is highly reliant on semiconductors and there has been a supply shortage of any significant supplier,semiconductors since 2021. See further discussion of the risks relating to the supply shortage of semiconductors and related risks, as well as certain mitigating activities we have undertaken, above in the absence“—Impact of a timelySupply Chain Disruptions and satisfactory alternative arrangement, or an inability to obtain essential components on reasonable terms or at all, could materially adversely affect our business, operationsOther Matters”, in Item 1A, “Risk Factors” and cash flows. Our businessItem 7, “Management’s Discussion and operations could also be materially adversely affected by delaysAnalysis of Financial Condition and Results of Operations” in deliveries from our suppliers.this Annual Report.
Proprietary Rights and Patents
The development of new or improved technologies is critical to the execution of our business strategy. PatentsCurrently owned patents and patents obtained for new or improved technologies form an important basis for the success of the Company and underpin the success of our research and development efforts. We have adopted a policy of obtaining, where practical, the exclusive rights to use technology related to our products through patents or licenses for proprietary technologies or processes. We adapt and commercialize such technologies in products for mass production. We also have developed technologies or furthered the development of acquired technologies through internal research and development efforts.
As of December 31, 2019,2022, Gentherm held 574531 issued patents, of which 261 were U.S. patents and 270 were non-U.S. patents. Gentherm held 431265 patents directed to climate control products and thermoelectric technologies 92(including 5 patents directed atto ClimateSense®), 74 patents directed to battery cell connecting and cable technologies, 44 patents directed to massage and lumbar technologies, 37 patents directed to air moving devices, 34 patents directed to medical technologies, 30 patents directed to heating elements and technologies, 24 patents directed to medicaloccupant sensing technologies, 1918 patents directed to air moving devicesfluid valve technologies, and 85 patents directed to cable and cell connector batteryelectronics technologies. In furtherance of its Focused Growth strategy, theThe Company evaluatedcontinued to evaluate its patents during 20192022 and made strategic decisions
12
to reduce low-value patents and patents unrelated to current or planned business strategies. The acquisitions of Alfmeier and Dacheng added 68 issued patents to the Company’s patent portfolio.
Competition
See further discussion of the risks relating to competition in Item 1A, “Risk Factors”.
Gentherm faces competition from other automotive suppliers and, with respect to certain products, from the automobile OEMs and Tier 1 suppliers1s who producemanufacture or have the capability to producemanufacture certain products that Gentherm manufactures and supplies. The automotive supply industry competes on the basis of technology, quality, reliability of supply and price. Design, engineering capability and competitive pricing are increasingly important factors.
The competitive landscape for Gentherm’s climate comfort solutions Although the overall number of our automotive competitors has decreased due to ongoing industry consolidation, the automotive technology and battery sub-systems includes: component specialists, thermal management system suppliers and tier-one suppliers or automobile OEMs with their own integrated solutions. Independent suppliers that represent the principal competitors of Gentherm include I.G. Bauerhin GmbH, Kongsberg Automotive ASA, Lisa DRÄXLMAIER GmbH and ElringKlinger AG.
components industry remains extremely competitive. The competitive landscape for patient temperature management systems includes patient thermal management medical device OEMs. The principal competitors of Gentherm include 3M Company Co, Stryker Corporation and Becton, Dickinson and Company.manufactures.
We believe our expertise in core thermal management technologies and occupant thermalpneumatic comfort technologies, as well as itsour capability in applicationapplying specific component design, global footprint and broad product offerings make itus well positioned to compete against the traditional thermal management systems and pneumatic comfort suppliers, global tier-one'sTier 1s and component specialists.
SeasonalitySee further discussion of the risks relating to competition in Item 1A, “Risk Factors” in this Annual Report.
Seasonality
Our principal operations are directly related to the automotive industry. Consequently, we have historically experienced seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants close for model year changeovers and in December when many customer plants close for the holidays. See Item 8 “Financial Statements
Human Capital Management
Employees
At Gentherm, our mission is to “create and Supplementary Data” for selected quarterly financial data. deliver extraordinary thermal solutions that make meaningful differences in everyday life, by improving health, wellness, comfort and energy efficiency
Backlog
.” Our product revenues are generally based upon purchase orders issued by our customers, with updated releases for volume adjustments. As such, we typically do not have a backlog of firm orders at any point in time. Once selected to supply products for a particular platform, we typically supply those products for the platform life, which is normally five to seven years, although there is no guarantee that this will occur. In addition, when wepeople are the incumbent supplierfoundation for making our mission come to life every day.
Our human capital focus is to inspire people to achieve their aspirations and achieve strong business results. We also strive to promote a given platform, we believe we havesafe work environment and a culture that values fairness, diversity, equity, inclusion and belonging.
Our global workforce creates a competitive advantage and operates in winning the redesign or replacement platform, although there is no guarantee that this will occur.
10
Employees
14 countries in over 32 locations. As of December 31, 20192022, and 2018,2021, Gentherm’s employment levels worldwide were as follows:
|
| 2022(a) |
|
| 2021 |
| ||
Mexico |
|
| 5,047 |
|
|
| 3,293 |
|
Macedonia |
|
| 2,503 |
|
|
| 1,845 |
|
China |
|
| 2,070 |
|
|
| 1,456 |
|
Ukraine |
|
| 1,761 |
|
|
| 1,906 |
|
Vietnam |
|
| 986 |
|
|
| 858 |
|
Germany |
|
| 739 |
|
|
| 264 |
|
United States and Canada |
|
| 676 |
|
|
| 488 |
|
Hungary |
|
| 352 |
|
|
| 285 |
|
Czech Republic |
|
| 351 |
|
|
| — |
|
Korea |
|
| 49 |
|
|
| 45 |
|
Japan |
|
| 20 |
|
|
| 21 |
|
Malta |
|
| 10 |
|
|
| 9 |
|
United Kingdom |
|
| 4 |
|
|
| 4 |
|
Total |
|
| 14,568 |
|
|
| 10,474 |
|
Notable statistics as of December 31, 2022:
|
| 2019 |
|
| 2018 |
| ||
Mexico |
|
| 4,130 |
|
|
| 5,494 |
|
Macedonia |
|
| 1,871 |
|
|
| 1,771 |
|
China |
|
| 1,812 |
|
|
| 2,173 |
|
Ukraine |
|
| 1,725 |
|
|
| 1,959 |
|
Vietnam |
|
| 909 |
|
|
| 717 |
|
United States and Canada |
|
| 694 |
|
|
| 1,059 |
|
Germany |
|
| 255 |
|
|
| 246 |
|
Hungary |
|
| 252 |
|
|
| 259 |
|
Korea |
|
| 37 |
|
|
| 39 |
|
Japan |
|
| 23 |
|
|
| 21 |
|
Malta |
|
| 13 |
|
|
| 13 |
|
United Kingdom |
|
| 5 |
|
|
| 4 |
|
Total |
|
| 11,726 |
|
|
| 13,755 |
|
Gentherm retains13
Racially and Ethnically Diverse (Self-reported) |
| 2022 |
|
| 2021 |
| ||
All Employees |
|
| 36 | % |
|
| 36 | % |
Leadership |
|
| 23 | % |
|
| 23 | % |
Key Highlights of our Human Capital Strategy
In November 2021, we completed our first global engagement survey with a best-in-class response rate of 97%. In 2022, we developed action plans at every location to ensure we are representedcreating a culture of feedback and continual improvement. We plan to complete another benchmark survey in 2023, including employees from our Alfmeier and Dacheng acquisitions.
Health and Safety
At Gentherm, our “Safety Culture” has become a core strength. Our Vision Zero strategy helped us achieve significant progress in reducing accidents across our sites. We had fewer than 20 lost time accidents in 2022.
Diversity, Equity and Inclusion (DE+I)
Our DE+I mission “Embracing Diversity Inspires Innovation” cascades from our corporate mission. Our Diversity, Equity and Inclusion Council has built strong momentum. In 2022, we set a robust goal for talent acquisition. Such focus helped us increase diversity candidate slates, and through this effort we increased Director and VP population of Gentherm (excluding acquisitions of Alfmeier and Dacheng) representation by unionsover 3%. We took another step forward on our DE+I journey with scaling our inclusion trainings to all global salaried-professional employees with the purpose of building local and global awareness of DE+I at Gentherm. We also held several sessions to educate our employees on unconscious bias. Our goal is ensuring all team members are educated on consistent standards, identifying feedback mechanisms to solve for conflict, and creating a culture that unites us all.
Total Rewards
Gentherm’s compensation and benefits programs are designed to attract and retain our employees in the locations where we compete for talent using a mix of elements that allow us to achieve our Company’s short and long-term goals.
Total Talent Development
At Gentherm, we provide foundational leadership development programs to ensure our current and future people leaders are well equipped to engage and lead in today’s complex business environment. We have offered additional training programs to provide
14
on-demand, flexible learning solutions for our global workforce. We continue to invest in our Accelerator program for high potential employee development to retain our future leaders. In 2022, our workforce completed over 500,000 hours of training.
Environmental, Social, and Governance
In 2022, we issued our third sustainability report and continued to incorporate ESG into our everyday business operations and future strategies. Our sustainability efforts are based on three pillars: People, Planet, and Places.
These actions indicate the strength of our commitment to sustainability across Gentherm.
Environmental and Regulatory Compliance
Applicable laws and regulations, and significant changes to such laws and regulations, will potentially lead to increases in costs and complexity, and failure to comply with global and specific country regulations could subject us to civil penalties, production disruptions, or works councils.limitations on the sale of affected products. We maintain good relationsbelieve we are materially in compliance with bothsubstantially all these requirements or expect to be materially in compliance by the required dates.
Chemical Regulation
There are numerous global laws and regulations that prohibit or restrict the selection and use of certain chemicals for product development and manufacturing and potentially impact an automobile manufacturer’s responsibility for vehicle components at the end of a vehicle’s life. New chemical regulations continue to be introduced and passed, such as the new European requirements that require suppliers of parts and vehicles to the European market to disclose certain substances of concern in parts. Further, increases in the use of circuit boards and other electronics may require additional assessment under the directives related to certain hazardous substances and waste from electrical and electronic equipment.
Vehicle Safety
In the U.S., the National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates motor vehicle equipment that we manufacture and sell as well as vehicles. The Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable federal motor vehicle safety standards established by the National Highway Traffic Safety Administration (“NHTSA”). The Safety Act further requires that if a vehicle manufacturer or NHTSA determine a vehicle or an item of vehicle equipment does not comply with a safety standard, or that vehicle or equipment contains a defect that poses an unreasonable safety risk, the vehicle manufacturer must conduct a safety recall to remedy that condition in the affected vehicles. Should a vehicle manufacturer or NHTSA determine a safety defect or noncompliance issue exists with respect to any of our unionproducts, the cost of such recall campaigns could be substantial. Further, many other countries have established vehicle and non-union employees.vehicle equipment safety standards and regulations. Meeting or exceeding the many safety standards is costly as global compliance and non-governmental assessment requirements continue to evolve and grow more complex, and lack harmonization globally.
15 ITEM 1A. RISK FACTORS
|
|
You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this Annual Report, as well as any amendments or updates reflected in subsequent filings or furnishings with the SEC. We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity.
Industry and Operational Risks Relating to Our Business
The automotive industry, our primary market, is cyclical and is significantly impacted by macroeconomic, geopolitical and similar global factors, and a decline in the production levels of our major customers and OEMs, particularly with respect to models for which we supply significant amounts of product, could adversely affect our business, results of operations and financial condition.
Our Automotive segment represents 95%96%, 91%96% and 89%95% of our product revenues for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. Demand for our automotive products is directly related to automotive vehicle production, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle.vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. Automotive sales and production are cyclical and have been, and we expect will continue to be,are materially affected by general economicmacroeconomic, geopolitical and industry conditions that are outside of our control and the control of our customers and suppliers, including monetary fiscal policy, economic recessions, inflation, political instability, labor relations issues, fuelenergy prices, regulatory requirements, government initiatives, trade restrictions and agreements, capital and liquidity constraints, acts or war and terrorism, and natural and man-made disasters. Our operational costs are similarly impacted by such macroeconomic, geopolitical and industry conditions, which has and may continue to adversely impact our margins and profitability.
In recent years, macroeconomic, geopolitical and industry conditions were significantly impacted by the availabilityCOVID-19 pandemic and related government actions and restrictions, as well as health and safety measures implemented by companies and persons; any future impacts from such pandemic are highly uncertain and cannot be predicted. To the extent the COVID-19 pandemic materially adversely affects the Company's business and financial results, it may also have the effect of significantly heightening many of the other risks associated with the Company's business, results of operations, financial condition, cash flows, liquidity and stock price, including in ways that we cannot predict.
If we fail to manage our growth effectively or to integrate successfully any new or future business ventures, acquisitions, investments or strategic alliance into our business, including our recent acquisitions, our business and financial performance could be materially adversely harmed.
We regularly consider opportunities to pursue business ventures, acquisitions, investments and strategic alliances that could leverage our products, technologies and capabilities, as well as, enhance our customer base, geographic penetration and scale, to complement our current businesses, some of which could be material. We completed two acquisitions in 2022, Alfmeier and Dacheng, and we have completed other acquisitions and investments in recent years. Finding and assessing a potential growth opportunity and completing a transaction involves extensive due diligence, management time and expense; however, the amount of information we can obtain about a potential growth opportunity may be limited, and we may not be able to identify suitable candidates, negotiate appropriate terms, obtain financing on acceptable terms, complete proposed acquisitions, or expand into new geographies or markets. Further, we can give no assurance that new business ventures, acquisitions, investments and strategic alliances will positively affect our financial performance or will perform as planned, including regarding anticipated synergies or other financial or operational benefits. For significant transactions, we would expect to incur additional debt, issue equity and/or increase capital expenditures, which may increase leverage risks, result in dilution or reduce capital available for other investments in ongoing operations. If we fail to identify and complete suitable acquisition and investment opportunities in a timely and successful manner, our business, growth strategy reputation and results of operations could be materially impacted.
Furthermore, the success of our acquisitions is dependent, in part, on our ability to realize the expected benefits from the integration of the acquired businesses or assets. We may incur an unexpected amount of liabilities or make incorrect estimates regarding the planned accounting for acquisitions, such as the need to record non-recurring charges or write-off of significant amounts of goodwill or other assets that could adversely affect our results of operations, and we could have unexpected challenges due to the limitations of our due diligence process or contractual provisions. Further, the integration of acquired businesses is a complex, costly and time-consuming process that requires significant management attention and resources. It is possible that the integration process
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could result in the loss of key employees, the disruption of our operations, the inability to maintain or increase its competitive presence, inconsistencies in and incompatibility of information technology and accounting systems, as well as other compliance standards, controls, procedures and policies, difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition, additional litigation, compliance or regulatory risk, the diversion of credit for us, customersmanagement’s attention to integration matters and consumersdifficulties in the assimilation of employees and corporate cultures, especially if the acquisition involves a business, supply chain or operations in one or more countries in which we have a limited history and lack of experience. Any or all of these factors and our increased debt leverage following the closing of any significant transaction, such as the acquisition of Alfmeier, could have an adverse effect on our business and financial performance. In addition, many of these factors are outside of our control, and any one of these factors could result in increased costs, decreases in the amount of expected revenues and additional diversion of management’s time and energy, which could materially adversely impact our business, financial condition and results of operations. Likewise, our failure to integrate and manage acquired companies successfully may lead to reduced profitability and future impairment of any associated goodwill and intangible asset balances.
Our inability to effectively manage the development, timing, quality and costs of new product launches could adversely affect our financial performance.
Gentherm develops and launches new products and related technologies through internal research and development, and from acquisitions and investments in joint ventures. Further, winning new business awards will include specific customer requirements regarding, among other things, timing, performance and quality standards. The launch of new products and technologies is complex, the success of which depends on a wide range of factors, including the robustness of our product and manufacturing process development, success in sourcing new components and commodities with suitable suppliers, readiness of our and our suppliers' manufacturing facilities and manufacturing processes, as well as factors related to tooling, equipment, employees, initial product quality and other factors. IHS Markit recently forecasted lightNew launches have become even more complicated given the increased use of advanced electronics that must be integrated throughout a vehicle. Given the complexity of new product and technology launches, we may experience difficulties managing product quality, timeliness and associated costs.
In addition, new program launches require a significant ramp up of costs up to a few years prior to sales of such products. However, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could have a materially adverse effect on our business, results of operations and financial condition.
To the extent we are not able to successfully launch new business, vehicle production volumesat our customers could be significantly delayed or shut down. Such operating failures could result in significant financial penalties to us or a diversion of 87.2 million units,personnel and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives, and could result in our customers shifting work away from us to a declinecompetitor. Any of 1.9% from 2019.the foregoing matters could result in a significant loss of revenue and market share and could have an adverse effect on our profitability and cash flows.
We operate in a highly competitive industry and efforts by our competitors, as well as new non-traditional entrants to the industry could adversely affect our business, results of operations and financial condition.
The automotive component supply industry is subject to intense competition. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, timely delivery, technological innovation and service. There can be no assurance that we will be able to compete successfully with the products of our competitors. Further, our competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. Many of our competitors are substantially larger in size and have substantially greater financial, marketing and other resources than we do, and therefore may be more effective in adapting to customer requirements while being more profitable.
In addition, our customers may increase levels of production insourcing and compete directly with us for a variety of reasons, such as shifts in business strategies or the emergence of low-cost production opportunities in other countries, which may adversely affect our sales as well as the profit margins on our products.
The global automotive supply chain has been adversely impacted by raw material and component shortages, manufacturing disruptions and delays, logistics challenges and inflationary and other cost pressures, and we expect such conditions to continue to adversely affect our business, profitability and results of operations.
Our products contain a significant number of components that we source globally from suppliers who, in turn, source components from their global suppliers. If our supply chain fails to deliver products to us in sufficient quality and quantity on a timely
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basis, we will be challenged to meet our production schedules and fulfill our orders due to the “just-in-time” manufacturing process that is broadly utilized in our industry, which would decrease sales and profits and could damage our commercial reputation and customer relationships. Similarly, OEMs and Tier 1s to whom we supply our products are dependent on an ever-greater number of global suppliers to manufacture and sell their products to consumers, which drives sales of our products.
We and our customers, and our respective supply chains, have operated in a supply-constrained environment for over one year and are continuing to manage through raw material and component shortages, manufacturing disruptions and delays, logistics challenges and inflationary and other operational challenges and costs pressures, each of which is described in the risk factors below and has adversely affected, and is expected to continue to adversely effect, our business, profitability and results of operations. We have taken certain mitigation efforts to address such matters, which has led to increased operating costs and carrying costs due to the build-up of inventory.
Raw material and component shortages and pricing impacts have adversely impacted our business and financial performance and we expect these conditions to continue.
The availability of raw materials and product components fluctuates due to factors outside of our control, including supply and demand imbalances, geopolitical and macroeconomic factors, trade laws and tariffs, natural disasters, and global pandemics such as COVID-19, which has and we expect will continue to impact the ability of our supply chain to meet our production requirements and therefore our ability to meet the production demands of our customers. Even a single small subcomponent necessary to manufacture our product could force us to cease production, potentially for a prolonged period.
In particular, since 2021, the automotive industry is experiencingcontinuing to navigate through a periodsignificant shortage of significant technological change. Futuresemiconductors, a critical component in the automotive vehicle productionindustry. We, the OEMs and Tier 1s must compete among the automotive supply chain and with other industries to satisfy current and near-term requirements for semiconductors, and such allocation is not within our control even though we have continued to attempt various mitigating actions. Certain semiconductors we utilize are sourced from a very limited number of suppliers and many suppliers are based in Taiwan (and therefore such supply may be affectedimpacted by additional industry or consumer behaviors, includingChina-Taiwan geopolitical matters), which further exacerbates the developmentrisks to our operations. The shortage of semiconductors and useother key components (historically, such as TEDs), has disrupted our production schedule and has caused us to procure components on the open market, from time to time, at prices significantly above the contractual pricing we have with our current long-term suppliers. OEM and Tier 1 production also has been impacted by the shortage, which has resulted in reduced sales of autonomousour products. While the global semiconductor supply shortage is easing, it has had, and electric vehiclesis continuing to have, wide-ranging effects.
Furthermore, sudden changes in the production schedules of OEMs and increasing use of car-Tier 1s caused by raw material and ride-sharing and on-demand transportation as a service, as well as related
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regulations. The rapidly evolving nature of the markets in which we compete has attracted,component shortages also have resulted and may continue to attract, new entrants, including new entrants from outside the traditional automotive supply industry. Further,result in comparison to us,operating inefficiencies, which could adversely affect our competitors may foresee the courseprofitability and results of market developments more accurately, develop superior products, produce similar products at a lower cost, or adapt quicker to new technologies.
operations. If we do not accurately predict, prepare for and respondwere to new kinds of technological innovations, market developments and changing customer needs, our sales, profitability and long-term competitiveness may be harmed.
If we fail to managemake timely deliveries in accordance with contractual obligations, we generally must absorb our growth effectively or to integrate successfully any new or future business ventures, acquisitions or strategic alliance into our business, our business could be materially adversely harmed.
We regularly consider opportunities to pursue business ventures, acquisitions,own costs for identifying and strategic alliances that could leverage our products and capabilities,solving the problem as well as enhance ourexpeditiously producing replacement components or products. Generally, we must also carry the costs associated with catching up, such as overtime and premium freight. Additionally, if we are the primary cause for a customer base, geographic penetration and scale,being forced to complement our current businesses, some of which could be material. Finding and assessing a potential growth opportunity and completing a transaction involves extensive due diligence, management time and expense; however,halt production, the amount of information we can obtain about a potential growth opportunitycustomer may be limited. Further, we can give no assurance that new business ventures, acquisitions, and strategic alliances will positively affect our financial performance or will perform as planned, including regarding anticipated synergies. We may not be ableseek to successfully assimilate or integrate companies that we acquire, including personnel, financial systems, distribution, operations, internal controls and general operating procedures. Further, for significant transactions, we would expect to incur additional debt, issue equity and/or increase capital expenditures, which may increase leverage risks, result in dilution or reduce capital available for other investments in ongoing operations. If we fail to assimilate or integrate acquired companies successfully, our business, reputation and results of operations could be materially impacted. Likewise, our failure to integrate and manage acquired companies successfully may lead to future impairment of any associated goodwill and intangible asset balances. Given our limited history in the patient temperature management business, the foregoing risks may be heightened due to our lack of experience in integrating similar businesses.
As part of the Company’s ongoing Fit-for-Growth initiative, the Company consummated divestitures to eliminate investments in non-core businesses, and the Company may consider strategic dispositions in the future. However, we may not achieve some orrecoup all of its losses and expenses from the targeted results we originally anticipated at the time of disposition,Company. The raw material and wecomponent shortages have had and may needcontinue to provide material transition services or retain material liabilities to complete the transaction, any of which could have an adverse impact on our returns and our overall profitability.
The loss or insolvency of any of our principal customers would adversely affect our future results.
For the year ended December 31, 2019, our top two customers were Lear and Adient which comprised 16% and 15%, respectively, of our product revenues. We are dependent on the continued growth, viability and financial stability of our customers, as well as the OEMS to which our products are supplied. The loss of any significant portion of our sales to any of our customers would have a material adverse effect on our business, profitability and results of operationsoperations.
We also have experienced and financial condition. we may continue to experience margin pressure due to the pricing of components and certain other raw materials. Some of our products contain certain components, such as semiconductor chips, tellurium, a raw material used in TEDs, and other key raw materials including copper, silver and petroleum-based engineered plastics and raw materials, which generally cannot be substituted. The prices for these components and raw materials fluctuate depending on market conditions. The automotive industry has seen a period of sustained price increases for commodities, primarily related to steel, and to a lesser extent petrochemicals.If the market prices and related logistics costs (in particular for imported goods) for these components and raw materials remain higher than normal or they further increase, our gross profit may continue to be adversely impacted, including to the extent our suppliers pass cost increases on to us that we cannot pass on in full to our customers in spite of our mitigation efforts.
Inflationary pressures impacting our suppliers, customers, transportation companies and other third parties have increased our costs to manufacture and deliver our products, and therefore adversely impacted our margins and profitability.
The automotive industry has experienced a period of sustained price increases for various material components and transportation and other logistics services. These price increases are expected to continue into the foreseeable future due to continuing challenges with supply-demand imbalances. Although the Company has developed and implemented strategies to mitigate the impact
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of higher material component costs and transportation and other logistics costs, these strategies, together with commercial negotiations with Gentherm's customers and suppliers, have not historically and may not in the future fully offset our price increases, which may result in adverse impacts to the Company’s profitability and results of operations. A highly inflationary environment also can have a negative impact on customers’ willingness to purchase our products. We generally have been unable to raise prices to address in full the foregoing inflationary pricing pressures, together with price downs for our products that are customary in our industry, and therefore our margins and profitability have been and may continue to be adversely impacted.
The supply-constrained environment has led to a significant increase in inventory, which has had an adverse impact on profitability and could lead to future impairment.
In addition,order to secure components for our products, we have significant receivable balances relatedand may continue to these customers that would be at riskstrategically purchase components in the eventadvance of their bankruptcydemand to take advantage of favorable pricing or other restructuring.
We manage our business based on projectedto address concerns about future sales volume,availability. If we fail to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components, which is highly dependent on information received from customers and general market data, and any inaccuracies or changes in such information could adversely affect our business resultsand financial performance, including due to impairment of such assets.
Our global operations subject us to risks that may harm our operations and financial condition.results.
In 2022, 61% of our product revenue was generated from sales to customers outside the United States. We manage our business based upon projected future sales volumes, which are based upon many factors,have significant personnel, property, equipment and operations in a number of countries outside of the United States, including awarded businessChina, Germany, Hungary, North Macedonia, Mexico, South Korea, Czech Republic, Ukraine and assumptionsVietnam. Our exposure to the risks described below is substantial. We also derive a significant portion of conversion rates thereof, customers’ forecastsrevenues from Europe and general market data. Our customers generally do not guarantee sales volumes. Asia and conduct certain investing and financing activities in local currencies.
In addition awarded business may include business under arrangements thatto the general risks relating to our customers have the right to terminate without penalty at any time. Further,operations, our customers’ forecastsinternational operations are subject to numerous assumptions,unique risks inherent in doing business abroad, including:
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Additionally, our primary manufacturing locations are in Mexico, China, Vietnam, North Macedonia, Czech Republic and Ukraine, all countries that have historically experienced a heightened degree of political, civil and labor uncertainty. In China, continued U.S.-China trade tensions and weakening economic conditions, among other factors, may result in reduced sales, profitability and margins, increased operating costs and challenges to gaining or holding market share. Furthermore, certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, including Chinese regulation of the scope of our business and investments in China, as well as our ability to provide cash to and repatriate cash from our business entities in China. In order to maintain access to the Chinese market, we may be changed rapidlyrequired to comply with limited notice. Therefore,significant technical and other regulatory requirements that are unique to the Chinese market, at times with challenging lead times. These actions may increase the cost of doing business in China or limit how and under what conditions we may do business in China, which could materially and adversely affect our actual sales volumes,profitability and thusfinancial condition.
Our operations within Ukraine subject us to risks that may harm our operations and financial results.
The United States and global markets are experiencing volatility and disruption due to the ultimate amountescalation of geopolitical tensions and the military conflict between Russia and Ukraine. The conflict and certain measures taken in response have impacted the availability and prices of certain raw materials and energy (especially in Europe), and could have a lasting impact on regional and global economies. For example in response to Russia’s invasion in Ukraine, a number of countries, including the United States, the United Kingdom and members of the European Union, have implemented economic sanctions on Russia, Belarus and nearby regions, as well as numerous Russian individuals and enterprises including several large banks and state-owned entities.
Our facility in Vynohradiv is on the far western corner within the Transcarpathia region of Ukraine near the Hungary border. In 2022, products manufactured at our Ukraine facility represented approximately 8% of the Company’s total revenue, including automotive cables, seat heaters and steering wheel heaters, compared to 11% in 2021. At this time, our Ukraine facility is operating at normal levels and we continue to execute contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. We have incurred, and will likely continue to incur costs to support our employees and relocate equipment and production based on customer and company needs. We have also experienced and may continue to experience interruptions in power supply at our Ukraine facility. We have contingency measures in place to address intermittent power supply interruptions, however, extended interruptions could significantly impact our ability to operate the facility. Further, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we derive from such sales, are not committed. If actual production orders frommay experience a significant disruption to our operations. Our response to the ongoing conflict is based on a severity level contingency response plan that has been developed with certain customers. As the situation in Ukraine is very fluid, we continue to monitor its effects on our business and we continue to work closely with our customers to adjust our contingency response as necessary.
Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to and could lead to further market disruptions, including significant volatility in the prices and availability of certain commodities and energy, volatility in credit and capital markets, interruptions in our supply chain, increased costs and reduced availability of labor, materials and components, result in impairment of tangible assets and implementation of restructuring activities, and may impair our ability to complete financial or banking transactions. Any of the foregoing factors could have a material adverse effect on our business, financial results and stock price.
Labor shortages, work stoppages and additional workforce disruptions impacting us, our suppliers or customers periodically have disrupted our operations and our growth strategies, and resulting increases in labor and related operating costs may adversely impact our financial performance.
Labor shortages, work stoppages and additional workforce disruptions due to illness, quarantines and absenteeism, including ours and those at our suppliers or customers, periodically have disrupted our business and adversely impacted our financial performance. Because the automotive industry relies heavily on “just-in-time” delivery of components, labor shortages or work stoppages at one or more of Gentherm's production facilities or those of our suppliers could have adverse effects on the business and financial results, including if the OEMs elect to manufacture and sell cars without our products if we are not consistent withunable to deliver our projected future sales volumes,products on a timely basis or at all. Similarly, if one or more of our direct customers or an OEM were to experience labor shortages or work stoppages, such as what occurred during the General Motors labor strike occurring in the Fall of 2019 or the prolonged work stoppages that occurred in the first half of 2020 as a result of the COVID-19 pandemic, they likely would halt or limit purchases of our products, which could result in the temporary shutdown of the related Gentherm production facilities or other restructuring initiatives.
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Approximately 31% of the Company's workforce are members of industrial trade unions and we believe a significant percentage of employees of our largest customers and suppliers are members of industrial trade unions, all of whom are employed under the terms of various labor agreements. A union strike or inability to enter into a new labor agreement prior to expiration of an existing agreement could realize substantially less revenuehave an adverse impact on us or our suppliers or customers. In addition, competition for skilled workers due to labor shortages has increased labor costs and incur greater expenses over the life of vehicle programs.created employee retention and recruitment challenges, which has adversely impacted our profitability and operations and ability to execute on certain strategic initiatives.
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Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial performance.
Downward pricing pressure is customarily applied by automotive manufacturers to the automotive supply chain. Our customer contracts generally provide for annual price reductions over the production life of the vehicle, while requiring us to assume significant responsibility for the design, development and engineering of our products.products, as well as the costs incurred through our supply chain. Prices may also be adjusted on an ongoing basis to reflect changes in product content/costs and other commercial factors. Our inability to achieve product cost reductions that offset customer-imposed price reductions could adversely affect our financial condition, results of operations and cash flows.
Our inabilitySecurity breaches and other disruptions to effectively manageour information technology networks and systems, including a disruption related to cybersecurity, could interfere with our operations and could compromise the development, timing, quality and costs of new product launches could adversely affect our financial performance.
Gentherm is developing and launching new products and related technologies for its battery thermal management and electronic and software systems businesses, and intends to launch other new products in the future. The launch of products employing new technologies is a complex process, the success of which depends on a wide range of factors, including the robustnessconfidentiality of our productproprietary information or personal information.
We rely on our information technology systems and manufacturing process development, successnetworks in sourcing new components and commoditiesconnection with suitable suppliers, readinessmany of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our suppliers' manufacturing facilitiesdirect control. Our operations routinely involve receiving, storing, processing and manufacturing processes,transmitting sensitive information pertaining to our business, customers, suppliers, employees and other sensitive matters. We rely upon the capacity, reliability and security of our IT and data security infrastructure, as well as factors relatedour ability to tooling, equipment, employees, initial product qualityexpand and continually update this infrastructure in response to the changing needs of our business. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, due to failure to timely upgrade systems or during system upgrades and/or new system implementations, or resulting from failures of our third-party service providers, the resulting disruptions could have an adverse effect on our business.
As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other factors. Givensimilar incidents, none of which were material in 2022. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; delay our ability to deliver products to customers; and jeopardize the complexitysecurity of new product launches,our facilities. A cyber incident could be caused by malicious outsiders (including state-sponsored espionage or cyberwarfare) or insiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may experience difficulties managing product quality, timelinessbe unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware, “ransomware” and associated costs.other cyber-attacks, are increasing in both frequency and sophistication. Many victims of ransomware are forced to pay significant ransoms to regain access to their critical business data, and we may not be permitted under various regulations and laws to make such payments. With more of our employees working part-time remotely and in periods of significant acquisition integration activity such as we are currently undertaking, there may be increased opportunities for unauthorized access and cyber-attacks.Further, the United States government has warned of the potential risk of Russian cyberattacks stemming from the ongoing Russian-Ukraine conflict. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could subject us to legal or regulatory sanctions and have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
Despite our implementation of security measures, our IT systems, like those of other companies, are vulnerable to damages from computer viruses, natural disasters (which may become more frequent due to climate change), unauthorized access, cyber-attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations and include the theft of our intellectual property, trade secrets, customer information, human resources information or other confidential information. The foregoing matters could cause significant damage to our reputation, affect our relationships with its customers, lead to claims against us, fines and other penalties assessed upon us by governmental authorities, and ultimately harm our business and financial performance. In addition, new program launches require awe may be required to incur significant ramp upcosts to remediate and protect against damage caused by these disruptions or security breaches in the future.
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There is ongoing significant competition to address the evolution of costs. However,the automotive industry towards electric vehicles, autonomous vehicles and mobility on demand services, and our sales relatedfailure to these new programs generally are dependent upon the timingadapt our strategies and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launchesoperations successfully could have a materiallymaterial adverse effect on our business, results of operations and financial condition.
To the extentThe global automotive industry is experiencing a period of significant technological change, and we are not ablemaking significant investments to successfully launch new business,develop and acquire technologies and products that will enhance our competitiveness. Future automotive vehicle production is expected to be affected significantly by additional industry or consumer behaviors, including the development and use of autonomous and electric vehicles and increasing use of car and ridesharing and on-demand transportation as a service, as well as related regulations. Our future success is dependent on our ability to execute our long-term strategies addressing the evolution of the automotive industry and customer utilization of personal transportation. The rapidly evolving nature of the markets in which we compete has attracted, and may continue to attract, new entrants, including new entrants from outside the traditional automotive supply industry. Further, in comparison to us, our competitors may foresee the course of market developments more accurately, develop superior products and technologies, produce similar products at a lower cost, or adapt quicker to new industry technologies. If we do not accurately predict, prepare for and respond to new kinds of technological innovations, market developments and changing customer needs, our customerslong-term competitiveness could be harmed significantly delayed or shut down. Such operating failures could result in significant financial penalties to us or a diversionand our business, results of personneloperations and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives,condition could be materially and could result in our customers shifting work away from us to a competitor. Any of the foregoing matters could result in a significant loss of revenue and market shares and could have an adverse effect on our profitability and cash flows.adversely impacted.
Our ability to market our products successfully depends on acceptance of our products by existing and potential customers and consumers, as well as the success of our customers.
We have been, and will continue to be, required to educate potential customers and demonstrate that the merits of our existing products justify the costs associated with them. Similar and enhanced efforts will be required with existing and potential customers for additional products we develop usingand technologies we develop, acquire or license. Customers will only include our products if there appears to be consumer demand. For our automotive products, we rely on OEMs and applicable dealer networks to market our products to consumers, and we do not have any control over the marketing budget or messaging nor the training of employees and agents regarding our products. Further, OEMs and dealer networks may market products offered by our competitors, including products manufactured by such OEMs. If customers or consumers conclude that temperature control seats or our other automotive products are unnecessary or too expensive or that our competitors offer more favorable sales terms or better products, OEMs and other manufacturerscustomers may reduce availability or decline to include our products in their vehicles.
Adverse developments affectingOur ongoing efforts to optimize our global supply chain could cause supply disruptions and be more costly, time-consuming and resource-intensive than expected.
Our ongoing efforts to optimize the efficiency of our global supply chain could cause supply disruptions and could be more expensive, time-consuming and resource-intensive than expected. Furthermore, certain of our suppliers may decide to discontinue business with us or limit the allocation of products to us or we may become too dependent on one or more ofsuppliers, which could result in our suppliersinability to fill our supply needs and jeopardize our ability to fulfill our contractual obligations, which could harmin turn, result in a decrease in revenues and profitability, contract penalties or terminations, and damage to customer relationships.
We manage our profitabilitybusiness based on projected future sales volume, which is highly dependent on information received from customers and business reputation.
Our supply chain may be adversely impacted by events outside of our control, including macro-economic events, trade restrictions, political crises, labor relations issues, liquidity constraints, naturalgeneral market data, and any inaccuracies or environmental occurrences or other factors noted herein that can adversely affect us, which maychanges in such information could adversely affect our business, results of operations and profitability.financial condition.
We manage our business based upon projected future sales volumes, which are based upon many factors, including awarded business and assumptions of conversion rates thereof, customers’ forecasts and general macroeconomic and industry market data. Our product revenues generally are based upon purchase orders issued by our customers, with updated production schedules for volume adjustments, and our customers generally do not guarantee sales volumes. As such, we typically do not have a backlog of firm orders at any point in time. In particular, manyaddition, awarded business may include business under arrangements that our customers have the right to terminate without penalty at any time. Further, our customers’ forecasts are subject to numerous assumptions, and such forecasts often are changed rapidly with limited notice. Therefore, our actual sales volumes, and thus the ultimate amount of revenue that we derive from such sales, are not committed. We also must incur costs and make commitments well in advance of the receipt of orders and resulting revenues from customers. If actual production orders from our customers are not consistent with our projected future sales volumes, especially for our higher-margin products, include TEDs, which contain certain raw materials that generally cannot be substituted. The prices for these raw materials fluctuate depending on market conditions. Tellurium, a raw material used in TEDs,we could realize substantially less revenue and other key raw materials include copper, silver and petroleum-based engineered plastics. Ifincur greater expenses over the market prices for these raw materials significantly increases, as they have in the past, our gross profit may be adversely impacted to the extent our suppliers pass those price increases on to us.life of vehicle programs.
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IfThe receipt of orders and resulting revenues from customers is significantly affected by global automotive production levels. Recent macroeconomic, geopolitical and industry factors noted above have made it particularly challenging for us to project future sales volumes and manage our suppliers fail to deliver products, parts and components of sufficient quality and to our other stated written expectations on a timely basis, we could have difficulties fulfilling our orders, business.
The material reduction in sales and profits could decline, and our commercial reputation could be damaged. If we were to experience a significant or prolonged shortage of critical components from any of our suppliers, particularly those whoprincipal customers, due to acquisition activity, insolvency or otherwise, could materially and adversely affect our business, results of operations, cash flows and financial condition.
For the year ended December 31, 2022, our top two customers were Lear and Adient, which comprised 16% and 15%, respectively, of our product revenues. Combined, approximately 70% of product revenues to these customers was sourced directly by the OEMs. Our products supplied to General Motors and Hyundai represented 15% and 11% of our total product revenues for the year ended December 31, 2022. The continued growth, viability and financial stability of our principal customers, as well as the OEMs to which our products are sole sources,supplied, are critical to our success. The loss of any significant portion of our sales from either of these customers or other significant customers, whether due to acquisition activity, insolvency or otherwise, would have a material adverse effect on our business, results of operations, cash flows and financial condition. We sometimes experience, and we expect to continue to experience, a delay in our collection of accounts receivable balances from our customers, which may be significant and could not procurebe at risk in the components fromevent of their bankruptcy or other sources, we would be unable to meet its production schedules for somerestructuring.
In addition, if any of our keysignificant customers successfully insources products that we currently manufacture, whether by the acquisition of one of our competitors or otherwise, the discontinuation or loss of business as a result would have an adverse impact on our business and financial performance. For example, Lear recently has acquired certain companies that have competed with us historically and has announced its intent to ship suchinsource more products toand technologies in the future, and Lear may compete with us directly in the future. The impact of Lear’s acquisitions on our customers in a timely fashion which wouldbusiness with Lear, as well as with OEMs and other Tier 1s, is unknown and could adversely affect sales, marginsimpact our financial condition, results of operations and customer relations. Furthermore, unfavorable economic or industry conditions could result in financial distress within our supply base, thereby increasing the risk of supply disruption.cash flows.
Our business is subject to risks associated with manufacturing processes.
If certain of our existing production facilities become incapable of manufacturing products or production capacity is limited for any reason, such as terror attacks, war, or other civil disturbances, natural disasters (which may be more frequent due to climate change), other catastrophic events, public health crises, labor shortages, work stoppages, or other events that cause facility closures or production disruptions, we may be unable to meet production requirements, sales and profits could decline, and our commercial reputation could be damaged. For example, we experienced extended work stoppages in the first half of 2020 as the pandemic spread and governmental authorities initiated “lock-down” orders for all non-essential activities. Without operation of certain existing production facilities, we may be limited in our ability to deliver products until we restore the manufacturing capability at the particular facility, find an alternative manufacturing facility or arrange an alternative source of supply.
We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our insurance policies may not offset the lost sales, harm to our business reputation or increased costs that may be experienced during the disruption of operations. Further, any such proceeds may be received and accounted for in a different reporting period, which could materially and adversely affect our business, financial condition, results of operations and cash flow generally or for a specific reporting period.
Work stoppages, including those atWe use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers and similar events could significantly disruptrelating to intellectual property rights, our business
Because the automotive industry relies heavily on “just-in-time” delivery of components, a work stoppage at one or more of Gentherm's production facilities could have adverse effects on the business. Similarly, if one or more of our direct customers or an OEM were to experience a work stoppage, such as what occurred during the General Motors labor strike occurring in fall 2019, our customer would likely halt or limit purchases of our products, which could result in the temporary shutdown of the related Gentherm production facilities or other restructuring initiatives.
Our global operations subject us to risks that may harm our operations and financial results.
In 2019, 55% of our product revenue was generated from sales to customers outside the United States. We have significant personnel, property, equipment and operations in a number of countries outside of the United States, including Canada, China, Germany, Hungary, Macedonia, Mexico, Ukraine and Vietnam. Our exposure to the risks described below is substantial. We also derive a significant portion of revenues from Europe and Asia and conduct certain investing and financing activities in local currencies.
In addition to the general risks relating to our operations, our international operations are subject to unique risks inherent in doing business abroad, including:
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In particular, we derived over 20% of our revenue in fiscal 2019 (based on shipment destination) from Japan, China and South Korea. We have three manufacturing facilities in China, and several of our customers, subcontractors and suppliers also are located in China as well as Japan and South Korea. As a result of the coronavirus, our operations, and those of our customers and suppliers, have experienced and in the future may experience delays or disruptions, such as difficulty obtaining components, travel restrictions and temporary suspension of operations. In addition, our financial condition and results of operations could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights and trade secrets. Our intellectual property plays an important role in maintaining our competitive position in many of the markets that we serve.
We cannot guarantee, however, that we will be able to secure all desired protection, nor that the steps we have taken to protect our intellectual property will be adequate, to prevent infringement of our rights or misappropriation or theft of our technology, trade secrets or know-how. For example, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some of the countries in which we operate. In addition, while we generally enter into confidentiality agreements with our employees and third parties to protect our trade secrets, know-how, business strategy and other proprietary information, such confidentiality agreements could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the extent that coronavirusdesign, manufacture or any other epidemic or outbreak harms motor vehicle product consumption specifically and the economies of China, Japan and South Korea and the world generally
Additionally, our primary manufacturing locations are in Mexico, China, Vietnam, Macedonia and Ukraine, all countries that have historically experienced a heightened degree of political, civil and labor uncertainty. Political conflict and related demonstrations and violence in Ukraine in recent years, for example, highlights the risks to our foreign manufacturing facilities. Although our manufacturing facility in Ukraineis located approximately 700 miles by road from Kiev, and approximately the same distance from the activities along the border of Ukraine and Russia where fighting has occurred, we cannot be certain that similar demonstrations, unrest and international tensions will not affect our facility in the future, including due to electrical outages and periodic battles with separatists closer to our facility. In addition, certainoperation of our employeesproducts. If it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail. Further, adequate remedies may not be available in Ukraine are routinely conscripted into
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the military and/event of an unauthorized use or sent to the Russian border to fight in the ongoing conflict. Furthermore, mostdisclosure of our trade secrets and manufacturing expertise. Finally, for those products manufactured in Ukraine are shipped acrossour portfolio that rely on patent protection, once a patent has expired, the border from Ukraineproduct is generally open to Hungary for further deliverycompetition. Products under patent protection usually generate higher revenues and profitability than those not protected by patents. If we fail to successfully enforce our customers. If that border crossing were to be closed or restricted for any reason, we would essentially experience a loss of the use ofintellectual property rights, our Ukrainian facility,competitive position could suffer, which would have a material adverse effect oncould harm our business.
Ourbusiness, financial condition, results of operations and financial conditioncash flows.
In addition, our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Foreign governments may adopt regulations, and foreign governments or courts may render decisions, requiring compulsory licensing of intellectual property rights, or foreign governments may require products to meet standards that serve to favor local companies or provide reduced protection relative to other countries.
Our Board approved the Company’s plan to exit its non-automotive electronics business, including a potential sale or wind-down of the business, and will incur significant non-cash expenses.
In December 2022, our Board approve the Company’s plan to exit its non-automotive electronics business to strengthen the Company’s core business and focus its resources and equipment with businesses and investments that are more strategic and profitable. The Company will continue to sell certain business products until the exit is complete. For the twelve months ended December 31, 2022, the Company’s product revenues from the business were $17.1 million. In connection with approval of the plan to exit the non-automotive electronics business, the Company recorded non-cash impairment charges of $9.4 million, $5.6 million and $0.7 million for write-downs of inventory, intangible assets, and property and equipment, respectively. The Company is expected to incur total non-cash expenses of between $13 million and $18 million. The Company may be adversely impacted fromunable sell the business or substantially all of its assets on a decrease intimely basis, for a reasonable purchase price or cessationat all, any wind-down of the business may not occur on a timely basis or clawbackrequire more of government incentivesthe Company’s resources than anticipated, the Company’s incurred expense related to investments.
We receive economic benefitsthe exit from national, state and local governments in various regionsor wind-down of the worldbusiness may exceed the Company’s projections and there may be additional expense and costs in the form of incentives designed to encourage manufacturers to establish, maintain or increase investment, workforce or production. These incentives may take various forms, including grants, loan subsidiesfuture periods.
Legal, Regulatory and tax abatements or credits. The impact of these incentives can be significant in a particular market during a reporting period. A decrease in, expiration without renewal of, or other cessation or clawback of government incentives for any of our business units, as a result of administrative decision or otherwise, could have an adverse impact on our results of operationsCompliance Risks
Economic and financial condition, as well as our ability to fund new investments.
Changes to trade policy, including tariffs and customs regulations, could have a material and adverse effect on our business.
A significant portionThe U.S. has established free trade laws and regulations that set certain duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as China and Mexico, could have a material adverse effect on our business activities are conducted in foreign countries, including Mexico. As a result of changes to U.S. administrative policy, there may be changes to existing trade agreements, like NAFTA and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”) which is still subject to approval by Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the U.S., particularly tariffs on products manufactured in Mexico, among other possible changes.
Additionally, during 2018,financial results. In recent years, the U.S. and China appliedChinese governments have imposed a series of significant incremental retaliatory tariffs to certain of each other’s exports. The institution of trade tariffs, both globally and betweenimported products. Most notably with respect to the automotive industry, the U.S. imposed tariffs on imports of certain steel, aluminum and automotive components, and China specifically, carries the risk of negatively impacting overall economic conditions, which could have negative repercussions on the Company. More directly, imposition of tariffs has caused and could cause further increases in the costs of our raw materials which we may not be able to pass on to our customers in part or in full, which would directly and negatively impact our business. We purchase a significant amount of raw material components, including products
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manufactured in our China facilities, which are subject to such tariffs. The imposition of tariffs has caused and could cause further increases in the costs of our raw materials, and we may not be able to mitigate the impact from these tariffs or additional future tariffs.
Most recently, a “phase one” trade deal signed between the U.S. and China on January 15, 2020 accompanied a U.S. decision to cancel a plan to increaseimposed retaliatory tariffs on an additional listimports of Chinese products. While the signing of the agreement signals a cooling of tensions between the U.S. vehicles and China over trade, concerns over the stability of bilateral trade relations remain, particularly given the limited scope of the phase one agreement.certain automotive components. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these tariffs the executive order and its implementation andany other future regulatory actions implemented on a broader range of products or raw materials could materially affect our business, including in the form of increaseincreased cost of goods sold, decreased margins, increased pricing for customers, reduced sales and reduced sales.disruption in our supply chain.
In addition, various countries regulate cross-border transactions of certain products through import permitting and licensing requirements. The United Kingdom’s withdrawal fromexportation, re-exportation, transfers within foreign countries and importation of our products, including by our suppliers and vendors, must comply with these laws and regulations, and any violations may result in reputational harm, government investigations and penalties, and a denial or curtailment of importing or exporting activities. Complying with export control and sanctions laws may be time consuming, may increase our costs, and may result in the delay or loss of sales opportunities. If we are found to be in violation of U.S. sanctions or export control laws, or similar laws in other jurisdictions, we and the individuals working for us could incur substantial fines and penalties. Changes in export, sanctions or import laws or regulations may delay the introduction and sale of our products in the U.S. and international markets, require us to spend resources to seek necessary government authorizations or to develop different versions of our products, or, in some cases, prevent the export or import of our products to certain countries, regions, governments, persons or entities, which could adversely affect our business, financial condition and operating results.
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We may face particular privacy, data security and data protection risks.
We are subject to several data privacy and data security laws and regulations in the various jurisdictions that we operate. An increasing number of U.S. states have enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of personal information, such as social security numbers, financial information and other information. For example, several U.S. territories and all 50 states have adopted data breach rules that require timely notification if a company has experienced the unauthorized access or acquisition of personal information. Similarly, many of the requirements mandated by the California Consumer Protection Act (“CCPA”) that went into effect on January 1, 2020 have not yet been interpreted by courts, and best practices are still being developed by the industry, all of which increase the risk of compliance failure and related adverse impacts. Furthermore, on January 1, 2023, substantive provisions of the California Privacy Rights Act (“CPRA”) became effective, in some cases requiring new or modified practices and operations. Other states enacted similar privacy laws in recent years and other states are considering doing so. These privacy laws may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow private class-action litigation and carry significant potential liability for our business.
Legislators and/or regulators in foreign countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws as well. In particular, the European Union may have a negative impactUnion’s General Data Protection Regulation (“GDPR”), which became effective on global economic conditions, financial marketsMay 25, 2018, imposes additional obligations and risk upon our financial results.
The United Kingdom leftbusiness and which increases substantially the European Union January 31, 2020 (“Brexit”). Under the current withdrawal agreement between the United Kingdom and the European Union, the United Kingdom willpenalties to which we could be subject to a transition period until December 31, 2020, during which European Union rules will continue to apply. The relationship betweenin the United Kingdom and the European Union after the transition period has not been determined yet. As a result, the impact of Brexit is not yet known and depends on any agreements the United Kingdom and European Union may make to retain access to each other's markets after the transition period. The measures or lackevent of any agreement may continue to impact global light vehicle production,non-compliance. Many countries have enacted similar types of legislative and affect the business of and/or our relationships with our customersregulatory requirements concerning data protection, and suppliers, as well as alter the relationship among tariffsadditional countries are considering similar legal frameworks.
The CCPA, CPRA, GDPR and currencies. In addition, Brexit could lead to legal uncertainly and potentially divergent nationalother similar laws and regulations including with respectthose recently or soon to data privacy. A withdrawal frombe enacted (such as the European Union is unprecedented and it is unclear what financial, trade, legal and employment implications the withdrawal of the United Kingdom from the European Union will have following the transition period and how the withdrawal will affect us. Adverse consequences suchSECs proposed cybersecurity disclosure regulations), as reduced consumer spending, deterioration in economic conditions, volatility in exchange rates, and prohibitive laws and regulations could have a negative impact on our business, operating results and financial condition.
Tax matters, including changes in the corporate tax rates, disagreement with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
We are subject to income andwell as any associated inquiries or investigations or any other taxes in the U.S. and our operations, plans and results are affected by tax legislation and other initiatives. For example, on December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law by President Trump. The Tax Act contained significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small business), limitation of the deduction for net operation losses (“NOLs”) to 80% of current year taxable income and elimination of NOL carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they were repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), new taxes on certain foreign earnings, a new minimum tax related to payment to foreign subsidiaries and affiliates, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and the modification or repeal of many business deductions and credits. It remains uncertain if, and to what extent, various states will conform to the Tax Act and if foreign countries will react by adopting tax legislation or taking other actions.
We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There cangovernment actions, may be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our result of operations and financial position.
We also needcostly to comply with, new, evolvingresult in negative publicity, increase our operating costs, require significant management time and attention to monitor and be in compliance with, and subject us to remedies that may harm our business, including fines or revised tax laws and regulations. The enactment ofdemands or increases in tariffs, or other changes in the application or interpretation of the Tax Act, or on specific productsorders that we sellmodify or with which our products compete, may have an adverse effect on ourcease existing business or on our results of operations.
Our patient temperature management business is subject to extensive industry regulation and failure to comply with all applicable rules and regulation may adversely impact us.
Our patient temperature management products are subject to extensive, complex, costly and evolving government regulation. In the United States, this is principally administered by the Food and Drug Administration (“FDA”). Various regulatory agencies in foreign countries where our medical products are sold also regulate that business. Under both United States and foreign country
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practices.regulations, we are subject to periodic inspection of our facilities (including third-party facilities that are performing services for us), procedures and operations and testing of our products. Following such FDA inspections, should any noncompliance with regulations or other quality issues be noted, we may receive observations, notices, citations and/or warning letters that could require us to get FDA approval of a corrective action plan and modify certain activities identified during the inspection, possibly at a significant cost. We are also required to report adverse events associated with our medical products to the FDA and other foreign regulatory authorities where our products have been approved or received market clearance. Unexpected or serious health or safety concerns could result in liability claims, recalls, market withdrawals or other regulatory actions. Changes in laws or regulations could require us to change the way we operate or to utilize resources to maintain compliance, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in fines or revocation of our operating permits and licenses or, in rare circumstances, market withdrawal of the product.
The process for obtaining governmental approval to manufacture and market new medical devices is time-consuming and costly. We are dependent on receiving FDA and other governmental or third-party approvals prior to manufacturing, marketing and shipping any new medical products. We cannot be certain that any new medical products we develop will receive FDA or other necessary approvals. Also receipt of approval in one country does not guarantee approval by the FDA or any other foreign regulatory agency.
Defects or quality issues associated with our automotive and medical products, as well as a significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers, or an investigation regarding vehicle safety generally, could adversely affect the results of our operations.
Our design, manufacture and marketing of automotive products may subject us to warranty claims and product liability in the event that our products (or the products of our customers that incorporate our products) fail to perform as expected and, in the case of product liability, such failure of our products (or the products of our customers that incorporate our products) results or is alleged to result in bodily injury or property damage. This risk may be enhanced for any new developed products or recently acquired products, which has been a significant part of our growth in recent years. If any of our products are or are alleged to be defective, we also may be required by our customers or regulators to participate in a recall or other corrective action involving such products, which we have been subject to periodically. Automotive manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims, as well as requiring their suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. OEMs historically have recalled vehicles for perceived defects in seat heaters, and we have incurred liabilities in connection with the recalls and other field actions. In addition, governmental regulatory agencies throughout the world, such as NHTSA in the U.S., have safety standards that require manufacturers to remedy defects related to vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard.
Any large liability claims, if made, could exceed our insurance coverage limits and insurance may not continue to be available on commercially acceptable terms, if at all, and we may incur significant costs to defend these claims. In addition, we may not be successful in recovering amounts from third parties, including suppliers, in connection with these claims. In certain instances, allegedly defective products may be the result of components supplied by our supply chain, and we may be limited in our ability to obtain recovery from our suppliers of materials or services included within our products that are associated with product liability and warranty claims, particularly if the affected items relate to global platforms or involve defects that are identified years after production. A recall, product liability or warranty claim brought against us that is not insured or is in excess of our available insurance, and if other third parties do not contribute or indemnify us, could have an adverse impact on our results of operations and reputation or market acceptance of our products.
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The design, manufacture and marketing of medical products involve certain inherent risks. Manufacturing or design defects, component failures, unapproved or improper use of our products, or inadequate disclosure of risks or other information relating to the use of our products can lead to regulatory action, injury or other serious adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or as required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall, inadequate disclosure or defect could result in significant costs and lost sales and customers, enforcement actions and/or investigations by state and federal governments or other enforcement bodies, as well as negative publicity and damage to our reputation that could reduce future demand for our products. Personal injuries relating to the use of our products can also result in significant product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in regulatory approval of new products or the imposition of post-market approval requirements, such as further clinical testing. Such clinical testing is costly and time-consuming and could delay market approval or the meeting of additional post-market requirements.
Our business may be negatively impacted by the effects of climate change and by regulatory and stakeholder-imposed requirements to address climate change and other sustainability issues.
As evidenced by shifting industry and consumer behaviors, including the development and use of electric vehicles, the automotive industry and consumers have a heightened focus on climate change and the environmental impact of product manufacturing and end use. This increased focus on sustainability and the environmental impact of the automotive industry and manufacturing processes has caused our customers and other stakeholders to impose additional requirements on us and our suppliers, which often exceed regulatory standards. These customer requirements include increased tracking and reporting of greenhouse gas emissions and other environmental metrics, reduced waste and wastewater from operations, increased use of sustainable materials in our products, and the use of renewable energy sources in our factory operations. We expect to incur increased operating costs and capital expenditures to procure renewable energy and additional equipment or make operational and process changes to comply with customer requirements. To the extent we are unable to meet or exceed customer sustainability requirements, demand for our products and our revenues could be adversely impacted. A failure to adequately meet other stakeholder expectations may result in the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent.
Climate change is continuing to receive ever increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to and we expect will continue to lead to legislative and regulatory efforts in many jurisdictions to limit greenhouse gas emissions. New federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell, lead to changes in automotive technology, and expedite the transition to electric vehicles. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require increased capital expenditures to improve our product portfolio to meet such new laws, regulations and standards. Such legislative developments could adversely impact our business by increasing costs and could require us to make changes to our operations and result in substantial additional capital expenditures and operating costs. These additional costs, changes in operations, or loss of revenues could have a material adverse effect on our business, financial condition, and results of operations.
Finally, the effects of climate change, such as increased intensity, frequency or duration of storms, droughts or other severe weather events may create financial or physical risk to us. Physical risks include disrupting the manufacturing, logistics and procurement activities and employee working conditions of us, our supply chain and our customers. Financial risks include the fluctuating demand for our products and technologies based on the climate where consumers live, since our business involves thermal management technologies, as well as potential additional costs of insurance and maintaining facilities in certain regions prone to climate risk. We could also face indirect financial risks passed through the supply chain, and process disruptions due to physical climate changes could result in price modifications for our products and the resources needed to produce them. Any of the foregoing could have a material adverse effect on our financial condition and results of operations.
Our patient temperature management business is subject to extensive industry regulation and failure to comply with all applicable rules and regulation may adversely impact us.
Our patient temperature management products are subject to extensive, complex, costly and evolving government regulation. In the United States, this is principally administered by the Food and Drug Administration (“FDA”). Various regulatory agencies in foreign countries where our medical products are sold also regulate that business. Under both United States and foreign country regulations, we are subject to periodic inspection of our facilities (including third-party facilities that are performing services for us), procedures and operations and testing of our products. Following such FDA inspections, should any noncompliance with regulations
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or other quality issues be noted, we may receive observations, notices, citations and/or warning letters that could require us to get FDA approval of a corrective action plan and modify certain activities identified during the inspection, possibly at a significant cost. We are also required to report adverse events associated with our medical products to the FDA and other foreign regulatory authorities where our products have been approved or received market clearance. Unexpected or serious health or safety concerns could result in liability claims, recalls, market withdrawals or other regulatory actions. Changes in laws or regulations could require us to change the way we operate or to utilize resources to maintain compliance, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in fines or revocation of our operating permits and licenses or, in rare circumstances, market withdrawal of the product.
The process for obtaining governmental approval to manufacture and market new medical devices is time-consuming and costly. We are dependent on receiving FDA and other governmental or third-party approvals prior to manufacturing, marketing and shipping any new medical products. We cannot be certain that any new medical products we develop will receive FDA or other necessary approvals. Also receipt of approval in one country does not guarantee approval by the FDA or any other foreign regulatory agency.
Any failure to comply with anti-corruption laws and regulations could have a material and adverse effect on our reputation, business and financial results.
Our operations outside of the United States require us to comply with various anti-bribery and anti-corruption regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act and the China Anti-Unfair Competition Law. Violations of these laws, which are complex and often difficult to interpret and apply, could result in significant criminal penalties or sanctions that could adversely affect our business, financial condition, results of operations and cash flows.
We are subject to significant foreign currency risk and foreign exchange exposure related to our global operations.
A significant portion of our global transactions is conducted in currencies other than the U.S. Dollar. While we sometimes employ financial instruments to hedge some of our transactional foreign exchange exposure, developing an effective and economical foreign currency risk strategy is complex and expensive and no strategy can completely insulate us from those exposures. Exchange rates can be volatile and could adversely affect our financial results and comparability of results from period to period.
We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights and trade secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in many of the markets that we serve.
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We cannot guarantee, however, that we will be able to secure all desired protection, nor that the steps we have taken to protect our intellectual property will be adequate, to prevent infringement of our rights or misappropriation or theft of our technology, trade secrets or know-how. For example, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some of the countries in which we operate. In addition, while we generally enter into confidentiality agreements with our employees and third parties to protect our trade secrets, know-how, business strategy and other proprietary information, such confidentiality agreements could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the design, manufacture or operation of our products. If it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail. Further, adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. Finally, for those products in our portfolio that rely on patent protection, once a patent has expired, the product is generally open to competition. Products under patent protection usually generate significantly higher revenues than those not protected by patents. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows.
In addition, our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, such as China, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Foreign governments may adopt regulations, and foreign governments or courts may render decisions, requiring compulsory licensing of intellectual property rights, or foreign governments may require products to meet standards that serve to favor local companies or provide reduced protection relative to other countries.
A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers, or an investigation regarding vehicle safety generally, could materially and adversely affect our financial performance.
In the event that our products fail to perform as expected, whether allegedly due to our fault or that of one of our suppliers, and such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims, and we have been in the past and may again be required or requested by our customers or regulators to participate in a recall or other corrective action involving such products. We also are a party to agreements with certain of our customers, whereby these customers may pursue claims against us for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims. We carry insurance for certain product liability claims, and have utilized such insurance periodically. However, such coverage may be limited for future claims. In addition, we may not be successful in recovering amounts from third parties, including suppliers, in connection with these claims. These types of claims could materially and adversely affect our financial condition, operating results and cash flows.
We are involved from time to time in various legal and regulatory proceedings and claims, which could adversely affect our financial performance.
We are involved in various legal and regulatory proceedings and claims that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our customers, suppliers or competitors, intellectual property matters, personal injury claims, environmental matters, tax matters and employment matters. Such legal and regulatory proceedings could result in an adverse outcome for the Company that would adversely affect our financial condition, results of operations and cash flows.
Our success dependsTax matters, including changes in partthe corporate tax rates, disagreement with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
We are subject to income and other taxes in the U.S. and internationally. We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on retaining key personnelour result of operations and effective succession planning.financial position.
Our success will dependWe also need to a large extent uponcomply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other changes in the continued contributionsapplication or interpretation of key personnel. tax legislation and other initiatives, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
The loss of the services of one or morevalue of our executive officersdeferred tax assets may not be realized, which could materially and adversely affect our business. Effective successionoperating results.
As of December 31, 2022, we had approximately $49 million in net deferred tax assets, inclusive of a $37 million valuation allowance. These deferred tax assets include net operating loss carryovers and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is also importantnot sufficient positive evidence to our long-term success. Failuresupport the valuation of these assets, due to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. Further, our success will depend, in part, upon our ability to recruit and retain qualified engineering andthe risk factors described herein or other technical and marketing personnel. There is significant competition for technologically qualified personnel in our business andfactors, we may not be successfulrequired to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in recruiting or retaining sufficient qualified personnel.material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our financial statements.
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We are required to comply with environmental laws and regulations that could cause us to incur significant costs.
Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future. We may also assume, or be deemed to assume, significant environmental liabilities in acquisitions. Environmental liability may be imposed without regard to fault, and under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. No assurance can be given that all environmental liabilities have been identified or that no prior owner or operator of our properties or former properties has created an environmental condition not known to us. Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Violations of these requirements could result in fines or sanctions, obligations to investigate or remediate contamination, third party property damage or personal injury claims due to the migration of contaminants off-site, or modification or revocation of our operating permits, which could materially and adversely affect our financial condition, results of operations and cash flows. Additionally, proposed
Financial Risks
We are subject to significant foreign currency risk and existing effortsforeign exchange exposure related to address climate change by reducing greenhouse gas emissions could directly or indirectly affect our costs of energy, materials, manufacturing, distribution, packaging and other operating costs, which could impact our business and financial results.global operations.
We may be unable to realize the expected benefitsA significant portion of our restructuring actions, whichglobal transactions is conducted in currencies other than the U.S. Dollar, including the Euro, the Chinese Renminbi, the Vietnamese Dong, the Hungarian Forint, the North Macedonian Denar, the Ukrainian Hryvnia, the South Korean Won and the Mexican Peso. While we sometimes employ financial instruments to hedge some of our transactional foreign exchange exposure, developing an effective and economical foreign currency risk strategy is complex and expensive and no strategy can completely insulate us from those exposures. Exchange rates can be volatile and could adversely affect our financial results and comparability of results from period to period. Such exchange rate volatility could also increase the costs of raw materials or components from foreign suppliers, and as a result, our profitability and operations.could be adversely affected.
We have undertaken significant restructuring activities in recent years that remain ongoing, and may take future restructuring actions to realign and resize our production capacity and cost structure, lower our cost base, improve our financial performance and cash flow generation, and create a simplified organization best positioned to deliver on our key financial and operational priorities. Charges related to these actions or any further restructuring actions may have a material adverse effect on our results of operations and financial condition. We cannot ensure that any current or future restructuring will be completed as planned, on a timely basis or at all, will be on budget, or achieve the desired results.
Our existing indebtedness and the inability to access capital markets could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance.
As of December 31, 2019,2022, our total consolidated indebtedness was $80.6 million.$235.1 million, with $264.9 million available for additional borrowings under the Second Amended and Restated Credit Agreement subject to specified conditions that Gentherm currently satisfies. In 2022, we incurred significant indebtedness in connection with our acquisitions of Alfmeier and Dacheng. We may also incur additional indebtedness in the future. Thisfuture, including in connection with additional acquisitions or significant capital expenditures. If our outstanding borrowings increase, including under existing availability of revolving credit or if we incur additional indebtedness, the amount of our outstanding debt could have important, adverse consequences to us and our investors, including:
• requiring a substantial portion of our cash flow from operations to make interest payments; • making it more difficult to satisfy other obligations; • increasing our vulnerability to general adverse economic and industry conditions; • reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our businesses; • limiting our flexibility in planning for, or reacting to, changes in our businesses and industries; and • limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise.
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Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: incur additional debt, create liens, make certain payments or distributions (including for the repurchase or redemption of our shares), engage in mergers or consolidations, make certain dispositions and transfers of assets, enter into transactions with affiliates and guarantee indebtedness. While not unusual for financings of the type that we have, the restrictions in our credit facilities may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute our business plans, take advantage of business opportunities, or react to changing industry conditions.
To the extent that we incur additional indebtedness, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our ability to make payments of principal and interest on our indebtedness depends upon our future performance. If our cash flow from operations mayis not be sufficient to service our outstanding debt or to repay the
28
outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.
19
debt and we may have to reduce or delay planned capital or operating expenditures. The occurrence of any of such events could have a material adverse effect upon our business, cash flows, financial condition and results of operations. If an event of default would occur under our existing debt agreements or any additional indebtedness, our lenders could declare all amounts outstanding to be immediately due and payable, which may cause cross-defaults under our other debt obligations. If our lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to all lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our existing credit facilities, the lenders would have the right to foreclose on certain of our assets, which could have a material adverse effect on our business, results of operations and financial condition.condition.
AnWe utilize various strategies to move funds between countries to manage global liquidity needs without material adverse changetax consequences. Any repatriation of cash to the U.S. may result in various tax consequences and the movement of capital remains subject to evolving government regulation, which could have an adverse impact on our liquidity and cash flows.
We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Second Amended and Restated Credit Agreement. We utilize a combination of strategies and currently there are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of December 31, 2022, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled $108.6 million. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S. In addition, the movement of capital between our subsidiaries and us in different countries remains subject to evolving government regulation and geopolitical stability, and our liquidity and cash flows could be impacted adversely upon regulatory and geopolitical changes in the interest ratesfuture.
We are exposed to risks related to accounts receivable sales agreements.
We have entered into several receivables factoring arrangements, including acquired in connection with the Alfmeier acquisition, that permit us to sell certain accounts receivable on a revolving basis, subject to outstanding balances and concentration limits. These agreements permit us to recover on our accounts receivable for specific customers sooner than if they were not in place and help reduce the risk of non-payment by such customers. A limited number of our borrowingscustomers participate in these programs to date. If we do not enter into these agreements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures in collecting trade accounts receivables for the applicable customers. In addition, if any of the financial institutions with which we have these agreements experiences financial difficulties or otherwise modifies or terminates these agreements, such modification, termination or other loss of these arrangements could have a material and adverse effect upon our liquidity and cash flows.
We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations.
We have undertaken significant restructuring activities in recent years that remain ongoing and may take future restructuring actions to realign and resize our production capacity and cost structure, lower our cost base, improve our financial condition
Our current outstanding variable rate indebtedness uses LIBOR asperformance and cash flow generation, and create a benchmark for establishing the interest rate. LIBOR is the subject of recent national, internationalsimplified organization best positioned to deliver on our key financial and other regulatory guidance and proposals for reform. These reformsoperational priorities. Charges related to these actions or any further restructuring actions may cause LIBOR to disappear entirely after 2021 or to perform differently than in the past. We expect that reasonable alternatives to LIBOR will be created and implemented prior to the 2021 target date. Fallback provisions are being written into LIBOR-based contracts to attempt to reduce the risk of sudden and unpredictable increases in the cost of variable rate indebtedness. However, we cannot predict the consequences and timing of these developments.
Additionally, in the future, we may need to renegotiate our existing indebtedness or incur other indebtedness, and the phase-out of LIBOR may negatively impact the terms of such indebtedness. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR, which could have a material adverse effect on our financial position, results of operations and liquidity.
Security breaches and other disruptions to our information technology networks and systems, includingfinancial condition. We cannot ensure that any current or future restructuring will be completed as planned, on a disruption related to cybersecurity, could interfere with our operations and could compromisetimely basis or at all, will be on budget, or achieve the confidentiality of our proprietary information or personal information.
We rely upon information technology networks and systems, some of which are managed or hosted by third-parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including electronic communications among our locations around the world and between Company personnel and our customers and suppliers, supply chain management, manufacturing, and invoicing and collection of payments. We use these information technology network and systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the proprietary business information of our customers and suppliers, as well as personally identifiable information of our employees, customers and suppliers, in data centers, on information technology networks and systems, some of which are operated by third parties and third-party locations. The secure operation of these data centers, information technology networks, and systems and the processing, maintenance, confidentiality, integrity and availability of this information, is critical to our business operations and strategy.
The Company maintains an information risk management program which is supervised by information technology management and reviewed by a cross-functional committee. As part of this program, reports that include analysis of emerging risks as well as the Company’s plans and strategies to address them are regularly prepared and presented to senior management and the Board of Directors. Despite security measures, such as disaster recovery and business continuity plans, including those measures related to cybersecurity, these data centers, our information technology networks and systems may be vulnerable to damage, corruption, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures, geopolitical events, or natural disasters or other catastrophic events.
Cyber threats are constantly evolving, thereby increasing the difficulty of detecting and successfully defending against them. The occurrence of any of the aforementioned events, many of which are outside our control, could compromise our systems or networks and the information stored there, which may include confidential or proprietary information or personal information of third parties, could be accessed, publicly disclosed, compromised, corrupted, lost or stolen. Any such access, disclosure or other loss or corruption of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, cause a loss of confidence in our reputation, goodwill, products and services, reduce the competitive advantage we expect to derive from our investment in advanced technologies and adversely affect our financial condition,
20
results of operations, and cash flows. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems.desired results.
We may face particular privacy, data security and data protection risks.
Legislators and/or regulators in countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws. In particular, the European Union’s General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018, imposes additional obligations and risk upon our business and which increases substantially the penalties to which we could be subject in the event of any non-compliance. The GDPR and other similar laws and regulations, including the new California Consumer Protection Act (“CCPA”) and other similar state laws recently or soon to be enacted, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. Furthermore, the CCPA went into effect on January 1, 2020 and many of its requirements have not yet been interpreted by courts, and best practices are still being developed by the industry, all of which increase the risk of compliance failure and related adverse impacts.
Any failure to maintain effective internal control over financial reporting or disclosure controls and procedures may affect our ability to accurately report our financial results, cause us to fail to meet our reporting obligations, fail to prevent fraud and adversely affect the market price of our common stock.
Under the Sarbanes-Oxley Act, we must maintain effective internal control over financial reporting and disclosure controls and procedures, which requires significant resources and management oversight. Effectiveness of such controls are necessary for us to provide reliable financial reports, effectively prevent fraud and to operate successfully as a public company.
Our management determined we had a material weakness in our internal control over financial reporting as of December 31, 2018, which we determined was remediated as of September 30, 2019. Any future failure to maintain effective internal control over financial reporting or disclosure controls and procedures, or timely effect any necessary improvement of such controls, could harm our results of operations or cause us to fail to meet our reporting obligations, which could subject us to adverse regulatory consequences. Ineffectiveness of such controls also could cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our stock.
We are currently restricted in our ability to make dividend payments on our Common Stock. Furthermore, we do not anticipate paying dividends on our Common Stock in the near future.Investment Risks
Our bank credit facilities generally restrict our ability to pay cash of dividends on our Common Stock so long as such facilities are outstanding. We have never paid any cash dividends on our Common Stock and do not anticipate paying dividends in the near future.
The price of our Common Stock may fluctuate significantly.
The price of our Common Stock on the Nasdaq Global Select Market has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the automotive industry and the stock market as a whole have experienced significant stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its stock to exceed the stock’s price at a given point in time. If the Company fails to meet expectations related to future
29
growth, profitability, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.
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None.
21
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The following table presentsOn December 11, 2020, the Company’s significant propertiesBoard of Directors authorized a new stock repurchase program, pursuant to which the Company is authorized to repurchase up to $150 million of common stock over a three-year period. Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any Company stock repurchases under the program may result in stock price and volume fluctuations. During the year ended December 31, 2022, the Company did not make any repurchases under the 2020 Stock Repurchase Program and have a remaining repurchase authorization of $130.0 million as of December 31, 2019:2022.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Facility |
| Location |
| Purpose |
| Segment |
| Square Footage |
|
| Owned or Leased |
| Monthly Rent |
|
| Lease Expiration |
| |||
Gentherm Headquarters |
| Northville, MI U.S.A. |
| Corporate Headquarters |
| Automotive |
|
| 82,000 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm North America |
| Farmington Hills, MI U.S.A. |
| Research and Development |
| Automotive and Industrial |
|
| 44,000 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm Medical |
| Cincinnati, OH U.S.A. |
| Medical Headquarters and Manufacturing |
| Industrial |
|
| 84,000 |
|
| Leased |
| $ | 51,800 |
|
| 1/31/2022 |
| |
Gentherm GmbH |
| Odelzhausen, Germany |
| Customer Service Center and Research and Development |
| Automotive |
|
| 170,600 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm Hungary |
| Pilisszentivan, Hungary |
| Research and Development and Distribution Center |
| Automotive |
|
| 298,700 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm Ukraine |
| Vinogradov, Ukraine |
| Manufacturing |
| Automotive |
|
| 209,500 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm Macedonia |
| Prilep, Macedonia |
| Manufacturing |
| Automotive |
|
| 403,500 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm China |
| Langfang, China |
| Manufacturing |
| Automotive |
|
| 279,900 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm Asia Electronics |
| Shenzhen, China |
| Manufacturing |
| Automotive |
|
| 74,400 |
|
| Leased |
| $ | 54,800 |
|
| 12/31/2021 |
| |
Gentherm Asia Electronics |
| Shenzhen, China |
| Manufacturing |
| Automotive |
|
| 49,300 |
|
| Leased |
| $ | 24,600 |
|
| 11/30/2022 |
| |
Gentherm Vietnam |
| Ha Nam, Vietnam |
| Manufacturing |
| Automotive |
|
| 245,300 |
|
| Owned |
| $ | — |
|
|
| — |
|
Gentherm Mexico |
| Acuña, Mexico |
| Manufacturing |
| Automotive |
|
| 105,600 |
|
| Leased |
| $ | 27,900 |
|
| 6/1/2020 |
| |
Gentherm Mexico |
| Acuña, Mexico |
| Manufacturing |
| Automotive |
|
| 106,500 |
|
| Leased |
| $ | 44,700 |
|
| 7/1/2020 |
| |
Gentherm Mexico |
| Celaya, Mexico |
| Manufacturing |
| Automotive |
|
| 147,900 |
|
| Leased |
| $ | 65,300 |
|
| 10/1/2025 |
| |
Gentherm Canada |
| Burlington, Canada |
| Manufacturing |
| Automotive |
|
| 46,000 |
|
| Leased |
| $ | 21,800 |
|
| 11/24/2022 |
| |
Stihler Electronic GmbH |
| Stuttgart, Germany |
| Manufacturing |
| Industrial |
|
| 18,000 |
|
| Leased |
| $ | 14,300 |
|
| 6/30/2020 |
|
None.
ITEM 2. PROPERTIES As of December 31, 2022, we operate in over 32 locations across 14 countries, which are primarily for manufacturing, assembly, distribution, warehousing, engineering and testing. The majority of our Automotive facilities located outside of the U.S. are principally used in manufacturing and distribution and are located in China, Hungary, Mexico, North Macedonia, South Korea, Ukraine, Czech Republic, Germany, and Vietnam. Our global headquarters is located in Northville, Michigan, our European headquarters is located in Odelzhausen, Germany and our Asia-Pacific headquarters is located in Shanghai, China. Our Medical business is principally comprised of our headquarters and manufacturing site located in Cincinnati, Ohio and our manufacturing sites in Germany and China. We also have sales offices, warehouses and engineering centers, strategically located throughout the world. Nearly all of our manufacturing and distribution sites in Mexico and Asia are leased, while most of our European sites are owned. ITEM 3. LEGAL PROCEEDINGS |
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We are subject to litigation from time to time in the ordinary course of our business, however, there is no current material pending litigation to which we are a party and no material legal proceedings were terminated, settled or otherwise resolved during the fourth quarter of the fiscal year ended December 31, 2019.2022.
ITEM 4. MINE SAFETY DISCLOSURES.
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Not applicable.
2230
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market Information
Our Common Stock trades on the Nasdaq Global Select Market under the symbol “THRM.”
Holders
As of February 14, 2020,17, 2023, our Common Stock was held by 4032 shareholders of record. A substantially greater number of holders are beneficial owners whose shares of record are held by banks, brokers and other nominees.
Dividends
We have not paid any Common Stock cash dividends since formation, and we do not expect to pay any in the foreseeable future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon business conditions, our earnings and financial condition and other factors. Currently, our bank credit facilities limit payment of dividends on our Common Stock.
Stock Repurchase Program
In December 2016,2020, the Board of Directors authorized a three-year, $100 millionnew stock repurchase program. In June 2018, our Boardprogram (the “2020 Stock Repurchase Program”). pursuant to which the Company is authorized to repurchase up to $150 million of Directors authorized an increase inits issued and outstanding common stock over a three-year period, expiring December 15, 2023.
Repurchases under the stock repurchase plan to $300 million and extended the stock repurchase plan until December 2020.
Under the program, we2020 Stock Repurchase Program may repurchase,be made, from time to time, our common stock in amounts and at prices as we deemthe Company deems appropriate, taking into accountsubject to market conditions, applicable legal requirements, debt covenants and other considerations. The number of shares repurchased and the time of theAny such repurchases under the stock repurchase program will be determined by our management. Repurchases may be made on theexecuted using open market or inpurchases, privately negotiated transactions. Repurchases may also be made under the Exchange Actagreements or other transactions (including Rule 10b5-1 plan, which would permit shares totrading plans), and may be repurchased when we might otherwise be precludedfunded from doing so under securities laws.cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The authorization of this stock repurchase program does not require we repurchase any specific dollar value or number of shares and2020 Stock Repurchase Program may be modified, extended or terminated by our Board of Directors at any time.time without prior notice.
Issuer Purchases of Equity Securities During Fourth Quarter 20192022
Period |
| (a) 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) |
| ||||
October 1, 2019 to October 31, 2019 |
|
| 86,106 |
|
| $ | 39.72 |
|
|
| 86,106 |
|
| $ | 85,140,110 |
|
November 1, 2019 to November 30, 2019 |
|
| 44,600 |
|
| $ | 40.87 |
|
|
| 44,600 |
|
| $ | 83,317,485 |
|
December 1, 2019 to December 31, 2019 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 83,317,485 |
|
|
| (a) | (b) | (c) | (d) |
|
| |||||||||||||||
October 1, 2022 to | — | $ | — | — | 130,000,105 | |||||||||||
November 1, 2022 to | — | $ | — | — | 130,000,105 | |||||||||||
December 1, 2022 to December 31, 2022 | — | $ | — | — | 130,000,105 |
23
Performance Graphgraph
The following graph reflects the comparative changes in the value from December 31, 20142017 through December 31, 2019,2022, assuming an initial investment of $100 and the reinvestment of dividends, if any, in (1) our Common Stock, (2) the NASDAQ Composite index, (3) the Russell 2000 Index and (4) the Dow Jones U.S. Auto & Parts Index. Historical performance may not be indicative of future shareholder returns.
31
|
| As of December 31, |
| |||||||||||||||||||||
|
| 2014 |
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2019 |
| ||||||
Gentherm Incorporated |
| $ | 100.00 |
|
| $ | 129.44 |
|
| $ | 92.44 |
|
| $ | 86.70 |
|
| $ | 109.18 |
|
| $ | 121.22 |
|
NASDAQ Composite Index |
| $ | 100.00 |
|
| $ | 106.96 |
|
| $ | 116.45 |
|
| $ | 150.96 |
|
| $ | 146.67 |
|
| $ | 200.49 |
|
Russell 2000 Index |
| $ | 100.00 |
|
| $ | 95.59 |
|
| $ | 115.95 |
|
| $ | 132.94 |
|
| $ | 118.30 |
|
| $ | 148.49 |
|
Dow Jones U.S. Auto & Parts Index |
| $ | 100.00 |
|
| $ | 97.85 |
|
| $ | 104.83 |
|
| $ | 125.05 |
|
| $ | 92.48 |
|
| $ | 122.02 |
|
|
|
|
|
| As of December 31, |
| ||||||||||||||||||
|
|
|
|
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
| ||||||
Gentherm Incorporated |
| $ | 100.00 |
|
| $ | 125.92 |
|
| $ | 139.81 |
|
| $ | 205.42 |
|
| $ | 273.70 |
|
| $ | 205.64 |
|
NASDAQ Composite |
| $ | 100.00 |
|
| $ | 97.16 |
|
| $ | 132.81 |
|
| $ | 192.47 |
|
| $ | 235.15 |
|
| $ | 158.65 |
|
Russell 2000 |
| $ | 100.00 |
|
| $ | 88.99 |
|
| $ | 111.70 |
|
| $ | 134.00 |
|
| $ | 153.85 |
|
| $ | 122.41 |
|
Dow Jones US Auto Parts |
| $ | 100.00 |
|
| $ | 69.37 |
|
| $ | 88.40 |
|
| $ | 103.88 |
|
| $ | 125.69 |
|
| $ | 92.46 |
|
ITEM 6. RESERVED
24
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
The following table sets forth selected financial data and should be read in conjunction with the consolidated financial statements and the notes thereto, as well as Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Report.
|
| Year Ended December 31, |
| |||||||||||||||||
|
| (In thousands, except per share data) |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
Product revenues(a) |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
| $ | 993,991 |
|
| $ | 925,206 |
|
| $ | 863,152 |
|
Operating income |
|
| 84,260 |
|
|
| 72,788 |
|
|
| 97,098 |
|
|
| 106,119 |
|
|
| 121,319 |
|
Net income |
|
| 37,506 |
|
|
| 41,899 |
|
|
| 35,227 |
|
|
| 76,598 |
|
|
| 95,393 |
|
Basic earnings per share |
| $ | 1.13 |
|
| $ | 1.17 |
|
| $ | 0.96 |
|
| $ | 2.10 |
|
| $ | 2.65 |
|
Diluted earnings per share |
| $ | 1.13 |
|
| $ | 1.16 |
|
| $ | 0.96 |
|
| $ | 2.09 |
|
| $ | 2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| |||||||||||||||||
|
| (In thousands) |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
Working capital (b)(c) |
| $ | 217,159 |
|
| $ | 267,679 |
|
| $ | 289,754 |
|
| $ | 295,130 |
|
| $ | 270,320 |
|
Total assets (c) |
|
| 727,386 |
|
|
| 803,047 |
|
|
| 883,405 |
|
|
| 843,030 |
|
|
| 648,343 |
|
Long-term obligations |
|
| 98,032 |
|
|
| 147,952 |
|
|
| 158,216 |
|
|
| 189,002 |
|
|
| 118,596 |
|
Accumulated earnings |
|
| 401,732 |
|
|
| 363,965 |
|
|
| 293,645 |
|
|
| 256,922 |
|
|
| 180,324 |
|
|
|
|
|
|
|
|
|
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (and notes related thereto) and other more detailed financial information appearing elsewhere in this Annual Report. Further, you should read the following discussion and analysis of our financial condition and results of operations together with the “Risk Factors” included elsewhere in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Forward-Looking Statements” in Item 1Part I of this Annual Report.
Overview
Gentherm Incorporated is athe global developer and marketermarket leader of innovative thermal management and pneumatic comfort technologies for a broad range of heatingthe automotive industry. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and coolingother components), battery performance solutions, cable systems, lumbar and temperature control applications. Ourmassage comfort solutions, valve system technologies, and other electronic devices. Medical products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well asinclude patient temperature management within the health care industry.systems. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and will lead to new product applications for existing and new markets. Our automotive products can be found on the vehicles ofmanufactured by nearly all the major automotive manufacturersOEMs operating in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and to create new product applications for existing and new markets.
We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During 2019, we secured an estimated $1.5 billion of automotive new business awards, which represents the estimated future lifetime product revenues for all automotive customers. This amount does not represent firm customer orders. We report our new business awards primarily based on communication of award from our customers using price and volume projections available at the time of award, and we have not updated such previously communicated estimates as of December 31, 2019 or the date hereof. Our estimates of automotive new business awards are forward-looking statements and may not actually be achieved. See the risk factor “We may not realize sales represented by awarded business” in Item 1A “Risk Factors” of Part I of this report.
Recent Trends and Economic Conditions
Our sales are driven by the number of vehicles produced by the automotive manufacturers,OEMs, which is ultimately dependent on consumer demand for automotive vehicles, our product content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our content per vehicle. Newcustomers. Historically, new vehicle demand isand product content (i.e. vehicle features) have been driven by macro-economicmacroeconomic and other factors, such as interest rates, automotive manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. According to the forecasting firm IHS Markit, global light vehicle production was 88.9 million unitsVehicle content has also been driven by trends in 2019, down from 94.2 million units in 2018, a decline of 5.6%. Actual light vehicle production volumes in North Americaconsumer preferences, such as preferences for 2019 were 16.3 million units compared to 17.0 million units in 2018, a decrease of 4.0%,smart devices and light vehicle production volumes in Europe were 21.1 million units for 2019 compared to 22.0 million units in 2018, a decrease of 4.2%. Actual light vehicle production volumes in Japan/Korea remained relatively stable with 13.1 million units in 2019 compared to 13.2 million units in 2018, a decrease of 0.8%. The largest light vehicle production volume decline was in China, with 24.7 million units in 2019 compared to 26.9 million units in 2018, a decrease of 8.2%.
IHS Markit forecasted light vehicle production volumes for 2020 is 87.2 million units, a decline of 1.9% from 2019 primarily related to the recent coronavirus outbreak originating from China,features, personalized user experience, and the significant impact to manufacturingcomfort, health and consumption in the broader China market,wellness. Economic volatility or weakness, as well as Japan and South Korea. The coronavirus outbreak has resulted in extended shutdown of certain businesses in the region and disruptions in the supply chain, which could result in further social, economic and labor instability.
Economic volatility or weaknessgeopolitical factors, in North America, Europe or Asia, have had and could result in a significant reduction in automotive sales and production by our customers, which have had and would have an adverse effect on our business, results of operations and financial condition. There is also potential that geopolitical factors could adversely impact the U.S. and other economies, and specificallySince 2020, the automotive sector. Whileindustry has experienced fluctuating demand and production disruptions related to supply chain challenges, facility closures, labor shortages, work stoppages and inflationary pressures, as described below. We believe our diversified automotive OEM customer base and geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns and benefit from industry upturns in the ordinary course. However, shifts in the mix of global automotive production to higher cost regions or to vehicles withthat contain less of our product content as well as continuing production challenges and inflationary pressures could adversely impact our profitability.
26
Volatility, In addition, we may be adversely impacted by volatility or weakness or slow growth in markets for hybrid or electric vehicles could resultspecifically. We believe our products offer certain advantages for hybrid and electric vehicles, including improved energy efficiency, and position us well to withstand changes in less growththe volume mix between vehicles driven by internal combustion engines and hybrid and other electric vehicles. We believe our industry is increasingly progressing towards a focus on human comfort and health, which is evidenced by increasing adoption rates for comfort products. We believe that products we are developing, such as ClimateSense® and our acquisition of Alfmeier’s pneumatic comfort solutions, position us well to address trends in automotive salesconsumer preferences such as personalized user experience, comfort, health and production by our customers than planned,wellness.
Recent Trends
General Macroeconomic and Geopolitical Conditions
Since 2020, the global economy has experienced significant volatility and disrupted supply chains, which would have anhas had a widespread adverse effect on our business,the global automotive industry. These macroeconomic conditions have resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. These broad-based inflationary impacts have negatively impacted the Company’s financial condition, results of operations and cash flows. Although we are optimistic that the worst of the global macroeconomic volatility is in the past, the direct and indirect impacts on our markets, operations, and financial performance have been unpredictable. As a result of this continued uncertainty, there may still be impacts on our industry, operations, workforce, supply chains, distribution systems, and demand for our products in the future which cannot be reasonably estimated at this time.
33
Additionally, the United States and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflict between Russia and Ukraine. In February 2022, Russia launched a full-scale military invasion of Ukraine. As a result of the conflict, the United States, United Kingdom, European Union and other countries have levied economic sanctions and bans on Russia and Russia has responded with its own retaliatory measures. These measures have impacted the price of certain raw materials and energy and could have a lasting impact on regional and global economies.
Our facility in Vynohradiv is on the far western corner within the Transcarpathia region of Ukraine near the Hungary border. In 2022, products manufactured at our Ukraine facility represented approximately 8% of the Company’s total revenue, including automotive cables, seat heaters and steering wheel heaters, compared to 11% in 2021. At this time, our Ukraine facility is operating at normal levels and we continue to execute contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. We have incurred, and will likely continue to incur costs to support our employees and relocate equipment and production based on customer and company needs. Further, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we may experience a significant disruption to our operations. Our response to the ongoing conflict is based on a severity level contingency response plan that has been developed with certain customers. As the situation in Ukraine is very fluid, we continue to monitor its effects on our business and we continue to work closely with our customers to adjust our contingency response as necessary.
Supply shortages of semiconductor chips and other components have resulted in decreases in global automotive vehicle production and significant volatility in customer vehicle production schedules. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, including Gentherm, have been unable to fully meet the vehicle production demands of the OEMs due to events which are outside the Company's control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, fires at suppliers’ facilities, significant weather events impacting semiconductor supplier facilities in the southern United States, and other extraordinary events. The Company has experienced and may continue to experience direct impacts of ongoing shortages of semiconductors. Our ability to meet customer orders without significant delay and/or expense remains subject to significant uncertainty.
Global inflation has increased significantly over the past year. Changing costs of freight, materials, equipment, labor and other inputs used to manufacture and sell our products and logistics costs, in particular, have impacted and may in the future impact operating costs and, accordingly, may affect the prices of our products. We are involved in continuing programs to mitigate the impact of cost increases through identification of sourcing and manufacturing efficiencies where possible. However, there have been, and there may still be, impacts we are not able to fully mitigate or pass through the increases in our operating costs.
We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain international operations into U.S. Dollars as part of the consolidation process. Therefore, fluctuations in foreign currency exchange rates can create volatility in the results of operations and may adversely affect our financial condition.
Fit-for-Growth
On June 25, 2018, Gentherm announced a strategic plan intendedIn response to improve business performancethe global supply chain instability and positioninflationary cost increases, the Company has taken several actions to deliver above market growthminimize any potential and improved profitabilityactual adverse impacts by working closely with its suppliers and customers to its shareholders. An important elementclosely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise. We expect global supply chain instability will continue to have an adverse impact on our business and financial performance for the foreseeable future, and such adverse impact may be material. The consequences of the strategy waspandemic, global supply chain instability and inflationary cost increases and their adverse impact to the Fit-for-Growth initiative that focusedglobal economy continue to evolve. Accordingly, the significance of the future adverse impact on purchasing excellence, rationalizationour business and financial statements remains subject to significant uncertainty as of research and development activities, reducing selling, general and administrative expense, minimization or eliminationthe date of investments in non-core areas and developing a manufacturing footprint commensurate with the new plan.
During 2018, the Company initiated this strategy through the sale of its battery management systems division located in Irvine, California and the filing.site consolidation of its advanced research and development operations which resulted in vacating two leased facilities in Azusa, California. Further, the Company exited, several product categories including furniture, aviation, battery management electronics, industrial battery packs, automotive thermoelectric generators and other non-core electronics. Additionally, the Company undertook restructuring actions to reduce global overhead costs to improve selling, general and administrative expense.
During 2019, the Company completed its plan to eliminate non-core areas of investment through the divestitures of its environmental test equipment business, Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”) and its remote power generation systems business, Gentherm Global Power Technologies (“GPT”). In addition, we launched a plan to optimize our manufacturing footprint and took additional actions to reduce costs through purchasing excellence and additional restructuring activities focused on reductions of selling, general and administrative expense.
The Company continues to execute the Fit-for-Growth strategy in an effort deliver market growth and improve profitability to its shareholders.
Divestitures
Divestiture of CSZ-ICAcquisitions
On February 1, 2019,July 13, 2022, the Company completed the divestitureacquisition of CSZ-ICJiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”) and the former Cincinnati Sub-Zero headquarters facilityits wholly owned subsidiary, IOB Medical, Inc. Dacheng, a privately held manufacturer of medical materials and medical equipment, including patient temperature management solutions, for numerous local and international customers. The acquisition provides Gentherm Medical a local presence in China’s high-growth market for patient warming devices and other medical device products, while also expanding overall manufacturing capacity to Weiss Technik North America, Inc.include a low-cost manufacturing site. The total consideration for total cash proceeds of $47.5this acquisition was $35.0 million, including $2.5 millionwhich is comprised of cash proceeds placed into an escrow account for a periodpayments, net of cash acquired. The purchase agreement also includes future cash payments of up to one year as partial security for$3.0 million, contingent upon the Company’s obligations under the sale agreement. In connection with the sale, Gentherm entered into an operating lease agreement for a portionachievement of certain performance metrics and continued
34
employment of the officeformer majority shareholder through a series of defined dates. These contingent payments will be accounted for as compensation expense and manufacturing building space purchased by Weiss Technik North America, Inc. For the year ended December 31, 2019, the Company recognized a $4.3 million gain on sale, which is classified as Asset impairments and net loss on divestitures within the consolidated statements of income.
Divestiture of GPT
OnOctober 1, 2019, the Company completed the divesture of GPT for a nominal amount. For the year ended December 31, 2019, the Company recognized asset impairments and loss on sale totaling $27.1 million, consisting of $16.8 million of impairment on assets held for sale, $4.5 million related to impairment of an equity investment that met held for sale criteria during 2019 and $5.8 million of loss on sale, which includes $4.0 million related to the release of previously deferred foreign currency translation losses recorded in accumulated other comprehensive loss and $1.5 million related to a loan to the buyer that was considered uncollectible. These impairment charges and loss on sale are classified as Asset impairments and net loss on divestitures within the consolidated statements of income.
Acquisitions
Acquisition of Stihler Electronic GmbH (“Stihler”)
On April 1, 2019, Gentherm acquired Stihler, a leading developer and manufacturer of patient and blood temperature management systems, for a purchase price of $15.5 million, net of cash acquired and including $0.7 million 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 $0.7 million to be paid if the selling shareholder remains employed by Stihler through
27
December 2020, which 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.administrative.
Acquisition of Etratech
On NovemberAugust 1, 2017,2022, the Company acquired substantially all100% of the assetsequity interests of Alfmeier Präzision SE (“Alfmeier”) a global leader in automotive lumbar and assumed substantially allmassage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. The acquisition further expands the operating liabilitiesCompany's current value proposition beyond thermal in comfort, health, wellness, and energy efficiency and aligns well with global consumer demand for expanded offerings in vehicle passenger comfort. The total consideration for this acquisition was $170.7 million. The Company made cash payments of Etratech Inc., an Ontario corporation and all of the outstanding shares of Etratech Hong Kong, an entity organized under the laws of Hong Kong, in an all-cash transaction for a purchase price of $65.0approximately $170.4 million, net of cash acquired of $0.7 million. Etratech manufactures advanced electronic controls and control systems for the automotive, RV and marine, security, medical and other industries. The results of operations of Etratech are reported within the Company’s Automotive segment from the date of acquisition.acquired.
Manufacturing Footprint Rationalization
On September 23, 2019, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. Under this plan, the Company will relocate and consolidate certain existing automotive manufacturing and, as a result, certain other activities, overall reducing the number of plants by two. During the year ended December 31, 2019, the Company recognized expense of $4.9 million for employee separation costs that will be paid pursuant to the terms of statutory requirements of the affected locations. Additionally, the Company recognized $2.1 million of accelerated depreciation and fixed asset impairment.
The Company expects to incur total costs of between $20.0 million and $24.0 million, of which between $17.0 million and $21.0 million are expected to be cash expenditures. The total expected costs include employee separation costs of between $9.0 million and $11.0 million, capital expenditures of between $4.5 million and $5.5 million and non-cash expenses for accelerated depreciation and impairment of fixed assets of $3.0 million. The Company also expects to incur other transition costs including recruiting, relocation, and machinery and equipment move and set up costs of between $3.5 million and $4.5 million. The actions under this plan are expected to be substantially completed by the end of 2021. The actual timing, costs and savings of the Plan may differ materially from the Company’s current expectations and estimates.
See Note 5 to our consolidated financial statements for information about our restructuring activities.
Stock Repurchase Program
In December 2016, the Board4, “Acquisitions” of Directors authorized a three-year, $100.0 million stock repurchase program. In June 2018, our Board of Directors authorized an increase in the stock repurchase plan to $300.0 million and extended the stock repurchase plan until December 2020. In 2019, we repurchased approximately $63.3 million of shares and have a remaining repurchase authorization of approximately $83.3 million.
For further information related to our stock repurchase program, see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," and Note 16, "Equity" to the consolidated financial statements included in this Report.Report for additional information.
Impairments – Non-Automotive Electronics Business
On December 31, 2022, the Company approved a plan to exit its non-automotive electronics business to strengthen the Company’s core business and focus its resources and equipment with businesses and investments that are more strategic and profitable. The Company will continue to sell certain non-automotive electronics products until the exit is complete.
The Company is evaluating a potential sale of the non-automotive electronics business or substantially all of its assets. If such sale is not pursued or is unsuccessful, the Company intends to wind-down the operations of the business over approximately eight to twelve months, subject to discussions with customers and suppliers. In the event of a wind-down, certain property, plant and equipment will be utilized by other operations of the Company.
During the year ended December 31, 2022, the Company recorded non-cash impairment charges of $9.4 million, $5.6 million and $0.7 million for write downs of inventory, intangible assets and property and equipment, respectively, within the Automotive segment. Write downs of inventory are recorded in Cost of sales. Write downs of intangible assets and property and equipment are recorded in Impairment of intangible assets and property and equipment.
Light Vehicle Production Volumes
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm S&P Global Mobility (February 2023 release), global light vehicle production in 2022 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to 2021, are shown below (in millions of units):
|
| 2022 |
|
| 2021 |
|
| % Change |
| |||
North America |
|
| 14.3 |
|
|
| 13.0 |
|
|
| 9.7 | % |
Europe |
|
| 15.8 |
|
|
| 15.9 |
|
|
| (0.5 | )% |
Greater China |
|
| 26.4 |
|
|
| 24.8 |
|
|
| 6.3 | % |
Japan / South Korea |
|
| 11.2 |
|
|
| 10.9 |
|
|
| 2.6 | % |
Total light vehicle production volume in key markets |
|
| 67.7 |
|
|
| 64.7 |
|
|
| 4.7 | % |
The S&P Global Mobility report (February 2023 release) forecasted light vehicle production volume in the Company’s key markets for full year 2023 to increase to 70.0 million units, a 3.4% increase from full year 2022 light vehicle production volumes. Forecasted light vehicle production volumes are a component of the data we use in forecasting future business. However, these forecasts generally are updated monthly, and future forecasts have been and may continue to be significantly different from period to period due to changes in macroeconomic conditions or matters specific to the automotive industry. Further, due to differences in regional product mix at our manufacturing facilities, as well as material production schedules from our customers for our products on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of S&P Global Mobility or other third-party sources.
New Business Awards
We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During 2022, we secured an estimated $1,793 million of automotive new business awards (inclusive of three full quarters of Alfmeier), which is at the high end of the range of new business awards in recent years. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by our customers to Gentherm in the applicable period, with the
35
value based on the price and volume projections received from each customer as of the award date. Although automotive new business awards are not firm customer orders, we believe that new business awards are an indicator of future revenue. New business awards are not projections of revenue or future business as of December 31, 2022, the date of this Annual Report or any other date. Customer projections regularly change over time, and we do not update our calculation of any new business award after the date initially communicated. Automotive new business awards in 2022 also do not reflect, in particular, the impact of macroeconomic and geopolitical challenges on future business. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties as described in Item 1 under “Forward-Looking Statements” of this Annual Report.
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Industrial. Medical.
See Note 719, “Segment Reporting,” to the consolidated financial statements included in this Annual Report for a description of our reportable segments as well as their proportional contribution to the Company’s reported product revenues and operating income. The financial information used by our chief operating decision maker to assess operating performance and allocate resources is based on these reportable segments.
Results of Operations Year Ended December 31, 20192022 Compared to Year Ended December 31, 20182021
This section discusses our consolidated results of operations for the yearsyear ended December 31, 2019 versus 2018. A2022 compared to the year ended December 31, 2021. For a detailed discussion of our consolidated results of operations for the years ended December 31, 20182021 compared to the year ended December 31, 2017 can be found under “Item 7. Management’s2020, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Results of Operations Year Ended December 31, 2021 Compared to December 31, 2020” in Part II of our Annual Reportannual report on Form 10-K for the year ended December 31, 2018,2021, which was filed with the SEC on February 26, 2019.17, 2022.
The results of operations for the years ended December 31, 20192022 and 2018,2021, in thousands, were as follows:
|
| Year Ended December 31, |
|
|
|
|
|
| Year Ended December 31, |
| ||||||||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| ||||||
Product revenues |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
| $ | (76,821 | ) |
| $ | 1,204,656 |
|
| $ | 1,046,150 |
|
| $ | 158,506 |
|
Cost of sales |
|
| 683,349 |
|
|
| 743,647 |
|
|
| 60,298 |
|
|
| 931,006 |
|
|
| 742,519 |
|
|
| (188,487 | ) |
Gross margin |
|
| 288,335 |
|
|
| 304,858 |
|
|
| (16,523 | ) |
|
| 273,650 |
|
|
| 303,631 |
|
|
| (29,981 | ) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Research and development expenses |
|
| 91,033 |
|
|
| 98,663 |
|
|
| 7,630 |
| ||||||||||||
Reimbursed research and development expenses |
|
| (18,557 | ) |
|
| (18,763 | ) |
|
| (206 | ) | ||||||||||||
Net research and development expenses |
|
| 72,476 |
|
|
| 79,900 |
|
|
| 7,424 |
|
|
| 85,722 |
|
|
| 75,214 |
|
|
| (10,508 | ) |
Selling, general and administrative expenses |
|
| 118,680 |
|
|
| 137,398 |
|
|
| 18,718 |
|
|
| 132,693 |
|
|
| 109,554 |
|
|
| (23,139 | ) |
Impairment of intangible assets and property and equipment |
|
| 6,291 |
|
|
| — |
|
|
| (6,291 | ) | ||||||||||||
Restructuring expenses |
|
| 12,919 |
|
|
| 14,772 |
|
|
| 1,853 |
|
|
| 637 |
|
|
| 3,857 |
|
|
| 3,220 |
|
Total operating expenses |
|
| 204,075 |
|
|
| 232,070 |
|
|
| 27,995 |
|
|
| 225,343 |
|
|
| 188,625 |
|
|
| (36,718 | ) |
Operating income |
|
| 84,260 |
|
|
| 72,788 |
|
|
| 11,472 |
|
|
| 48,307 |
|
|
| 115,006 |
|
|
| (66,699 | ) |
Interest expense |
|
| (4,763 | ) |
|
| (4,942 | ) |
|
| 179 |
| ||||||||||||
Foreign currency gain |
|
| 2,326 |
|
|
| 622 |
|
|
| 1,704 |
| ||||||||||||
Asset impairments and net loss on divestitures |
|
| (22,793 | ) |
|
| (11,476 | ) |
|
| (11,317 | ) | ||||||||||||
Interest expense, net |
|
| (4,294 | ) |
|
| (2,758 | ) |
|
| (1,536 | ) | ||||||||||||
Foreign currency (loss) gain |
|
| (6,778 | ) |
|
| 1,487 |
|
|
| (8,265 | ) | ||||||||||||
Other income |
|
| 121 |
|
|
| 1,127 |
|
|
| (1,006 | ) |
|
| 1,147 |
|
|
| 117 |
|
|
| 1,030 |
|
Earnings before income tax |
|
| 59,151 |
|
|
| 58,119 |
|
|
| 1,032 |
|
|
| 38,382 |
|
|
| 113,852 |
|
|
| (75,470 | ) |
Income tax expense |
|
| 21,645 |
|
|
| 16,220 |
|
|
| (5,425 | ) |
|
| 13,941 |
|
|
| 20,418 |
|
|
| 6,477 |
|
Net income |
| $ | 37,506 |
|
| $ | 41,899 |
|
| $ | (4,393 | ) |
| $ | 24,441 |
|
| $ | 93,434 |
|
| $ | (68,993 | ) |
36
Product revenues by product category, in thousands, for the years ended December 31, 20192022 and 20182021 were as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| % Change |
| |||
Climate Control Seat |
| $ | 426,046 |
|
| $ | 393,816 |
|
|
| 8.2 | % |
Seat Heaters |
|
| 283,970 |
|
|
| 270,054 |
|
|
| 5.2 | % |
Steering Wheel Heaters |
|
| 120,949 |
|
|
| 102,496 |
|
|
| 18.0 | % |
Automotive Cables |
|
| 76,962 |
|
|
| 84,114 |
|
|
| (8.5 | )% |
Battery Performance Solutions |
|
| 71,907 |
|
|
| 69,594 |
|
|
| 3.3 | % |
Electronics |
|
| 44,106 |
|
|
| 51,648 |
|
|
| (14.6 | )% |
Lumbar and Massage Comfort Solutions (a) |
|
| 56,980 |
|
|
| — |
|
|
| 100.0 | % |
Valve System Technologies (a) |
|
| 41,980 |
|
|
| — |
|
|
| 100.0 | % |
Other Automotive |
|
| 38,716 |
|
|
| 32,911 |
|
|
| 17.6 | % |
Subtotal Automotive segment |
|
| 1,161,616 |
|
|
| 1,004,633 |
|
|
| 15.6 | % |
Medical segment (a) |
|
| 43,040 |
|
|
| 41,517 |
|
|
| 3.7 | % |
Total Company |
| $ | 1,204,656 |
|
| $ | 1,046,150 |
|
|
| 15.2 | % |
|
| Year Ended December 31, |
|
|
|
|
| |||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Climate Control Seat (CCS) |
| $ | 359,355 |
|
| $ | 373,945 |
|
|
| (3.9 | )% |
Seat Heaters |
|
| 284,174 |
|
|
| 305,337 |
|
|
| (6.9 | )% |
Automotive Cables |
|
| 88,031 |
|
|
| 98,931 |
|
|
| (11.0 | )% |
Steering Wheel Heaters |
|
| 65,426 |
|
|
| 69,845 |
|
|
| (6.3 | )% |
Electronics |
|
| 47,542 |
|
|
| 56,783 |
|
|
| (16.3 | )% |
Battery Thermal Management (BTM) |
|
| 41,498 |
|
|
| 28,472 |
|
|
| 45.8 | % |
Other Automotive |
|
| 34,199 |
|
|
| 24,511 |
|
|
| 39.5 | % |
Subtotal Automotive |
| $ | 920,225 |
|
| $ | 957,824 |
|
|
| (3.9 | )% |
Medical |
|
| 36,860 |
|
|
| 30,108 |
|
|
| 22.4 | % |
GPT |
|
| 11,181 |
|
|
| 19,520 |
|
|
| (42.7 | )% |
CSZ-IC |
|
| 3,418 |
|
|
| 41,053 |
|
|
| (91.7 | )% |
Subtotal Industrial |
| $ | 51,459 |
|
| $ | 90,681 |
|
|
| (43.3 | )% |
Total Company |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
|
| (7.3 | )% |
Product Revenues
Below is a summary of our productProduct revenues, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
|
|
| Variance Due To: |
| ||||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
|
|
| Volume |
|
| FX |
|
| Pricing/Other |
|
| Total |
| |||||||
Product revenues |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
| $ | (76,821 | ) |
|
| $ | (3,171 | ) |
| $ | (19,495 | ) |
| $ | (54,155 | ) |
| $ | (76,821 | ) |
|
| Year Ended December 31, |
|
|
| Variance Due To: |
| ||||||||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
|
|
| Automotive Volume |
|
| FX |
|
| Acquisition |
|
| Pricing/ Other |
|
| Total |
| ||||||||
Product revenues |
| $ | 1,204,656 |
|
| $ | 1,046,150 |
|
| $ | 158,506 |
|
|
| $ | 108,356 |
|
| $ | (55,109 | ) |
| $ | 102,322 |
|
| $ | 2,937 |
|
| $ | 158,506 |
|
Product revenues for the year ended December 31, 2019 decreased 7.3%2022 increased 15.2% as compared to the year ended December 31, 2018.2021. Revenue increased in all product categories except Electronics and Automotive Cables. The decreaseincrease in product revenues is due to unfavorablefavorable volumes in our Automotive segment, including adverse impactsthe inclusion of $12.4 million resultingsales from Alfmeier and Dacheng since the General Motors labor strike. Product revenues were also negatively impactedacquisitions, and the negotiation of lower annual price reductions and cost recoveries from customers, partially offset by unfavorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won and Chinese Renminbi. The decrease in product revenues included in Variance Due To Pricing/Other above is primarily attributable to the divestitures of CSZ-IC on February 1, 2019 and GPT on October 1, 2019, the acquisition of Stihler on April 1, 2019, as well as decreases in customer pricing.Won.
29
Cost of Sales
Below is a summary of our costCost of sales and grossGross margin, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
|
|
| Variance Due To: |
|
| Year Ended December 31, |
|
|
| Variance Due To: |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
|
|
| Volume |
|
| Operational Performance |
|
| FX |
|
| Other |
|
| Total |
|
| 2022 |
|
| 2021 |
|
| Favorable / |
|
|
| Automotive Volume |
|
| FX |
|
| Operational Performance |
|
| Acquisitions and Other |
|
| Total |
| ||||||||||||||||
Cost of sales |
| $ | 683,349 |
|
| $ | 743,647 |
|
| $ | 60,298 |
|
|
| $ | 1,918 |
|
| $ | 28,073 |
|
| $ | 10,755 |
|
| $ | 19,552 |
|
| $ | 60,298 |
|
| $ | 931,006 |
|
| $ | 742,519 |
|
| $ | (188,487 | ) |
|
| $ | (65,942 | ) |
| $ | 30,778 |
|
| $ | (34,056 | ) |
| $ | (119,267 | ) |
| $ | (188,487 | ) |
Gross margin |
|
| 288,335 |
|
|
| 304,858 |
|
|
| (16,523 | ) |
|
|
| (1,253 | ) |
|
| 13,755 |
|
|
| (8,740 | ) |
|
| (20,285 | ) |
|
| (16,523 | ) |
|
| 273,650 |
|
|
| 303,631 |
|
|
| (29,981 | ) |
|
| $ | 42,414 |
|
| $ | (24,331 | ) |
| $ | (29,696 | ) |
| $ | (18,368 | ) |
| $ | (29,981 | ) |
Gross margin - Percentage of product revenues |
|
| 29.7 | % |
|
| 29.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22.7 | % |
|
| 29.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales for the year ended December 31, 2019 decreased 8.1%2022 increased by 25.4% as compared to the year ended December 31, 2018.2021. The decreaseincrease in cost of sales is dueprimarily related to increased volumes decreases in our Automotive segment, operational performance improvements,the inclusion of expenses from Alfmeier and Dacheng since the acquisitions, inflation associated with wages, higher transportation costs and material costs, and impairment recorded related to the exit of the non-automotive electronics business. These increases were partially offset by favorable foreign currency impacts primarily attributable to the Euro and Chinese Renminbi and Mexican Peso. The operational performance improvements are primarily attributable to decreases in headcount, overtime, expedited freight and material costs. The decrease in cost of sales is also due to the following items included in Variance Due To Other above:Renminbi.
|
|
|
|
|
|
37
Net Research and Development Expenses
Below is a summary of our netNet research and development expenses, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| ||||||
Research and development expenses |
| $ | 91,033 |
|
| $ | 98,663 |
|
| $ | 7,630 |
|
| $ | 105,914 |
|
| $ | 91,807 |
|
| $ | (14,107 | ) |
Reimbursed research and development expenses |
|
| (18,557 | ) |
|
| (18,763 | ) |
|
| (206 | ) |
|
| (20,192 | ) |
|
| (16,593 | ) |
|
| 3,599 |
|
Net research and development expenses |
|
| 72,476 |
|
|
| 79,900 |
|
|
| 7,424 |
|
| $ | 85,722 |
|
| $ | 75,214 |
|
| $ | (10,508 | ) |
Percentage of product revenues |
|
| 7.5 | % |
|
| 7.6 | % |
|
|
|
|
|
| 7.1 | % |
|
| 7.2 | % |
|
|
|
Net research and development expenses for the year ended December 31, 2019 decreased 9.3%2022 increased 14% as compared to the year ended December 31, 2018.2021. The decreaseincrease in net research and development expenses is primarily related to the Company’s cost reduction initiatives that were launched ininclusion of expenses from Alfmeier since the second half of 2018. These initiatives were focused on the minimization or elimination ofacquisition and increased investments in non-core areas.ClimateSense® and battery performance solutions, partially offset by favorable foreign currency impacts.
Selling, General and Administrative Expenses
Below is a summary of our selling,Selling, general and administrative expenses, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| ||||||
Selling, general and administrative expenses |
| $ | 118,680 |
|
| $ | 137,398 |
|
| $ | 18,718 |
|
| $ | 132,693 |
|
| $ | 109,554 |
|
| $ | (23,139 | ) |
Percentage of product revenues |
|
| 12.2 | % |
|
| 13.1 | % |
|
|
|
|
|
| 11.0 | % |
|
| 10.5 | % |
|
|
|
Selling, general and administrative expenses for the year ended December 31, 2019 decreased 13.6%2022 increased 21% as compared to the year ended December 31, 2018.2021. The decreaseincrease in selling, general and administrative expenses is primarily related to the impactsinclusion of divested businesses (CSZ-ICexpenses from Alfmeier since the acquisition and GPT)increases in acquisition related costs, partially offset by lower incentive compensation and the Company’s cost reduction initiatives that were launched in the second halffavorable foreign currency impacts.
Impairment of 2018.intangible assets and property and equipment
30
Restructuring Expenses
Below is a summary of our restructuringImpairment of intangible assets and property and equipment, in thousands, for the years ended December 31, 2022 and 2021:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| |||
Impairment of intangible assets and property and equipment |
| $ | 6,291 |
|
| $ | — |
|
| $ | (6,291 | ) |
Impairment of intangible assets and property and equipment primarily related to the intangible asset and property and equipment impairment recorded as a result of the Company’s plan to exit its non-automotive electronics business.
Restructuring Expenses
Below is a summary of our Restructuring expenses, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
| |||
Restructuring expenses |
| $ | 12,919 |
|
| $ | 14,772 |
|
| $ | 1,853 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| |||
Restructuring expenses |
| $ | 637 |
|
| $ | 3,857 |
|
| $ | 3,220 |
|
Restructuring expenses in 2019 primarily relate to the Manufacturing Footprint Rationalization restructuring program and other discrete restructuring activities focused on the rotation ofoptimizing our manufacturing and engineering footprint to lower cost locations and the reduction of global overhead expenses. During the year ended December 31, 2019, the Company recognized expenses of $8.1 millionfor employee separation costs, $2.5 millionof accelerated depreciation and asset impairment charges and $2.4 millionof other related costs.
Restructuring expenses in 2018 primarily relate to restructuring activities focused on reduction of global overhead costs and the minimization or elimination of investments in non-core areas of our business. During the year ended December 31, 2018, the Company recognized expenses of $8.4 million for employee separation costs, $2.5 million of accelerated depreciation and asset impairment charges and $3.8 million of other related costs.
38
expenses. See Note 5, "Restructuring" of"Restructuring and Impairments," in the notes to the consolidated financial statements included in this Annual Report for additional information.
Interest Expense
Below is a summary of our interestInterest expense, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
| |||
Interest expense, net |
| $ | (4,763 | ) |
| $ | (4,942 | ) |
| $ | 179 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| |||
Interest expense, net |
| $ | (4,294 | ) |
| $ | (2,758 | ) |
| $ | (1,536 | ) |
The increase in interest expense during the year ended December 31, 2022 compared to 2021 primarily relates to the increased interest from a higher balance on our revolving credit agreement. See Note 13, "Debt" of9, "Debt," in the notes to the consolidated financial statements included in this Annual Report for additional information.
Foreign Currency (Loss) Gain
Below is a summary of our foreignForeign currency (loss) gain, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
| |||
Foreign currency gain |
| $ | 2,326 |
|
| $ | 622 |
|
| $ | 1,704 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| |||
Foreign currency (loss) gain |
| $ | (6,778 | ) |
| $ | 1,487 |
|
| $ | (8,265 | ) |
Foreign currency loss for the year ended December 31, 2022, included net realized foreign currency loss of $2.1 million and unrealized net foreign currency loss of $4.7 million.
Foreign currency gain for the year ended December 31, 2019,2021, included net realized foreign currency gainloss of $56 thousand$1.6 million and unrealized net foreign currency gain of $2.3$3.1 million.
Foreign currency gain for the year ended December 31, 2018, included net realized foreign currency gain of $1.2 million and unrealized net foreign currency loss of $0.6 million.
Asset Impairments and Net Loss on DivestituresOther Income
Below is a summary of our asset impairment and net loss on divestitures, in thousands, for the years ended December 31, 2019 and 2018:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
| |||
Asset impairments and net loss on divestitures |
| $ | (22,793 | ) |
| $ | (11,476 | ) |
| $ | (11,317 | ) |
31
Asset impairments and net loss on divestitures for the year ended December 31, 2019 includes the following:
|
|
|
|
|
|
|
|
Asset impairments and net loss on divestitures for the year ended December 31, 2018 includes the following:
|
|
|
|
|
|
Other Income
Below is a summary of our other income, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
| |||
Other income |
| $ | 121 |
|
| $ | 1,127 |
|
| $ | (1,006 | ) |
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| |||
Other income |
| $ | 1,147 |
|
| $ | 117 |
|
| $ | 1,030 |
|
The decreaseincrease in other income primarily is primarily duedriven by the repayment of a loan to a reductionthe buyer of lower miscellaneous income.Global Power Technologies, which previously was considered uncollectible and written-off.
Income Tax Expense
Below is a summary of our incomeIncome tax expense, in thousands, for the years ended December 31, 20192022 and 2018:2021:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| Favorable / (Unfavorable) |
| |||
Income tax expense |
| $ | 21,645 |
|
| $ | 16,220 |
|
| $ | (5,425 | ) |
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Favorable / |
| |||
Income tax expense |
| $ | 13,941 |
|
| $ | 20,418 |
|
| $ | 6,477 |
|
Income tax expense was $21.6$13.9 million for the year ended December 31, 2019,2022, on earnings before income tax of $59.2$38.4 million, representing an effective tax rate of 36.6%. The pre-tax earnings amount included the non-deductible impairment loss of $27.1 million. Adjusted for the impairment loss, the effective tax rate was 25.1% for 2019.36.3 %. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the international provisionsunfavorable impact of the U.S. tax reform, such as global intangible low-tax income (“GILTI”), enacted in December 2017, partlywithholding taxes, other non-deductible expenses and acquisition costs and uncertain tax positions, offset by certain intercompany transactions which disproportionately benefited lowerfavorable tax rate jurisdictions.effects on equity vesting, research and development credits in various jurisdictions and the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate.
Income tax expense was $16.2$20.4 millionfor the year ended December 31, 2018,2021, on earnings before income tax of $58.1$113.9 million, representing an effective tax rate of 27.9%17.9%. The pre-tax earnings amount included the non-deductible impairment loss of $11.5 million. Adjusted for the impairment loss, the effective tax rate was 23.3% for 2018. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to
39
certain favorable tax effects on equity vesting, intercompany transactions during the international provisionsyear and the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, offset by the unfavorable impact of the U.S.GILTI, withholding taxes, other non-deductible expenses and uncertain tax reform, such as global intangible low-tax income (“GILTI”), enacted in December 2017, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.positions.
32
Liquidity and Capital Resources
CashOverview
Our primary sources of liquidity and Cash Flows
The Company has funded its financial needs primarily throughcapital resources are cash flows from operations and borrowings available under our Second Amended and Restated Credit Agreement. Our cash requirements consist principally of working capital, capital expenditures, research and development, operating activitieslease payments, income tax payments and equity and debt financings. Our ongoing strategic plan sets forth a capital allocation strategy that includes a targeted debt-to-earnings leverage ratio and allows for some ofgeneral corporate purposes. We generally reinvest available cash flows from operations into our cash flow to be paid back to investors through Common Stock repurchases. On June 25, 2018,business, while opportunistically utilizing our Board of Directors increased the Company’sauthorized stock repurchase authorization to $300.0 million, of which $83.3 million of availability remained asprogram. Further, we continuously evaluate acquisition and investment opportunities that will enhance our business strategies.
As of December 31, 2019. This authorization expires on December 16, 2020. Based on its current operating plan, management believes2022, the Company had $153.9 million of cash and cash equivalents at December 31, 2019, together with cash flows from operating activities, and borrowing available$264.9 million of availability under our Second Amended and Restated Credit Agreement, are sufficient to meet operatingAgreement. See Note 13, “Financial Instruments” of the consolidated financial statements included in this Report for details regarding our factoring arrangements. Significant changes in our liquidity occurred during July 2022 in connection with the close of the Alfmeier and capital expenditure needs, and to serviceDacheng acquisitions. See "Material Cash Requirements" below for further information. We may issue debt for at least the next 12 months.or equity securities, which may provide an additional source of liquidity. 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. Therethere can be no assurance that such capitalequity or debt financing will be available at allto us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current shareholders.
We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Second Amended and Restated Credit Agreement. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on reasonable terms, which could adversely affectthe ability of our futuresubsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of December 31, 2022, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled approximately $108.6 million. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and business strategy. pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S.; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts.
The following table representsWe currently believe that our cash and cash equivalents and short-term investments, in thousands:borrowings available under our Second Amended and Restated Credit Agreement, receivables factoring arrangements, and cash flows from operations will be adequate to meet anticipated cash requirements for at least the next twelve months and the foreseeable future.
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash and cash equivalents at beginning of period |
| $ | 39,620 |
|
| $ | 103,172 |
|
Cash provided by operating activities |
|
| 118,803 |
|
|
| 118,434 |
|
Cash provided by (used in) investing activities |
|
| 5,840 |
|
|
| (40,757 | ) |
Cash used in financing activities |
|
| (108,593 | ) |
|
| (139,266 | ) |
Foreign currency effect on cash and cash equivalents |
|
| (2,722 | ) |
|
| (1,963 | ) |
Cash and cash equivalents at end of period |
| $ | 52,948 |
|
| $ | 39,620 |
|
Cash and Cash Flows
The table below summarizes our cash activity for each of the last two fiscal years (in thousands):
|
| Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash and cash equivalents at beginning of period |
| $ | 190,606 |
|
| $ | 268,345 |
|
Net cash provided by operating activities |
|
| 14,947 |
|
|
| 143,076 |
|
Net cash used in investing activities |
|
| (239,899 | ) |
|
| (48,830 | ) |
Net cash provided by (used in) financing activities |
|
| 189,927 |
|
|
| (169,141 | ) |
Foreign currency effect on cash and cash equivalents |
|
| (1,690 | ) |
|
| (2,844 | ) |
Cash and cash equivalents at end of period |
| $ | 153,891 |
|
| $ | 190,606 |
|
40
Cash Flows From Operating Activities
We manage our cash, cash equivalents and short-term investments to fund operating requirements and preserve liquidity to take advantage of future business opportunities. The following table compares the cash flows from operating activities earned during 2019 with those earned in 2018, in thousands:
|
| Year Ended December 31, |
|
|
|
|
| |||||
|
| 2019 |
|
| 2018 |
|
| Change |
| |||
Operating Activities: |
|
|
| |||||||||
Net income |
| $ | 37,506 |
|
| $ | 41,899 |
|
| $ | (4,393 | ) |
Non-cash adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 44,246 |
|
|
| 50,638 |
|
|
| (6,392 | ) |
Deferred income taxes |
|
| 3,617 |
|
|
| 6,699 |
|
|
| (3,082 | ) |
Stock compensation |
|
| 6,253 |
|
|
| 9,047 |
|
|
| (2,794 | ) |
Defined benefit pension plan (expense)/income |
|
| (570 | ) |
|
| 82 |
|
|
| (652 | ) |
Provision for doubtful accounts |
|
| 353 |
|
|
| (1 | ) |
|
| 354 |
|
Loss on sale of property and equipment |
|
| 462 |
|
|
| 2,602 |
|
|
| (2,140 | ) |
Operating lease expense |
|
| 6,173 |
|
|
| — |
|
|
| 6,173 |
|
Asset impairments and net loss on divestitures |
|
| 22,793 |
|
|
| 11,476 |
|
|
| 11,317 |
|
Other |
|
| 1,612 |
|
|
| — |
|
|
| 1,612 |
|
Net income before non-cash adjustments |
|
| 122,445 |
|
|
| 122,442 |
|
|
| 3 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 6,801 |
|
|
| 3,024 |
|
|
| 3,777 |
|
Inventory |
|
| (3,859 | ) |
|
| (7,689 | ) |
|
| 3,830 |
|
Other current assets |
|
| 7,996 |
|
|
| (4,428 | ) |
|
| 12,424 |
|
Accounts payable |
|
| (10,253 | ) |
|
| 12,380 |
|
|
| (22,633 | ) |
Accrued liabilities |
|
| (4,327 | ) |
|
| (7,295 | ) |
|
| 2,968 |
|
Net cash provided by operating activities |
| $ | 118,803 |
|
| $ | 118,434 |
|
| $ | 369 |
|
33
The following table highlights significant differences between the operating cash flows for the periods ending December 31, 2019 and 2018, respectively:
Net cash provided by operating activities during 2018 |
| $ | 118,434 |
|
Higher net income before changes in operating assets and liabilities |
|
| 2 |
|
Changes in working capital, net |
|
| 7,230 |
|
Changes in other assets and liabilities |
|
| (6,863 | ) |
Net cash provided by operating activities during 2019 |
| $ | 118,803 |
|
Net cash provided by operating activities before changes intotaled $14.9 million and $143.1 million for the years ended December 31, 2022 and 2021, respectively. Cash flow provided by operating activities for the year ended December 31, 2022 consisted primarily of net income of $24.4 million, increased by $51.8 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, and loss on disposition of property and equipment, $15.9 million for inventory provisions, and impairments of intangible assets and liabilities decreased during 2019 dueproperty and equipment of $6.3 million related to lower revenuesthe planned exit of the non-automotive electronics business, partially offset by higher cash based operating expensesnon-cash charges of $7.3 million for deferred income taxes and impairment losses. Additionally, working capital, net provided favorable cash flowsother, and $76.9 million related to accounts receivable, prepaid expenseschanges in assets and liabilities. Cash flow provided by operating activities for the year ended December 31, 2021 consisted primarily of net income of $93.4 million, increased by $54.3 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, and loss on disposition of property and equipment, partially offset by non-cash charges of $0.5 million for deferred income taxes and other, and $4.2 million related to changes i1n assets and accrued liabilities,liabilities.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $239.9 million and unfavorable amounts related to inventory$48.8 million for the years ended December 31, 2022 and accounts payable.
Working Capital
2021, respectively. The following table illustrates changes in working capital during 2019, in thousands:
Working capital at December 31, 2018 |
| $ | 267,679 |
|
Increase in cash and cash equivalents |
|
| 10,525 |
|
Decrease in accounts receivable |
|
| (6,662 | ) |
Increase in inventory |
|
| 4,721 |
|
Decrease in tax receivables, net |
|
| (8,609 | ) |
Increase in other current assets |
|
| 135 |
|
Decrease in payables |
|
| 9,725 |
|
Increase in accrued expenses and other liabilities |
|
| (6,589 | ) |
Additional impairment on held for sale assets |
|
| (14,701 | ) |
Decrease in working capital from sale of business |
|
| (42,603 | ) |
Increase in working capital from acquisition of new company |
|
| 5,203 |
|
Foreign currency effect on working capital |
|
| (1,665 | ) |
Working capital at December 31, 2019 |
| $ | 217,159 |
|
The following table highlights significant transactions that contributed to the increase in cash experiencedusage is primarily attributable to payments for the Alfmeier and Dacheng acquisitions of $205.5 million and increases in the purchases of property and equipment during the year ended December 31, 2019, in thousands:
Net cash provided by operating activities |
| $ | 118,803 |
|
Purchases of property and equipment |
|
| (23,729 | ) |
Repayment of debt |
|
| (96,999 | ) |
Borrowings from U.S. Revolving Note |
|
| 37,812 |
|
Stock repurchases |
|
| (63,283 | ) |
Proceeds from the exercise of Common Stock options |
|
| 16,557 |
|
Proceeds from divestitures of businesses, net |
|
| 44,173 |
|
Acquisition of business, net of cash acquired |
|
| (14,823 | ) |
Other items |
|
| (5,183 | ) |
Increase in cash, cash equivalents and restricted cash |
| $ | 13,328 |
|
The changes in current assets and liabilities reflects the classification of GPT and CSZ-IC (disposal group)2022 as held for sale during 2018. All assets and liabilities of the disposal group were classified as held for sale within current assets and current liabilities, respectively, on the Company’s consolidated balance sheet forcompared to the year ended December 31, 2018. See Note 4 to our consolidated financial statement for additional information about the assets and liabilities classified as held for sale.2021.
Cash Flows From Investing Activities
Cash provided by investing activities was $5.8 million during 2019, reflecting cash proceeds of $47.5 million related to the sale of CSZ-IC, partially offset by the acquisition of Stihler for $14.8 million and purchases of property and equipment related to the expansion of production capacity totaling $23.7 million.
34
Cash Flows From Financing Activities
CashNet cash provided by financing activities totaled $189.9 million for the year ended December 31, 2022 and net cash used in financing activities was $108.6totaled $169.1 million during 2019, reflecting paymentsfor the year ended December 31, 2021. Cash flows provided by financing activities for the year ended December 31, 2022 primarily included $207.0 million of principal ondebt borrowings to fund acquisitions and $1.7 million of proceeds from the U.S. Revolving Note, the DEG China Loan and the DEG Vietnam Loan totaling $97.0 million in aggregate,exercise of common stock options, partially offset by additional borrowings on$13.1 million of debt repayments and $5.5 million paid for employee taxes related to the U.S. Revolving Note totaling $37.8 million. Undrawn borrowing capacity under the U.S. Revolving Note was $403.4 million as of December 31, 2019. Cash was also paid during 2019 to repurchase Common Stock totaling $63.3 million, and for cancellationsnet settlement of restricted stock awards totaling $1.4 million.units that vested during the year. Cash flows used in financing activities for the year ended December 31, 2021 primarily included $153.2 million of debt repayments, $20.0 million paid to repurchase common stock and $4.1 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year, partially offset by $8.3 million of proceeds from the exercise of common stock options.
35
Debt
Amended Credit Agreement
As ofThe following table summarizes the Company’s debt at December 31, 2018, the Company,2022 and 2021 (dollars in thousands):
|
| December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
|
| Interest |
|
| Principal |
|
| Interest |
|
| Principal |
| ||||
Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Revolving Note (U.S. Dollar denominations) |
|
| 5.80 | % |
| $ | 232,000 |
|
|
| 1.35 | % |
| $ | 35,000 |
|
Other loans |
| 3.89% - 5.21% |
|
|
| 2,011 |
|
|
| 5.21 | % |
|
| 3,750 |
| |
Finance leases |
| N/A |
|
|
| 1,085 |
|
| N/A |
|
|
| — |
| ||
Total debt |
|
|
|
|
| 235,096 |
|
|
|
|
|
| 38,750 |
| ||
Current maturities |
|
|
|
|
| (2,443 | ) |
|
|
|
|
| (2,500 | ) | ||
Long-term debt, less current maturities |
|
|
|
| $ | 232,653 |
|
|
|
|
| $ | 36,250 |
|
Credit Agreement
Gentherm, together with certain direct and indirectof its subsidiaries, had a credit agreement (the “Credit Agreement”) which includedmaintain a revolving credit note (“U.S. Revolving Note”) with a maximum borrowing capacity of $350.0 million.
On June 27, 2019, the Company entered into anunder its Second Amended and Restated Credit Agreement (the “Amended“Second Amended and Restated Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Second Amended and Restated Credit Agreement amendedwas entered into on June 10, 2022 and restatedamends and restates in its entirety the Credit Agreement. The outstanding principalAmended and interest of the U.S. Revolving Note under theRestated Credit Agreement continueddated June 27, 2019, by and constitute obligations underamong Gentherm, certain of its direct and indirect subsidiaries, the lenders party thereto and the Agent. The Second Amended Credit Agreement.
The Amendedand Restated Credit Agreement increased the U.S. Revolving Note from $350.0 million to $475.0has a maximum borrowing capacity of $500 million and extended the maturity from March 17, 2021 tomatures on 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 $175.0 million.10, 2027. The Second Amended and Restated Credit Agreement also provides $15.0 million availability for the issuance of letters of credit and a maximum of $40.0 million for swing line borrowing. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the Amended Credit Agreement. The Company had $0 and $0.5 million of outstanding letters of credit issued under the Amended Credit Agreement as of December 31, 2019 and 2018, respectively.
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 pledge and 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,contains covenants, that, among other things, the amount of dividend payments the Company can make to shareholders.
The Amended Credit Agreement contains customary affirmative and negative covenants that will(i) prohibit or limit the ability of the Borrowersborrowers and any material subsidiary to among other things, incur additional indebtedness, create liens, pay dividends, make certain types of investments (including
41
acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets merge with other companies or enter into certain other transactions outside the ordinary course of business, requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, and contain customary events of default. These restrictions on the Company’s material subsidiaries have not had and are not expected to have a material impact on the Company’s ability to meet its cash obligations. The Amended Credit Agreement also requires the Company to(ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Net Leverage Ratio (based on consolidated EBITDA for the applicable trailing four fiscal quarters) as definedof the end of any fiscal quarter.
Finance Leases
As of December 31, 2022, there was $1.1 million of outstanding finance leases.
Other Sources of Liquidity
Receivable Factoring
The Company is party to receivable factoring agreements with unrelated third parties under which we can sell receivables for certain account debtors, on a revolving basis, subject to outstanding balances and concentration limits. The receivable factoring agreements are transferred 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 equaltheir entirety to the highestacquiring entities and are accounted for as a sale. Some of the Federal Funds Rate (1.55% at December 31, 2019) plus 0.50%, Bankagreements, including those assumed through the acquisition of America’s prime rate (4.75% at December 31, 2019), or the Eurocurrency rate plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (1.76% at December 31, 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 defaultAlfmeier, have deferred purchase price arrangements. See Note 13, “Financial Instruments” 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.
DEG Vietnam Loan
The Company also has a fixed interest rate loan with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank. The fixed interest rate senior 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 theconsolidated financial statements of Gentherm’s wholly owned subsidiary, Gentherm Vietnam Co. Ltd.
36
included in this Report for further details regarding our factoring arrangements.DEG China Loan
The Company had a second DEG loan, which was used to fund capital investments in China (the “DEG China Loan”). The DEG China Loan was subject to semi-annual principal payments that began March 2015 and ended in September 2019. During the third quarter of 2019, the DEG China Loan was paid in full.Material Cash Requirements
The following table summarizes the Company’s debt at December 31, 2019 (dollars in thousands).
|
| December 31, 2019 |
| |||||
|
| Interest Rate |
|
| Principal Balance |
| ||
Amended Credit Agreement: |
|
|
|
|
|
|
|
|
U.S. Revolving Note (U.S. Dollar Denominations) |
|
| 3.05 | % |
| $ | 50,000 |
|
U.S. Revolving Note (Euro Denominations) |
|
| 1.25 | % |
|
| 21,874 |
|
DEG Vietnam Loan |
|
| 5.21 | % |
|
| 8,750 |
|
DEG China Loan |
|
| — |
|
|
| — |
|
Total debt |
|
|
|
|
|
| 80,624 |
|
Current maturities |
|
|
|
|
|
| (2,500 | ) |
Long-term debt, less current maturities |
|
|
|
|
| $ | 78,124 |
|
As of December 31, 2019, we were in compliance with all terms as outlined in the Amended Credit Agreementcurrent and DEG Vietnam Loan. Undrawn borrowing capacity under the U.S. Revolving Note was $403.4 millionlong-term material cash requirements as of December 31, 2019.2022, which we expect to fund primarily with operating cash flows.
|
| Payments Due by Period |
| |||||||||||||||||
Material Cash Requirements (in thousands) |
| Total |
|
| Less than 1 year |
|
| 1 to 3 years |
|
| 3 to 5 years |
|
| More than 5 years |
| |||||
Long-term debt obligations (1) |
| $ | 2,011 |
|
| $ | 2,011 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Operating lease obligations (2) |
|
| 31,352 |
|
|
| 8,074 |
|
|
| 11,987 |
|
|
| 4,753 |
|
|
| 6,538 |
|
Finance lease obligations (2) |
|
| 1,085 |
|
|
| 432 |
|
|
| 585 |
|
|
| 68 |
|
|
| — |
|
Purchase obligations (3) |
|
| 40,130 |
|
|
| 34,809 |
|
|
| 5,321 |
|
|
| — |
|
|
| — |
|
Capital commitments (4) |
|
| 6,853 |
|
|
| 6,853 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other |
|
| 200 |
|
|
| 50 |
|
|
| 50 |
|
|
| 50 |
|
|
| 50 |
|
Total |
| $ | 81,631 |
|
| $ | 52,229 |
|
| $ | 17,943 |
|
| $ | 4,871 |
|
| $ | 6,588 |
|
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our
Additional cash payments may be required for contingent payments of up to $3.0 million related to the Dacheng acquisition. See Note 4, "Acquisitions," to the consolidated financial statements included in this Annual Report for additional information about the purchase prices associated with recent acquisition transactions.
42
Other Commitments
In December 2021, the Company committed to make a $5 million investment in Autotech Fund III, L.P., pursuant to a limited partnership agreement. As a limited partner, the Company will periodically make capital contributions toward this total commitment amount over the expected ten year life of the fund. The Company has made contributions of approximately $0.5 million to the Autotech Fund III, LP as of December 31, 2022. Timing of the capital contributions is unknown and therefore amounts have been excluded from the Material Cash Requirements table above.
Capital Expenditures
We anticipate capital expenditures in fiscal year 2023 of approximately $60 million to $70 million. We will continue support organic growth through capacity expansion in our facilities and make capital improvements as necessary. We believe cash on hand, cash generated from operations, and the borrowing capacity available under our Credit Agreement will be sufficient to support our capital expenditures.
Stock Repurchase Program
On December 11, 2020, the Board of Directors authorized the 2020 Stock Repurchase Program, pursuant to which the Company is authorized to repurchase up to $150 million of its issued and outstanding common stock over a three-year period, expiring December 15, 2023. During the year ended December 31, 2022, the Company did not make any repurchases under the 2020 Stock Repurchase Program. The 2020 Stock Repurchase Program has $130 million of repurchase authorization remaining as of December 31, 2022.
Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. Repurchases may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources.
For further information related to our stock repurchase program, see Note 15, "Equity" in the notes to the consolidated financial statements included in this Annual Report.
Effects of Inflation
The automotive component supply industry has historically been subject to inflationary pressures with respect to materials and labor. In 2021 and continuing in 2022, macroeconomic effects of the COVID-19 pandemic have resulted in inflationary cost increases in certain materials and components, labor and transportation. These inflationary cost increases are expected to continue for the foreseeable future as demand remains elevated and supply remains constrained. Although the Company has developed and implemented strategies to mitigate the impact of higher material component costs and transportation costs, these strategies, together with commercial negotiations with Gentherm's customers and suppliers have not fully offset to date and may not fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. America (“GAAP”). In preparing these consolidated financial statements, management was required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. These estimates and assumptions are subject to an inherent degree of uncertainty. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material to our financial statements.
We have identified the following estimates as our most critical accounting estimates, which are those that are most important to aid in fully understanding and evaluating the Company’s financial condition and results of operations, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 2, "Summary of Significant Accounting Policies", of the notes to the consolidated financial statements.
43
Impairments of Goodwill
Critical estimates: Goodwill is tested for impairment at least annually as of December 31 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare 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 Company utilizes an income approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow that is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in our industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates and terminal value margin rates. To further support the fair value estimate determined by the income approach, the Company utilizes a market valuation approach to estimate the fair value of a reporting unit. The market approach considers historical and/or anticipated financial metrics of a reporting unit and applies valuation multiples based on recent observed transactions involving companies similar enough to the reporting units from which to draw meaningful conclusions.
Judgments and uncertainties: These fair value calculations contain uncertainties as they require management to make assumptions about future cash flows and appropriate discount rates to reflect the risk inherent in the future cash flows and to derive a reasonable enterprise value and related premium. Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape, including estimates of revenue based on production volumes over the foreseeable future and long-term growth rates, and operating margins based on historical trends and future cost containment activities.
Also, the market valuation approach is highly subjective as it requires the selection of comparable companies and valuation multiples.
Impact if actual results differ from assumptions: As of December 31, 2022, our goodwill balance included $73.1 million related to our Automotive segment and $46.7 million related to our Medical segment. These balances could be fully or partially impaired if management does not achieve the expected cash flows assumed in the fair value estimates or if assumptions and cash flow estimates change in future periods.
The Company’s Medical segment is comprised of one reporting unit (the “Medical Reporting Unit”). The estimated fair value of the Medical Reporting Unit exceeded its carrying value by less than 10% as of December 31, 2022. The Medical Reporting Unit is at risk of failing future impairment tests, as the estimate of fair value does not substantially exceed its carrying value. The Company’s estimated future cash flow projections for the Medical Reporting Unit for the period of 2023 through 2025 assume a compound annual growth rate for revenue of approximately 24%, which we deem to be a critical assumption in the fair value determination as of December 31, 2022. This forecasted revenue growth, which is significantly higher than historical periods, is primarily driven by anticipated product launches that are expected to increase volume and price due to new features and product capabilities. Realization of this assumed revenue growth is dependent on the successful launch of these new products and product features and the acceptance of customers. If this revenue growth is not achieved or if the estimated growth rates are reduced because of new information or experience, the fair value of the Medical Reporting Unit could decrease, which could result in a material impairment of goodwill. Additionally, forecasted cash flows assume margin expansion as a direct result of the forecasted revenue growth. If we experience higher costs than assumed in our forecast or if we experience other deviations from forecasted results and/or external factors (e.g., continued increasing of interest rates), it could result in a material impairment.
For the reporting units of the Company’s recently acquired Alfmeier, the estimated fair values at the acquisition date were determined to approximate the estimated fair values as of December 31, 2022. The Company had no other material reporting units in
44
its Automotive segment with a fair value that was not substantially in excess of its respective carrying value as of the fourth quarter of 2022.
Income Taxes
Critical estimates: The Company is subject to income taxes in the United States and numerous international jurisdictions. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. When determining whether we will be able to realize deferred tax assets, judgment is used to evaluate the positive and negative evidence, including forecasting taxable income using historical and future operating results. The provision for income taxes includes current income taxes as well as deferred income taxes. Deferred tax assets and liabilities are measured based on the difference between the financial statement and tax base of assets and liabilities at the applicable enacted tax rates.
Judgments and uncertainties: We have various tax filing positions with regard to the timing and amount of deductions and credits and the allocation of income among various tax jurisdictions, based on our interpretation of local tax laws, supported by external advisor review for material positions.
Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized when management considers it more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is based on the evaluation of positive and negative evidence, which includes historical profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis.
The Company is subject to ongoing tax examinations and assessments in various jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities and a number of years may elapse before a particular matter, for which a liability has been established, is audited and fully resolved or clarified. In evaluating the exposures associated with various tax filing positions, the Company may record liabilities for such exposures. The Company generally adjusts its liabilities for unrecognized tax benefits and related indemnification obligations through earnings in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and may materially increase or decrease the effective tax rate, as well as impact the Company’s operating results.
Impact if actual results differ from assumptions: Some or all of management’s judgments are subject to review by the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows. Further, if the Company is unable to generate sufficient future taxable income, there is a material change in the actual effective tax rates, a change to the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then the Company could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate.
For the year ended December 31, 2022, each change of the effective tax rate by one percentage point would impact income tax expense by $0.4 million.
Business combinations
Critical estimates: The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating results.
Judgments and uncertainties: The Company uses a variety of information sources to determine the value of acquired assets and liabilities including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories. Goodwill is assigned to reporting units as of the date of the related acquisition. If goodwill is assigned to more than one reporting unit, the Company utilizes a method that is consistent with the manner in which the amount of goodwill in a business combination is determined. Costs related to the acquisition of a business are expensed as incurred.
45
The Company estimates the fair value of acquired customer relationships using the multi-period excess earnings method. Value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated earnings from contributory assets. Assumptions used in these calculations are considered from a market participant perspective and include revenue growth rates, estimated earnings, contributory asset charges, customer attrition and discount rates.
The Company estimates the fair value of trade names and developed technology using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Assumptions in the determination of the fair value of the developed technology included revenue growth rates, royalty rates, obsolescence factors and discount rates. Assumptions used in the determination of the fair value of the trade name included the revenue growth rates, the royalty rate and discount rate.
Impact if actual results differ from assumptions: While the Company uses its best estimates and assumptions, fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statement of earnings. Future changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.
Recent Accounting Pronouncements
For a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations, as well as significant accounting standards that have been adopted during the year ended December 31, 2022, see Note 3, “New Accounting Pronouncements,” to the consolidated financial statements included in this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to the Company's debt obligations under the Second Amended and Restated 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, acquisitions denominated in foreign currencies, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Czech Koruna 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 decision of whether and when to execute derivative financial instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not enter into derivative financial instruments for speculative or trading purposes. Some derivative contracts do not qualify for hedge accounting; for other derivative contracts, we elect to not apply hedge accounting.
The Company’s designated 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 that 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 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 statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency and copper commodity hedging instruments, if any, to cost of sales, and the ineffective portion of interest rate swaps, if any, to interest expense in the consolidated
46
statements of income. Cash flows associated with derivatives are reported in net cash (used in) provided by operating activities in the Company’s consolidated statements of cash flows.
Information related to the fair values of all derivative instruments in our consolidated balance sheet as of December 31, 2022 is set forth in Note 13, “Financial Instruments” in the consolidated financial statements included in this Report.
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, excluding finance leases. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency.
|
| Expected Maturity Date |
| |||||||||||||||||||||||||
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| Total |
|
| Fair Value |
| |||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Long-Term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Variable rate |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 232,000 |
|
| $ | 232,000 |
|
| $ | 232,000 |
|
Variable interest rate as of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5.80 | % |
|
| 5.80 | % |
|
|
| |||||
Fixed rate |
| $ | 2,011 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 2,011 |
|
| $ | 2,005 |
|
Fixed interest rate |
| 3.89% - 5.21% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3.89% - 5.21% |
|
|
|
|
Based on the amounts outstanding as of December 31, 2022, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense by $2.3 million. To hedge the Company's exposure to interest payment fluctuations on a portion of the borrowings, we entered into a floating-to-fixed interest rate swap agreement with a notional amount of $100.0 million.
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 |
| 2023 |
|
| 2024 |
|
| Total |
|
| Fair Value |
| ||||
USD Functional Currency |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward Exchange Agreements: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Receive MXN / Pay USD) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total contract amount |
| $ | 27,093 |
|
| $ | 12,970 |
|
| $ | 40,063 |
|
| $ | 3,791 |
|
Average contract rate |
|
| 22.15 |
|
|
| 23.13 |
|
|
| 22.46 |
|
|
|
|
The table below presents the potential gain and loss in fair value for the foreign currency derivative contracts from a hypothetical 10% change in quoted currency exchange rates.
|
| 2022 |
| |||||
Exchange Rate Sensitivity |
| Potential loss in fair value |
|
| Potential gain in fair value |
| ||
Forward Exchange Agreement:(Receive MXN / Pay USD) |
| $ | 3,999 |
|
| $ | 4,888 |
|
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements and related financial information required to be filed hereunder are indexed on page F-1 of this Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2022. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2022.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (2013).” Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022.
Our acquisition of Dacheng became effective on July 13, 2022 and the acquisition of Alfmeier became effective on August 1, 2022. The Company currently is integrating Dacheng and Alfmeier into its operations, compliance programs and internal control processes. Dacheng and Alfmeier constituted approximately 4% and 27%, respectively, of the Company's total assets as of December 31, 2022, including the goodwill and other intangible assets recorded as part of the purchase price allocations, and less than 1% and 9%, respectively, of the Company's product revenues for the year ended December 31, 2022. SEC rules and regulations allow companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year following an acquisition. The Company has excluded the acquired operations of Dacheng and Alfmeier from its assessment of the Company’s internal control over financial reporting.
The attestation report of the Company’s independent registered public accounting firm, regarding the effectiveness of the Company’s internal control over financial reporting, is set forth in Item 15, "Exhibits and Financial Statement Schedules," included under the caption "Report of Independent Registered Public Accounting Firm".
Changes in Internal Control Over Financial Reporting
In conjunction with our recent acquisition activity, we utilized our existing framework of internal control over financial reporting specific to business combinations. The applicable controls address the various elements of a business combination, including but not limited to: 1) calculation of the consideration transferred; 2) identifying and properly accounting for transactions that are separate from the business combination; 3) use and oversight of competent and qualified personnel in performing the valuation of assets acquired and liabilities assumed; 4) review of inputs and outputs to the valuation models; 5) identifying and disclosing provisional amounts; and 6) tracking measurement period adjustments.
48
Except as described above with regard to the acquisition and integration of Alfmeier and Dacheng, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
49
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth under the following captions in our proxy statement to be filed with respect to the 2023 annual meeting of shareholders (the “Proxy Statement”), all of which is incorporated herein by reference: “Proposal No. 1 – Election of Directors”, “Board Matters – The Board of Directors”, “Board Matters – Standing Committees of the Board”, “Board Matters – Corporate Governance”, “Executive Officers” and “Additional Information – Requirements for Submission of Shareholder Proposals and Nominations for 2024 Annual Meeting.”
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Board Matters – Director Compensation”, “Compensation Discussion and Analysis”, “Compensation and Talent Committee Report”, “Named Executive Officer Compensation Tables”, “Pay Versus Performance” and “CEO Pay Ratio.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management” and “Proposal No. 5 – Approval of the Gentherm Incorporated 2023 Equity Incentive Plan.”
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Board Matters – A Board Substantially Consisting of Independent Directors” and “Related Person Transactions.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Audit Committee Matters.”
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report:
The following financial statements of the Company and reports of independent accountants are included in Item 15 of this Annual Report:
Page | |||
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42) | F-2 | ||
F-7 | |||
F-8 | |||
F-9 | |||
F-10 | |||
F-11 | |||
F-12 |
The following Schedule to Financial Statements is included herein:
Schedule II — Valuation and Qualifying Accounts.
51
The exhibits to this Annual Report are as follows:
52
|
|
|
|
|
| Incorporated by Reference | ||||||
Exhibit |
| Exhibit Description |
| Filed/Furnished Herewith |
| Form |
| Period Ending |
| Exhibit / Appendix Number |
| Filing Date |
10.3.16** |
|
|
|
| 8-K |
|
|
| 10.2 |
| 3/15/21 | |
10.3.17** |
|
|
|
| 8-K |
|
|
| 10.3 |
| 3/15/21 | |
10.4.1 |
|
|
|
| 8-K |
|
|
| 10.1 |
| 6/13/22 | |
10.4.2 |
|
|
|
| 8-K |
|
|
| 10.2 |
| 6/13/22 | |
10.5.1** |
| Employment Contract between Gentherm Incorporated and Phillip Eyler, dated as of September 18, 2017 |
|
|
| 8-K |
|
|
| 10.1 |
| 10/3/17 |
10.5.2** |
|
|
|
| 8-K |
|
|
| 10.1 |
| 12/7/18 | |
10.5.3** |
|
|
|
| 10-Q |
| 6/30/20 |
| 10.4 |
| 8/4/20 | |
10.6.1** |
| Offer Letter between Gentherm Incorporated and Matteo Anversa, dated as of October 22, 2018 |
|
|
| 8-K |
|
|
| 10.1 |
| 12/12/18 |
10.6.2** |
|
|
|
| 10-Q |
| 6/30/20 |
| 10.5 |
| 8/4/20 | |
10.6.3** |
|
|
|
| 8-K |
|
|
| 10.5 |
| 3/15/21 | |
10.7.1** |
| Employment Contract between Gentherm GmbH and Thomas Stocker, effective September 1, 2019 |
|
|
| 10-Q |
| 9/30/19 |
| 10.1 |
| 10/29/19 |
10.7.2** |
|
|
|
| 10-Q |
| 6/30/21 |
| 10.1 |
| 7/30/21 | |
10.8** |
| Offer Letter between Gentherm Incorporated and Hui (Helen) Xu, effective November 4, 2019 |
|
|
| 10-K |
| 12/31/19 |
| 10.11 |
| 2/20/20 |
10.9** |
| Offer Letter between Gentherm Incorporated and Matt Fisch dated January 29, 2020 |
|
|
| 10-K |
| 12/31/21 |
| 10.11 |
| 2/17/22 |
10.10** |
| Severance Pay Plan for Eligible Employees of Gentherm Incorporated |
|
|
| 8-K |
|
|
| 10.4 |
| 3/15/21 |
10.11** |
|
|
|
| 8-K |
|
|
| 10.7 |
| 3/15/21 | |
10.12.1** |
|
|
|
| 10-Q |
| 6/30/19 |
| 10.4 |
| 7/26/19 | |
10.12.2** |
|
|
|
| 8-K |
|
|
| 10.2 |
| 1/4/19 | |
21 |
|
| X |
|
|
|
|
|
|
|
|
53
Incorporated by Reference | ||||||||||||
Exhibit | Exhibit Description | Filed/Furnished Herewith | Form | Period Ending | Exhibit / Appendix Number | Filing Date | ||||||
23.1 | X | |||||||||||
24 | X | |||||||||||
31.1 | X | |||||||||||
31.2 | X | |||||||||||
32.1*** | X | |||||||||||
32.2*** | X | |||||||||||
101.INS | Inline 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. | X | ||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||
104 | Cover Page Interactive Date File – the cover page XBRL tags are embedded within the Inline XBRL document | X |
* Schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish any omitted schedules or exhibits upon the request of the SEC.
** Indicates management contract or compensatory plan or arrangement.
*** Documents are furnished not filed.
ITEM 16. Form 10-K Summary
None.
54
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Gentherm Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Gentherm Incorporated (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the account or disclosure to which they relate.
F-2
Valuation of Goodwill – Medical | |
Description of the Matter | As of December 31, 2022, the Company’s goodwill related to the medical reporting unit (segment) was $46.7 million. As discussed in Note 2 to the consolidated financial statements, goodwill is tested for impairment at least annually as of December 31 and whenever events or changes in circumstances indicate that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Auditing management’s annual goodwill impairment assessment for the medical reporting unit was complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting unit. In particular, the fair value estimates used in the valuation of the medical reporting unit were sensitive to significant assumptions, such as changes in the discount rate, revenue growth rates, including the terminal growth rate and operating margins, which are affected by expectations about future market or economic conditions. |
How We Addressed the Matter in our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s annual goodwill assessment, and annual forecasting process whereby the Company develops significant assumptions that are used in its analyses. This included controls over management's review of the valuation model and the significant assumptions used in the fair value measurements discussed above. To test the estimated fair value of the Company’s medical reporting unit, we performed audit procedures that included, among others, assessing the methodologies used and directly testing the significant assumptions and the underlying data used by the Company in its analysis, including assessing the completeness and accuracy of such underlying data. We utilized internal valuation specialists to assist in the evaluation of the assumptions and other relevant information that are most significant to the fair value estimate of the reporting unit, such as assessing the fair value methodologies applied and evaluating the reasonableness of the discount rate selected by management. We compared the significant assumptions used by management to current industry and economic trends, historical performance, guideline public companies in the same industry and strategic plans. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. Furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements. |
Valuation of Intangible Assets - Alfmeier Präzision SE ("Alfmeier") | |
Description of the Matter | During 2022, the Company completed its acquisition of Alfmeier for net consideration of $170.7 million as disclosed in Note 4 to the consolidated financial statements. The acquisition was accounted for under the acquisition method of accounting and accordingly tangible and intangible assets acquired and liabilities assumed were recorded based on the respective estimated fair values. Auditing the Company's accounting for its acquisition of Alfmeier was complex due to the significant estimation required in the Company’s determination of the fair value of identified intangible assets of $31.5 million, which principally consisted of customer related assets and developed technology. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company used a discounted cash flow model to measure the developed technology and customer relationship intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates, customer platform renewal rates and royalty rates). These significant assumptions are forward looking and could be affected by future economic and market conditions. |
F-3
How We Addressed the Matter in our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the recognition and measurement of the intangible assets. This included testing controls over management’s review of the fair value methodology and significant assumptions used to develop the estimates of fair value for those intangible assets. To test the estimated fair value of the technology and customer-related intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. We compared the significant assumptions used by management to current industry and economic trends, historical performance of the acquired entity, guideline public companies in the same industry and strategic plans. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the identified intangible assets. Furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements. |
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2020.
Detroit, Michigan
February 24, 2023
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Gentherm Incorporated
Opinion on Internal Control Over Financial Reporting
We have audited Gentherm Incorporated’s (the Company's) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Alfmeier Präzision SE (“Alfmeier”) and Jiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”), which is included in the December 31, 2022 consolidated financial statements of the Company and constituted approximately 27% and 4% of total assets, respectively, as of December 31, 2022, and approximately 9% and 1% of revenues, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Alfmeier and Dacheng.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 and our report dated February 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-5
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 24, 2023
F-6
GENTHERM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current Assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 153,891 |
|
| $ | 190,606 |
|
Accounts receivable, net |
|
| 247,131 |
|
|
| 182,987 |
|
Inventory, net |
|
| 218,248 |
|
|
| 159,477 |
|
Other current assets |
|
| 64,597 |
|
|
| 32,775 |
|
Total current assets |
|
| 683,867 |
|
|
| 565,845 |
|
Property and equipment, net |
|
| 244,480 |
|
|
| 155,270 |
|
Goodwill |
|
| 119,774 |
|
|
| 66,033 |
|
Other intangible assets, net |
|
| 73,933 |
|
|
| 37,554 |
|
Operating lease right-of-use assets |
|
| 29,945 |
|
|
| 24,387 |
|
Deferred income tax assets |
|
| 69,840 |
|
|
| 69,630 |
|
Other non-current assets |
|
| 17,461 |
|
|
| 16,624 |
|
Total assets |
| $ | 1,239,300 |
|
| $ | 935,343 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current Liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ | 182,225 |
|
| $ | 122,727 |
|
Current lease liabilities |
|
| 7,143 |
|
|
| 5,669 |
|
Current maturities of long-term debt |
|
| 2,443 |
|
|
| 2,500 |
|
Other current liabilities |
|
| 93,814 |
|
|
| 82,193 |
|
Total current liabilities |
|
| 285,625 |
|
|
| 213,089 |
|
Long-term debt, less current maturities |
|
| 232,653 |
|
|
| 36,250 |
|
Non-current lease liabilities |
|
| 20,538 |
|
|
| 19,789 |
|
Pension benefit obligation |
|
| 3,638 |
|
|
| 6,832 |
|
Other non-current liabilities |
|
| 24,573 |
|
|
| 5,577 |
|
Total liabilities |
| $ | 567,027 |
|
| $ | 281,537 |
|
Shareholders’ equity: |
|
|
|
|
|
| ||
Common Stock: |
|
|
|
|
|
| ||
No par value; 55,000,000 shares authorized 33,202,082 and 33,008,185 issued and outstanding at December 31, 2022 and December 31, 2021, respectively |
|
| 122,658 |
|
|
| 118,646 |
|
Paid-in capital |
|
| 5,447 |
|
|
| 5,866 |
|
Accumulated other comprehensive loss |
|
| (46,489 | ) |
|
| (36,922 | ) |
Accumulated earnings |
|
| 590,657 |
|
|
| 566,216 |
|
Total shareholders’ equity |
|
| 672,273 |
|
|
| 653,806 |
|
Total liabilities and shareholders’ equity |
| $ | 1,239,300 |
|
| $ | 935,343 |
|
The accompanying notes are an integral part of these consolidated financial statements requires us
F-7
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Product revenues |
| $ | 1,204,656 |
|
| $ | 1,046,150 |
|
| $ | 913,098 |
|
Cost of sales |
|
| 931,006 |
|
|
| 742,519 |
|
|
| 644,994 |
|
Gross margin |
|
| 273,650 |
|
|
| 303,631 |
|
|
| 268,104 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Net research and development expenses |
|
| 85,722 |
|
|
| 75,214 |
|
|
| 68,040 |
|
Selling, general and administrative expenses |
|
| 132,693 |
|
|
| 109,554 |
|
|
| 105,044 |
|
Impairment of intangible assets and property and equipment |
|
| 6,291 |
|
|
| — |
|
|
| — |
|
Restructuring expenses |
|
| 637 |
|
|
| 3,857 |
|
|
| 5,803 |
|
Total operating expenses |
|
| 225,343 |
|
|
| 188,625 |
|
|
| 178,887 |
|
Operating income |
|
| 48,307 |
|
|
| 115,006 |
|
|
| 89,217 |
|
Interest expense, net |
|
| (4,294 | ) |
|
| (2,758 | ) |
|
| (4,559 | ) |
Foreign currency (loss) gain |
|
| (6,778 | ) |
|
| 1,487 |
|
|
| (5,439 | ) |
Other income |
|
| 1,147 |
|
|
| 117 |
|
|
| 2,337 |
|
Earnings before income tax |
|
| 38,382 |
|
|
| 113,852 |
|
|
| 81,556 |
|
Income tax expense |
|
| 13,941 |
|
|
| 20,418 |
|
|
| 21,866 |
|
Net income |
| $ | 24,441 |
|
| $ | 93,434 |
|
| $ | 59,690 |
|
Basic earnings per share |
| $ | 0.74 |
|
| $ | 2.82 |
|
| $ | 1.83 |
|
Diluted earnings per share |
| $ | 0.73 |
|
| $ | 2.79 |
|
| $ | 1.81 |
|
Weighted average number of shares – basic |
|
| 33,126 |
|
|
| 33,086 |
|
|
| 32,666 |
|
Weighted average number of shares – diluted |
|
| 33,503 |
|
|
| 33,510 |
|
|
| 33,028 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-8
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net income |
| $ | 24,441 |
|
| $ | 93,434 |
|
| $ | 59,690 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
| |||
Pension benefit obligations |
|
| 1,826 |
|
|
| 558 |
|
|
| (80 | ) |
Foreign currency translation adjustments |
|
| (14,081 | ) |
|
| (21,551 | ) |
|
| 27,242 |
|
Unrealized (loss) gain on foreign currency derivative securities, net of tax |
|
| 2,693 |
|
|
| (952 | ) |
|
| 211 |
|
Unrealized (loss) gain on commodity derivative securities, net of tax |
|
| (5 | ) |
|
| 5 |
|
|
| — |
|
Other comprehensive (loss) income, net of tax |
|
| (9,567 | ) |
|
| (21,940 | ) |
|
| 27,373 |
|
Comprehensive income |
| $ | 14,874 |
|
| $ | 71,494 |
|
| $ | 87,063 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-9
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
| Accumulated |
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Earnings |
|
| Total |
| ||||||
Balance at December 31, 2019 |
|
| 32,674 |
|
| $ | 102,507 |
|
| $ | 10,852 |
|
| $ | (42,355 | ) |
| $ | 413,092 |
|
| $ | 484,096 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 59,690 |
|
|
| 59,690 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 27,373 |
|
|
| — |
|
|
| 27,373 |
|
Stock compensation, net |
|
| 493 |
|
|
| 27,658 |
|
|
| (3,394 | ) |
|
| — |
|
|
| — |
|
|
| 24,264 |
|
Stock repurchase |
|
| (246 | ) |
|
| (9,092 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,092 | ) |
Balance at December 31, 2020 |
|
| 32,921 |
|
| $ | 121,073 |
|
| $ | 7,458 |
|
| $ | (14,982 | ) |
| $ | 472,782 |
|
| $ | 586,331 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 93,434 |
|
|
| 93,434 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,940 | ) |
|
| — |
|
|
| (21,940 | ) |
Stock compensation, net |
|
| 327 |
|
|
| 17,573 |
|
|
| (1,592 | ) |
|
| — |
|
|
| — |
|
|
| 15,981 |
|
Stock repurchase |
|
| (240 | ) |
|
| (20,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,000 | ) |
Balance at December 31, 2021 |
|
| 33,008 |
|
| $ | 118,646 |
|
| $ | 5,866 |
|
| $ | (36,922 | ) |
| $ | 566,216 |
|
| $ | 653,806 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,441 |
|
|
| 24,441 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,567 | ) |
|
| — |
|
|
| (9,567 | ) |
Stock compensation, net |
|
| 194 |
|
|
| 4,012 |
|
|
| (419 | ) |
|
| — |
|
|
| — |
|
|
| 3,593 |
|
Balance at December 31, 2022 |
|
| 33,202 |
|
| $ | 122,658 |
|
| $ | 5,447 |
|
| $ | (46,489 | ) |
| $ | 590,657 |
|
| $ | 672,273 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-10
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Operating Activities: |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 24,441 |
|
| $ | 93,434 |
|
| $ | 59,690 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 44,394 |
|
|
| 38,780 |
|
|
| 41,114 |
|
Deferred income taxes |
|
| (7,322 | ) |
|
| (150 | ) |
|
| 849 |
|
Stock based compensation |
|
| 6,599 |
|
|
| 14,530 |
|
|
| 8,829 |
|
Loss on disposition of property and equipment |
|
| 771 |
|
|
| 973 |
|
|
| 683 |
|
Impairment of intangible assets and property and equipment |
|
| 6,291 |
|
|
| — |
|
|
| — |
|
Provisions for inventory |
|
| 15,923 |
|
|
| 2,499 |
|
|
| 1,768 |
|
Gain on sale of patents |
|
| — |
|
|
| — |
|
|
| (1,978 | ) |
Other |
|
| 721 |
|
|
| (271 | ) |
|
| (748 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
| |||
Accounts receivable, net |
|
| (44,221 | ) |
|
| 25,099 |
|
|
| (46,742 | ) |
Inventory |
|
| (40,322 | ) |
|
| (42,372 | ) |
|
| (2,582 | ) |
Other assets |
|
| (11,906 | ) |
|
| 10,307 |
|
|
| (11,997 | ) |
Accounts payable |
|
| 28,314 |
|
|
| 8,166 |
|
|
| 29,960 |
|
Other liabilities |
|
| (8,736 | ) |
|
| (7,919 | ) |
|
| 31,849 |
|
Net cash provided by operating activities |
|
| 14,947 |
|
|
| 143,076 |
|
|
| 110,695 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
| |||
Purchases of property and equipment |
|
| (39,703 | ) |
|
| (38,468 | ) |
|
| (17,219 | ) |
Proceeds from the sale of patents and property and equipment |
|
| 248 |
|
|
| 22 |
|
|
| 2,140 |
|
Acquisition of businesses, net of cash acquired |
|
| (205,487 | ) |
|
| (2,827 | ) |
|
| — |
|
Proceeds from deferred purchase price of factored receivables |
|
| 5,538 |
|
|
| — |
|
|
| — |
|
Cost of technology investments |
|
| (495 | ) |
|
| (7,557 | ) |
|
| — |
|
Acquisition of intangible assets |
|
| — |
|
|
| — |
|
|
| (3,141 | ) |
Net cash used in investing activities |
|
| (239,899 | ) |
|
| (48,830 | ) |
|
| (18,220 | ) |
Financing Activities: |
|
|
|
|
|
|
|
|
| |||
Borrowings on debt |
|
| 207,000 |
|
|
| — |
|
|
| 201,194 |
|
Repayments of debt |
|
| (13,272 | ) |
|
| (153,243 | ) |
|
| (91,439 | ) |
Proceeds from the exercise of Common Stock options |
|
| 1,670 |
|
|
| 8,279 |
|
|
| 16,552 |
|
Taxes withheld and paid on employees' share-based payment awards |
|
| (5,471 | ) |
|
| (4,108 | ) |
|
| (1,117 | ) |
Cash paid for the repurchase of Common Stock |
|
| — |
|
|
| (20,000 | ) |
|
| (9,092 | ) |
Acquisition contingent consideration payment |
|
| — |
|
|
| (69 | ) |
|
| (618 | ) |
Net cash provided by (used in) provided by financing activities |
|
| 189,927 |
|
|
| (169,141 | ) |
|
| 115,480 |
|
Foreign currency effect |
|
| (1,690 | ) |
|
| (2,844 | ) |
|
| 7,442 |
|
Net (decrease) increase in cash and cash equivalents |
|
| (36,715 | ) |
|
| (77,739 | ) |
|
| 215,397 |
|
Cash and cash equivalents at beginning of period |
|
| 190,606 |
|
|
| 268,345 |
|
|
| 52,948 |
|
Cash and cash equivalents at end of period |
| $ | 153,891 |
|
| $ | 190,606 |
|
| $ | 268,345 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| |||
Cash paid for taxes |
| $ | 21,645 |
|
| $ | 14,857 |
|
| $ | 5,013 |
|
Cash paid for interest |
| $ | 6,338 |
|
| $ | 2,378 |
|
| $ | 4,204 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-11
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1 — Overview
Gentherm Incorporated, a Michigan corporation, and its consolidated subsidiaries (“Gentherm”, “we”, “us”, “our” or the “Company”) is a global developer, manufacturer and marketer of innovative thermal management and pneumatic comfort technologies for a broad range of heating, cooling and temperature control applications, as well as lumbar and massage comfort solutions, primarily in the automotive and medical industries. Within the automotive industry, our products provide solutions for passenger comfort and convenience, battery thermal management and cell connecting systems. Within the medical industry our products provide patient temperature management solutions. Our automotive products can be found on vehicles manufactured by nearly all the major automotive original equipment manufacturers (“OEMs”) operating in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. The Company also is developing a number of new technologies and products that are expected to enable improvements to existing products and will lead to new product applications for existing and new markets.
On July 13, 2022, Gentherm acquired Jiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”), a manufacturer of medical materials and medical equipment, including patient temperature management solutions. The acquisition was accounted for as a business combination within our Medical segment.
On August 1, 2022, Gentherm acquired Alfmeier Präzision SE (“Alfmeier”), a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. The acquisition was accounted for as a business combination within our Automotive segment.
See Note 4, "Acquisitions," to the consolidated financial statements included in this Annual Report for additional information.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and those entities in which it has a controlling financial interest. The Company evaluates its relationship with other entities for consolidation and to identify whether such entities are variable interest entities (“VIE”) and to assess whether the Company is the primary beneficiary of such entities. Investments in affiliates in which Gentherm does not have control but does have the ability to exercise significant influence over operating and financial policies are accounted for under the equity method. When Gentherm does not have the ability to exercise significant influence (generally when ownership interest is less than 20%), investments in affiliates are measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
Intercompany transactions and balances between consolidated businesses have been eliminated.
Use of Estimates
In preparing these consolidated financial statements, management was required to make estimates and judgmentsassumptions that affect the reported amountamounts of assets, and liabilities, revenues and expenses, and related disclosures at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.expenses. These estimates and assumptions include, butare based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. These estimates and assumptions are subject to an inherent degree of uncertainty. We are not limited to:presently aware of any events or circumstances that would require us to update such estimates and assumptions or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events
F-12
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
occur and additional information is obtained. As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements.
Business combinations In accordance with ASC Topic 805, “Business Combinations,” acquisitions are recorded using the acquisition method of accounting. The Company includes the operating results of acquired entities from their respective dates of acquisition. The Company recognizes and measures the identifiable assets acquired, liabilities assumed, and any non-controlling interest as of the acquisition date fair value. The excess, if any, of total consideration transferred in a business combination over the fair value of identifiable assets acquired, liabilities assumed and any non-controlling interest is recognized as goodwill. Costs incurred as a result of a business combination other than costs related to the issuance of debt or equity securities are recorded in the period the costs are incurred. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to assets acquired and liabilities assumed with the corresponding offset to goodwill. Segment Reporting The Company has two reportable segments: Automotive and Medical. The Automotive reporting segment is comprised of the results from our global automotive businesses, including the design, development, manufacturing and sales of automotive climate comfort systems, automotive cable systems, lumbar and massage comfort solutions, valve system technologies, battery performance solutions, and automotive electronic and software systems. The Medical reporting segment is comprised of the results from the patient temperature management business in the medical industry. Patient temperature management includes temperature management systems across multiple product categories addressing the needs of hyper-hypothermia therapy in intensive care, normothermia in surgical procedures and additional warming/cooling therapies utilized in acute care, ambulatory, clinics and home health.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition
Revenue is recognized from agreements containing enforceable rights and obligations, when promised goods are delivered or services are completed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.Product revenues. Shipping and handling fees billed to customers are included in net sales,Product revenues, while costs of shipping and handling are included in costCost of sale.sales.
Automotive Revenues
The Company provides production parts to its customers under long-term supply agreements (“LTAs”). The duration of an LTA is generally consistent with the life cycle of a vehicle,vehicle; however, ana LTA does not reach the level of a performance obligation until Gentherm receives either a purchase order and/or a materials release from theits customer for a specific number of production parts at a specified price, at which point an enforceable contract exists. Revenue is recognized when control of the production parts has transferred to the customer
37
according to the terms of the contract, which typically occurs when the parts are shipped or delivered to the customer’s premises.Revenue is measured as the amount of consideration we expect to receive in exchange for transferring production parts.
Certain LTAs provide for annual price reductions over the production life of the vehicle. Agreements that are determined to provide customers with purchase option discounts that would not be received without entering into the contract are considered to contain a material right (for example, a discount given to a customer that is incremental to the range of discounts typically given to that class of customer). The material right represents a purchase option that provides the customer with the ability to purchase additional production parts at a set price in the future and is accounted for as a separate performance obligation. Under these circumstances, each transfer of production parts under the LTA requires allocation of the purchase price to the production part and the purchase option. As a practical alternative to estimating the standalone selling price of an option, the Company allocates transaction
F-13
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
price to the purchase option by reference to the production part volumes expected to be ordered and the consideration expected to be received over the life of the vehicle program.
The production part’s relative standalone selling price observed under the LTA is subtracted from the total amount of consideration expected to be received in exchange for transferring of parts under the current contract and the difference is allocated to the purchase option. Revenue from options containing a material right is recognized when the amounts billed byto the customer for production parts transferred, under the LTA, is less than the standalone selling price of those production parts.
Medical Revenues
Revenues from our patient temperature management business unit are generated from the sale of products and equipment. Our medical products and equipment focus on body and blood temperature management. The Company sells medical products and equipment primarily through distributor and group purchasing organization agreements. These agreements allow member participants to the distributor or group purchasing organization to make purchases at discounted prices negotiated by the distributor or group purchasing organization. A rebate is incurred at the point in time a member participant purchases product covered under these types of agreements. Rebates are accounted for as variable consideration, using an expected value, probability weighted approach, based on the level of sales to the distributor and the time lag between the initial sale and the rebate claim in determining the transaction price of a contract. Revenue is recognized at the point in time the medical products or equipment is transferred to the customer.
GPT and CSZ-IC Revenues
Revenues from our divested businesses, GPT and CSZ-IC, were generatedAssets Recognized from the saleCosts to Obtain a Contract with a Customer
The Company has no material contract assets or contract liabilities as of products and services. GPT and CSZ-IC customers commonly entered into multiple-element agreementsDecember 31, 2022.
The Company recognizes an asset for the purchaseincremental costs of productsobtaining a contract with a customer if the benefits of those costs are expected to be realized for a period greater than one year. Total capitalized costs to obtain a contract were $2,239 and services. Installation$1,946 as of December 31, 2022 and 2021, respectively. These amounts are recorded in Other non-current assets and are being amortized into Product revenues over the expected production life of the applicable program. During the year ended December 31, 2022 and 2021, $78 and $174, respectively, was amortized into Product revenues.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of less than 90 days to be cash equivalents. Cash balances in individual banks may exceed the federally insured limit by the Federal Deposit Insurance Corporation. The Company had Cash and cash equivalents of $108,620 and $161,496 held in foreign jurisdictions as of December 31, 2022 and 2021, respectively.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of financial instruments comprising cash and cash equivalents, short-term investments, accounts receivable, notes receivable and accounts payable approximate fair value because of the short maturities of these instruments. The carrying amount of the Company’s revolving credit note under the June 10, 2022 amended and restated credit agreement (“Credit Agreement”) approximates its fair value because interest charged on the loan balance is variable. See Note 14, “Fair Value Measurement,” for information about the techniques used to assess the fair value of financial assets and liabilities, including our fixed rate debt instruments.
F-14
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Concentration of Credit Risk
Financial assets, which subject the Company to concentration of credit risk, consist primarily of cash equivalents, short-term investments, accounts receivable and notes receivable. Cash equivalents consist primarily of money market funds managed by major financial services companies. The credit risk for example, were separatethese cash equivalents is considered low. The Company does not require collateral from its customers. As of December 31, 2022, the Company’s Automotive customers, Adient and distinct performance obligations that were oftenLear both individually represented 18% and 17%, respectively, of the Company’s accounts receivable balance. As of December 31, 2021, the Company’s Automotive customers, Adient and Lear both individually represented 22% and 18%, respectively, of the Company’s accounts receivable balance.
Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowance for doubtful accounts for estimated amounts not expected to be collected, and do not bear interest. The Company determines the allowances based on historical write-off experience by industry and regional economic data, current expectations of future credit losses and historical cash discounts. The Company’s accounts receivables are continually assessed for collectability and any allowance is recorded based upon the age of outstanding receivables, historical payment experience and customer creditworthiness. We write-off accounts receivable when they become uncollectible. The allowance for doubtful accounts was $1,220 and $1,399 as of December 31, 2022 and 2021, respectively.
The reconciliation of the beginning and ending amount of the allowance for doubtful accounts is as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Balance at beginning of year |
| $ | 1,399 |
|
| $ | 1,161 |
|
| $ | 1,193 |
|
Charged to costs and expenses |
|
| 1,088 |
|
|
| 1,066 |
|
|
| 1,298 |
|
Other activity |
|
| - |
|
|
| (12 | ) |
|
| 33 |
|
Deductions from reserves |
|
| (1,267 | ) |
|
| (816 | ) |
|
| (1,363 | ) |
Balance at end of year |
| $ | 1,220 |
|
| $ | 1,399 |
|
| $ | 1,161 |
|
Primarily in the Asia-Pacific region, the Company receives bank notes from certain customers to settle trade receivables. The collection of such bank notes is included in contracts to purchase customized environmental test chambers. Depending on the application, delivery of an environmental test chamber or remote power generation system to the customer’s place of business could range from two weeks to nine months from commencement of the contract. Installation services, while reliant on the specifications and timing from the customer, rarely remained incomplete more than two months after delivery.
Revenues allocated to environmental test chambers or remote power systems wereoperating cash flows based on the stand-alone selling pricesubstance of the products themselves. Judgement wasunderlying transactions, which are operating in nature. Bank notes held by the Company are classified as notes receivable within other current assets. The Company may hold such bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third-party financial institutions in exchange for cash.
Inventory
The Company’s inventory is measured at the lower of cost or net realizable value. Raw materials, components and consumables are measured using the weighted average cost method. Work-in-process and finished goods are measured using the first-in first-out method. If the net realizable value expected on the reporting date is below cost, a write-down is recorded to adjust inventory to its net realizable value. We recognize a reserve for obsolete and slow-moving inventories based on estimates of future sales and an inventory item’s capacity to be repurposed for a different use. We consider the number of months' supply on hand based on current planned requirements, uncommitted future projections and historical usage in estimating the inventory reserve.
Property and Equipment
Property and equipment, including additions and improvements, are recorded at cost less accumulated depreciation. Expenditures for general repairs and maintenance are charged to expense as incurred. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as Operating income or expense. The Company evaluates the recoverability of long-lived assets when events and circumstances indicate that the assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying value. If the net carrying value exceeds the fair value, an impairment loss exists and is calculated based on either estimated salvage value or estimated orderly liquidation value.
F-15
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Depreciation is computed using the straight-line method. The estimated useful lives of the Company’s Property and equipment are as follows:
Asset Category | Useful Life | |
Buildings and improvements | 1 to 30 years | |
Plant and equipment | 10 years | |
Production tooling | 2 to 10 years | |
Leasehold improvements | Term of lease | |
Information technology | 1 to 5 years |
The Company recognized depreciation expense of $33,730, $29,622 and $31,037 for the years ended December 31, 2022, 2021 and 2020, respectively.
Tooling
The Company incurs costs related to tooling used to determine the degree to which early pay discounts and other credits were utilized in the calculationmanufacture of standalone selling price,products sold to its customers. In some cases, the Company enters into contracts with its customers whereby the Company incurs the costs to design, develop and onlypurchase tooling and is then reimbursed by the customer under a reimbursement contract. Tooling costs that will be reimbursed by customers are included toin Other current assets in the extent it was probable that a significant reversal of any incremental revenue would not occur. Revenues were recognizedaccompanying consolidated balance sheets at the point in timelower of accumulated cost or the chamber or power system was shipped to the customer. For contracts that also included a promise for installation, the portioncustomer reimbursable amount. As of total transaction price allocated to the installation was recognized as revenue at the point in time the installation is complete.
GPTDecember 31, 2022 and CSZ-IC often required milestone payments for contracts to provide environmental test chambers or remote power systems to customers. Milestone payments did not provide2021, the Company with a righthad $15,267 and $3,778, respectively, of reimbursable tooling costs capitalized. Company-owned tooling is included in Property and equipment and depreciated over its expected useful life, generally two to payment for the work completed to date and did not represent the satisfaction of a performance obligation. Milestone payments were deferred and reported within unearned revenue until construction was complete and the unit had been delivered or was installed. If the environmental test chamber contract included a separate promise to provide installation services, any installation-related payments received from the customer were deferred until the point in time the installation was complete.ten years.
38
Impairments of Goodwill and Other Intangible Assets
WheneverGoodwill and other intangible assets recorded in conjunction with business combinations are based on the Company’s estimate of fair value, as of the date of acquisition.
Amortization of other intangible assets is computed using the straight-line method. The fair value and corresponding useful lives for acquired intangible assets are listed below as follows:
Asset Category | Useful Life | |
Customer relationships | 8 to 15 years | |
Technology | 5 to 12 years | |
Product development costs | 5 to 10 years | |
Trade names | Indefinite | |
Software development costs | 4 to 5 years |
Our business strategy largely centers on designing products based upon internally developed and purchased technology, and we protect certain technology with patents that have value to our business strategy. All costs associated with the development and issuance of new patents are expensed as incurred. Such costs are classified as research and development expenses in the accompanying consolidated statements of income.
Impairments of Other Intangible Assets and Goodwill
Goodwill is tested for impairment at least annually as of December 31 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the Companyor if we elect not to perform a qualitative assessment of a reporting unit, we then comparescompare 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.
F-16
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The Company utilizes an income approach to estimate the fair value of a reporting unit is estimated by analyzing internal inputsand a market valuation approach to further support this analysis (level 3) to calculate forward values and discounting those values. The income approach is based on projected debt-free cash flow that is discounted to the present value.
Accrued Warranty Costs
The Company accrues warranty obligations for products soldvalue using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on management estimatesthe reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of future failure rates and current claim cost experience, with support from the sales, engineering, quality and legal functions. While we believecyclical trends that occur in our warranty reserveindustry. Fair value is adequate and that the judgment applied is appropriate, such estimates could differ materially from what will actually transpire in the future. The warranty policy is reviewed by management annually. Using historical information available to the Company, including claims already filed by customers, the warranty accrual is adjusted quarterly to reflect management’s best estimate of future claims.
Litigation Reserves
We record estimated future costs related to new or ongoing litigation based on input from legal counsel and our best estimate of probable loss. These estimates include costs associated with attorney fees and potential claims and assessments less any amounts we anticipate are recoverable under insurance policies. Final resolution of the litigation contingencies could result in amounts different from current accruals and, therefore, have an impact on our consolidated financial results in future reporting periods.
Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowance for doubtful accounts for estimated amounts not expected to be collected, and do not bear interest. We record an allowance for doubtful accounts once exposure to collection risk of an account receivable is specifically identified. We analyze the length of time an account receivable is outstanding,using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a customer’s payment historyrisk factor, if necessary. Other significant assumptions include terminal value growth rates and abilityterminal value margin rates. While there are inherent uncertainties related to paythe assumptions used and to determinemanagement’s application of these assumptions to this analysis, we believe that the needincome approach provides a reasonable estimate of the fair value of a reporting unit.
The Company performs its indefinite-lived intangible asset impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Investments in non-consolidated affiliates
During 2021, the Company’s Automotive segment invested $5,200 for an ownership interest in Carrar Ltd. (“Carrar”), an Israel-based technology developer of advanced thermal management systems for the electric mobility market. The Company determined that Carrar is a VIE; however, the Company does not have a controlling financial interest or have the power to recorddirect the activities that most significantly affect the economic performance of the investment. Therefore, the Company has concluded that it is not the primary beneficiary. Gentherm’s investment in Carrar is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, and is recorded in Other non-current assets.
During 2021, the Company’s Automotive segment invested $2,357 for an allowanceownership interest in Forciot Oy (“Forciot”), a Finland-based technology developer of sensors for doubtful accounts.touch, motion and force measurement. Gentherm’s investment in Forciot is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, and is recorded in Other non-current assets.
In December 2021, the Company committed to make a $5,000 investment in Autotech Fund III, L.P., pursuant to a limited partnership agreement. As a limited partner, the Company will periodically make capital contributions toward this total commitment amount over the expected ten-year life of the fund. The Company has made contributions totaling approximately $495 to the Autotech Fund III, LP as of December 31, 2022. This fund focuses broadly on the automotive industry and compliments the Company’s innovation strategy.
Research and Development Expenses
Research and development activities are expensed as incurred. The Company groups development and prototype costs and related reimbursements in research and development.
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 write-off accounts receivable when they become uncollectible.also have operating leases for office equipment and automobiles.Excluding land leases, our leases have remaining lease terms ranging from less than 1 year to 9 years and may include options to extend the lease. Land leases have remaining lease terms that range from 3 to 40 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.
Inventory ReservesF-17
GENTHERM INCORPORATED
We recognizeNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The Company determines whether a reserve for obsoletecontractual arrangement is or contains a lease at inception. Leases that are operating in nature are recognized in Operating lease right-of-use assets, Current lease liabilities and slow-moving inventoriesNon-current lease liabilities in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, net, current maturities of long-term debt, and long-term debt on the Company’s consolidated balance sheets.
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 estimates of future sales and an inventory item’s capacity to be repurposed forindex or rate. Rental payments are discounted using an incremental borrowing rate, unless there is a different use. We considerrate implicit in the number of months supply on handlease agreement. The incremental borrowing rate is based on current planned requirements, uncommitted future projectionsthe Company’s credit rating, determined on a fully collateralized loan basis from information available at commencement date, and historical usagethe duration of the lease term (the “reference rate”). Judgment is used to assess the importance of risk factor inputs during the computation of the Company’s credit rating. For leases at foreign subsidiaries denominated in estimatingU.S. Dollars, a risk premium associated with the inventory reserve. Additional provisionsborrower 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.
Operating lease right-of-use assets are mademeasured at the amount of the lease liability, adjusted for supplier claimsprepaid 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 obsolete materials, prototype inventory, spareleases that contain separate lease and non-lease 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 customer service inventoryless and, for all periods other than at year-end, estimates for physical inventory adjustments.instead, recognizes rent payments on a straight-line basis over the lease term in the consolidated statements of income.
Income Taxes
We recordThe Company records income tax expense using the liability method which specifies that deferred tax assets and liabilities be measured each year based on the difference between the financial statement and tax basesbase of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided for deferred tax assets when management considers it more likely than not that the asset will not be realized. At December 31, 2022 and 2021, a valuation allowance has been provided for certain deferred tax assets which the Company has concluded are more likely than not to not be realized. If future annual taxable income were to be significantly less than current and projected levels, there is a risk that certain of our deferred tax assets not already provided for by the valuation allowance would expire prior to utilization.
We recognizeThe Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognizeThe Company recognizes interest and penalties related to income tax matters in incomeIncome tax expense.
Derivative Financial Instruments – Hedge Accounting
All derivative instruments are required to be reported on the balance sheet at fair value unless the transactions qualify and are designated as normal purchases or sales. Changes in fair value are reported currently through earnings unless they meet hedge accounting criteria. The Company’s designated 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.
F-18
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The Company accounts for its designated derivative financial instruments as cash flow hedges. For derivative contracts which are designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative contract is recorded to Accumulated other comprehensive loss (“AOCI”) in the accompanying consolidated balance sheets. When the underlying hedge transaction is realized, the gain or loss included in AOCI is recorded into earnings in the accompanying consolidated statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. Any ineffective portion of the gain or loss is recognized in the accompanying consolidated statements of income under Foreign currency gain (loss) for foreign currency derivatives, and cost of goods sold for commodity derivatives. These hedging transactions and the respective correlations meet the requirements for hedge accounting.
Exposure to fluctuations in interest rates and certain commodity prices are managed by entering into swaps with various counterparties. The Company does not enter into derivative transactions for speculative or trading purposes. As part of the hedging program approval process, Gentherm identifies the specific financial risk which the derivative transaction will minimize, the appropriate hedging instrument to be used to reduce the risk and the correlation between the financial risk and the hedging instrument. Hedge positions, as well as the correlation between the transaction risks and the hedging instruments, are reviewed on an ongoing basis.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the respective period. The Company’s diluted earnings per share give effect to all potential shares of common stock outstanding during a period that do not have an anti-dilutive impact to the calculation. In computing the number of diluted shares outstanding, the treasury stock method is used in order to arrive at a net number of shares created upon the conversion of common stock equivalents.
Stock Based Compensation
We account forShare based payments that involve the issuance of common stock to employees, including grants of employee stock options, restricted stock, and time-based and performance-based restricted stock units, and restricted stockare recognized in the consolidated financial statements as compensation expense based upon the fair value on the date of grantgrant.
Share based payments that are satisfied only by the payment of cash, such as stock appreciation rights, are accounted for as liabilities. The liability is reported at market value of the vested portion of the underlying units. During each period, the change in the liability is recorded as compensation expense.
F-19
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 3 — New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. In January 2021, the FASB subsequently issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2020-04 and ASU 2021-01 are effective as of March 12, 2020 through December 31, 2022 and may be applied retrospectively to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. Upon adoption of this standard, the Company does not expect it to have a material impact to the Company’s financial statements.
Note 4 – Acquisitions
Alfmeier Präzision SE
On August 1, 2022, the Company acquired 100% of the equity interests of Alfmeier, a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. The acquisition further expands the Company's current value proposition beyond thermal to comfort, health, wellness, and energy efficiency and aligns with global consumer demand for expanded offerings in vehicle passenger comfort.
The total consideration transferred was $170,700, including cash consideration of $170,439 and amounts due to seller of $261. The results of Alfmeier's operations are reported within the Automotive segment from the acquisition date.
The following table provides product revenues and operating income from Alfmeier that are included in our consolidated financial statements:
|
| Year Ended December 31, |
| |
|
| 2022 |
| |
Product revenues |
| $ | 98,960 |
|
Net loss |
|
| (2,675 | ) |
Assets acquired and liabilities assumed were recorded at estimated fair values based on third-party valuations, management’s estimates, available information, and supportable assumptions that management considered reasonable.
F-20
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The following table summarizes the purchase consideration to the fair values of assets acquired and liabilities assumed as of the acquisition date and subsequent measurement period adjustments:
|
| Initial Allocation |
|
| Measurement Period Adjustments |
|
| Revised Allocation |
| |||
Purchase price, consideration, net of cash acquired (a) |
| $ | 164,887 |
|
| $ | 5,813 |
|
| $ | 170,700 |
|
|
|
|
|
|
|
|
|
| — |
| ||
Accounts receivable |
|
| 24,988 |
|
|
| (121 | ) |
|
| 24,867 |
|
Inventory |
|
| 36,026 |
|
|
| (106 | ) |
|
| 35,920 |
|
Prepaid expenses and other assets |
|
| 20,920 |
|
|
| (74 | ) |
|
| 20,846 |
|
Operating lease right-of-use assets |
|
| 4,608 |
|
|
| — |
|
|
| 4,608 |
|
Property and equipment |
|
| 89,942 |
|
|
| 1,242 |
|
|
| 91,184 |
|
Other intangible assets |
|
| 22,668 |
|
|
| 8,791 |
|
|
| 31,459 |
|
Goodwill |
|
| 43,678 |
|
|
| (9,184 | ) |
|
| 34,494 |
|
Assumed liabilities |
|
| (55,994 | ) |
|
| 975 |
|
|
| (55,019 | ) |
Deferred tax liabilities |
|
| (21,949 | ) |
|
| 4,290 |
|
|
| (17,659 | ) |
Net assets acquired |
| $ | 164,887 |
|
| $ | 5,813 |
|
| $ | 170,700 |
|
The following table summarizes the allocation of the purchase consideration to the other intangible assets acquired:
|
| Preliminary Fair Value |
|
| Weighted Average Life (in years) |
| ||
Definite-lived: |
|
|
|
|
|
| ||
Customer related |
| $ | 19,812 |
|
|
| 14 |
|
Technology |
|
| 11,647 |
|
|
| 9 |
|
Total |
| $ | 31,459 |
|
|
|
|
The fair value of the intangible assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to the Company’s expected future economic benefits from combining operations to offer more compelling and high-value solutions across complementary customer relationships as well as expected future synergies. The goodwill is not expected to be deductible for tax purposes.
The following unaudited pro forma information represents our product revenues and net income as if the acquisition of Alfmeier had occurred as of January 1, 2021:
|
| Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Product revenues |
| $ | 1,348,295 |
|
| $ | 1,304,505 |
|
Net Income |
|
| 17,645 |
|
|
| 92,079 |
|
Jiangmen Dacheng Medical Equipment Co. Ltd
On July 13, 2022, the Company acquired 100% of the equity interests of Dacheng and its wholly owned subsidiary, IOB Medical, Inc. Dacheng, is a manufacturer of medical materials and medical equipment, including patient temperature management solutions, for numerous local and international customers. The acquisition provides Gentherm Medical a local presence in China’s high-growth market for patient warming devices and other medical device products, while also expanding overall manufacturing capacity to include a low-cost manufacturing site.
The total consideration was $35,048, which is comprised of cash payments, net of cash acquired. The purchase agreement also includes future cash payments of up to $3,000, contingent upon the achievement of certain performance metrics and continued employment of the former majority shareholder through a series of defined dates. These contingent payments will be accounted for as compensation expense and will be recorded as a component of selling, general and administrative.
F-21
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The results of Dacheng's operations are reported within the Medical segment from the date of acquisition. The following table provides product revenues and operating income from Dacheng that are included in our consolidated financial statements:
|
| Year Ended December 31, |
| |
|
| 2022 |
| |
Product revenues |
| $ | 3,499 |
|
Net Loss |
|
| (217 | ) |
Assets acquired and liabilities assumed were recorded at estimated fair values based on third-party valuations, management’s estimates, available information, and supportable assumptions that management considered reasonable.
The following table summarizes the purchase consideration to the fair values of assets acquired and liabilities assumed as of the acquisition date and subsequent measurement period adjustments:
|
| Initial Allocation |
|
| Measurement Period Adjustments |
|
| Revised Allocation |
| |||
Purchase price, cash consideration, net of cash acquired |
| $ | 35,048 |
|
| $ | — |
|
| $ | 35,048 |
|
|
|
|
|
|
|
|
|
| — |
| ||
Accounts receivable |
|
| 746 |
|
|
| (84 | ) |
|
| 662 |
|
Inventory |
|
| 1,942 |
|
|
| (177 | ) |
|
| 1,765 |
|
Prepaid expenses and other assets |
|
| 152 |
|
|
| 22 |
|
|
| 174 |
|
Operating lease right-of-use assets |
|
| 841 |
|
|
| — |
|
|
| 841 |
|
Property and equipment |
|
| 684 |
|
|
| — |
|
|
| 684 |
|
Other intangible assets |
|
| 19,094 |
|
|
| 965 |
|
|
| 20,059 |
|
Goodwill |
|
| 22,995 |
|
|
| (3,979 | ) |
|
| 19,016 |
|
Assumed liabilities |
|
| (2,799 | ) |
|
| (40 | ) |
|
| (2,839 | ) |
Deferred tax liabilities |
|
| (8,607 | ) |
|
| 3,293 |
|
|
| (5,314 | ) |
Net assets acquired |
| $ | 35,048 |
|
| $ | — |
|
| $ | 35,048 |
|
The following table summarizes the allocation of the purchase consideration to the other intangible assets acquired:
|
| Preliminary Fair Value |
|
| Weighted Average Life (in years) |
| ||
Definite-lived: |
|
|
|
|
|
| ||
Customer related |
| $ | 12,837 |
|
|
| 12 |
|
Technology |
|
| 4,749 |
|
|
| 12 |
|
Indefinite-lived: |
|
|
|
|
|
| ||
Tradenames |
|
| 2,473 |
|
|
| — |
|
Total |
| $ | 20,059 |
|
|
|
|
The fair value of the intangible assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to the Company’s expected future economic benefits from the enhanced access to high-growth markets including private label opportunities through Dacheng’s innovative patient temperature management devices. The goodwill is not expected to be deductible for tax purposes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements are presented.
F-22
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Acquisition of Beckmann & Egle Industrieelektronik GmbH
On July 1, 2021, the Company acquired the medical business unit of Beckmann & Egle Industrieelektronik GmbH (“B&E”), a developer and manufacturer of electronic control units, for a purchase price of $2,827. The acquisition was accounted for as a business combination with the purchase price assigned to inventory, property and equipment and other intangible assets based on their estimated fair values as of the acquisition date. The results of operations of B&E are reported within the Company’s Medical segment from the date of acquisition.
Note 5 — Restructuring and Impairments
The Company continuously monitors market developments, industry trends and changing customer needs and in response, may undertake restructuring actions, as necessary, to execute management’s strategy, streamline operations and optimize the Company’s cost structure. Restructuring actions may include the realignment of existing manufacturing footprint, facility closures, or similar actions, either in the normal course of business or pursuant to significant restructuring programs.
These actions may result in employees receiving voluntary or involuntary employee termination benefits, which are mainly statutory requirements or other contractual agreements. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination.
Manufacturing Footprint Rationalization
During 2019, the Company committed to a restructuring plan (“Plan”) to improve the Company’s manufacturing productivity and rationalize its footprint. Under this Plan, the Company relocated and consolidated certain automotive electronics manufacturing plants in North America and China.
During the year ended December 31, 2022, the Company recognized restructuring expense of $56 for employee separation costs and $198 for other costs, primarily related to equipment move and set up costs.
During the year ended December 31, 2021, the Company recognized restructuring expense of $1,303 for employee separation costs and $1,665 for other costs, primarily related to equipment move and set up costs.
During the year ended December 31, 2020, the Company recognized restructuring expense of $(832) for employee separation costs and $1,019 for other costs, primarily related to accelerated depreciation and equipment move and set up costs. The net activity for the year ended December 31, 2020 was primarily related to a reduction in the estimates of previously recognized employee separation costs.
The Company has recorded approximately $10,359 of restructuring expenses since the inception of this program and as of December 31, 2022, $588 remains accrued.
Other Restructuring Activities
The Company has undertaken several discrete restructuring actions. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $0, $889 and $5,382 of employee separation costs, respectively, and $383, $0 and $234 of other related costs, respectively. These restructuring expenses were primarily associated with restructuring actions focused on the rotation of our manufacturing footprint to best cost locations and the reduction of global overhead costs.
F-23
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Restructuring Expenses By Reporting Segment
Restructuring expense by reporting segment for the years ended December 31, 2022, 2021 and 2020 was as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Automotive |
| $ | 637 |
|
| $ | 2,793 |
|
| $ | 5,075 |
|
Medical |
|
| — |
|
|
| — |
|
|
| 112 |
|
Corporate |
|
| — |
|
|
| 1,064 |
|
|
| 616 |
|
Total |
| $ | 637 |
|
| $ | 3,857 |
|
| $ | 5,803 |
|
Restructuring Liability
The following table summarizes restructuring activity for all restructuring initiatives for the years ended December 31, 2022 and 2021:
|
| Employee Separation Costs |
|
| Other Related Costs |
|
| Total |
| |||
Balance at December 31, 2020 |
| $ | 5,627 |
|
| $ | — |
|
| $ | 5,627 |
|
Additions, charged to restructuring expenses |
|
| 2,406 |
|
|
| 1,927 |
|
|
| 4,333 |
|
Change in estimate |
|
| (214 | ) |
|
| (262 | ) |
|
| (476 | ) |
Cash payments |
|
| (6,129 | ) |
|
| (1,709 | ) |
|
| (7,838 | ) |
Non-cash utilization |
|
| — |
|
|
| (218 | ) |
|
| (218 | ) |
Currency translation and other |
|
| (196 | ) |
|
| 262 |
|
|
| 66 |
|
Balance at December 31, 2021 |
| $ | 1,494 |
|
| $ | — |
|
| $ | 1,494 |
|
Additions, charged to restructuring expenses |
|
| 6 |
|
|
| 581 |
|
|
| 587 |
|
Change in estimate |
|
| 50 |
|
|
| — |
|
|
| 50 |
|
Cash payments |
|
| (881 | ) |
|
| (581 | ) |
|
| (1,462 | ) |
Currency translation and other |
|
| (81 | ) |
|
| — |
|
|
| (81 | ) |
Balance at December 31, 2022 |
| $ | 588 |
|
| $ | — |
|
| $ | 588 |
|
Impairments – Non-Automotive Electronics Business
On December 31, 2022, the Company approved a plan to exit its non-automotive electronics business to strengthen the Company’s core business and focus its resources and equipment with businesses and investments that are more strategic and profitable. The Company will continue to sell certain non-automotive electronics products until the exit is complete.
The Company is evaluating a potential sale of the non-automotive electronics business or substantially all of its assets. If such sale is not pursued or is unsuccessful, the Company intends to wind-down the operations of the business over approximately eight to twelve months, subject to discussions with customers and suppliers. In the event of a wind-down, certain property, plant and equipment will be utilized by other operations of the Company.
During the year ended December 31, 2022, the Company recorded non-cash impairment charges of $9,378, $5,601 and $690 for write downs of inventory, intangible assets and property and equipment, respectively, within the Automotive segment. Write downs of inventory are recorded in Cost of sales. Write downs of intangible assets and property and equipment are recorded in Impairment of intangible assets and property and equipment.
F-24
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 6 — Details of Certain Financial Statement Components
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Inventory: |
|
|
|
|
|
| ||
Raw materials, net of reserve |
| $ | 136,217 |
|
| $ | 96,426 |
|
Work in process, net of reserve |
|
| 17,695 |
|
|
| 9,495 |
|
Finished goods, net of reserve |
|
| 64,336 |
|
|
| 53,556 |
|
Total inventory, net |
| $ | 218,248 |
|
| $ | 159,477 |
|
Other current assets: |
|
|
|
|
|
| ||
Notes receivable |
| $ | 12,127 |
|
| $ | 13,033 |
|
Income tax and other tax receivable |
|
| 15,041 |
|
|
| 10,681 |
|
Billable tooling |
|
| 15,267 |
|
|
| 3,778 |
|
Short-term derivative financial instruments |
|
| 6,564 |
|
|
| 300 |
|
Prepaid expenses |
|
| 6,239 |
|
|
| 3,407 |
|
Receivables due from factor |
|
| 5,490 |
|
|
| — |
|
Other |
|
| 3,869 |
|
|
| 1,576 |
|
Total other current assets |
| $ | 64,597 |
|
| $ | 32,775 |
|
Property and equipment: |
|
|
|
|
|
| ||
Machinery and equipment |
| $ | 214,342 |
|
| $ | 155,463 |
|
Buildings and improvements |
|
| 123,714 |
|
|
| 100,788 |
|
Information technology |
|
| 39,726 |
|
|
| 33,060 |
|
Production tooling |
|
| 24,839 |
|
|
| 25,180 |
|
Leasehold improvements |
|
| 12,271 |
|
|
| 11,445 |
|
Construction in progress |
|
| 29,023 |
|
|
| 14,506 |
|
Total property and equipment |
|
| 443,915 |
|
|
| 340,442 |
|
Less: accumulated depreciation |
|
| (199,435 | ) |
|
| (185,172 | ) |
Total property and equipment, net |
| $ | 244,480 |
|
| $ | 155,270 |
|
Other current liabilities: |
|
|
|
|
|
| ||
Accrued employee liabilities |
| $ | 32,031 |
|
| $ | 28,818 |
|
Liabilities from discounts and rebates |
|
| 26,640 |
|
|
| 27,343 |
|
Income tax and other taxes payable |
|
| 14,459 |
|
|
| 17,068 |
|
Restructuring |
|
| 588 |
|
|
| 1,494 |
|
Accrued warranty |
|
| 2,380 |
|
|
| 1,916 |
|
Other |
|
| 17,716 |
|
|
| 5,554 |
|
Total other current liabilities |
| $ | 93,814 |
|
| $ | 82,193 |
|
F-25
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 7 — Goodwill and Other Intangibles
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, for the years ended December 31, 2022 and 2021 were as follows:
|
| Automotive |
|
| Medical |
|
| Total |
| |||
Balance as of December 31, 2020 |
| $ | 39,495 |
|
| $ | 28,529 |
|
| $ | 68,024 |
|
Acquisition of B&E |
|
| — |
|
|
| 976 |
|
|
| 976 |
|
Exchange rate impact |
|
| (2,166 | ) |
|
| (801 | ) |
|
| (2,967 | ) |
Balance as of December 31, 2021 |
| $ | 37,329 |
|
| $ | 28,704 |
|
| $ | 66,033 |
|
Acquisition of Dacheng |
|
| — |
|
|
| 19,016 |
|
|
| 19,016 |
|
Acquisition of Alfmeier |
|
| 34,494 |
|
|
| — |
|
|
| 34,494 |
|
Exchange rate impact |
|
| 1,246 |
|
|
| (1,015 | ) |
|
| 231 |
|
Balance as of December 31, 2022 |
| $ | 73,069 |
|
| $ | 46,705 |
|
| $ | 119,774 |
|
Other Intangible Assets
Other intangible assets and accumulated amortization balances as of December 31, 2022 and 2021 were as follows:
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| |||
Definite-lived: |
|
|
|
|
|
|
|
|
| |||
Customer relationships |
| $ | 112,286 |
|
| $ | (65,748 | ) |
| $ | 46,538 |
|
Technology |
|
| 44,745 |
|
|
| (25,709 | ) |
|
| 19,036 |
|
Product development costs |
|
| 18,774 |
|
|
| (18,456 | ) |
|
| 318 |
|
Software development |
|
| 1,007 |
|
|
| — |
|
|
| 1,007 |
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
| |||
Tradenames |
|
| 7,034 |
|
|
| — |
|
|
| 7,034 |
|
Balance as of December 31, 2022 |
| $ | 183,846 |
|
| $ | (109,913 | ) |
| $ | 73,933 |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| |||
Definite-lived: |
|
|
|
|
|
|
|
|
| |||
Customer relationships |
| $ | 90,448 |
|
| $ | (64,105 | ) |
| $ | 26,343 |
|
Technology |
|
| 29,464 |
|
|
| (24,487 | ) |
|
| 4,977 |
|
Product development costs |
|
| 20,329 |
|
|
| (19,772 | ) |
|
| 557 |
|
Software development |
|
| 1,007 |
|
|
| — |
|
|
| 1,007 |
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
| |||
Tradenames |
|
| 4,670 |
|
|
| — |
|
|
| 4,670 |
|
Balance as of December 31, 2021 |
| $ | 145,918 |
|
| $ | (108,364 | ) |
| $ | 37,554 |
|
On December 31, 2022, the Company approved a plan to exit its non-automotive electronics business, resulting in an impairment of our customer relationships intangible assets of $5,601. See Note 5, "Restructuring and Impairments," to the consolidated financial statements included in this Annual Report for additional information.
In connection with the acquisition of Alfmeier, the Company recorded technology of $11,647 and customer relationships of $19,812. These definite-lived assets are being amortized using the straight-line method over their estimated useful lives of approximately 9 years and 14 years, respectively.
F-26
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
In connection with the acquisition of Dacheng, the Company recorded technology of $4,749, customer relationships of $12,837, and indefinite-lived tradenames of $2,473. Technology and customer relationships are definite-lived assets that are being amortized using the straight-line method over their estimated useful lives of approximately 12 years for each.
In connection with the acquisition of B&E, the Company recorded technology of $976. These definite-lived assets are being amortized using the straight-line method over their estimated useful lives of approximately seven years.
On February 28, 2020, Gentherm acquired the automotive patents and technology of a development-stage technology company for $3,141. The investment was accounted for as an asset acquisition of defensive intangible assets and will be amortized over six years.
On June 19, 2020, Gentherm sold patents from a non-core business for $2,055. The gain on sale of $1,978 was recorded in Other income in the consolidated statements of income.
A total of $9,018, $8,821 and $9,226 in other intangible assets were amortized in 2022, 2021 and 2020, respectively.
An estimate of other intangible asset amortization by year, is as follows:
2023 |
| $ | 8,294 |
|
2024 |
| $ | 7,297 |
|
2025 |
| $ | 7,284 |
|
2026 |
| $ | 7,284 |
|
2027 |
| $ | 7,284 |
|
Note 8 — Leases
Components of lease expense for the years ended December 31, 2022, 2021 and 2020 were as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Lease cost: |
|
|
|
|
|
|
|
|
| |||
Operating lease cost |
| $ | 8,040 |
|
| $ | 8,227 |
|
| $ | 6,773 |
|
Amortization of ROU assets - finance leases |
|
| 168 |
|
|
| — |
|
|
| — |
|
Interest on lease liabilities - finance leases |
|
| 16 |
|
|
| — |
|
|
| — |
|
Short-term lease cost |
|
| 1,773 |
|
|
| 1,941 |
|
|
| 1,834 |
|
Sublease income |
|
| (101 | ) |
|
| (163 | ) |
|
| (158 | ) |
Total lease cost |
| $ | 9,896 |
|
| $ | 10,005 |
|
| $ | 8,449 |
|
F-27
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Other information related to leases is recognizedas follows:
|
| Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
| ||
Operating cash flows for operating leases |
| $ | 10,381 |
|
| $ | 7,685 |
|
Operating cash flows for finance leases |
|
| 16 |
|
|
| — |
|
Financing cash flows for finance leases |
|
| 164 |
|
|
| — |
|
Right-of-use lease assets obtained in exchange for lease obligations: |
|
|
|
|
|
| ||
Operating leases |
| $ | 15,902 |
|
| $ | 2,379 |
|
Finance leases |
|
| 1,180 |
|
|
| — |
|
|
|
|
|
|
|
| ||
|
| December 31, 2022 |
|
| December 31, 2021 |
| ||
Weighted average remaining lease term: |
|
|
|
|
|
| ||
Operating leases |
| 5.7 years |
|
| 6.9 years |
| ||
Finance leases |
| 2.7 years |
|
| N/A |
| ||
Weighted average discount rate: |
|
|
|
|
|
| ||
Operating leases |
|
| 4.35 | % |
|
| 4.53 | % |
Finance leases |
|
| 3.57 | % |
| N/A |
|
A summary of operating leases as of December 31, 2022, under all non-cancellable operating leases with terms exceeding one year is as follows:
2023 |
| $ | 8,074 |
|
2024 |
|
| 7,003 |
|
2025 |
|
| 4,984 |
|
2026 |
|
| 3,122 |
|
2027 |
|
| 1,631 |
|
2028 or later |
|
| 6,538 |
|
Total future minimum lease payments |
|
| 31,352 |
|
Less imputed interest |
|
| (3,671 | ) |
Total |
| $ | 27,681 |
|
A summary of finance leases as of December 31, 2022, under all non-cancellable finance leases with terms exceeding one year is as follows:
2023 |
| $ | 432 |
|
2024 |
|
| 437 |
|
2025 |
|
| 148 |
|
2026 |
|
| 68 |
|
Total future minimum lease payments |
| $ | 1,085 |
|
F-28
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 9 — Debt
The following table summarizes the Company’s debt as of December 31, 2022 and 2021:
|
| December 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
|
| Interest |
|
| Principal |
|
| Interest |
|
| Principal |
| ||||
Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Revolving Note (U.S. Dollar denominations) |
|
| 5.80 | % |
| $ | 232,000 |
|
|
| 1.35 | % |
| $ | 35,000 |
|
Other loans |
| 3.89% - 5.21% |
|
|
| 2,011 |
|
|
| 5.21 | % |
|
| 3,750 |
| |
Finance leases |
| N/A |
|
|
| 1,085 |
|
| N/A |
|
|
| — |
| ||
Total debt |
|
|
|
|
| 235,096 |
|
|
|
|
|
| 38,750 |
| ||
Current maturities |
|
|
|
|
| (2,443 | ) |
|
|
|
|
| (2,500 | ) | ||
Long-term debt, less current maturities |
|
|
|
| $ | 232,653 |
|
|
|
|
| $ | 36,250 |
|
Credit Agreement
On June 10, 2022, the Company entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent (the “Agent”). The Second Amended and Restated Credit Agreement amended and restated in its entirety the Amended and Restated Credit Agreement dated June 27, 2019, by and among Gentherm, certain of its direct and indirect subsidiaries, the lenders party thereto and the Agent.
The Second Amended and Restated Credit Agreement provides for a $500,000 secured revolving credit facility (the “Revolving Credit Facility”) (a $25,000 increase from the revolving credit facility under the Amended and Restated Credit Agreement), with a $50,000 sublimit for swing line loans and a $15,000 sublimit for the issuance of standby letters of credit. Any amount of the facility utilized for swing line loans or letters of credit outstanding will reduce the amount available under the Second Amended and Restated Credit Agreement. The Company had no outstanding letters of credit issued as of December 31, 2022 and December 31, 2021.
Subject to specified conditions, Gentherm can increase the Revolving Credit Facility or incur secured term loans in an aggregate amount of up to $200,000. The Second Amended and Restated Credit Agreement extended the maturity of the Revolving Credit Facility from June 27, 2024 to June 10, 2027. The outstanding principal and interest (of approximately $35,000 as of June 10, 2022) under the Amended and Restated Credit Agreement continued and remained obligations under the Second Amended and Restated Credit Agreement.
The U.S. borrowers and guarantors participating in the Second Amended and Restated Credit Agreement also entered into a Second Amended and Restated Pledge and Security Agreement (the “Second Amended and Restated Security Agreement”). The Second Amended and Restated Security Agreement grants a security interest to the Agent 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 Second Amended and Restated Security 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 Second Amended and Restated Credit Agreement (including all obligations of any U.S. or non-U.S. loan party) are unconditionally guaranteed by certain of Gentherm’s domestic subsidiaries, and the German subsidiary borrowers and certain other foreign subsidiaries guarantee all obligations of the non-U.S. loan parties under the Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement restricts, among other things, the amount of dividend payments the Company can make to shareholders.
The Second Amended and Restated Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets or enter into certain other transactions outside the ordinary course of business, and (ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Net Leverage Ratio (based on consolidated EBITDA for the applicable trailing four fiscal quarters) as of the end of any fiscal quarter. The Second Amended and Restated Credit Agreement also contains customary events of default. As of December 31, 2022, the Company was in compliance with the terms of the Second
F-29
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement additionally contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the Revolving Credit Facility may be accelerated and may become immediately due and payable.
Under the Second Amended and Restated Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate Loans”) or Term SOFR rate (“Term SOFR Rate Loans”), plus a margin (“Applicable Rate”). The rate for Base Rate Loans is equal to the highest of the Federal Funds Rate plus 0.50%, Bank of America’s prime rate, or the Term SOFR rate plus 1.00%. The rate for Term SOFR Rate Loans denominated in U.S. Dollars is equal to the forward-looking Secured Overnight Financing Rate (“SOFR”) term rate administered by the CME with a term of one month. All loans denominated in a currency other than the U.S. Dollar must be Term SOFR Rate Loans. Interest is payable at least quarterly. Additionally, a commitment fee of between 0.175% to 0.300%, which will vary based on the Consolidated Net Leverage Ratio, as defined in the Second Amended and Restated Credit Agreement, is payable on the average daily unused amounts under the Revolving Credit Facility.
The Applicable Rate varies based on the Consolidated Net Leverage Ratio reported by the Company. As long as the Company is not in default of the terms and conditions of the Second Amended and Restated Credit Agreement, the lowest and highest possible Applicable Rate is 1.125% and 2.125%, respectively, for Term SOFR Rate Loans and 0.125% and 1.125%, respectively, for Base Rate Loans.
Borrowing availability is subject to, among other things, the Company’s compliance with the minimum Consolidated Interest Coverage Ratio and the maximum Consolidated Net Leverage Ratio as of the end of any fiscal quarter. Based upon consolidated EBITDA for the trailing four fiscal quarters calculated for purposes of the Consolidated Net Leverage Ratio, $264,904 remained available as of December 31, 2022 for additional borrowings under the Second Amended and Restated Credit Agreement subject to specified conditions that Gentherm currently satisfies.
In connection with the Second Amended and Restated Credit Agreement, the Company incurred debt issuance costs of $1,417, which have been capitalized and will be amortized into interest expense over the term of the credit facility. In addition, unamortized deferred debt issuance costs of $144 were written-off and recognized in Interest expense, net during the twelve months ended December 31, 2022.
The scheduled principal maturities of our debt as of December 31, 2022 were as follows:
|
| U.S. |
|
| Other Debt |
|
| Total |
| |||
2023 |
| $ | — |
|
| $ | 2,443 |
|
| $ | 2,443 |
|
2024 |
|
| — |
|
|
| 437 |
|
|
| 437 |
|
2025 |
|
| — |
|
|
| 148 |
|
|
| 148 |
|
2026 |
|
| — |
|
|
| 68 |
|
|
| 68 |
|
2027 |
|
| 232,000 |
|
|
| — |
|
|
| 232,000 |
|
Total |
| $ | 232,000 |
|
| $ | 3,096 |
|
| $ | 235,096 |
|
Note 10 — Pension and Other Post Retirement Benefit Plans
The Company maintains a U.S. defined benefit pension plan covering its former Chief Executive Officer (“U.S. Plan”) and a German defined benefit pension plan covering certain retired executive employees of the Company’s wholly owned subsidiary, Gentherm GmbH (“German Plan”).
F-30
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The components of net periodic benefit cost for the Company’s defined benefit plans for the years ended December 31, 2022, 2021 and 2020 were as follows:
|
| U.S. Plan |
|
| German Plan |
| ||||||||||||||||||
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
| ||||||
Net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Service cost |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Interest cost |
|
| 56 |
|
|
| 42 |
|
|
| 85 |
|
|
| 92 |
|
|
| 91 |
|
|
| 88 |
|
Expected return on plan assets |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (109 | ) |
|
| (120 | ) |
|
| (121 | ) |
Amortization of prior service cost and actuarial loss |
|
| 22 |
|
|
| 26 |
|
|
| 7 |
|
|
| 114 |
|
|
| 133 |
|
|
| 124 |
|
Net periodic benefit cost |
| $ | 78 |
|
| $ | 68 |
|
| $ | 92 |
|
| $ | 97 |
|
| $ | 104 |
|
| $ | 91 |
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discount rate |
|
| 1.80 | % |
|
| 1.20 | % |
|
| 2.40 | % |
|
| 1.25 | % |
|
| 1.08 | % |
|
| 1.06 | % |
Long-term return on assets |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 2.90 | % |
|
| 2.90 | % |
|
| 3.10 | % |
A reconciliation of the change in benefit obligation and the change in plan assets for the years ended December 31, 2022 and 2021 is as follows:
|
| U.S. Plan |
|
| German Plan |
| ||||||||||
|
| As of December 31, |
|
| As of December 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at beginning of year |
| $ | 3,446 |
|
| $ | 3,847 |
|
| $ | 8,102 |
|
| $ | 8,934 |
|
Interest cost |
|
| 56 |
|
|
| 42 |
|
|
| 92 |
|
|
| 91 |
|
Paid pension distributions |
|
| (342 | ) |
|
| (342 | ) |
|
| (281 | ) |
|
| (310 | ) |
Actuarial (gain) loss |
|
| (349 | ) |
|
| (101 | ) |
|
| (2,001 | ) |
|
| 9 |
|
Exchange rate impact |
|
| — |
|
|
| — |
|
|
| (514 | ) |
|
| (622 | ) |
Balance at end of year |
| $ | 2,811 |
|
| $ | 3,446 |
|
| $ | 5,398 |
|
| $ | 8,102 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at beginning of year |
|
| — |
|
|
| — |
|
|
| 4,069 |
|
|
| 4,276 |
|
Actual return on plan assets |
|
| — |
|
|
| — |
|
|
| 89 |
|
|
| 98 |
|
Contributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 310 |
|
Paid pension distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (310 | ) |
Exchange rate impact |
|
| — |
|
|
| — |
|
|
| (240 | ) |
|
| (305 | ) |
Balance at end of year |
| $ | — |
|
| $ | — |
|
| $ | 3,918 |
|
| $ | 4,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Underfunded Status |
| $ | (2,811 | ) |
| $ | (3,446 | ) |
| $ | (1,480 | ) |
| $ | (4,033 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance sheet classification: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other current liabilities |
| $ | (342 | ) |
| $ | (342 | ) |
| $ | (314 | ) |
| $ | (306 | ) |
Pension benefit obligation |
|
| (2,469 | ) |
|
| (3,104 | ) |
|
| (1,166 | ) |
|
| (3,727 | ) |
Accumulated other comprehensive loss (pre-tax): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Actuarial losses |
|
| 205 |
|
|
| 575 |
|
|
| 965 |
|
|
| 3,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Discount rate |
|
| 4.65 | % |
|
| 1.80 | % |
|
| 4.10 | % |
|
| 1.25 | % |
Pre-tax amounts included in AOCI that are expected to be recognized in net periodic benefit cost during the year ended December 31, 2023 are as follows:
|
| U.S Plan |
|
| German Plan |
| ||
Actuarial losses |
| $ | - |
|
| $ | 22 |
|
F-31
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The accumulated benefit obligations were as follows:
|
| U.S. Plan |
|
| German Plan |
| ||||||||||
|
| As of December 31, |
|
| As of December 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Accumulated benefit obligation |
| $ | 2,811 |
|
| $ | 3,446 |
|
| $ | 5,398 |
|
| $ | 8,102 |
|
Interest costs are recognized in Selling, general and administrative expenses in the consolidated statements of income and actuarial gains and losses are included the consolidated balance sheet as part of Accumulated other comprehensive loss within shareholders’ equity. Actuarial gains or losses are amortized to Selling, general and administrative expense in the consolidated statements of income based on the average future life of the Plan using the corridor method. Prior service cost is included in Selling, general and administrative expenses in the consolidated statements of income.
Plan assets – German Plan
Plan assets are comprised of Gentherm GmbH’s pension insurance policies and are pledged to the beneficiaries of the German Plan. A market valuation technique, based on observable underlying insurance charges, is used to determine the fair value of the pension plan assets (Level 2).
The expected return on plan assets assumption used to calculate Gentherm GmbH’s pension benefit obligation was determined using actual returns realized on plan assets in the prior year.
Contributions
We do not expect contributions to be paid to the U.S. Plan or the German Plan during the next fiscal year.
The schedule of future expected pension payments is as follows:
|
| Projected Pension |
| |||||
Year |
| U.S Plan |
|
| German Plan |
| ||
2023 |
| $ | 342 |
|
| $ | 311 |
|
2024 |
|
| 342 |
|
|
| 303 |
|
2025 |
|
| 342 |
|
|
| 294 |
|
2026 |
|
| 342 |
|
|
| 285 |
|
2027 |
|
| 342 |
|
|
| 274 |
|
2028-2031 |
|
| 1,710 |
|
|
| 2,732 |
|
Total |
| $ | 3,420 |
|
| $ | 4,199 |
|
Defined contribution plans
The Company also sponsors defined contribution plans for eligible employees. On a discretionary basis, the Company matches a portion of the employee contributions and or makes additional discretionary contributions. Gentherm recognized costs of $1,984, $1,724 and $1,275 related to contributions to its defined contribution plans during the years ended December 31, 2022, 2021 and 2020, respectively.
Note 11 — Commitments and Contingencies
Legal and other contingencies
The Company may be subject to various legal actions and claims in the ordinary course of its business, including those arising out of breach of contracts, intellectual property rights, environmental matters, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these
F-32
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
matters will not have a material adverse effect on its consolidated results of operations or financial position. Product liability and warranty reserves are recorded separately from legal reserves.
Product Liability and Warranty Matters
In the event that the Company’s products fail to perform as expected or result in alleged bodily injury or property damage, our products may subject us to warranty claims and product liability. If any of our products are or are alleged to be defective, we may be required to participate in a recall or other corrective action involving such products. The Company maintains liability insurance coverage at levels based on commercial norms and historical claims experience. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend such claims.
The Company accrues warranty obligations for products sold based on management estimates of future failure rates and current claim cost experience, with support from the sales, engineering, quality and legal functions. Using historical information available to the Company, including claims already filed by customers, the warranty accrual is adjusted quarterly to reflect management’s best estimate of future claims.
The following is a reconciliation of the changes in accrued warranty costs:
|
| Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Balance at beginning of year |
| $ | 1,916 |
|
| $ | 2,391 |
|
Warranty opening balance from acquired entities |
|
| 907 |
|
|
| - |
|
Warranty claims paid |
|
| (1,841 | ) |
|
| (2,164 | ) |
Warranty expense for products shipped during the current period |
|
| 1,584 |
|
|
| 1,813 |
|
Adjustments to warranty estimates from prior periods |
|
| (274 | ) |
|
| (73 | ) |
Adjustments due to currency translation |
|
| 88 |
|
|
| (51 | ) |
Balance at end of year |
| $ | 2,380 |
|
| $ | 1,916 |
|
Other matters
Purchase commitments for materials, supplies, services and capital expenditures, as part of the normal course of business, are generally consistent from year to year. Commitments for capital expenditures as of December 31, 2022 were $6,853. In addition, due to supply shortages of semiconductors, the Company has entered into agreements with various suppliers to reserve the right to purchase certain semiconductor chips over rolling periods of 12-24 months, with volume commitments determined based on our anticipated production requirements. As of December 31, 2022, the Company’s total commitments for these semiconductor chip agreements was $40,130. Such agreements provide the Company with priority access to semiconductor chips as they become available, however, these agreements do not guarantee that our suppliers will meet the timing and quantities requested by Gentherm. All other purchase commitments as of December 31, 2022 were immaterial.
Employees
Approximately 31% of the Company’s workforce are members of industrial trade unions and are employed under the terms of various labor agreements. In 2023, certain agreements will require a vote on the terms of their respective labor contracts. Management does not anticipate any significant difficulties with respect to the renewal of these agreements.
Note 12 — Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. The Company’s diluted earnings per share give effect to all potential shares of 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.
F-33
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The following table illustrates earnings per share and the weighted average shares outstanding used in calculating basic and diluted earnings per share:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net income |
| $ | 24,441 |
|
| $ | 93,434 |
|
| $ | 59,690 |
|
|
|
|
|
|
|
|
|
|
| |||
Basic weighted average shares of Common Stock outstanding |
|
| 33,126,202 |
|
|
| 33,085,732 |
|
|
| 32,666,025 |
|
Dilutive effect of stock options, restricted stock awards and restricted stock units |
|
| 376,952 |
|
|
| 423,988 |
|
|
| 362,079 |
|
Diluted weighted average shares of Common Stock outstanding |
|
| 33,503,154 |
|
|
| 33,509,720 |
|
|
| 33,028,104 |
|
|
|
|
|
|
|
|
|
|
| |||
Basic earnings per share |
| $ | 0.74 |
|
| $ | 2.82 |
|
| $ | 1.83 |
|
Diluted earnings per share |
| $ | 0.73 |
|
| $ | 2.79 |
|
| $ | 1.81 |
|
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.
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Anti-dilutive securities share impact |
|
| — |
|
|
| — |
|
|
| 12,000 |
|
See Note 17 for information about the Company’s different equity incentive plans.
Note 13 —Financial Instruments
Derivative Financial Instruments
The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to its debt obligations under the Second Amended and Restated 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, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Czech Koruna 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 decision of whether and when to execute derivative financial instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not enter into derivative financial instruments for speculative or trading purposes. Some derivative contracts do not qualify for hedge accounting; for other derivative contracts, we elect to not apply hedge accounting.
F-34
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The Company’s designated 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 AOCI in the consolidated 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 statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency and copper commodity hedging instruments, if any, to cost of sales, in the consolidated statements of income. Cash flows associated with derivatives are reported in net cash provided by operating activities in the Company’s Consolidated Statements of Cash Flows.
The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounting such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term.
In the second quarter of 2022, the Company entered into a floating-to-fixed interest rate swap agreement with a notional amount of $100,000. This interest rate swap is an undesignated hedge of the Company’s exposure to interest payment fluctuations on a portion of the Credit Facility borrowings that were drawn for the acquisitions of Alfmeier and Dacheng. The periodic changes in fair value are recognized in Interest expense, net.
In the second and third quarter of 2022, the Company entered into forward contracts with a notional amount of $128,319 to hedge the foreign currency risk associated with the forecasted purchase of Alfmeier. These contracts matured and were settled in the third quarter of 2022. During the year ended December 31, 2022 the Company recognized expense of $3,806 in Foreign currency (loss) gain within the consolidated income statement.
Information related to the recurring fair value measurement of derivative financial instruments in the consolidated balance sheet as of December 31, 2022 is as follows:
|
|
|
|
|
|
| Asset Derivatives |
|
| Liability Derivatives |
|
|
|
| ||||||||
|
| Fair Value |
| Notional Amount |
|
| Balance Sheet |
| Fair |
|
| Balance Sheet |
| Fair |
|
| Net Asset/ |
| ||||
Derivatives Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency derivatives |
| Level 2 |
| $ | 40,063 |
|
| Other current assets |
| $ | 3,791 |
|
| Other current liabilities |
| $ | — |
|
| $ | 3,791 |
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| Level 2 |
| $ | 100,000 |
|
| Other current assets |
| $ | 2,772 |
|
| Other current liabilities |
| $ | — |
|
| $ | 2,772 |
|
Information related to the recurring fair value measurement of derivative financial instruments in the consolidated balance sheet as of December 31, 2021 is as follows:
|
|
|
|
|
|
| Asset Derivatives |
|
| Liability Derivatives |
|
|
|
| ||||||||
|
| Fair Value |
| Notional Amount |
|
| Balance Sheet |
| Fair |
|
| Balance Sheet |
| Fair |
|
| Net Asset/ |
| ||||
Derivatives Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency derivatives |
| Level 2 |
| $ | 13,974 |
|
| Other current assets |
| $ | 294 |
|
| Other current liabilities |
| $ | — |
|
| $ | 294 |
|
Commodity hedges |
| Level 2 |
| $ | 309 |
|
| Other current assets |
| $ | 6 |
|
| Other current liabilities |
| $ | — |
|
| $ | 6 |
|
F-35
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Information related to the effect of derivative instruments in the consolidated statements of income is as follows:
|
|
|
| Year Ended December 31, |
| |||||||||
|
| Location |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Derivatives Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
| |||
Foreign currency derivatives |
| Cost of sales – income |
| $ | 1,458 |
|
| $ | 1,609 |
|
| $ | (1,629 | ) |
|
| Other comprehensive (loss) income |
|
| 3,496 |
|
|
| (1,217 | ) |
|
| 272 |
|
|
| Foreign currency loss |
|
| — |
|
|
| — |
|
|
| (118 | ) |
Total foreign currency derivatives |
|
|
| $ | 4,954 |
|
| $ | 392 |
|
| $ | (1,475 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||
Commodity derivatives |
| Cost of sales – income |
| $ | 19 |
|
| $ | 14 |
|
| $ | — |
|
|
| Other comprehensive (loss) income |
|
| (6 | ) |
|
| 6 |
|
|
| — |
|
Total commodity derivatives |
|
|
| $ | 13 |
|
| $ | 20 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
| |||
Foreign currency derivatives |
| Foreign currency (loss) gain |
| $ | (3,806 | ) |
| $ | - |
|
| $ | - |
|
Total foreign currency derivatives |
|
|
| $ | (3,806 | ) |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest rate contracts |
| Interest income (expense), net |
| $ | 2,772 |
|
| $ | - |
|
| $ | - |
|
Total interest rate derivatives |
|
|
| $ | 2,772 |
|
| $ | - |
|
| $ | - |
|
The Company did not incur any hedge ineffectiveness during the years ended December 31, 2022 and 2021.
Accounts Receivable Factoring
The Company sells certain customer trade receivables under factoring arrangements with designated financial institutions. All current factoring arrangements were assumed through the acquisition of Alfmeier. Beginning January 1, 2023, our North American factoring agreement is not active and the parties are currently undergoing negotiations in the ordinary course of business. Certain transactions occur under non-recourse agreements and are accounted for as sales, and the cash proceeds are included in cash provided by operating activities. The remaining transactions occur under deferred purchase agreements, in which a portion of the purchase price for the receivables is paid by the bank purchasers to the Company in cash upon sale. The remaining portion is recorded as a deferred purchase receivable, which is paid to the Company as payments on the receivables that are collected by the financial institution from account debtors. Cash proceeds received upon the sale of the receivables to the financial institution are included in cash provided by operating activities and the cash proceeds received on the deferred purchase receivables are included in cash provided by investing activities. All factoring arrangements incorporate customary representations, including representations as to validity of amounts due, completeness of performance obligations and absence of commercial disputes.
During the year ended December 31, 2022, we sold trade receivables totaling $61,482 and incurred factoring fees of $180. As of December 31, 2022, receivables of $19,108 had been factored and had not yet been paid by customers to the respective financial institutions and our availability under the receivables factoring agreements was $5,479. The collective limit under our factoring arrangements as of December 31, 2022 was $24,142.
F-36
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 14 — Fair Value Measurement
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on one or more of the following three valuation techniques:
Market: This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income: This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
Cost: This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
The Company uses the following fair value hierarchy 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 are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Items Measured at Fair Value on a Recurring Basis
Except for derivative financial instruments (see Note 13) and pension plan assets (see Note 10), the Company has no material financial assets and liabilities that are carried at fair value at December 31, 2022 and 2021. 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.
Items Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. On July 1, 2021 the Company acquired B&E for $2,827. The purchase price was allocated to inventory (Level 2), property and equipment (Level 2) and other intangible assets (Level 3) based on their estimated fair values as of the acquisition date. The Company utilized a third-party to assist in the Level 3 fair value estimates of other intangible assets for recent acquisitions (see Note 4). The estimated fair values of these assets were based on third-party valuations and management’s estimates, generally utilizing income and market approaches. As of December 31, 2022, and December 31, 2021, there were no other significant assets or liabilities measured at fair value on a non-recurring basis.
Items Not Carried at Fair Value
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 December 31, 2022, and 2021, the carrying values of the indebtedness under the Company’s Credit Agreement 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 9).
F-37
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 15 — Equity
Common Stock
The Company is authorized to issue up to 59,991,000 shares, of which 55,000,000 shares shall be common stock, without par value, and 4,991,000 shall be Preferred Stock, without par value. As of December 31, 2022, an aggregate of 33,202,082 shares of its common stock were issued and outstanding. As of December 31, 2022, there are no preferred stock shares issued or outstanding. The Company’s common stock is listed on the Nasdaq Global Select Market under the symbol, “THRM”, and has the following rights and privileges:
Stock Repurchase Program
In December 2020, the Board of Directors of Gentherm Incorporated (“Board of Directors”) authorized a stock repurchase program (the “2020 Stock Repurchase Program”) to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150,000 of its issued and outstanding common stock over a three-year period, expiring December 15, 2023.
Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. Repurchases may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. During the year ended December 31, 2022, the Company did not make any repurchases under the 2020 Stock Repurchase Program. The 2020 Stock Repurchase Program had $130,000 repurchase authorization remaining as of December 31, 2022.
F-38
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 16 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the years ended December 31, 2022, 2021 and 2020 are as follows:
|
| Defined |
|
| Foreign |
|
| Commodity Hedge Derivatives |
|
| Foreign |
|
| Total |
| |||||
Balance at December 31, 2021 |
| $ | (2,893 | ) |
| $ | (34,188 | ) |
| $ | 5 |
|
| $ | 154 |
|
| $ | (36,922 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 2,341 |
|
|
| (13,786 | ) |
|
| 13 |
|
|
| 4,954 |
|
|
| (6,478 | ) |
Income tax effect of other comprehensive income (loss) before reclassifications |
|
| (621 | ) |
|
| (295 | ) |
|
| (3 | ) |
|
| (1,092 | ) |
|
| (2,011 | ) |
Amounts reclassified from accumulated other comprehensive loss into net income |
|
| 137 |
|
|
| — |
|
|
| (19 | ) | a |
| (1,458 | ) | a |
| (1,340 | ) |
Income taxes reclassified into net income |
|
| (31 | ) |
|
| — |
|
|
| 4 |
|
|
| 289 |
|
|
| 262 |
|
Net current period other comprehensive income (loss) |
|
| 1,826 |
|
|
| (14,081 | ) |
|
| (5 | ) |
|
| 2,693 |
|
|
| (9,567 | ) |
Balance at December 31, 2022 |
| $ | (1,067 | ) |
| $ | (48,269 | ) |
| $ | — |
|
| $ | 2,847 |
|
| $ | (46,489 | ) |
|
| Defined |
|
| Foreign |
|
| Commodity Hedge Derivatives |
|
| Foreign |
|
| Total |
| |||||
Balance at December 31, 2020 |
| $ | (3,451 | ) |
| $ | (12,637 | ) |
| $ | — |
|
| $ | 1,106 |
|
| $ | (14,982 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 512 |
|
|
| (21,274 | ) |
|
| 20 |
|
|
| 392 |
|
|
| (20,350 | ) |
Income tax effect of other comprehensive income (loss) before reclassifications |
|
| (71 | ) |
|
| (277 | ) |
|
| (4 | ) |
|
| (85 | ) |
|
| (437 | ) |
Amounts reclassified from accumulated other comprehensive loss into net income |
|
| 159 |
|
|
| — |
|
|
| (14 | ) | a |
| (1,609 | ) | a |
| (1,464 | ) |
Income taxes reclassified into net income |
|
| (42 | ) |
|
| — |
|
|
| 3 |
|
|
| 350 |
|
|
| 311 |
|
Net current period other comprehensive income (loss) |
|
| 558 |
|
|
| (21,551 | ) |
|
| 5 |
|
|
| (952 | ) |
|
| (21,940 | ) |
Balance at December 31, 2021 |
| $ | (2,893 | ) |
| $ | (34,188 | ) |
| $ | 5 |
|
| $ | 154 |
|
| $ | (36,922 | ) |
F-39
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
|
| Defined Benefit |
|
| Foreign Currency |
|
| Commodity Hedge Derivatives |
|
| Foreign Currency |
|
| Total |
| |||||
Balance at December 31, 2019 |
| $ | (3,371 | ) |
| $ | (39,879 | ) |
| $ | — |
|
| $ | 895 |
|
| $ | (42,355 | ) |
Other comprehensive (loss) income before reclassifications |
|
| (328 | ) |
|
| 27,147 |
|
|
| — |
|
|
| (1,751 | ) |
|
| 25,068 |
|
Income tax effect of other comprehensive (loss) income before reclassifications |
|
| 117 |
|
|
| 95 |
|
|
| — |
|
|
| 381 |
|
|
| 593 |
|
Amounts reclassified from accumulated other comprehensive loss into net income |
| $ | 131 |
|
|
| — |
|
|
| — |
|
|
| 2,023 |
| a |
| 2,154 |
|
Income taxes reclassified into net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (442 | ) |
|
| (442 | ) |
Net current period other comprehensive (loss) income |
|
| (80 | ) |
|
| 27,242 |
|
|
| — |
|
|
| 211 |
|
|
| 27,373 |
|
Balance at December 31, 2020 |
| $ | (3,451 | ) |
| $ | (12,637 | ) |
| $ | — |
|
| $ | 1,106 |
|
| $ | (14,982 | ) |
The Company expects all of the existing gains and losses related to foreign currency derivatives reported in Accumulated other comprehensive loss as of December 31, 2022 to be reclassified into earnings during the next twelve months. See Note 13 for additional information about derivative financial instruments and the effects from reclassification to net income.
Note 17 — Accounting for Stock Based Compensation
On May 16, 2013, the Compensation Committee of the Company’s Board of Directors (the “Board”) approved the Gentherm Incorporated 2013 Equity Incentive Plan (the “2013 Plan”), covering 3,500,000 shares of our Common Stock. The 2013 Plan was amended on May 19, 2017 to increase the number of available shares by 2,000,000 and further amended on May 21, 2020 to increase the number of available shares by 2,450,000. The 2013 Plan permits the granting of various awards including stock options (including both nonqualified options and incentive options), stock appreciation rights (“SARs”), restricted stock and restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”) shares and certain other awards to employees, outside directors and consultants and advisors of the Company. As of December 31, 2022, the Company had an aggregate of 2,216,324 shares of Common Stock available to issue under the 2013 Plan. All equity plans are administered by the Compensation and Talent Management Committee of the Board.
During the three-year period ended December 31, 2022, the Company has outstanding stock options, SARs, restricted stock awards and restricted stock units to employees, directors and consultants. These awards become available to the recipient upon the satisfaction of a vesting condition, either based on a period of service ofor based on the performance of a specific achievement. For optionequity-based awards measured at fair value,with a service condition, the fair value is determined
39
requisite service period typically ranges between using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates certain assumptions, such as expected volatility, expected lifethree to four years for employees and consultants and one year for directors. As of options, risk-free interest rate and expected dividend yield, in order to arrive at a fair value estimate. Expected volatilities areDecember 31, 2022, there were 320,449 PSUs outstanding. These awards cliff vest after three-years based on the averageCompany’s achievement of the historical volatility of the Company’s Common Stock and that of an index of companies in our industry group. To evaluate our assumptions for the expected lives of options, we consider the average holding period of previously exercised options and the remaining terms of outstanding options. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s history of having never issued a dividend, the limitations to issue a dividend under the Amended Credit Agreement and management’s current expectation regarding future dividends. We believe that the assumptions selected by management are reasonable; however, significant changes could materially impact the results of the calculation of fair value.
We also have granted restricted stock units measured based on either a target return on invested capital ratio (“ROIC”), as defined in the award agreement, for a specified fiscal year a target three year cumulative Adjusted EBITDA (“Adjusted EBITDA”), as defined in the award agreement, or the Company’s common stock market price returning a targetrelative total shareholder return (“TSR”), as defined in the award agreement, during a specific three-year measurement period. Upon achievement In each case, awards will be earned at 50% of the target number of shares for achieving a minimum threshold or up to 200% of the target number of shares for exceeding the target, with a linear adjustment between threshold and target or between target and stretch performance measurement, performance-based restricted stock units (“PSUs”) vest over a three-year period. goals. All other outstanding, unvested equity-based awards were service based. Equity-based award vesting may be accelerated at the discretion of the Board under conditions specified in the 2013 Plan.
Under FASB ASC Topic 718, the provisions of the PSUs that vest upon the achievement of relative TSR are considered a market condition, and therefore the effect of that market condition is reflected in the grant date fair value for this portion award. A
F-40
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
third party was engaged to complete a “MonteMonte Carlo simulation”simulation to account for the market condition. That simulation takes into account the beginning stock price of our common stock, the expected volatilities for the relative TSR comparator group, the expected volatilities for the Company’s stock price, correlation coefficients, the expected risk-free rate of return and the expected dividend yield of the Company and the comparator group. The single grant-date fair value computed by this valuation method is recognized by the Company in accounting for the awards regardless of the actual future outcome of the relative TSR feature. The grant date fair value of the other PSUs and RSUs are calculated as the closing price of our common stock as quoted on Nasdaq on the grant date multiplied by the number of shares subject to the award. Each of ROIC and Adjusted EBITDA is considered a performance condition and the grant-date fair value for ROIC PSUs and Adjusted EBITDA PSUs corresponds with management's expectation of the probable outcome of the performance condition as of the grant date.
Stock appreciation rights (“SARs”) are also an award type granted under our management incentive programThe total recognized and they are accounted for using the liability method since they are settled in cash, which requires mark-to-market adjustments based on the current trading price of Gentherm Common Stock to be recognized in statements of income.unrecognized stock-based compensation expense is as follows:
Stock-Based Compensation Expense |
| 2022 |
|
| 2021 |
|
| 2020 |
|
| Unrecognized Stock-Based Compensation Expense at December 31, 2022 |
|
| Remaining Weighted Average Vesting Period |
| |||||
RSUs |
| $ | 5,551 |
|
| $ | 4,594 | �� |
| $ | 3,137 |
|
| $ | 8,724 |
|
|
| 1.80 |
|
PSUs |
|
| 954 |
|
|
| 5,535 |
|
|
| 3,361 |
|
|
| 6,745 |
|
|
| 1.97 |
|
Restricted Shares |
|
| 888 |
|
|
| 1,198 |
|
|
| 1,495 |
|
|
| 419 |
|
|
| 0.42 |
|
SARs |
|
| (794 | ) |
|
| 2,721 |
|
|
| 5,494 |
|
|
| - |
|
|
| - |
|
Stock options |
|
| - |
|
|
| 482 |
|
|
| 836 |
|
|
| - |
|
|
| - |
|
Total Stock-Based Compensation |
| $ | 6,599 |
|
| $ | 14,530 |
|
| $ | 14,323 |
|
| $ | 15,888 |
|
|
| 1.84 |
|
Pension Plans
The Company’s obligations and expenses for its pension plans are substantially dependent on the Company’s selection of discount rate and,related deferred tax (expense) benefit for the Gentherm GmbH Plan, expected long-term rate of return on plan assets assumptions used by actuaries to calculate these amounts. Actual results that differ from assumptions used are accumulated and amortized over future periods and generally affect recognized expense in future periods. As such, assumptions used to calculate benefit obligations as of the annual measurement date directly impact the expense to be recognized in future periods.
Recent Accounting Pronouncements
For a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations, as well as significant accounting standards that have been adopted during the yearyears ended December 31, 2019, see Note 3, “New Accounting Pronouncements”2022, 2021 and 2020 was $(444), $2,725, and $3,002, respectively. If Gentherm were to the consolidated financial statements included in this Report.
Off-Balance Sheet Arrangements
At December 31, 2019, we do not have any off-balance sheetrealize expired share-based payment arrangements, that have, or are,they would be reported as a forfeit in the opinion of management, reasonably likely to have, a current or future material effect on our financial condition or results of operations.
40
Effects of Inflationactivity roll forward tables below.
The automotive component supply industry is subject to inflationary pressures with respect to raw materials and labor, which have historically placed operational and financial burdens on the entire supply chain. Accordingly, the Company continues to take actions with its customers and suppliers to mitigate the impact of these inflationary pressures in the future. Actions to mitigate inflationary pressures with customers include collaboration on alternative product designs and material specifications, contractual price escalation clauses and negotiated customer recoveries. Actions to mitigate inflationary pressures with suppliers include aggregation of purchase requirements to achieve optimal volume benefits, negotiation of cost-reductions and identification of more cost competitive suppliers. While these actions are designed to offset the impact of inflationary pressures, the Company cannot provide assurance that it will be successful in fully offsetting increased costs resulting from inflationary pressure.RSUs
Contractual Obligations and Commitments
The following table summarizes our expected cash outflows resulting from financial contracts and commitments as of December 31, 2019. We have not included information on our recurring purchases of materials for use in our manufacturing operations. These amounts are generally consistent from year to year, closely reflect our levels of production and are not long-term in nature.
|
| Payments Due by Period |
| |||||||||||||||||
Contractual Obligations (in thousands) |
| Total |
|
| 2020 |
|
| 2021 & 2022 |
|
| 2023 & 2024 |
|
| Thereafter |
| |||||
Long-term debt obligations (1) |
| $ | 80,624 |
|
| $ | 2,500 |
|
| $ | 5,000 |
|
| $ | 73,124 |
|
|
|
|
|
Purchase commitments |
|
| 7,406 |
|
|
| 6,974 |
| �� |
| 432 |
|
|
| — |
|
|
| — |
|
Total |
| $ | 88,030 |
|
| $ | 9,474 |
|
| $ | 5,432 |
|
| $ | 73,124 |
|
| $ | — |
|
|
|
The Company does not have any outstanding capital lease agreements.
|
|
Our exposure to market risk for changes in interest rates relates primarily to our debt obligations and foreign currency contracts. We have inrestricted stock unit activity during 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. 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 $14.4 million and $33.3 million outstanding at December 31, 2019 and 2018, respectively.
41
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. 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 derivative instruments in our consolidated balance sheet as of December 31, 2019 is as follows (in thousands):
|
|
|
|
|
| Asset Derivatives |
|
| Liability Derivatives |
|
|
|
|
| ||||||
|
| Hedge Designation |
| Fair Value Hierarchy |
| Balance Sheet Location |
| Fair Value |
|
| Balance Sheet Location |
| Fair Value |
|
| Net Asset/ (Liabilities) |
| |||
Foreign currency derivatives |
| Cash flow hedge |
| Level 2 |
| Current assets |
| $ | 1,242 |
|
| Current liabilities |
| $ | — |
|
| $ | 1,242 |
|
Information related to the fair values of derivative instruments in our consolidated balance sheet as of December 31, 2018 is as follows (in thousands):
|
|
|
|
|
| Asset Derivatives |
|
| Liability Derivatives |
|
|
|
|
| ||||||
|
| Hedge Designation |
| Fair Value Hierarchy |
| Balance Sheet Location |
| Fair Value |
|
| Balance Sheet Location |
| Fair Value |
|
| Net Asset/ (Liabilities) |
| |||
Foreign currency derivatives |
| Cash flow hedge |
| Level 2 |
| Current assets |
| $ | 92 |
|
| Current liabilities |
| $ | — |
|
| $ | 92 |
|
Information related to the effect of derivative instruments on our consolidated statements of income and statements of comprehensive income is as follows (in thousands):
|
|
|
| Year Ended December 31, |
| |||||
|
| Location |
| 2019 |
|
| 2018 |
| ||
Foreign currency derivatives |
| Cost of sales |
| $ | 1,976 |
|
| $ | (444 | ) |
|
| Selling, general and administrative |
|
| — |
|
|
| 75 |
|
|
| Other comprehensive income |
|
| 1,151 |
|
|
| 1,096 |
|
|
| Foreign currency gain (loss) |
|
| (46 | ) |
|
| 50 |
|
Total foreign currency derivatives |
|
|
|
| 3,081 |
|
|
| 777 |
|
Commodity derivatives |
| Cost of sales |
|
| — |
|
|
| 145 |
|
|
| Other comprehensive income |
|
| — |
|
|
| (218 | ) |
Total commodity derivatives |
|
|
| $ | — |
|
| $ | (73 | ) |
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 European Euros (€EUR), as indicated in parentheses.
|
| Expected Maturity Date |
| |||||||||||||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| Total |
|
| Fair Value |
| ||||||||
|
| (In thousands, except rate information) |
| |||||||||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate (€EUR) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 21,874 |
|
| $ | — |
|
| $ | 21,874 |
|
| $ | 21,874 |
|
Variable Interest Rate as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.25 | % |
|
|
|
|
|
| 1.25 | % |
|
|
|
|
Variable Rate ($USD) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 50,000 |
|
| $ | — |
|
| $ | 50,000 |
|
| $ | 50,000 |
|
Variable Interest Rate as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3.05 | % |
|
|
|
|
|
| 3.05 | % |
|
|
|
|
Fixed Rate ($USD) |
| $ | 2,500 |
|
| $ | 2,500 |
|
| $ | 2,500 |
|
| $ | 1,250 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,750 |
|
| $ | 8,785 |
|
Fixed Interest Rate |
|
| 5.21 | % |
|
| 5.21 | % |
|
| 5.21 | % |
|
| 5.21 | % |
|
|
|
|
|
|
|
|
|
| 5.21 | % |
|
|
|
|
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 |
| 2020 |
|
| Total |
|
| Fair Value |
| |||
|
| (In thousands, except rate information) |
| |||||||||
$U.S. functional currency |
|
|
|
|
|
|
|
|
|
|
|
|
Forward Exchange Agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
(Receive MXN/Pay USD$) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Contract Amount |
| $ | 14,449 |
|
| $ | 14,449 |
|
| $ | 1,242 |
|
Average Contract Rate |
| 20.76 |
|
| 20.76 |
|
|
|
|
|
43
|
|
Supplementary Financial Information – Selected Quarterly Financial Data
Unaudited Quarterly Financial Data
For the Years Ended December 31, 2019 and 2018
(In thousands, except per share data)
|
| Three Months Ended, |
| |||||||||||||
|
| March 31, 2019 |
|
| June 30, 2019 |
|
| September 30, 2019 |
|
| December 31, 2019 |
| ||||
Product revenues |
| $ | 257,921 |
|
| $ | 243,326 |
|
| $ | 240,056 |
|
| $ | 230,381 |
|
Gross margin |
|
| 75,307 |
|
|
| 72,714 |
|
|
| 74,692 |
|
|
| 65,622 |
|
Operating income |
|
| 21,845 |
|
|
| 20,057 |
|
|
| 20,329 |
|
|
| 22,029 |
|
Net income |
|
| 8,414 |
|
|
| 2,751 |
|
|
| 15,887 |
|
|
| 10,454 |
|
Basic earnings per share |
| $ | 0.25 |
|
| $ | 0.08 |
|
| $ | 0.48 |
|
| $ | 0.32 |
|
Diluted earnings per share |
| $ | 0.25 |
|
| $ | 0.08 |
|
| $ | 0.48 |
|
| $ | 0.32 |
|
|
| Three Months Ended, |
| |||||||||||||
|
| March 31, 2018 |
|
| June 30, 2018 |
|
| September 30, 2018 |
|
| December 31, 2018 |
| ||||
Product revenues (a) |
| $ | 264,586 |
|
| $ | 266,400 |
|
| $ | 261,504 |
|
| $ | 256,015 |
|
Gross margin |
|
| 81,242 |
|
|
| 77,092 |
|
|
| 75,704 |
|
| $ | 70,820 |
|
Operating income |
|
| 20,649 |
|
|
| 15,593 |
|
|
| 15,713 |
|
|
| 20,833 |
|
Net income (loss) |
|
| 12,966 |
|
|
| 16,659 |
|
|
| (355 | ) |
|
| 12,629 |
|
Basic earnings (loss) per share |
| $ | 0.35 |
|
| $ | 0.46 |
|
| $ | (0.01 | ) |
| $ | 0.37 |
|
Diluted earnings (loss) per share |
| $ | 0.35 |
|
| $ | 0.45 |
|
| $ | (0.01 | ) |
| $ | 0.36 |
|
|
The sum of the quarterly amounts shown above may not be the same as the annual totals shown in our consolidated financial statements or elsewhere in this report due to rounding. The audited consolidated financial statements and related financial information required to be filed hereunder are indexed on page F-1 of this report and are incorporated herein by reference.
|
|
None.
|
|
Evaluation of Disclosure Controls and Procedures
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2019. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.
44
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (2013).” Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.
In April 2019, the Company completed the acquisition of Stihler Electronic GmbH. ("Stihler") and is currently integrating Stihler into its operations, compliance programs and internal control processes. Stihler constituted approximately 2% of the Company's total assets as of December 31, 2019, including the goodwill and other intangible assets recorded as part of the purchase price allocation, and less than 1% of the Company's product revenues for the yearyears ended December 31, 2019. SEC rules2022, 2021 and regulations allow companies to exclude acquisitions from their assessment2020:
Unvested Restricted Stock Units |
| Time Vesting |
|
| Weighted-Average |
| ||
Outstanding at December 31, 2019 |
|
| 141,741 |
|
| $ | 42.16 |
|
Granted |
|
| 132,864 |
|
|
| 34.41 |
|
Vested |
|
| (50,953 | ) |
|
| 42.13 |
|
Forfeited |
|
| (14,747 | ) |
|
| 39.16 |
|
Outstanding at December 31, 2020 |
|
| 208,905 |
|
| $ | 37.26 |
|
Granted |
|
| 93,539 |
|
|
| 79.79 |
|
Vested |
|
| (88,296 | ) |
|
| 38.49 |
|
Forfeited |
|
| (20,522 | ) |
|
| 48.76 |
|
Outstanding at December 31, 2021 |
|
| 193,626 |
|
| $ | 56.02 |
|
Granted |
|
| 117,507 |
|
|
| 66.86 |
|
Vested |
|
| (95,692 | ) |
|
| 49.85 |
|
Forfeited |
|
| (13,863 | ) |
|
| 70.52 |
|
Outstanding at December 31, 2022 |
|
| 201,578 |
|
| $ | 64.27 |
|
The total intrinsic value of internal control over financial reportingrestricted stock units vested during the first year following an acquisition. The Company has excluded the acquired operations of Stihler from its assessment of the Company’s internal control over financial reporting.
The attestation report of the Company’s independent registered public accounting firm, regarding the effectiveness of the Company’s internal control over financial reporting, is set forth in Item 15, "Exhibits and Financial Statement Schedules," included under the caption "Report of Independent Registered Public Accounting Firm".
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting, that occurred during the quarteryears ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer2022, 2021 and Chief Financial Officer, does not expect that our disclosure controls2020 was $4,774, $3,398 and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
|
|
None.
45
PART III2,214, respectively.
|
|
The information required by this item is set forth under the following captions in our proxy statement to be filed with respect to the 2020 annual meeting of shareholders (the “Proxy Statement”), all of which is incorporated herein by reference: “Proposal No. 1 – Election of Directors”, “Board Matters – The Board of Directors”, “Board Matters – Committees of the Board”, “Board Matters – Corporate Governance”, “Executive Officers”, “Additional Information – Delinquent Section 16(a) Reports” and “Additional Information – Requirements for Submission of Shareholder Proposals and Nominations for 2021 Annual Meeting.”
|
|
The information required by this item set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Compensation Discussion and Analysis”, “Named Executive Officer Compensation Tables”, “Board Matters – Director Compensation” and “Compensation Committee Report.”
|
|
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Additional Information – Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management.”
|
|
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Related Person Transactions” and “Proposal No. 1 – Election of Directors – Director Independence.”
|
|
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Audit Committee Matters.”
46
PART IV
|
|
The following documents are filed as part of this Report:
|
|
The following financial statements of the Company and reports of independent accountants are included in Item 15 of this Annual Report:
| |||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
|
|
|
The following Schedule to Financial Statements is included herein:
Schedule II — Valuation and Qualifying Accounts.
47
|
|
The exhibits to this Report are as follows:
|
|
|
|
|
| Incorporated by Reference | ||||||
Exhibit |
| Exhibit Description |
| Filed/Furnished Herewith |
| Form |
| Period Ending |
| Exhibit / Appendix Number |
| Filing Date |
2** |
|
|
|
| 8-K |
|
|
| 2.1 |
| 11/1/17 | |
3.1 |
| Second Amended and Restated Articles of Incorporation of Gentherm Incorporated |
|
|
| 8-K |
|
|
| 3.2 |
| 3/5/18 |
3.2 |
| Amended and Restated Bylaws of Gentherm Incorporated |
|
|
| 8-K |
|
|
| 3.1 |
| 5/26/16 |
4 |
|
| X |
|
|
|
|
|
|
|
| |
10.1* |
|
|
|
| 10-K |
| 12/31/18 |
| 10.1 |
| 2/26/19 | |
10.2* |
| Amended and Restated Gentherm Incorporated 2019 Senior Level Performance Bonus Plan |
|
|
| 10-K |
| 12/31/18 |
| 10.2 |
| 2/26/19 |
10.3.1* |
|
|
|
| Schedule 14A |
|
|
| A |
| 4/24/06 | |
10.3.2* |
|
|
|
| 10-K |
| 12/31/06 |
| 10.3.2 |
| 2/20/07 | |
10.3.3* |
|
|
|
| 8-K |
|
|
| 10.1 |
| 3/20/07 | |
10.3.4* |
|
|
|
| Schedule 14A |
|
|
| B |
| 4/20/09 | |
10.3.5* |
|
|
|
| 8-K |
|
|
| 10.8 |
| 3/31/11 | |
10.3.6* |
|
|
|
| 10-K |
| 12/31/11 |
| 10.3.6 |
| 3/15/12 | |
10.3.7* |
|
|
|
| 8-K |
|
|
| 10.2 |
| 5/20/13 | |
10.4.1* |
|
|
|
| Schedule 14A |
|
|
| A |
| 5/20/11 | |
10.4.2* |
|
|
|
| 10-K |
| 12/31/11 |
| 10.3.8 |
| 3/15/12 | |
10.4.3* |
|
|
|
| 8-K |
|
|
| 10.3 |
| 5/11/12 | |
10.4.4* |
|
|
|
| 8-K |
|
|
| 10.3 |
| 5/20/13 | |
10.5.1* |
|
|
|
| Schedule 14A |
|
|
| A |
| 4/22/13 | |
10.5.2* |
| Amendment to the Gentherm Incorporated 2013 Equity Incentive Plan |
|
|
| 8-K |
|
|
| 10.2 |
| 5/19/17 |
10.5.3* |
| Form of Stock Option Award Agreement under the 2013 Equity Incentive Plan |
|
|
| 8-K |
|
|
| 10.1 |
| 6/27/13 |
10.5.4* |
| Form of Stock Appreciation Right Award Agreement under the 2013 Equity Incentive Plan |
|
|
| 8-K |
|
|
| 10.2 |
| 6/27/13 |
10.5.5* |
| Form of Restricted Stock Award Agreement under the 2013 Equity Incentive Plan |
|
|
| 8-K |
|
|
| 10.3 |
| 6/27/13 |
10.5.6* |
| Form of Restricted Stock Award Agreement (Retention Award) under the 2013 Equity Incentive Plan |
|
|
| 8-K |
|
|
| 10.1 |
| 10/4/17 |
10.5.7* |
|
|
|
| 8-K |
|
|
| 10.1 |
| 6/13/18 | |
10.5.8* |
| Form of Restricted Stock Unit Award Agreement (Time-Based) under the 2013 Equity Incentive Plan |
|
|
| 8-K |
|
|
| 10.2 |
| 6/13/18 |
10.5.9* |
|
|
|
| 8-K |
|
|
| 10.2 |
| 12/12/18 |
48
|
|
|
|
|
| Incorporated by Reference | ||||||
Exhibit |
| Exhibit Description |
| Filed/Furnished Herewith |
| Form |
| Period Ending |
| Exhibit / Appendix Number |
| Filing Date |
10.5.10* |
|
|
|
| 8-K |
|
|
| 10.3 |
| 12/12/18 | |
10.6.1 |
|
|
|
| 8-K |
|
|
| 10.1 |
| 6/28/19 | |
10.6.2 |
|
|
|
| 8-K |
|
|
| 10.2 |
| 6/28/19 | |
10.6.3 |
|
| X |
|
|
|
|
|
|
|
| |
10.7.1* |
|
|
|
| 8-K |
|
|
| 10.1 |
| 5/7/19
| |
10.8.1* |
| Employment Contract between Gentherm Incorporated and Phillip Eyler, dated as of September 18, 2017 |
|
|
| 8-K |
|
|
| 10.1 |
| 10/3/17 |
10.8.2* |
|
|
|
| 8-K |
|
|
| 10.1 |
| 12/7/18 | |
10.9* |
| Offer Letter between Gentherm Incorporated and Matteo Anversa, dated as of October 22, 2018 |
|
|
| 8-K |
|
|
| 10.1 |
| 12/12/18 |
10.10* |
| Employment Contract between Gentherm GmbH and Thomas Stocker, effective September 1, 2019 |
|
|
| 10-Q |
| 9/30/19 |
| 10.1 |
| 12/12/18 |
10.11* |
| Offer Letter between Gentherm Incorporated and Hui (Helen) Xu, effective November 4, 2019 |
| X |
|
|
|
|
|
|
|
|
10.12* |
| Offer Letter between Gentherm Incorporated and Yijing Brentano, effective February 23, 2018 |
| X |
|
|
|
|
|
|
|
|
10.13.1* |
|
|
|
| 10-Q |
| 6/30/19 |
| 10.4 |
| 7/26/19 | |
10.13.2* |
|
|
|
| 8-K |
|
|
| 10.2 |
| 1/4/19 | |
16 |
|
|
|
| 8-K |
|
|
| 16 |
| 1/31/20 | |
21 |
|
| X |
|
|
|
|
|
|
|
| |
23 |
|
| X |
|
|
|
|
|
|
|
| |
24 |
|
| X |
|
|
|
|
|
|
|
| |
31.1 |
|
| X |
|
|
|
|
|
|
|
| |
31.2 |
|
| X |
|
|
|
|
|
|
|
| |
32.1 |
|
| X |
|
|
|
|
|
|
|
| |
32.2 |
|
| X |
|
|
|
|
|
|
|
|
49
| ||||||||||||
|
|
|
|
|
|
| ||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
None.
50
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Gentherm Incorporated
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Gentherm Incorporated (a Michigan corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule included under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 20, 2020 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment – Medical
As described further in Note 2 to the financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The determination of the fair value of the reporting units requires management to make significant estimates and assumptions related to the forecast of future revenues, operating margins and discount rates. These assumptions could have a significant impact on either the fair value of the reporting units, the amount of any goodwill impairment charge or both. We identified the annual goodwill impairment assessment of a reporting unit of the Industrial reporting segment as a critical audit matter (hereafter referred to as the “reporting unit”).
The principal consideration for our determination that the annual goodwill impairment assessment of the reporting unit is a critical audit matter is the high degree of auditor judgement necessary in evaluating certain inputs and assumptions made by management in the discounted cash flow analysis. Those assumptions include forecasted revenue of a number of new products the Company plans to introduce to the market beginning in 2020 and after, which contributes significantly to the fair value of the
reporting unit. In addition to forecasted revenues, other inputs and assumptions requiring a high degree of subjectivity include operating margin and the applied discount rate (hereafter referred to collectively as “key inputs and assumptions”).
Our audit procedures related to the goodwill impairment assessment of the reporting unit included the following, among others.
|
|
|
|
|
|
|
|
Income Taxes
As described in Notes 2 and 9 to the financial statements, the Company is subject to income taxes in the United States and numerous foreign jurisdictions, and the assessment of tax positions involves dealing with uncertainties in the application of complex tax laws and regulations, which are subject to legal and factual interpretation, judgment and uncertainty. The Company recorded a provision for income taxes of $21.6 million for the year ended December 31, 2019 and net deferred tax assets of $56.3 million, including a valuation allowance of $28.8 million and unrecognized tax benefits of $3.8 million as of December 31, 2019. Determining the provision for income taxes and other tax positions require significant management judgments, including the application of complex tax laws and regulations, tax incentives, transfer pricing, tax credits and the realizability of deferred tax assets. We identified income taxes as a critical audit matter.
The principal consideration for our determination that income taxes is a critical audit matter is that the matter involved subjective and complex auditor judgment related to the evaluation of management’s conclusions related to tax laws and regulations, transfer pricing and tax credits as they relate to management’s determination of the provision for income taxes and other tax positions. In addition, this matter required significant audit effort in performing our procedures over income taxes, including the use of professionals with specialized skill and knowledge.
Our audit procedures related to income taxes included the following, among others.
|
|
|
|
|
|
|
|
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Southfield, Michigan
February 20, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Gentherm Incorporated
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Gentherm Incorporated (a Michigan corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February 20, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Stihler Electronic GmbH, a wholly owned subsidiary, whose financial statements reflect approximately 2% of total assets and less than 1% of revenues of the related consolidated financial statement amounts as of and for the year ended December 31, 2019. As indicated in Management’s Report, Stihler Electronic GmbH was acquired during 2019. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Stihler Electronic GmbH.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Southfield, Michigan
February 20, 2020
GENTHERM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
| 2019 |
|
| 2018 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 50,443 |
|
| $ | 39,620 |
|
Restricted cash |
|
| 2,505 |
|
|
| — |
|
Accounts receivable, less allowance of $1,193 and $851, respectively |
|
| 159,710 |
|
|
| 166,858 |
|
Inventory, net |
|
| 118,479 |
|
|
| 112,535 |
|
Assets held for sale |
|
| — |
|
|
| 69,699 |
|
Other current assets |
|
| 42,726 |
|
|
| 54,363 |
|
Total current assets |
|
| 373,863 |
|
|
| 443,075 |
|
Property and equipment, net of accumulated depreciation of $129,458 and $98,705, respectively |
|
| 160,605 |
|
|
| 171,380 |
|
Goodwill |
|
| 64,572 |
|
|
| 55,311 |
|
Other intangible assets, net of accumulated amortization of $89,112 and $81,198, respectively |
|
| 49,783 |
|
|
| 56,385 |
|
Operating lease right-of-use assets |
|
| 11,587 |
|
|
| — |
|
Deferred income tax assets |
|
| 57,650 |
|
|
| 64,024 |
|
Other non-current assets |
|
| 9,326 |
|
|
| 12,872 |
|
Total assets |
| $ | 727,386 |
|
| $ | 803,047 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 83,035 |
|
| $ | 93,113 |
|
Current lease liabilities |
|
| 4,586 |
|
|
| — |
|
Current maturities of long-term debt |
|
| 2,500 |
|
|
| 3,413 |
|
Liabilities held for sale |
|
| — |
|
|
| 13,062 |
|
Other current liabilities |
|
| 66,583 |
|
|
| 65,808 |
|
Total current liabilities |
|
| 156,704 |
|
|
| 175,396 |
|
Long-term debt, less current maturities |
|
| 78,124 |
|
|
| 136,477 |
|
Pension benefit obligation |
|
| 8,057 |
|
|
| 7,211 |
|
Non-current lease liabilities |
|
| 6,751 |
|
|
| — |
|
Deferred income tax liabilities |
|
| 1,357 |
|
|
| 1,177 |
|
Other non-current liabilities |
|
| 3,743 |
|
|
| 3,087 |
|
Total liabilities |
| $ | 254,736 |
|
| $ | 323,348 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Common Stock: |
|
|
|
|
|
|
|
|
No par value; 55,000,000 shares authorized, 32,674,354 and 33,856,629 issued and outstanding at December 31, 2019 and December 31, 2018, respectively |
|
| 102,507 |
|
|
| 140,300 |
|
Paid-in capital |
|
| 10,852 |
|
|
| 14,934 |
|
Accumulated other comprehensive loss |
|
| (42,441 | ) |
|
| (39,500 | ) |
Accumulated earnings |
|
| 401,732 |
|
|
| 363,965 |
|
Total shareholders’ equity |
|
| 472,650 |
|
|
| 479,699 |
|
Total liabilities and shareholders’ equity |
| $ | 727,386 |
|
| $ | 803,047 |
|
The accompanying notes are an integral part of these consolidated financial statements
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Product revenues |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
| $ | 993,991 |
|
Cost of sales |
|
| 683,349 |
|
|
| 743,647 |
|
|
| 674,796 |
|
Gross margin |
|
| 288,335 |
|
|
| 304,858 |
|
|
| 319,195 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
| 91,033 |
|
|
| 98,663 |
|
|
| 94,515 |
|
Reimbursed research and development expenses |
|
| (18,557 | ) |
|
| (18,763 | ) |
|
| (12,037 | ) |
Net research and development expenses |
|
| 72,476 |
|
|
| 79,900 |
|
|
| 82,478 |
|
Selling, general and administrative expenses |
|
| 118,680 |
|
|
| 137,398 |
|
|
| 139,619 |
|
Restructuring expenses |
|
| 12,919 |
|
|
| 14,772 |
|
|
| — |
|
Total operating expenses |
|
| 204,075 |
|
|
| 232,070 |
|
|
| 222,097 |
|
Operating income |
|
| 84,260 |
|
|
| 72,788 |
|
|
| 97,098 |
|
Interest expense, net |
|
| (4,763 | ) |
|
| (4,942 | ) |
|
| (4,885 | ) |
Foreign currency gain (loss) |
|
| 2,326 |
|
|
| 622 |
|
|
| (23,108 | ) |
Asset impairments and net loss on divestitures |
|
| (22,793 | ) |
|
| (11,476 | ) |
|
| — |
|
Other income |
|
| 121 |
|
|
| 1,127 |
|
|
| 150 |
|
Earnings before income tax |
|
| 59,151 |
|
|
| 58,119 |
|
|
| 69,255 |
|
Income tax expense |
|
| 21,645 |
|
|
| 16,220 |
|
|
| 34,028 |
|
Net income |
| $ | 37,506 |
|
| $ | 41,899 |
|
| $ | 35,227 |
|
Basic earnings per share |
| $ | 1.13 |
|
| $ | 1.17 |
|
| $ | 0.96 |
|
Diluted earnings per share |
| $ | 1.13 |
|
| $ | 1.16 |
|
| $ | 0.96 |
|
Weighted average number of shares – basic |
|
| 33,120 |
|
|
| 35,921 |
|
|
| 36,721 |
|
Weighted average number of shares – diluted |
|
| 33,298 |
|
|
| 36,177 |
|
|
| 36,814 |
|
The accompanying notes are an integral part of these consolidated financial statements
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Net income |
| $ | 37,506 |
|
| $ | 41,899 |
|
| $ | 35,227 |
|
Other comprehensive income (loss), gross of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on pension benefit obligations |
|
| (1,264 | ) |
|
| 91 |
|
|
| 244 |
|
Foreign currency translation adjustments (loss) gain |
|
| (2,415 | ) |
|
| (19,212 | ) |
|
| 48,059 |
|
Unrealized gain on foreign currency derivative securities |
|
| 1,151 |
|
|
| 1,096 |
|
|
| 301 |
|
Unrealized (loss) gain on commodity derivative securities |
|
| — |
|
|
| (218 | ) |
|
| 55 |
|
Other comprehensive (loss) gain, gross of tax |
| $ | (2,528 | ) |
| $ | (18,243 | ) |
| $ | 48,659 |
|
Other comprehensive income (loss), related tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change due to ASU 2018-02 |
|
| — |
|
|
| (40 | ) |
|
| — |
|
Net gain (loss) on pension benefit obligations |
|
| 232 |
|
|
| (15 | ) |
|
| (60 | ) |
Foreign currency translation adjustments (loss) gain |
|
| (393 | ) |
|
| (390 | ) |
|
| 148 |
|
Unrealized loss on foreign currency derivative securities |
|
| (252 | ) |
|
| (300 | ) |
|
| (81 | ) |
Unrealized loss on commodity derivative securities |
|
| — |
|
|
| (68 | ) |
|
| (19 | ) |
Other comprehensive loss, related tax effect |
| $ | (413 | ) |
| $ | (813 | ) |
| $ | (12 | ) |
Other comprehensive loss, net of tax |
| $ | (2,941 | ) |
| $ | (19,056 | ) |
| $ | 48,647 |
|
Comprehensive income |
| $ | 34,565 |
|
| $ | 22,843 |
|
| $ | 83,874 |
|
The accompanying notes are an integral part of these consolidated financial statements
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
| |
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
| Accumulated |
|
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Earnings |
|
| Total |
| ||||||
Balance at December 31, 2016 |
|
| 36,534 |
|
| $ | 262,251 |
|
| $ | 10,323 |
|
| $ | (69,091 | ) |
| $ | 256,922 |
|
| $ | 460,405 |
|
Exercise of Common Stock options for cash |
|
| 202 |
|
|
| 3,662 |
|
|
| (907 | ) |
|
| — |
|
|
| — |
|
|
| 2,755 |
|
Cumulative effect of accounting change due to adoption of ASU 2016-09 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,496 |
|
|
| 1,496 |
|
Common Stock issued to Board of Directors and employees |
|
| 242 |
|
|
| 6,298 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,298 |
|
Stock repurchase |
|
| (164 | ) |
|
| (5,326 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,326 | ) |
Stock option compensation |
|
| — |
|
|
| — |
|
|
| 6,209 |
|
|
| — |
|
|
| — |
|
|
| 6,209 |
|
Cancellation of restricted stock |
|
| (53 | ) |
|
| (1,837 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,837 | ) |
Net gain on pension benefit obligation, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 184 |
|
|
| — |
|
|
| 184 |
|
Currency translation, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 48,207 |
|
|
| — |
|
|
| 48,207 |
|
Foreign currency hedge, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 220 |
|
|
| — |
|
|
| 220 |
|
Commodity hedge, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 36 |
|
|
| — |
|
|
| 36 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 35,227 |
|
|
| 35,227 |
|
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 | ) |
|
| (3,264 | ) |
Cumulative effect of accounting change due to adoption of ASU 2016-16 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31,645 |
|
|
| 31,645 |
|
Cumulative effect of accounting change due to adoption of ASU 2018-02 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (40 | ) |
|
| 40 |
|
|
| — |
|
Stock repurchase |
|
| (3,470 | ) |
|
| (148,074 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (148,074 | ) |
Exercise of Common Stock options for cash |
|
| 615 |
|
|
| 18,755 |
|
|
| (3,979 | ) |
|
| — |
|
|
| — |
|
|
| 14,776 |
|
Cancellation of restricted stock |
|
| (71 | ) |
|
| (1,188 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,188 | ) |
Stock option compensation |
|
| — |
|
|
| — |
|
|
| 3,288 |
|
|
| — |
|
|
| — |
|
|
| 3,288 |
|
Common stock issued to Board of Directors and employees |
|
| 22 |
|
|
| 5,759 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,759 |
|
Currency translation, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (19,602 | ) |
|
| — |
|
|
| (19,602 | ) |
Foreign currency hedge, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 796 |
|
|
| — |
|
|
| 796 |
|
Commodity hedge, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (286 | ) |
|
| — |
|
|
| (286 | ) |
Net gain on pension benefit obligation, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 76 |
|
|
| — |
|
|
| 76 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 41,899 |
|
|
| 41,899 |
|
Balance at December 31, 2018 |
|
| 33,857 |
|
|
| 140,300 |
|
|
| 14,934 |
|
|
| (39,500 | ) |
|
| 363,965 |
|
|
| 479,699 |
|
Cumulative effect of accounting change due to adoption of ASU 2016-02 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 261 |
|
|
| 261 |
|
Stock repurchase |
|
| (1,595 | ) |
|
| (63,283 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (63,283 | ) |
Exercise of Common Stock options for cash |
|
| 431 |
|
|
| 21,524 |
|
|
| (4,967 | ) |
|
| — |
|
|
| — |
|
|
| 16,557 |
|
Cancellation of restricted stock |
|
| (62 | ) |
|
| (1,402 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,402 | ) |
Stock option compensation |
|
| — |
|
|
| — |
|
|
| 885 |
|
|
| — |
|
|
| — |
|
|
| 885 |
|
Common stock issued to Board of Directors and employees |
|
| 43 |
|
|
| 5,368 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,368 |
|
Currency translation, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,808 | ) |
|
| — |
|
|
| (2,808 | ) |
Foreign currency hedge, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 899 |
|
|
| — |
|
|
| 899 |
|
Net loss on pension benefit obligation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,032 | ) |
|
| — |
|
|
| (1,032 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 37,506 |
|
|
| 37,506 |
|
Balance at December 31, 2019 |
|
| 32,674 |
|
| $ | 102,507 |
|
| $ | 10,852 |
|
| $ | (42,441 | ) |
| $ | 401,732 |
|
| $ | 472,650 |
|
The accompanying notes are an integral part of these consolidated financial statements
GENTHERM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 37,506 |
|
| $ | 41,899 |
|
| $ | 35,227 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 44,246 |
|
|
| 50,638 |
|
|
| 44,972 |
|
Deferred income taxes |
|
| 3,617 |
|
|
| 6,699 |
|
|
| 5,135 |
|
Stock based compensation |
|
| 6,253 |
|
|
| 9,047 |
|
|
| 12,507 |
|
Defined benefit plan (income) expense |
|
| (570 | ) |
|
| 82 |
|
|
| (23 | ) |
Provision of doubtful accounts |
|
| 353 |
|
|
| (1 | ) |
|
| (469 | ) |
Loss on sale of property and equipment |
|
| 462 |
|
|
| 2,602 |
|
|
| 1,042 |
|
Operating lease expense |
|
| 6,173 |
|
|
| — |
|
|
| — |
|
Asset impairments and net loss on divestitures |
|
| 22,793 | �� |
|
| 11,476 |
|
|
| — |
|
Other |
|
| 1,612 |
|
|
| — |
|
|
| — |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 6,801 |
|
|
| 3,024 |
|
|
| 6,033 |
|
Inventory |
|
| (3,859 | ) |
|
| (7,689 | ) |
|
| (4,348 | ) |
Other current assets |
|
| 7,996 |
|
|
| (4,428 | ) |
|
| (12,334 | ) |
Accounts payable |
|
| (10,253 | ) |
|
| 12,380 |
|
|
| (7,691 | ) |
Other current liabilities |
|
| (4,327 | ) |
|
| (7,295 | ) |
|
| (30,171 | ) |
Net cash provided by operating activities |
|
| 118,803 |
|
|
| 118,434 |
|
|
| 49,880 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired |
|
| (14,823 | ) |
|
| (15 | ) |
|
| (66,994 | ) |
Proceeds from the sale of property and equipment |
|
| 219 |
|
|
| 799 |
|
|
| 91 |
|
Proceeds from divestitures of businesses, net |
|
| 44,173 |
|
|
| — |
|
|
| — |
|
Purchases of property and equipment |
|
| (23,729 | ) |
|
| (41,541 | ) |
|
| (50,785 | ) |
Net cash provided by (used in) investing activities |
|
| 5,840 |
|
|
| (40,757 | ) |
|
| (117,688 | ) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing of debt |
|
| 37,812 |
|
|
| 94,679 |
|
|
| — |
|
Repayments of debt |
|
| (96,999 | ) |
|
| (99,460 | ) |
|
| (27,156 | ) |
Cash paid for financing costs |
|
| (1,278 | ) |
|
| — |
|
|
| — |
|
Cash paid for the cancellation of restricted stock |
|
| (1,402 | ) |
|
| (1,188 | ) |
|
| (1,837 | ) |
Proceeds from the exercise of Common Stock options |
|
| 16,557 |
|
|
| 14,777 |
|
|
| 2,755 |
|
Cash paid for the repurchase of Common Stock |
|
| (63,283 | ) |
|
| (148,074 | ) |
|
| (5,326 | ) |
Net cash used in financing activities |
|
| (108,593 | ) |
|
| (139,266 | ) |
|
| (31,564 | ) |
Foreign currency effect |
|
| (2,722 | ) |
|
| (1,963 | ) |
|
| 25,357 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| 13,328 |
|
|
| (63,552 | ) |
|
| (74,015 | ) |
Cash, cash equivalents and restricted cash at beginning of period |
|
| 39,620 |
|
|
| 103,172 |
|
|
| 177,187 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 52,948 |
|
| $ | 39,620 |
|
| $ | 103,172 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
| $ | 11,008 |
|
| $ | 23,159 |
|
| $ | 76,741 |
|
Cash paid for interest |
| $ | 4,462 |
|
| $ | 5,027 |
|
| $ | 4,540 |
|
The accompanying notes are an integral part of these consolidated financial statements
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 1 — Overview
Gentherm Incorporated is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. 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. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and to create new product applications for existing and new markets.PSUs
On February 1, 2019, the Company completed the divestiture of its environmental test equipment business, Cincinnati Sub Zero industrial chamber business (“CSZ-IC”) and on October 1, 2019, the Company completed the divestiture of its remote power generation systems business, Gentherm Global Power Technologies (“GPT”). The Company’s consolidated financial statements herein includefollowing table summarizes performance stock unit activity during the results of CSZ-IC and GPT through their respective dates of divestiture. CSZ-IC and GPT are not subject to discontinued operations classification.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain prior period amounts have been reclassified to conform to current period presentation. Notably, $10,246 and $8,308 in customer relationship amortization was reclassified from product revenues to selling, general and administrative expenses for the fiscal years ended December 31, 20182022, 2021 and 2017, respectively, and2020:
Unvested Performance Stock Units |
| Relative TSR Target |
|
| Weighted-Average |
|
| ROIC Target |
|
| Weighted-Average |
|
| Adjusted EBITDA Target Shares |
|
| Weighted-Average |
|
| Total |
| |||||||
Outstanding at December 31, 2019 |
|
| 95,041 |
|
| $ | 61.77 |
|
|
| 95,039 |
|
| $ | 42.78 |
|
|
| — |
|
| $ | — |
|
|
| 190,080 |
|
Granted |
|
| 77,967 |
|
|
| 49.25 |
|
|
| 77,967 |
|
|
| 33.72 |
|
|
| — |
|
|
| — |
|
|
| 155,934 |
|
Vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (15,090 | ) |
|
| 56.84 |
|
|
| (15,090 | ) |
|
| 39.96 |
|
|
| — |
|
|
| — |
|
|
| (30,180 | ) |
Outstanding at December 31, 2020 |
|
| 157,918 |
|
| $ | 56.06 |
|
|
| 157,916 |
|
| $ | 38.58 |
|
|
| — |
|
| $ | — |
|
|
| 315,834 |
|
Granted |
|
| 20,626 |
|
|
| 118.08 |
|
|
| 40,580 |
|
|
| 78.98 |
|
|
| 39,930 |
|
|
| 79.49 |
|
|
| 101,136 |
|
Performance Adjustment |
|
| 30,828 |
|
|
| 69.18 |
|
|
| (30,830 | ) |
|
| 44.92 |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
Vested |
|
| (61,656 | ) |
|
| 69.18 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (61,656 | ) |
Forfeited |
|
| (16,148 | ) |
|
| 61.10 |
|
|
| (17,374 | ) |
|
| 44.32 |
|
|
| (2,454 | ) |
|
| 79.49 |
|
|
| (35,976 | ) |
Outstanding at December 31, 2021 |
|
| 131,568 |
|
| $ | 62.09 |
|
|
| 150,292 |
|
| $ | 47.52 |
|
|
| 37,476 |
|
| $ | 79.49 |
|
|
| 319,336 |
|
Granted |
|
| 21,324 |
|
|
| 103.31 |
|
|
| 42,640 |
|
|
| 68.63 |
|
|
| 42,640 |
|
|
| 68.63 |
|
|
| 106,604 |
|
Performance Adjustment |
|
| 45,004 |
|
|
| 57.46 |
|
|
| (2,258 | ) |
|
| 41.61 |
|
|
| — |
|
|
| — |
|
|
| 42,746 |
|
Vested |
|
| (90,371 | ) |
|
| 57.46 |
|
|
| (43,106 | ) |
|
| 41.61 |
|
|
| — |
|
|
| — |
|
|
| (133,477 | ) |
Forfeited |
|
| (4,724 | ) |
|
| 68.67 |
|
|
| (6,493 | ) |
|
| 56.87 |
|
|
| (3,543 | ) |
|
| 75.10 |
|
|
| (14,760 | ) |
Outstanding at December 31, 2022 |
|
| 102,801 |
|
| $ | 65.20 |
|
|
| 141,075 |
|
| $ | 55.18 |
|
|
| 76,573 |
|
| $ | 73.66 |
|
|
| 320,449 |
|
The total intrinsic value of performance stock units vested during the results from asset disposals during 2017 were reclassified from other income to cost of sales for the yearyears ended December 31, 2017.2022, 2021 and 2020 was $6,986, $4,265 and $0, respectively.
PrinciplesRestricted Shares
The following table summarizes restricted stock activity during the years ended December 31, 2022, 2021 and 2020:
Unvested Restricted Shares |
| Shares |
|
| Weighted-Average |
| ||
Outstanding at December 31, 2019 |
|
| 34,920 |
|
| $ | 38.31 |
|
Granted |
|
| 32,406 |
|
|
| 39.96 |
|
Vested |
|
| (32,420 | ) |
|
| 38.33 |
|
Forfeited |
|
| — |
|
|
| — |
|
Outstanding at December 31, 2020 |
|
| 34,906 |
|
| $ | 39.82 |
|
Granted |
|
| 13,742 |
|
|
| 70.18 |
|
Vested |
|
| (37,272 | ) |
|
| 41.70 |
|
Forfeited |
|
| — |
|
|
| — |
|
Outstanding at December 31, 2021 |
|
| 11,376 |
|
| $ | 70.33 |
|
Granted |
|
| 13,600 |
|
|
| 73.54 |
|
Vested |
|
| (11,376 | ) |
|
| 70.33 |
|
Forfeited |
|
| — |
|
|
| — |
|
Outstanding at December 31, 2022 |
|
| 13,600 |
|
| $ | 73.54 |
|
The compensation cost associated with restricted shares is estimated on the date of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and those entities in which it has a controlling financial interest. Investments in affiliates in which Gentherm does not have control but does have the ability to exercise significant influence over operating and financial policies are accounted for under the equity method. When Gentherm does not have the ability to exercise significant influence (generally when ownership interest is less than 20%), investments in affiliates are measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect amounts reported therein. Considerable judgment is involved in making these determinations and the use of different estimates or assumptions could result in significantly different results. Management believes its assumptions and estimates are reasonable and appropriate. However, actual results could differ from those reported herein.
Segment Reporting
The Company has 2 reportable segments: Automotive, which includes automotive climate comfort systems, specialized automotive cable systems, battery thermal management, and automotive electronic systems; and Industrialgrant using quoted market prices (Level 1 input). The Industrial segment represents the combined results from our patient temperature management systems business (“Medical”)total fair value of restricted shares vested in 2022, 2021 and 2020 was $800, GPT (through October 1, 2019)$1,554 and $1,499, CSZ-IC (through February 1, 2019) and Gentherm’s advanced research and development division. The operating results fromrespectively.
F-11F-42
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
these businesses and division are presented together as one reporting segment because of their historical joint concentration on identifying new markets and product applications based on thermal management technologies.
Revenue Recognition
Revenue is recognized from agreements containing enforceable rights and obligations, when promised goods are delivered or services are completed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from product revenues. Shipping and handling fees billed to customers are included in product revenues, while costs of shipping and handling are included in cost of sales.
Automotive Revenues
The Company provides production parts to its customers under long-term supply agreements (“LTAs”). The duration of an LTA is generally consistent with the life cycle of a vehicle; however, an LTA does not reach the level of a performance obligation until Gentherm receives either a purchase order and/or a materials release from the customer for a specific number of production parts at a specified price, at which point an enforceable contract exists. Revenue is recognized when control of the production parts has transferred to the customer according to the terms of the contract, which typically occurs when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring production parts.
Certain LTAs provide for annual price reductions over the production life of the vehicle. Agreements that are determined to provide customers with purchase option discounts that would not be received without entering into the contract are considered to contain a material right (for example, a discount given to a customer that is incremental to the range of discounts typically given to that class of customer). The material right represents a purchase option that provides the customer with the ability to purchase additional production parts at a set price in the future and is accounted for as a separate performance obligation. Under these circumstances, each transfer of production parts under the LTA requires allocation of the purchase price to the production part and the purchase option. As a practical alternative to estimating the standalone selling price of an option, the Company allocates transaction price to the purchase option by reference to the production part volumes expected to be ordered and the consideration expected to be received over the life of the vehicle program.
The production part’s relative standalone selling price observed under the LTA is subtracted from the total amount of consideration expected to be received in exchange for transferring of parts under the current contract and the difference is allocated to the purchase option. Revenue from options containing a material right is recognized when the amounts billed by the customer for production parts transferred, under the LTA, is less than the standalone selling price of those production parts.
Medical Revenues
Revenues from our patient temperature management business unitSARs
The following table summarizes SARs activity during the years ended December 31, 2022, 2021 and 2020:
Stock Appreciation Rights |
| Shares |
|
| Weighted-Average |
|
| Weighted-Average |
|
| Aggregate |
| ||||
Outstanding at December 31, 2019 |
|
| 554,250 |
|
| $ | 39.41 |
|
|
| 2.84 |
|
| $ | 2,981 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| (342,150 | ) |
|
| 38.22 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (40,500 | ) |
|
| 44.39 |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2020 |
|
| 171,600 |
|
| $ | 40.60 |
|
|
| 2.44 |
|
| $ | 4,224 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| (116,000 | ) |
|
| 40.34 |
|
|
|
|
|
|
| ||
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2021 |
|
| 55,600 |
|
| $ | 41.15 |
|
|
| 1.28 |
|
| $ | 2,544 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| (40,850 | ) |
|
| 42.27 |
|
|
|
|
|
|
| ||
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2022 |
|
| 14,750 |
|
| $ | 38.05 |
|
|
| 1.15 |
|
| $ | 402 |
|
Exercisable at December 31, 2022 |
|
| 14,750 |
|
| $ | 38.05 |
|
|
| 1.15 |
|
| $ | 402 |
|
There have been noSARs granted since the year ended December 31, 2017 and all SARs are generated fromcurrently vested. The total intrinsic value of SARs exercised during the saleyears ended December 31, 2022, 2021 and 2020 was $1,348, $4,301 and $4,164, respectively.
Stock Options
The following table summarizes stock option activity during the years ended December 31, 2022, 2021 and 2020:
Options |
| Shares |
|
| Weighted-Average |
|
| Weighted-Average |
|
| Aggregate |
| ||||
Outstanding at December 31, 2019 |
|
| 869,000 |
|
| $ | 37.87 |
|
|
| 3.51 |
|
| $ | 5,172 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| (434,250 | ) |
|
| 38.12 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (6,750 | ) |
|
| 38.05 |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2020 |
|
| 428,000 |
|
| $ | 37.61 |
|
|
| 3.20 |
|
| $ | 11,815 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| (215,250 | ) |
|
| 38.46 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (6,000 | ) |
|
| 38.05 |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2021 |
|
| 206,750 |
|
| $ | 36.72 |
|
|
| 2.60 |
|
| $ | 10,375 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| (44,116 | ) |
|
| 37.87 |
|
|
|
|
|
|
| ||
Forfeited |
|
| - |
|
|
| - |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2022 |
|
| 162,634 |
|
| $ | 36.41 |
|
|
| 2.68 |
|
| $ | 8,212 |
|
Exercisable at December 31, 2022 |
|
| 162,634 |
|
| $ | 36.41 |
|
|
| 2.68 |
|
| $ | 8,212 |
|
There have been nostock options granted since the year ended December 31, 2017 and all stock options are currently vested. The total intrinsic value of productsstock options exercised during the years ended December 31, 2022, 2021 and equipment. Our medical products2020 was $1,582, $8,269 and equipment focus on body and blood temperature management. The Company sells medical products and equipment primarily through distributor and group purchasing organization agreements. These agreements allow member participants to the distributor or group purchasing organization to make purchases at discounted prices negotiated by the distributor or group purchasing organization. A rebate is incurred at the point in time a member participant purchases product covered under these types of agreements. Rebates are accounted for as variable consideration, using an expected value, probability weighted approach, based on the level of sales to the distributor and the time lag between the initial sale and the rebate claim in determining the transaction price of a contract. Revenue is recognized at the point in time the medical products or equipment is transferred to the customer.$5,317, respectively.
F-43
GENTHERM INCORPORATED
GPT and CSZ-IC Revenues
Revenues from our divested businesses, GPT and CSZ-IC, were generated from the sale of products and services. GPT and CSZ-IC customers commonly entered into multiple-element agreements for the purchase of products and services. Installation
F-12
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
services, for example, were separate and distinct performance obligations that were often included in contracts to purchase customized environmental test chambers. Depending on the application, delivery of an environmental test chamber or remote power generation system to the customer’s place of business could range from two weeks to nine months from commencement of the contract. Installation services, while reliant on the specifications and timing from the customer, rarely remained incomplete more than two months after delivery.
Revenues allocated to environmental test chambers or remote power systems were based on the stand-alone selling price of the products themselves. Judgement was used to determine the degree to which early pay discounts and other credits were utilized in the calculation of standalone selling price, and only included to the extent it was probable that a significant reversal of any incremental revenue would not occur. Revenues were recognized at the point in time the chamber or power system was shipped to the customer. For contracts that also included a promise for installation, the portion of total transaction price allocated to the installation was recognized as revenue at the point in time the installation was complete.
GPT and CSZ-IC often required milestone payments for contracts to provide environmental test chambers or remote power systems to customers. Milestone payments did not provide the Company with a right to payment for the work completed to date and did not represent the satisfaction of a performance obligation. Milestone payments were deferred and reported within unearned revenue until construction was complete and the unit had been delivered or was installed. If the environmental test chamber contract included a separate promise to provide installation services, any installation-related payments received from the customer were deferred until the point in time the installation was complete.Note 18 — Income Taxes
The total amountincome tax provisions were calculated based upon the following components of unearned revenue associated with environmental chamber and remote power system contracts, including environmental chamber contracts that included a separate obligation to provide installation, that existed as of December 31, 2018 was $5,296 and is classified within Liabilities held for sale on the consolidated balance sheet at December 31, 2018. See Note 4 to our consolidated financial statements for information about the assets and liabilities that was classified as held for sale.
Assets Recognized from the Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefits of those costs are expected to be realized for a period greater than one year. Total capitalized costs to obtain a contract were $1,893 and $374 as of December 31, 2019 and 2018, respectively. These amounts are recorded in other current assets and are being amortized into product revenues over the expected production life of the program. During the year ended December 31, 2019, $1,006 was amortized into product revenues. During the year ended December 31, 2018, amounts amortized into product revenues was immaterial.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with original maturities of less than 90 days to be cash equivalents. Cash balances in individual banks may exceed the federally insured limit by the Federal Deposit Insurance Corporation. The Company had cash and cash equivalents of $35,735 and $31,976 held in foreign jurisdictions as of December 31, 2019 and 2018, respectively. Restricted cash includes cash that is legally restricted as to use or withdrawal.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of financial instruments comprising cash and cash equivalents, short-term investments and accounts receivable approximate fair value because of the short maturities of these instruments. The carrying amount of the Company’s U.S. Revolving Note approximates its fair value because interest charged on the loan balance is variable. See Note 15 for information about the techniques used to assess the fair value of financial assets and liabilities, including our fixed rate debt instruments.
F-13
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Concentration of Credit Risk
Financial assets, which subject the Company to concentration of credit risk, consist primarily of cash equivalents, short-term investments and accounts receivable. Cash equivalents consist primarily of money market funds managed by major financial services companies. The credit risk for these cash equivalents is considered low. The Company does not require collateral from its customers. As of December 31, 2019, Lear, Adient and Magna comprised 21%, 21% and 7% respectively, of the Company’s accounts receivable balance. As of December 31, 2018, Lear, Adient, and Faurecia comprised 21%, 18% and 9% respectively, of the Company’s accounts receivable balance. These accounts are currently in good standing.
Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowance for doubtful accounts for estimated amounts not expected to be collected, and do not bear interest. We record an allowance for doubtful accounts once exposure to collection risk of an account receivable is specifically identified. We analyze the length of time an account receivable is outstanding, as well as a customer’s payment history and ability to pay to determine the need to record an allowance for doubtful accounts. We write-off accounts receivable when they become uncollectible.
Inventory
The Company’s inventory is measured at the lower of cost or net realizable value, with cost being determined using the first-in first-out basis. Raw materials, consumables and commodities are measured at cost of purchase and unfinished and finished goods are measured at cost of production, using the weighted average method. If the net realizable value expected on the reporting date is below cost, a write-down is recorded to adjust inventory to its net realizable value. We recognize a reserve for obsolete and slow-moving inventories based on estimates of future sales and an inventory item’s capacity to be repurposed for a different use. We consider the number of months supply on hand based on current planned requirements, uncommitted future projections and historical usage in estimating the inventory reserve.
Property and Equipment
Property and equipment, including additions and improvements, are recorded at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as operatingearnings before income or expense.
Depreciation is computed using the straight-line method. The estimated useful lives of the Company’s property and equipment are as follows:
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The Company recognized depreciation expense of $33,639, $36,270 and $32,224tax for the years ended December 31, 2019, 20182022, 2021 and 2017, respectively.2020:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Earnings before income tax: |
|
|
|
|
|
|
|
|
| |||
Domestic |
| $ | (34,211 | ) |
| $ | (4,547 | ) |
| $ | (11,374 | ) |
Foreign |
|
| 72,593 |
|
|
| 118,399 |
|
|
| 92,930 |
|
Earnings before income tax |
| $ | 38,382 |
|
| $ | 113,852 |
|
| $ | 81,556 |
|
F-14
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Goodwill and Other Intangible Assets
Goodwill and other intangible assets recorded in conjunction with business combinations are based on the Company’s estimate of fair value, asThe components of the date of acquisition.
Amortization is computed using the straight-line method. The fair value and corresponding useful lives for acquired intangible assets are listed below as follows:
|
| |
|
| |
|
| |
|
| |
|
|
Our business strategy largely centers on designing products based upon internally developed and purchased technology. When possible and having value to the business strategy, we protect these technologies with patents. Our policy is to expense all costs associated with the development and issuance of new patents as incurred. Such costs are classified as research and development expenses in our consolidation statements of income.
Patents purchased as part of a business combination are capitalized based on their fair values. Periodically, we review the recoverability and remaining lives of our capitalized patents, and if necessary, make adjustments to reported amounts, based upon unfavorable impacts from market conditions, the emergence of competitive technologies and changes in our projected business plans.
Impairments of Long-Lived Assets, Other Intangible Assets and Goodwill
Whenever events or changes in circumstances indicate that it is more likely than not that a long-lived asset’s fair value, other intangible asset’s fair value or a reporting unit’s fair value is less than it’s carrying amount, the Company then compares the fair value of the long-lived asset, other intangible asset or reporting unit to the related net book value. If the net book value of a long-lived asset, other intangible asset or reporting unit exceeds its fair value, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its fair value. The fair value of a long-lived asset, other intangible asset or reporting unit is estimated by analyzing internal inputs (level 3) to calculate forward values and discounting those values to the present value. Goodwill is not amortized but is tested for impairment on at least an annual basis.
Accrued Warranty Costs
The Company accrues warranty obligations for products sold based on management estimates of future failure rates and current claim cost experience, with support from the sales, engineering, quality and legal functions. Using historical information available to the Company, including claims already filed by customers, the warranty accrual is adjusted quarterly to reflect management’s best estimate of future claims.
Tooling
The Company incurs costs related to tooling used in the manufacture of products sold to its customers. In some cases, the Company enters into contracts with its customers whereby the Company incurs the costs to design, develop and purchase tooling and is then reimbursed by the customer under a reimbursement contract. Tooling costs that will be reimbursed by customers are included in other current assets at the lower of accumulated cost or the customer reimbursable amount. As of December 31, 2019 and 2018, respectively, $5,347 and $6,628 of reimbursable tooling was capitalized within other current assets. Company-owned tooling is included in property and equipment and depreciated over its expected useful life, generally two to ten years. Management periodically
F-15
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
evaluates the recoverability of tooling costs, based on estimated future cash flows, and makes provisions, where appropriate, for tooling costs that will not be recovered.
Research and Development Expenses
Research and development activities are expensed as incurred. The Company groups development and prototype costs and related reimbursements in research and development. The Company recognizes amounts due as reimbursements for expenses as these expenses are incurred.
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 less than 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 41 to 43 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.
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, current lease liabilities and non-current lease liabilities on our consolidated 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 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 non-lease 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 statements of income.
Income Taxes
The Company records income tax expense using the liability method which specifies that deferred tax assets and liabilities be measured each year based on the difference between the financial statement and tax base of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided for deferred tax assets when management considers it more likely than not that
F-16
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
the asset will not be realized. At December 31, 2019 and 2018, a valuation allowance has been provided for certain deferred tax assets which the Company has concluded are more likely than not to not be realized. If future annual taxable income were to be significantly less than current and projected levels, there is a risk that certain of our deferred tax assets not already provided for by the valuation allowance would expire prior to utilization.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties related to income tax matters in income tax expense.
Derivative Financial Instruments – Hedge Accounting
The Company accounts for some of its derivative financial instruments as cash flow hedges as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815. For derivative contracts which can be classified as a cash flow hedge, the effective potion of the change in the fair value of the derivative is recorded to accumulated other comprehensive income in the consolidated balance sheets. When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive income 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. Any ineffective portion of the gain or loss is recognized in the consolidated statements of income under foreign currency gain (loss) or revaluation of derivatives gain (loss). These hedging transactions and the respective correlations meet the requirements for hedge accounting.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the respective period. The Company’s diluted earnings per common share give effect to all potential shares of Common Stock outstanding during a period that are not anti-dilutive. In computing the number of diluted shares outstanding, the treasury stock method is used in order to arrive at a net number of shares created upon the conversion of Common Stock equivalents.
Stock Based Compensation
Share based payments that involve the issuance of Common Stock to employees, including grants of employee stock options, restricted stock, and time-based and performance-based restricted stock units, are recognized in the financial statements as compensation expense based upon the fair value on the date of grant. Performance-based restricted stock unit awards are measured based on either a target return on invested capital ratio (“ROIC”), as defined in the award agreement, for a specified fiscal year, or the Company’s common stock market price returning a target total shareholder return (“TSR”), as defined, during a specific three-year measurement period. Upon achievement of the performance measurement, performance-based restricted stock units vest over a three-year period.
Share based payments that are satisfied only by the payment of cash, such as stock appreciation rights, are accounted for as liabilities. The liability is reported at market value of the vested portion of the underlying units. During each period, the change in the liability is recorded as compensation expense during periods when the liability increases or income during periods in which the liability decreases.
Pension Plans
The Company’s obligations and expenses for its pension plans are dependent on the Company’s selection of discount rate, expected long-term rate of return on plan assets and other assumptions used by actuaries to calculate these amounts.
F-17
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Assets and Liabilities Held for Sale
The Company classifies assets and liabilities (disposal groups) 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 any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent losses as an adjustment to the carrying value of the disposal group.
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 Balance Sheet in the period the disposal group meets the criteria to be classified as held for sale. See Note 4 to our consolidated financial statements for information about the assets and liabilities classified as held for sale.
Note 3 — New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (as amended, “ASU 2016-02”). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease, and is measured as the present value of the lease payments. The right-of-use asset represents the lessee’s right to use a specified asset for the lease term, and is measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. Leases are to be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the statements of income (loss).
The Company adopted ASU 2016-02 on January 1, 2019, by applying the modified retrospective method and recognized a cumulative-effect adjustment to the opening balance in retained earnings. Financial information has not been updated and disclosures under the new standard have not been provided to dates and periods before January 1, 2019, and the Company’s reporting for the comparative periods in the consolidated financial statements will continue to be in accordance with Accounting Standards Codification Topic 840, Leases (“ASC 840”).
F-18
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
ASU 2016-02 did not have a presentation impact on the Company’s consolidated statements of income or cash flows for the year ended December 31, 2019 but did have an impact on the consolidated balance sheet as of December 31, 2019. The cumulative effects of the changes made to the Company’s consolidated balance sheet as of January 1, 2019 for the adoption of ASU 2016-02 were as follows:
|
| Balance as of December 31, 2018 |
|
| Adjustments due to adoption of ASU 2016-02 |
|
| Balance as of January 1, 2019 |
| |||
Other current assets |
| $ | 54,363 |
|
| $ | (74 | ) |
| $ | 54,289 |
|
Assets held for sale |
|
| 69,699 |
|
|
| 4,127 |
|
|
| 73,826 |
|
Operating lease right-of-use assets |
|
| — |
|
|
| 13,019 |
|
|
| 13,019 |
|
Liabilities held for sale |
|
| 13,062 |
|
|
| 4,136 |
|
|
| 17,198 |
|
Deferred income tax liabilities |
|
| 1,177 |
|
|
| 114 |
|
|
| 1,291 |
|
Non-current lease liabilities |
|
| — |
|
|
| 12,561 |
|
|
| 12,561 |
|
Accumulated earnings |
|
| 363,965 |
|
|
| 261 |
|
|
| 364,226 |
|
The Company elected the package of practical expedients provided in ASU 2016-02, which permits a lessee to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Gentherm elected the use-of-hindsight to determine whether lease terms included 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, Gentherm elected to not 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 were not eligible for this practical expedient.
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 the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. 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. The Company is currently in the process of determining the impact the implementation of ASU 2016-13 will have on the consolidated financial statements and note disclosures. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
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 requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. 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. We are currently in the process of determining the impact the implementation of ASU 2018-15 will have on the Company’s financial statements and note disclosures. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
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.” ASU 2018-14 removes certain disclosure requirements, including (i) the amounts in accumulated other comprehensive income expected to be
F-19
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
recognized as components of net periodic benefit cost over the next fiscal year, and (ii) the amount and timing of plan assets expected to be returned to the employer. ASU 2018-14 also adds new disclosure requirements, including (i) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and (ii) 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 is permitted. We are currently in the process of determining the impact the implementation of ASU 2018-14 will have on the Company’s financial statement note disclosures. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
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.” ASU 2018-13 removes certain disclosure requirements, including (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfer between levels, and (iii) the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds new disclosure requirements, including (i) 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 and (ii) 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. We are currently in the process of determining the impact the implementation of ASU 2018-13 will have on the Company’s financial statement note disclosures. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
Note 4 – Acquisitions and Divestitures
In June 2018, Gentherm announced a new strategic plan. An important element of the strategy was the elimination of investments in non-core areas, including GPT and CSZ-IC. The strategy also identified several product categories the Company exited in 2018, including furniture, aviation, battery management electronics, industrial battery packs, automotive thermoelectric generators and other non-core electronics.
During the year ended December 31, 2018, Gentherm determined that GPT and CSZ-IC met the held for sale criteria and recognized $11,476 of asset impairment charges, consisting of $6,151 of goodwill impairment charges, $3,135 of other intangible asset impairment charges and $2,190 of impairment on assets held for sale. These impairment charges are reported within Industrial segment and are classified as Asset impairments and net loss on divestitures within the consolidated statements of income.
Divestiture of CSZ-IC
On February 1, 2019, the Company completed the sale of 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 cash proceeds 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 $4,298 pre-tax gain on the sale of CSZ-IC for the year ended December 31, 2019 which is classified as Asset impairments and net loss on divestitures within the consolidated statements of income. Subsequent to December 31, 2019, claims were made against the cash proceeds held in the escrow account. The Company is not able to estimate the possible loss, if any, of amounts held in escrow in connection with this matter.
Divestiture of GPT
During 2019, the Company continued to assess the fair value of the GPT disposal group, less costs to sell, at each reporting period. As a result of these fair value measurements, the Company recognized additional impairment losses of $21,206 consisting of
F-20
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
$4,486 of impairment of an equity investment that met the held for sale criteria during 2019 and $16,720 of impairment on assets held for sale. These impairment charges are classified as Asset impairments and net loss on divestitures within the consolidated statements of income.
On October 1, 2019, the Company completed the sale of GPT for a nominal amount and recognized a $5,885 loss on sale for the year ended December 31, 2019, which included $3,995 related to the release of previously deferred foreign currency translation losses recorded in accumulated other comprehensive loss and $1,500 related to a loan to the buyer that was considered uncollectible.
Assets and Liabilities Held for Sale as of December 31, 2018 – CSZ-IC and GPT
The assets and liabilities of the disposal group classified as held for sale as of December 31, 2018 were as follows:
Accounts receivable, less allowance of $96 |
| $ | 10,868 |
|
Inventory, net |
|
| 13,925 |
|
Prepaid expenses and other assets |
|
| 263 |
|
Property and equipment, net |
|
| 29,459 |
|
Goodwill |
|
| 6,844 |
|
Other intangible assets, net |
|
| 6,326 |
|
Deferred income tax assets |
|
| 4,204 |
|
Other non-current assets |
|
| — |
|
Impairment loss |
|
| (2,190 | ) |
Total assets for sale |
|
| 69,699 |
|
|
|
|
|
|
Accounts payable |
|
| 2,614 |
|
Accrued liabilities |
|
| 10,448 |
|
Total liabilities for sale |
| $ | 13,062 |
|
Acquisition of Stihler Electronic GmbH
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 is being recognized 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 year ended December 31, 2019, the Company incurred acquisition-related costs of approximately $324. These amounts were recorded as incurred, within the Company's consolidated statements of income.
F-21
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The acquisition was accounted for as a business combination. The purchase price and related allocation to the acquired net assets of Stihler, based on their estimated fair values as of the acquisition date, are shown below:
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 |
|
Accounts receivable |
|
| 883 |
|
Inventory |
|
| 1,698 |
|
Prepaid expenses and other assets |
|
| 241 |
|
Operating lease right-of-use assets |
|
| 263 |
|
Property and equipment |
|
| 260 |
|
Other intangible assets |
|
| 4,380 |
|
Goodwill |
|
| 9,816 |
|
Assumed liabilities |
|
| (2,065 | ) |
Net assets acquired |
| $ | 15,476 |
|
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 deductibleprovision for income tax purposes.
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.
Acquisition of Etratech
On November 1, 2017, the Company acquired substantially all of the assets and assumed substantially all of the operating liabilities of Etratech Inc., an Ontario corporation and all of the outstanding shares of Etratech Hong Kong, an entity organized under the laws of Hong Kong, in an all-cash transaction for a purchase price of $65,009, net of cash acquired of $670. Etratech manufactures advanced electronic controls and control systems for the automotive, RV and marine, security, medical and other industries. Results of operations for Etratech are reported within the Company’s Automotive segment from the date of acquisition. Etratech contributed $8,398 in product revenues and a net loss of $510 for the year ended December 31, 2017.
Supplemental Pro Forma Information
The unaudited pro forma combined historical results including the amounts of Etratech revenue and earnings that would have been included in the Company’s consolidated statements of income had the acquisition date been January 1, 2017 is as follows:
|
| Year Ended December 31, 2017 |
| |
Product revenues |
| $ | 1,032,273 |
|
Net income |
| $ | 35,911 |
|
Basic earnings per share |
| $ | 0.98 |
|
Diluted earnings per share |
| $ | 0.98 |
|
This pro forma information is not indicative of future operating results.
F-22
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 5 — Restructuring
Manufacturing Footprint Rationalization
On September 23, 2019, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. Under this plan, the Company will relocate and consolidate certain existing automotive manufacturing and, as a result, certain other activities, overall reducing the number of plants by two. During the year ended December 31, 2019, the Company recognized expense of $4,863 for employee separation costs that will be paid pursuant to the terms of statutory requirements of the affected locations. Additionally, the Company recognized $2,087 of accelerated depreciation and fixed asset impairment.
The Company expects to incur total costs of between $20,000 and $24,000, of which between $17,000 and $21,000 are expected to be cash expenditures. The total expected costs include employee separation costs of between $9,000 and $11,000, capital expenditures of between $4,500 and $5,500 and non-cash expenses for accelerated depreciation and impairment of fixed assets of $3,000. The Company also expects to incur other transition costs including recruiting, relocation, and machinery and equipment move and set up costs of between $3,500 and $4,500. The actions under this plan are expected to be substantially completed by the end of 2021. The actual timing, costs and savings of the Plan may differ materially from the Company’s current expectations and estimates.
Other Restructuring Activities
As part of the Company’s continued efforts to optimize its cost structure, the Company has undertaken several discrete restructuring actions. During the years ended December 31, 2019 and 2018, the Company recognized $2,942 and $6,598 of employee separation costs, respectively, and $1,360 and $2,869 of other related 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.
Advanced Research and Development Rationalization and Site Consolidation
In June 2018, Gentherm completed the 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 year ended December 31, 2018. An additional asset impairment loss of $425 was recognized during the year ended December 31, 2019.
During the year ended December 31, 2018, Gentherm recognized employee separation costs of $1,094, and $643 of other related costs associated with the closure of 2 leased facilities located in Azusa, California. The Company also recognized $1,400 in restructuring expenses for the year ended December 31, 2018 for the disposal of long-lived assets controlled and used in Azusa, California.
The Company has recorded approximately $4,669 of restructuring expenses since inception of this program and it is considered complete.
GPT and CSZ-IC
During 2018, Gentherm launched a program to actively market GPT and CSZ-IC. Costs associated with the divestiture process were classified as restructuring. During the year ended December 31, 2019 and 2018, the Company recognized $251 and $757 of employee separation costs, respectively, and $991 and $304 of other related costs, respectively.
The Company has recorded approximately $2,303 of restructuring expenses since inception of this program and it is considered substantially complete.
F-23
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Restructuring Expenses By Reporting Segment
Restructuring expense by reporting segmenttaxes for the years ended December 31, 2019, 20182022, 2021 and 2017 was2020 are summarized as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Automotive |
| $ | 9,353 |
|
| $ | 5,548 |
|
| $ | — |
|
Industrial |
|
| 1,838 |
|
|
| 5,607 |
|
|
| — |
|
Reconciling items |
|
| 1,728 |
|
|
| 3,617 |
|
|
| — |
|
Total |
| $ | 12,919 |
|
| $ | 14,772 |
|
| $ | — |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Current income tax expense: |
|
|
|
|
|
|
|
|
| |||
Federal |
| $ | 3,006 |
|
| $ | 1,944 |
|
| $ | 784 |
|
State and local |
|
| 650 |
|
|
| 234 |
|
|
| 83 |
|
Foreign |
|
| 17,607 |
|
|
| 18,390 |
|
|
| 20,150 |
|
Total current income tax expense |
| $ | 21,263 |
|
|
| 20,568 |
|
|
| 21,017 |
|
Deferred income tax (benefit) expense: |
|
|
|
|
|
|
|
|
| |||
Federal |
|
| (5,971 | ) |
|
| (4,400 | ) |
|
| (2,302 | ) |
State and local |
|
| (213 | ) |
|
| (91 | ) |
|
| 32 |
|
Foreign |
|
| (1,138 | ) |
|
| 4,341 |
|
|
| 3,119 |
|
Total deferred (benefit) income tax expense |
|
| (7,322 | ) |
|
| (150 | ) |
|
| 849 |
|
Total income tax expense |
| $ | 13,941 |
|
| $ | 20,418 |
|
| $ | 21,866 |
|
Restructuring Liability
The following table summarizes restructuring activity for all restructuring initiatives for the years ended December 31, 2019 and 2018:
|
| Employee Separation Costs |
|
| Accelerated Depreciation and Asset Impairment Charges |
|
| Other Related Costs |
|
| Total |
| ||||
Balance at December 31, 2017 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Additions, charged to restructuring expenses |
|
| 8,449 |
|
|
| 2,507 |
|
|
| 3,816 |
|
|
| 14,772 |
|
Cash payments |
|
| (6,346 | ) |
|
| — |
|
|
| (3,348 | ) |
|
| (9,694 | ) |
Non-cash utilization |
|
| — |
|
|
| (2,507 | ) |
|
| — |
|
|
| (2,507 | ) |
Reclassification to lease liability |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Currency translation |
|
| (24 | ) |
|
| — |
|
|
| — |
|
|
| (24 | ) |
Balance at December 31, 2018 |
|
| 2,079 |
|
|
| — |
|
|
| 468 |
|
|
| 2,547 |
|
Additions, charged to restructuring expenses |
|
| 8,056 |
|
|
| 2,512 |
|
|
| 2,351 |
|
|
| 12,919 |
|
Cash payments |
|
| (4,118 | ) |
|
| — |
|
|
| (2,636 | ) |
|
| (6,754 | ) |
Non-cash utilization |
|
| — |
|
|
| (2,512 | ) |
|
| — |
|
|
| (2,512 | ) |
Reclassification to lease liability |
|
| — |
|
|
| — |
|
|
| (112 | ) |
|
| (112 | ) |
Currency translation |
|
| (23 | ) |
|
| — |
|
|
| — |
|
|
| (23 | ) |
Balance at December 31, 2019 |
| $ | 5,994 |
|
| $ | — |
|
| $ | 71 |
|
| $ | 6,065 |
|
Note 6 — Earnings Per Share
The Company’s diluted earnings per share give effect to all potential common shares outstanding during a period that do not have an anti-dilutive impact to the calculation. The following summarizes the shares included in the dilutive shares as disclosed in the consolidated statements of income:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Weighted average number of shares for calculation of basic EPS – Common Stock |
|
| 33,120,076 |
|
|
| 35,920,782 |
|
|
| 36,720,749 |
|
Stock options, restricted stock awards and restricted stock units under equity incentive plans |
|
| 177,513 |
|
|
| 256,362 |
|
|
| 92,970 |
|
Weighted average number of shares for calculation of diluted EPS – Common Stock |
|
| 33,297,589 |
|
|
| 36,177,144 |
|
|
| 36,813,719 |
|
The accompanying table represents Common Stock issuable upon the exercise of certain stock options and that have been excluded from the diluted earnings calculation because the effect of their inclusion would be anti-dilutive.
F-24
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Stock options outstanding for equity incentive plans |
|
| 214,000 |
|
|
| 898,250 |
|
|
| 2,055,784 |
|
See Note 18 for information about the Company’s different equity incentive plans.
Note 7 — Segment Reporting
Segment information is used by management for making 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:
|
|
|
|
|
|
The tables below present segment information about the reported product revenues and operating income of the Company for years ended December 31, 2019, 2018 and 2017. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level.
|
| Automotive |
|
| Industrial |
|
| Reconciling Items |
|
| Consolidated Total |
| ||||
2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
| $ | 920,225 |
|
| $ | 51,459 |
|
| $ | — |
|
| $ | 971,684 |
|
Depreciation and amortization |
|
| 40,765 |
|
|
| 1,779 |
|
|
| 1,702 |
|
|
| 44,246 |
|
Operating income (loss) |
|
| 149,514 |
|
|
| (14,043 | ) |
|
| (51,211 | ) |
|
| 84,260 |
|
2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
| $ | 957,824 |
|
| $ | 90,681 |
|
| $ | — |
|
| $ | 1,048,505 |
|
Depreciation and amortization |
|
| 43,621 |
|
|
| 4,384 |
|
|
| 2,633 |
|
|
| 50,638 |
|
Operating income (loss) |
|
| 152,051 |
|
|
| (22,530 | ) |
|
| (56,733 | ) |
|
| 72,788 |
|
2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
| $ | 886,600 |
|
| $ | 107,391 |
|
| $ | — |
|
| $ | 993,991 |
|
Depreciation and amortization |
|
| 36,801 |
|
|
| 5,399 |
|
|
| 2,772 |
|
|
| 44,972 |
|
Operating income (loss) |
|
| 166,378 |
|
|
| (14,751 | ) |
|
| (54,529 | ) |
|
| 97,098 |
|
F-25
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Automotive and Industrial segment product revenues by product category for each of the years ended December 31, 2019, 2018 and 2017 are as follows:
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Climate Control Seat (CCS) |
| $ | 359,355 |
|
| $ | 373,945 |
|
| $ | 387,961 |
|
Seat Heaters |
|
| 284,174 |
|
|
| 305,337 |
|
|
| 307,308 |
|
Automotive Cables |
|
| 88,031 |
|
|
| 98,931 |
|
|
| 92,092 |
|
Steering Wheel Heaters |
|
| 65,426 |
|
|
| 69,845 |
|
|
| 62,125 |
|
Electronics |
|
| 47,542 |
|
|
| 56,783 |
|
|
| 8,816 |
|
Battery Thermal Management (BTM) |
|
| 41,498 |
|
|
| 28,472 |
|
|
| 10,046 |
|
Other Automotive |
|
| 34,199 |
|
|
| 24,511 |
|
|
| 18,252 |
|
Subtotal Automotive |
|
| 920,225 |
|
|
| 957,824 |
|
|
| 886,600 |
|
Medical |
|
| 36,860 |
|
|
| 30,108 |
|
|
| 30,375 |
|
GPT |
|
| 11,181 |
|
|
| 19,520 |
|
|
| 32,282 |
|
CSZ-IC |
|
| 3,418 |
|
|
| 41,053 |
|
|
| 44,734 |
|
Subtotal Industrial |
|
| 51,459 |
|
|
| 90,681 |
|
|
| 107,391 |
|
Total Company |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
| $ | 993,991 |
|
Revenue (based on shipment destination) by geographic area for each of the years ended December 31, 2019, 2018 and 2017 is as follows:
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
United States |
| $ | 440,316 |
|
| $ | 488,926 |
|
| $ | 454,669 |
|
Germany |
|
| 81,315 |
|
|
| 88,366 |
|
|
| 71,768 |
|
Japan |
|
| 76,197 |
|
|
| 62,633 |
|
|
| 57,467 |
|
China |
|
| 71,461 |
|
|
| 93,628 |
|
|
| 93,645 |
|
South Korea |
|
| 63,339 |
|
|
| 58,717 |
|
|
| 64,715 |
|
Czech Republic |
|
| 38,888 |
|
|
| 42,665 |
|
|
| 38,828 |
|
Canada |
|
| 37,804 |
|
|
| 44,500 |
|
|
| 46,368 |
|
United Kingdom |
|
| 31,357 |
|
|
| 37,533 |
|
|
| 36,033 |
|
Romania |
|
| 26,213 |
|
|
| 22,435 |
|
|
| 18,050 |
|
Other |
|
| 104,794 |
|
|
| 109,102 |
|
|
| 112,448 |
|
Total Non-U.S. |
|
| 531,368 |
|
|
| 559,579 |
|
|
| 539,322 |
|
Total Company |
| $ | 971,684 |
|
| $ | 1,048,505 |
|
| $ | 993,991 |
|
The table below lists the percentage of total product revenues generated from sales to customers which contributed 10% or more to the Company’s total consolidated product revenue:
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Lear |
|
| 16 | % |
|
| 17 | % |
|
| 20 | % |
Adient |
|
| 15 | % |
|
| 16 | % |
|
| 18 | % |
F-26
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Property and equipment, net, for each of the geographic areas in which the Company operates is as follows:
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Property and equipment, net |
|
|
|
|
|
|
|
|
Macedonia |
| $ | 38,989 |
|
| $ | 39,664 |
|
China |
|
| 23,721 |
|
|
| 26,108 |
|
Vietnam |
|
| 21,452 |
|
|
| 20,768 |
|
United States |
|
| 21,280 |
|
|
| 24,122 |
|
Mexico |
|
| 19,982 |
|
|
| 26,119 |
|
Ukraine |
|
| 11,727 |
|
|
| 10,670 |
|
Germany |
|
| 10,515 |
|
|
| 9,874 |
|
Hungary |
|
| 6,803 |
|
|
| 7,546 |
|
Other |
|
| 6,136 |
|
|
| 6,509 |
|
Total |
| $ | 160,605 |
|
| $ | 171,380 |
|
Note 8 –Revenue Recognition
The principal activity from which the Company generates its revenue is the manufacturing of production parts for automotive OEMs and automotive suppliers, as well as the sale of medical products and equipment primarily through distributor and group purchasing organization agreements.
Contract Balances
We record a receivable when revenue is recognized at the time of invoicing and unearned revenue when revenue is recognized subsequent to invoicing. For contracts where control of the goods or service is transferred to the customer over time, or whose terms required the customer to make milestone payments throughout the fulfillment period, the timing of revenue recognition is likely to differ from the timing of invoicing to customers.
Most of Gentherm’s unearned revenue pertains to LTAs containing a material right. In the early periods of an LTA containing a material right, when payments collected from the customer are greater than the standalone selling price of the production parts, revenue associated with the material right is deferred. In future periods, when amounts collected from customers as payment is less than the standalone selling price of the production parts delivered, the deferred revenue is reversed into revenue. For LTAs containing a material right and, thus, the timing of revenue recognition is likely to differ from the timing of invoicing to customer, the aggregate amount of transaction price allocated to material rights that remained unsatisfied under LTAs as of December 31, 2019 was $579. We expect to recognize into revenue, 69% of this balance in 2020, and the remaining 11%, 11% and 9% in 2021, 2022 and 2023, respectively.
Unearned revenue by segment was as follows:
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
Automotive |
| $ | 579 |
|
| $ | 1,597 |
|
Industrial |
|
| — |
|
|
| — |
|
Total |
| $ | 579 |
|
| $ | 1,597 |
|
F-27
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Changes in unearned revenue for the year ended December 31, 2019 were as follows:
Balance, beginning of period |
| $ | 1,597 |
|
Additions to unearned revenue |
|
| 234 |
|
Reclassified to revenue |
|
| (1,238 | ) |
Currency impacts |
|
| (14 | ) |
Balance, end of period |
| $ | 579 |
|
Revenue allocated to remaining performance obligations represent 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.
Note 9 — Income Taxes
U.S. Tax Reform
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21% beginning in 2018, required companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and created new taxes on certain foreign sourced earnings. In March 2018, the FASB issued ASU 2018-05, “Income Taxes – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. The guidance provided for a provisional one-year measurement period for entities to finalize their accounting for certain tax effects related to the Tax Act. As of December 31, 2017, the Company made a provisional estimate of $20,153 for the effects on our existing2022, deferred tax balances, the one-time transition tax and our indefinite reinvestment assertion regarding foreign subsidiary earnings in accordance with the guidance.
As of December 31, 2018, the Company evaluated the provisional amounts initially recorded for the year ended December 31, 2017 and recorded adjustments based on updates to the Company’s assumptions and the application of additional interpretative guidance as issued during 2018. The adjustments are primarily a result of refining the net deferred tax asset position with the completion of our 2017 U.S. income tax return and changing tax accounting methods that affected the timing of certain US tax deductions. These adjustments resulted in (i) a decrease in our existing deferred tax asset balances which resulted in an income tax expense of $4,950 and (ii) a net increase to the one-time transition tax which resulted in an income tax expense of $24,625. No adjustment was required to the $9,578 tax benefit included in the provision for income taxes as of December 31, 2017 to offset the one-time transition tax related to the previous deferred tax liability that existed for the undistributed foreign earnings that were not permanently reinvested. As of December 31, 2018, the total income tax expense was $19,997 for the year ended December 31, 2017, as compared to the provisional estimate of $20,153. The Company also analyzed the impact of several new provisions of the Tax Act that became effective as of January 1, 2018, such as global intangible low-taxed income (“GILTI”) provision, foreign-derived intangible income (“FDII”) deduction, a new minimum tax related to payment to foreign subsidiaries and affiliates known as base erosion anti-abuse tax (“BEAT”), interest expense limitations under Internal Revenue Code (“IRC”) section 163(j), executive compensation limitations under IRC section 162(m) and various other provisions.
The GILTI provision imposes a tax on certain earnings of foreign subsidiaries. U.S. GAAP allows companies to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to account for GILTI in the year the tax is incurred.
F-28
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The deferred tax assets and deferred tax liabilities and related valuation allowance were comprised of the following:
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
| $ | 17,881 |
|
| $ | 7,666 |
|
Intangible assets |
|
| 33,609 |
|
|
| 42,853 |
|
Research and development credits |
|
| 9,752 |
|
|
| 8,211 |
|
Depreciation |
|
| 7,223 |
|
|
| 6,321 |
|
Valuation reserves and accrued liabilities |
|
| 7,196 |
|
|
| 4,849 |
|
Foreign tax credit |
|
| 262 |
|
|
| 376 |
|
Stock compensation |
|
| 3,485 |
|
|
| 4,128 |
|
Inventory |
|
| 1,284 |
|
|
| 1,069 |
|
Patents |
|
| 134 |
|
|
| 150 |
|
Defined benefit obligation |
|
| 2,027 |
|
|
| 1,796 |
|
Other credits |
|
| 11,491 |
|
|
| 3,701 |
|
Other |
| $ | 114 |
|
|
| 89 |
|
Total deferred tax asset |
|
| 94,458 |
|
|
| 81,209 |
|
Valuation allowance |
|
| (28,763 | ) |
|
| (9,977 | ) |
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized foreign currency exchange gains |
|
| (674 | ) |
|
| (554 | ) |
Undistributed profits of subsidiary |
|
| (4,629 | ) |
|
| (4,352 | ) |
Property and equipment |
|
| (3,366 | ) |
|
| (2,896 | ) |
Other |
|
| (733 | ) |
|
| (583 | ) |
Total deferred tax liability |
|
| (9,402 | ) |
|
| (8,385 | ) |
Net deferred tax asset |
| $ | 56,293 |
|
| $ | 62,847 |
|
Reconciliations between the statutory Federal income tax rate and the effective rate of income tax expense for each of the three years in the period ended December 31, 2019 are as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Statutory Federal income tax rate |
|
| 21.0 | % |
|
| 21.0 | % |
|
| 34.0 | % |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in Valuation Allowance |
|
| 30.7 | % |
|
| (6.6 | )% |
|
| 10.6 | % |
Effect of different tax rates of foreign jurisdictions |
|
| (24.8 | )% |
|
| (6.6 | )% |
|
| (20.8 | )% |
US Tax Reform Items |
|
| 4.3 | % |
|
| 10.8 | % |
|
| 29.1 | % |
Research and Development Credits |
|
| (2.3 | )% |
|
| (2.5 | )% |
|
| (4.6 | )% |
Non-deductible expenses |
|
| 2.1 | % |
|
| 3.4 | % |
|
| 2.4 | % |
Foreign, state and local tax, net of Federal benefit |
|
| 1.7 | % |
|
| 1.8 | % |
|
| 0.8 | % |
Tax effects of intercompany transfers |
|
| 1.5 | % |
|
| 0.8 | % |
|
| (5.0 | )% |
Undistributed profit of subsidiaries |
|
| 1.2 | % |
|
| 1.2 | % |
|
| 5.8 | % |
Other |
|
| 1.2 | % |
|
| 4.6 | % |
|
| (1.0 | )% |
Stock Compensation Expense |
|
| 0.0 | % |
|
| 0.0 | % |
|
| (2.2 | )% |
Effective Rate |
|
| 36.6 | % |
|
| 27.9 | % |
|
| 49.1 | % |
F-29
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The Company has Net Operating Loss (“NOL”) carryforwards as follows:
Jurisdiction |
| Amount as of December 31, 2019 |
|
| Years of Expiration | |
U.S. Federal and state income tax |
| $ | 85,828 |
|
| 2020-2039 |
Foreign |
| $ | 13,153 |
|
| 2020-2024 |
Foreign |
| $ | 109,665 |
|
| Never |
A portion of the U.S. Federal NOLs was incurred prior to the June 8, 1999 Preferred Financing, which qualified as a change in ownership under Section 382 of the Internal Revenue Code (“IRC”). Due to this change in ownership, the NOL accumulated prior to the change in control can only be utilized against current earnings up to a maximum annual limitation of approximately $591. As a result of the annual limitation, approximately $19,349 in NOLs generated prior to the change in control have already expired without being utilized. NaN further NOL is available to be utilized in future periods.
We have incurred NOLs in various states associated with the benefits of the state dividends received reduction along with the foreign royalty exclusion. The state net operating loss carryforwards expire at various dates from 2020 to 2039. Management has concluded that it is more likely than not that a majority of these NOLs will not be utilized, and thus has not recognized the benefit of these NOLs.
At December 31, 2019, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $122,818. This amount includes $13,153 in NOLs that expire at various dates from 2020 through 2024 and the remaining $109,665 have no expiration date. The Company has a valuation allowance recorded against $110,012 of the total non-U.S. subsidiaries’ net operating loss carryforwards as of December 31, 2019.
The earnings before income taxes and our tax provision are comprised of the following:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 74,531 |
|
| $ | 10,092 |
|
| $ | 1,258 |
|
Foreign |
|
| (15,380 | ) |
|
| 48,027 |
|
|
| 67,997 |
|
Total income before income taxes |
| $ | 59,151 |
|
| $ | 58,119 |
|
| $ | 69,255 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Current income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 262 |
|
| $ | 340 |
|
| $ | 4,140 |
|
State and local |
|
| 94 |
|
|
| (71 | ) |
|
| 150 |
|
Foreign |
|
| 17,672 |
|
|
| 9,224 |
|
|
| 24,672 |
|
Total current income tax expense |
|
| 18,028 |
|
|
| 9,493 |
|
|
| 28,962 |
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| (2,490 | ) |
|
| (1,422 | ) |
|
| 15,207 |
|
State and local |
|
| (1 | ) |
|
| 20 |
|
|
| 2,308 |
|
Foreign |
|
| 6,108 |
|
|
| 8,129 |
|
|
| (12,449 | ) |
Total deferred income tax expense |
|
| 3,617 |
|
|
| 6,727 |
|
|
| 5,066 |
|
Total tax expense |
| $ | 21,645 |
|
| $ | 16,220 |
|
| $ | 34,028 |
|
F-30
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
As of December 31, 2019, deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries since these earnings will not be taxable upon repatriation to the United States. These earnings will be primarily treated as previously taxed income from either the one-time transition tax or GILTI,global intangible low-taxed income (“GILTI”) provision, or they will be offset with a 100%100% dividend received deduction. However, the Company continues to provide a deferred tax liability for foreign income and withholding tax that will be incurred with respect to the undistributed foreign earnings that are not permanentlyindefinitely reinvested.
F-44
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The deferred tax assets and deferred tax liabilities and related valuation allowance were comprised of the following as of December 31, 2022 and 2021:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Net operating losses |
| $ | 43,296 |
|
| $ | 25,610 |
|
Intangible assets |
|
| 4,417 |
|
|
| 21,179 |
|
Research and development credits |
|
| 7,835 |
|
|
| 9,736 |
|
Property and equipment |
|
| 6,983 |
|
|
| 7,071 |
|
Valuation reserves and accrued liabilities |
|
| 8,388 |
|
|
| 7,333 |
|
Capitalized Research and Development Costs |
|
| 19,087 |
|
|
| 9,018 |
|
Stock compensation |
|
| 3,051 |
|
|
| 3,832 |
|
Defined benefit obligation |
|
| 1,265 |
|
|
| 1,466 |
|
Inventory |
|
| 6,762 |
|
|
| 1,914 |
|
Other credits |
|
| 10,296 |
|
|
| 10,158 |
|
Other |
|
| 790 |
|
|
| 146 |
|
Total deferred tax asset |
|
| 112,170 |
|
|
| 97,463 |
|
Valuation allowance |
|
| (36,671 | ) |
|
| (16,090 | ) |
Deferred tax liabilities: |
|
|
|
|
|
| ||
Unrealized foreign currency exchange gains |
| $ | (2,413 | ) |
| $ | (2,488 | ) |
Undistributed profits of subsidiary |
|
| (5,981 | ) |
|
| (6,676 | ) |
Property and equipment |
|
| (15,423 | ) |
|
| (2,420 | ) |
Other |
|
| (3,056 | ) |
|
| (1,428 | ) |
Total deferred tax liability |
|
| (26,873 | ) |
|
| (13,012 | ) |
Net deferred tax asset |
| $ | 48,626 |
|
| $ | 68,361 |
|
Reconciliations between the statutory Federal income tax rate and the effective rate of income tax expense for the years ended December 31, 2022, 2021 and 2020 are as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Statutory Federal income tax rate |
|
| 21.0 | % |
|
| 21.0 | % |
|
| 21.0 | % |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
| |||
Change in valuation allowance |
|
| 6.4 | % |
|
| (1.2 | )% |
|
| (0.4 | )% |
Effect of different tax rates of foreign jurisdictions |
|
| (4.9 | )% |
|
| (5.2 | )% |
|
| (4.7 | )% |
Tax credits & deductions related to R&D |
|
| (10.1 | )% |
|
| (2.3 | )% |
|
| (3.8 | )% |
Non-deductible expenses |
|
| 14.9 | % |
|
| 1.7 | % |
|
| 2.1 | % |
Non-deductible expenses related to acquisitions |
|
| 7.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
Other foreign, state and local taxes |
|
| 0.7 | % |
|
| 1.6 | % |
|
| 1.4 | % |
Tax impact of foreign income |
|
| 4.2 | % |
|
| 3.6 | % |
|
| 4.9 | % |
Stock option compensation |
|
| (3.8 | )% |
|
| (2.0 | )% |
|
| (0.4 | )% |
Other |
|
| 0.9 | % |
|
| 0.7 | % |
|
| 6.7 | % |
Effective rate |
|
| 36.3 | % |
|
| 17.9 | % |
|
| 26.8 | % |
The Company has Net Operating Loss (“NOL”) carryforwards as follows:
Jurisdiction |
| Amount as of December 31, 2022 |
|
| Years of Expiration | |
U.S. state income tax |
| $ | 54,912 |
|
| 2023-2042 |
Foreign |
| $ | 320,417 |
|
| Indefinite |
We have NOL carryforwards in various states associated with the benefits of the state dividends received reduction and foreign royalty exclusion. The state NOL carryforwards generally expire at various dates from 2023 to 2042. We have concluded that there is
F-45
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
not sufficient evidence these NOL carryforwards will be utilized, and thus have not recognized the benefit of these NOL carryforwards.
At December 31, 2022, certain non-U.S. subsidiaries had NOL carryforwards totaling $320,417 which have no expiration date. The Company has a valuation allowance recorded against $133,877 of the total non-U.S. subsidiaries’ net operating loss carryforwards as of December 31, 2022.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of December 31, 2019,2022, the Company iswas no longer subject to U.S. Federal examinations by tax authorities for tax years before 20152019 and iswas no longer subject to foreign examinations by tax authorities for tax years before 2012.2014.
During 2015, to entice theThe Company to construct a new facilitycurrently benefits from tax holidays in Macedonia, the government of Macedonia granted the Company a tax holiday that released the Companyvarious non-U.S. jurisdictions with expiration dates from the obligation to pay corporate income taxes for a ten year period, subject to certain limitations. 2024 – 2025. The amount of corporate income tax savings realized by the Company as a result of thisthe tax holidayholidays during 2019the current and 2018, respectively,prior years was 0immaterial as a result of operating losses generated during previous periods. The aggregate dollar effect and per share effect of the corporate income tax holiday during 2019 and 2018 was, therefore, immaterial.previously generated.
At December 31, 2019, 20182022, 2021 and 2017,2020, the Company had total unrecognized tax benefits of $3,795, $2,819$6,185, $5,665 and $3,812,$4,967, respectively, all of which, if recognized, would affect the effective income tax rates. The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
| ||||||
Balance at beginning of year |
| $ | 2,819 |
|
| $ | 3,812 |
|
| $ | 3,877 |
|
| $ | 5,665 |
|
| $ | 4,967 |
|
| $ | 3,795 |
|
Additions based on tax position related to current year |
|
| 661 |
|
|
| 221 |
|
|
| 1,758 |
|
|
| 972 |
|
|
| 1,105 |
|
|
| 1,489 |
|
Additions based on tax position related to prior year |
|
| 352 |
|
|
| 423 |
|
|
| (105 | ) |
|
| 433 |
|
|
| 160 |
|
|
| 179 |
|
Reductions from settlements and statute of limitation expiration |
|
| — |
|
|
| (1,469 | ) |
|
| (2,247 | ) |
|
| (610 | ) |
|
| (312 | ) |
| $ | (650 | ) |
Effect of foreign currency translation |
|
| (37 | ) |
|
| (168 | ) |
|
| 529 |
|
|
| (275 | ) |
|
| (255 | ) |
|
| 154 |
|
Balance at end of year |
| $ | 3,795 |
|
| $ | 2,819 |
|
| $ | 3,812 |
|
| $ | 6,185 |
|
| $ | 5,665 |
|
| $ | 4,967 |
|
The Company classifies income tax-related penalties and net interest as income tax expense. In the years ended December 31, 2019, 20182022, 2021 and 20172020, income tax related interest and penalties were insignificant.not material. It is reasonably possible that audit settlements, the conclusions of current examinations or the expiration of the statute of limitations in several jurisdictions could impact the Company’s unrecognized tax benefits. If recognized, all
Note 19 — Segment Reporting
Segment information is used by management for making operating decisions for the Company. Management evaluates the performance of the Company’s gross unrecognized tax benefits would affectsegments based primarily on operating income or loss.
The Company’s reportable segments are as follows:
Note 10 design, development, manufacturing and sales of automotive climate comfort systems, automotive cable systems, battery performance solutions, lumbar and massage comfort solutions, valve system technologies, and automotive electronic and software systems.
The Corporate categoryincludes unallocated costs related to our corporate headquarter activities, including selling, general and Other Post Retirement Benefit Plansadministrative costs and acquisition transaction costs, which do not meet the requirements for being classified as an operating segment.
The Company maintains a U.S. defined benefit pension plan covering its former Chief Executive Officer (“U.S. Plan”) and a German defined benefit pension plan covering certain retired executive employees of the Company’s wholly owned subsidiary, Gentherm GmbH (“German Plan”).
F-31F-46
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
The componentstables below present segment information about the reported product revenues and operating income of net periodic benefit costthe Company for years ended December 31, 2022, 2021 and 2020. With the Company’s defined benefit plansexception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level.
|
| Automotive |
|
| Medical |
|
| Corporate |
|
| Total |
| ||||
2022: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenues |
| $ | 1,161,616 |
|
| $ | 43,040 |
|
| $ | — |
|
| $ | 1,204,656 |
|
Depreciation and amortization |
|
| 39,815 |
|
|
| 3,344 |
|
|
| 1,235 |
|
|
| 44,394 |
|
Operating income (loss) |
|
| 118,433 |
|
|
| (4,029 | ) |
|
| (66,097 | ) |
|
| 48,307 |
|
2021: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenues |
| $ | 1,004,633 |
|
| $ | 41,517 |
|
| $ | — |
|
| $ | 1,046,150 |
|
Depreciation and amortization |
|
| 35,389 |
|
|
| 2,460 |
|
|
| 931 |
|
|
| 38,780 |
|
Operating income (loss) |
|
| 162,994 |
|
|
| (1,829 | ) |
|
| (46,159 | ) |
|
| 115,006 |
|
2020: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenues |
| $ | 869,998 |
|
| $ | 43,100 |
|
| $ | — |
|
| $ | 913,098 |
|
Depreciation and amortization |
|
| 37,662 |
|
|
| 2,366 |
|
|
| 1,086 |
|
|
| 41,114 |
|
Operating income (loss) |
|
| 138,410 |
|
|
| 971 |
|
|
| (50,164 | ) |
|
| 89,217 |
|
Automotive and Medical segment product revenues by product category for each of the years ended December 31, 2019, 20182022, 2021 and 2017 were2020 are as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Climate Control Seat |
| $ | 426,046 |
|
| $ | 393,816 |
|
| $ | 342,550 |
|
Seat Heaters |
|
| 283,970 |
|
|
| 270,054 |
|
|
| 249,665 |
|
Steering Wheel Heaters |
|
| 120,949 |
|
|
| 102,496 |
|
|
| 76,272 |
|
Automotive Cables |
|
| 76,962 |
|
|
| 84,114 |
|
|
| 73,997 |
|
Battery Performance Solutions |
|
| 71,907 |
|
|
| 69,594 |
|
|
| 50,901 |
|
Electronics |
|
| 44,106 |
|
|
| 51,648 |
|
|
| 53,238 |
|
Lumbar and Massage Comfort Solutions (a) |
|
| 56,980 |
|
|
| — |
|
|
| — |
|
Valve System Technologies (a) |
|
| 41,980 |
|
|
| — |
|
|
| — |
|
Other Automotive |
|
| 38,716 |
|
|
| 32,911 |
|
|
| 23,375 |
|
Subtotal Automotive segment |
|
| 1,161,616 |
|
|
| 1,004,633 |
|
|
| 869,998 |
|
Medical segment (a) |
|
| 43,040 |
|
|
| 41,517 |
|
|
| 43,100 |
|
Total Company |
| $ | 1,204,656 |
|
| $ | 1,046,150 |
|
| $ | 913,098 |
|
|
| U.S. Plan |
|
| German Plan |
| ||||||||||||||||||
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
| ||||||
Net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | — |
|
| $ | — |
|
| $ | 101 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Interest cost |
|
| 127 |
|
|
| 114 |
|
|
| 111 |
|
|
| 147 |
|
|
| 147 |
|
|
| 130 |
|
Expected return on plan assets |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (126 | ) |
|
| (130 | ) |
|
| (121 | ) |
Amortization of prior service cost and actuarial loss |
|
| — |
|
|
| — |
|
|
| 509 |
|
|
| 72 |
|
|
| 73 |
|
|
| 78 |
|
Net periodic benefit cost |
| $ | 127 |
|
| $ | 114 |
|
| $ | 721 |
|
| $ | 93 |
|
| $ | 90 |
|
| $ | 87 |
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 3.65 | % |
|
| 2.95 | % |
|
| 3.25 | % |
|
| 1.06 | % |
|
| 2.04 | % |
|
| 1.93 | % |
Long-term return on assets |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 3.10 | % |
|
| 3.40 | % |
|
| 3.40 | % |
A reconciliationRevenue (based on shipment destination) by geographic area for each of the change in benefit obligation and the change in plan assets for the years ended December 31, 20192022, 2021 and 20182020 is as follows:
|
| U.S. Plan |
|
| German Plan |
| ||||||||||
|
| As of December 31, |
|
| As of December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
| $ | 3,832 |
|
| $ | 4,218 |
|
| $ | 7,529 |
|
| $ | 7,927 |
|
Interest cost |
|
| 127 |
|
|
| 114 |
|
|
| 147 |
|
|
| 147 |
|
Paid pension distributions |
|
| (342 | ) |
|
| (342 | ) |
|
| (285 | ) |
|
| (292 | ) |
Actuarial (gains) losses |
|
| 254 |
|
|
| (158 | ) |
|
| 1,116 |
|
|
| 114 |
|
Exchange rate impact |
|
| — |
|
|
| — |
|
|
| (154 | ) |
|
| (367 | ) |
Balance at end of year |
| $ | 3,871 |
|
| $ | 3,832 |
|
| $ | 8,353 |
|
| $ | 7,529 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
| $ | — |
|
| $ | — |
|
|
| 3,808 |
|
|
| 3,891 |
|
Actual return on plan assets |
|
| — |
|
|
| — |
|
|
| 126 |
|
|
| 130 |
|
Contributions |
|
| — |
|
|
| — |
|
|
| 284 |
|
|
| 292 |
|
Paid pension distributions |
|
| — |
|
|
| — |
|
|
| (284 | ) |
|
| (292 | ) |
Actuarial losses |
|
| — |
|
|
| — |
|
|
| (30 | ) |
|
| (30 | ) |
Exchange rate impact |
|
| — |
|
|
| — |
|
|
| (79 | ) |
|
| (183 | ) |
Balance at end of year |
| $ | — |
|
| $ | — |
|
| $ | 3,825 |
|
| $ | 3,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status (underfunded)/overfunded |
| $ | (3,871 | ) |
| $ | (3,832 | ) |
| $ | (4,528 | ) |
| $ | (3,721 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
| (342 | ) |
|
| (342 | ) |
|
| — |
|
|
| — |
|
Pension benefit obligation |
|
| (3,529 | ) |
|
| (3,490 | ) |
|
| (4,528 | ) |
|
| (3,721 | ) |
Accumulated other comprehensive loss (pre-tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses |
|
| 476 |
|
|
| 222 |
|
|
| 3,398 |
|
|
| 2,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 2.40 | % |
|
| 3.65 | % |
|
| 1.06 | % |
|
| 2.04 | % |
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
United States |
| $ | 472,468 |
|
| $ | 404,466 |
|
| $ | 377,577 |
|
China |
|
| 183,419 |
|
|
| 142,816 |
|
|
| 101,039 |
|
South Korea |
|
| 94,937 |
|
|
| 93,516 |
|
|
| 88,745 |
|
Germany |
|
| 75,367 |
|
|
| 66,929 |
|
|
| 58,536 |
|
Japan |
|
| 57,718 |
|
|
| 63,527 |
|
|
| 57,785 |
|
Czech Republic |
|
| 49,293 |
|
|
| 43,931 |
|
|
| 37,542 |
|
Romania |
|
| 47,532 |
|
|
| 51,367 |
|
|
| 33,147 |
|
Slovakia |
|
| 34,686 |
|
|
| 30,004 |
|
|
| 21,568 |
|
Finland |
|
| 33,627 |
|
|
| 29,325 |
|
|
| 15,958 |
|
Mexico |
|
| 23,233 |
|
|
| 18,194 |
|
|
| 13,429 |
|
Other |
|
| 132,376 |
|
|
| 102,075 |
|
|
| 107,772 |
|
Total Non-U.S. |
|
| 732,188 |
|
|
| 641,684 |
|
|
| 535,521 |
|
Total Company |
| $ | 1,204,656 |
|
| $ | 1,046,150 |
|
| $ | 913,098 |
|
F-32F-47
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Pre-tax amounts included in AOCI that are expectedThe table below lists the percentage of total product revenues generated from sales to be recognized in net periodic benefit cost during the year ended December 31, 2020 are as follows:
|
| U.S Plan |
|
| German Plan |
| ||
Actuarial losses |
| $ | 7 |
|
| $ | 122 |
|
The accumulated benefit obligations were as follows:
|
| U.S. Plan |
|
| German Plan |
| ||||||||||
|
| As of December 31, |
|
| As of December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Accumulated benefit obligation |
| $ | 3,871 |
|
| $ | 3,832 |
|
| $ | 8,529 |
|
| $ | 7,894 |
|
Interest costs are recognized in selling, general and administrative expenses incustomers which contributed 10% or more to the Company’s total consolidated statements of income and actuarial gains and losses are included the Company’s consolidated balance sheet as part of accumulated other comprehensive loss within shareholders’ equity. Actuarial gains or losses are amortized to selling, general and administrative expense in the Company’s consolidated statements of income based on the average future life of the Plan using the corridor method. Prior service cost is included in selling, general and administrative expenses in the Company’s consolidated statements of income.
Plan assets – German Plan
Plan assets are comprised of Gentherm GmbH’s pension insurance policies and are pledged to the beneficiaries of the German Plan. A market valuation technique, based on observable underlying insurance charges, is used to determine the fair value of the pension plan assets (Level 2).
The expected return on plan assets assumption used to calculate Gentherm GmbH’s pension benefit obligation was determined using actual returns realized on plan assets in the prior year.
Other assets
Although the U.S. Plan is not funded, the Company has established a separate trust having the sole purpose of paying benefits under the U.S. Plan. The only asset of the trust is a corporate-owned life insurance policy (“COLI”). The COLI is valued at fair value using quoted prices listed in active markets (Level 1). The policy value of the COLI was $2,592 and $2,148 as of December 31, 2019 and 2018, respectively, and is included in other non-current assets in the Company’s consolidated balance sheets.
Contributions
We do 0t expect contributions to be paid to the U.S. Plan or the German Plan during the next fiscal year.
The schedule of future expected pension payments is as follows:
|
| Projected Pension Benefit Payments |
| |||||
Year |
| U.S Plan |
|
| German Plan |
| ||
2020 |
| $ | 342 |
|
| $ | 289 |
|
2021 |
|
| 342 |
|
|
| 287 |
|
2022 |
|
| 342 |
|
|
| 283 |
|
2023 |
|
| 342 |
|
|
| 293 |
|
2024 |
|
| 342 |
|
|
| 287 |
|
2025-2029 |
|
| 1,710 |
|
|
| 2,839 |
|
Total |
| $ | 3,420 |
|
| $ | 4,278 |
|
F-33
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Defined contribution plans
The Company also sponsors defined contribution plans for eligible employees. On a discretionary basis, the Company matches a portion of the employee contributions and or makes additional discretionary contributions. Gentherm recognized costs of $1,384, $1,471 and $1,396 related to contributions to its defined contribution plans during the years ended December 31, 2019, 2018 and 2017, respectively.
Note 11 — Goodwill and Other Intangibles
Goodwill
Changes in the carrying amount of goodwill, by reportable segment,product revenue for the years ended December 31, 20192022, 2021 and 2018 were as follows:2020:
|
| Year Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Lear |
|
| 16 | % |
|
| 15 | % |
|
| 15 | % |
Adient |
|
| 15 | % |
|
| 15 | % |
|
| 14 | % |
|
| Automotive |
|
| Industrial |
|
| Total |
| |||
December 31, 2017 |
| $ | 38,912 |
|
| $ | 30,773 |
|
| $ | 69,685 |
|
Reclassifications to assets held for sale |
|
| — |
|
|
| (6,844 | ) |
|
| (6,844 | ) |
Impairment of goodwill (a) |
|
| — |
|
|
| (6,151 | ) |
|
| (6,151 | ) |
Exchange rate impact |
|
| (1,379 | ) |
|
| — |
|
|
| (1,379 | ) |
December 31, 2018 |
| $ | 37,533 |
|
| $ | 17,778 |
|
| $ | 55,311 |
|
Stihler acquisition |
|
| — |
|
|
| 9,816 |
|
|
| 9,816 |
|
Exchange rate impact |
|
| (595 | ) |
|
| 40 |
|
|
| (555 | ) |
December 31, 2019 |
| $ | 36,938 |
|
| $ | 27,634 |
|
| $ | 64,572 |
|
|
|
Other Intangible Assets
Other intangible assetsProperty and accumulated amortization balancesequipment, net, for each of the geographic areas in which the Company operates as of December 31, 20192022 and 2018 were as follows:
|
| Gross Carrying Value |
|
| Accumulated Amortization |
|
| Net Carrying Value |
| |||
Definite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 89,208 |
|
| $ | (50,687 | ) |
| $ | 38,521 |
|
Technology |
|
| 25,106 |
|
|
| (19,866 | ) |
|
| 5,240 |
|
Product development costs |
|
| 19,911 |
|
|
| (18,559 | ) |
|
| 1,352 |
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
| 4,670 |
|
|
| — |
|
|
| 4,670 |
|
Balance as of December 31, 2019 |
| $ | 138,895 |
|
| $ | (89,112 | ) |
| $ | 49,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 87,316 |
|
| $ | (44,269 | ) |
| $ | 43,047 |
|
Technology |
|
| 25,110 |
|
|
| (18,616 | ) |
|
| 6,494 |
|
Product development costs |
|
| 20,487 |
|
|
| (18,313 | ) |
|
| 2,174 |
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
| 4,670 |
|
|
| — |
|
|
| 4,670 |
|
Balance as of December 31, 2018 |
| $ | 137,583 |
|
| $ | (81,198 | ) |
| $ | 56,385 |
|
In connection with the acquisition of Stihler, the Company recorded intangible assets including customer relationships and technology of $3,420 and $538, respectively. These definite-lived assets are being amortized using the straight-line method over their estimated useful lives of approximately 9 years and 7 years, respectively.
F-34
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
A total of $10,068, $14,043 and $12,425 in other intangible assets, including capitalized patent costs, were amortized in 2019, 2018 and 2017, respectively.
An estimate of other intangible asset amortization by year,2021 is as follows:
2020 |
| $ | 8,644 |
|
2021 |
|
| 7,700 |
|
2022 |
|
| 7,225 |
|
2023 |
|
| 4,082 |
|
2024 |
|
| 3,033 |
|
|
|
|
|
|
|
| December 31, |
| |||||
Property and equipment, net |
| 2022 |
|
| 2021 |
| ||
Germany |
| $ | 47,342 |
|
| $ | 16,174 |
|
China |
|
| 43,162 |
|
|
| 25,411 |
|
United States |
|
| 41,034 |
|
|
| 19,222 |
|
Mexico |
|
| 31,597 |
|
|
| 20,296 |
|
North Macedonia |
|
| 27,808 |
|
|
| 32,682 |
|
Vietnam |
|
| 19,808 |
|
|
| 19,876 |
|
Czech Republic |
|
| 11,381 |
|
|
| — |
|
Hungary |
|
| 11,736 |
|
|
| 8,995 |
|
Ukraine |
|
| 5,077 |
|
|
| 9,539 |
|
Other |
|
| 5,535 |
|
|
| 3,075 |
|
Total |
| $ | 244,480 |
|
| $ | 155,270 |
|
Impairment Charges
During 2018, Gentherm determined GPT and CSZ-IC met the held for sale criteria, described above, and recorded an impairment loss on assets held for sale, goodwill and other intangible assets of $2,190, $6,151 and $3,135, respectively.
F-35F-48
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 12 — Details of Certain Financial Statement Components
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Inventory: |
|
|
|
|
|
|
|
|
Raw materials, net of reserve |
| $ | 61,323 |
|
| $ | 61,679 |
|
Work in process, net of reserve |
|
| 7,444 |
|
|
| 5,939 |
|
Finished goods, net of reserve |
|
| 49,712 |
|
|
| 44,917 |
|
Total inventory, net |
| $ | 118,479 |
|
| $ | 112,535 |
|
Other current assets: |
|
|
|
|
|
|
|
|
Income tax and other tax receivables |
| $ | 17,057 |
|
| $ | 28,887 |
|
Notes receivable |
|
| 9,963 |
|
|
| 9,837 |
|
Prepaid expenses |
|
| 7,022 |
|
|
| 6,962 |
|
Billable tooling |
|
| 5,194 |
|
|
| 6,475 |
|
Short-term derivative financial instruments |
|
| 1,242 |
|
|
| 92 |
|
Other |
|
| 2,248 |
|
|
| 2,110 |
|
Total other current assets |
| $ | 42,726 |
|
| $ | 54,363 |
|
Property and equipment: |
|
|
|
|
|
|
|
|
Buildings and improvements |
| $ | 90,675 |
|
| $ | 88,950 |
|
Plant and equipment |
|
| 137,813 |
|
|
| 125,487 |
|
Information technology |
|
| 27,697 |
|
|
| 26,381 |
|
Production tooling |
|
| 19,906 |
|
|
| 15,526 |
|
Leasehold improvements |
|
| 11,116 |
|
|
| 10,320 |
|
Construction in progress |
| $ | 2,856 |
|
| $ | 3,421 |
|
Total property and equipment |
|
| 290,063 |
|
|
| 270,085 |
|
Less: Accumulated depreciation |
|
| (129,458 | ) |
|
| (98,705 | ) |
Total property and equipment, net |
| $ | 160,605 |
|
| $ | 171,380 |
|
Other current liabilities: |
|
|
|
|
|
|
|
|
Accrued employee liabilities |
| $ | 26,019 |
|
| $ | 25,449 |
|
Liabilities from discounts and rebates |
|
| 16,593 |
|
|
| 16,907 |
|
Income and other taxes payable |
|
| 3,693 |
|
|
| 6,468 |
|
Restructuring |
|
| 6,065 |
|
|
| 2,547 |
|
Accrued warranty |
|
| 4,596 |
|
|
| 4,514 |
|
Other |
|
| 9,617 |
|
|
| 9,923 |
|
Total other current liabilities |
| $ | 66,583 |
|
| $ | 65,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 13 — 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 amended and restated 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 Amended Credit Agreement also provides $15,000 availability for the issuance of letters of credit and a maximum of $40,000 for swing line borrowing. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the Amended Credit Agreement. The Company had $0 and $455 of outstanding letters of credit issued under the Amended Credit Agreement as of December 31, 2019 and 2018, respectively.
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 pledge and 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, among other things, the amount of dividend payments the Company can make to shareholders.
The Amended Credit Agreement contains customary affirmative and negative covenants that will prohibit or limit the ability of the Borrowers and any material subsidiary to, among other things, incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets, merge with other companies or enter into certain other transactions outside the ordinary course of business requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, and contain customary events of default. These restrictions on the Company’s material subsidiaries have not had and are not expected to have a material impact on the Company’s ability to meet its cash obligations. 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 (1.55% at December 31, 2019) plus 0.50%, Bank of America’s prime rate (4.75% at December 31, 2019), or the Eurocurrency rate plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (1.76% at December 31, 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.
F-37
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
DEG Vietnam Loan
The Company also has a fixed interest rate loan with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank. The fixed interest rate senior 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.
DEG China Loan
The Company had a second DEG loan, which was used to fund capital investments in China (the “DEG China Loan”). The DEG China Loan was subject to semi-annual principal payments that began March 2015 and ended in September 2019. During the third quarter of 2019, the DEG China Loan was paid in full.
As of December 31, 2019, we were in compliance, in all material respects, with all terms as outlined in the Amended Credit Agreement and DEG Vietnam Loan. Undrawn borrowing capacity under the U.S. Revolving Note was $403,378 as of December 31, 2019. The following table summarizes the Company’s debt as of December 31, 2019 and 2018.
|
| December 31, |
| |||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||
|
| Interest Rate |
|
| Principal Balance |
|
| Interest Rate |
|
| Principal Balance |
| ||||
Amended Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Revolving Note (U.S. Dollar Denominations) |
|
| 3.05 | % |
| $ | 50,000 |
|
|
| 4.02 | % |
| $ | 122,000 |
|
U.S. Revolving Note (Euro Denominations) |
|
| 1.25 | % |
|
| 21,874 |
|
|
| 1.50 | % |
|
| 5,727 |
|
DEG Vietnam Loan |
|
| 5.21 | % |
|
| 8,750 |
|
|
| 5.21 | % |
|
| 11,250 |
|
DEG China Loan |
|
| — |
|
|
| — |
|
|
| 4.25 | % |
|
| 913 |
|
Total debt |
|
|
|
|
|
| 80,624 |
|
|
|
|
|
|
| 139,890 |
|
Current maturities |
|
|
|
|
|
| (2,500 | ) |
|
|
|
|
|
| (3,413 | ) |
Long-term debt, less current maturities |
|
|
|
|
| $ | 78,124 |
|
|
|
|
|
| $ | 136,477 |
|
The scheduled principal maturities of our debt as of December 31, 2019 is as follows:
Year |
| U.S. Revolving Note |
|
| DEG Vietnam Note |
|
| Total |
| |||
2020 |
| $ | — |
|
| $ | 2,500 |
|
| $ | 2,500 |
|
2021 |
|
| — |
|
|
| 2,500 |
|
|
| 2,500 |
|
2022 |
|
| — |
|
|
| 2,500 |
|
|
| 2,500 |
|
2023 |
|
| — |
|
|
| 1,250 |
|
|
| 1,250 |
|
2024 |
|
| 71,874 |
|
|
| — |
|
|
| 71,874 |
|
Total |
| $ | 71,874 |
|
| $ | 8,750 |
|
| $ | 80,624 |
|
F-38
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 14 —Financial Instruments
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 balance sheets to cash, cash equivalents and restricted cash presented on the consolidated statements of cash flows is as follows:
|
| As of December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash and cash equivalents presented in the consolidated balance sheets |
| $ | 50,443 |
|
| $ | 39,620 |
|
Restricted cash |
| $ | 2,505 |
|
| $ | — |
|
Cash, cash equivalents and restricted cash presented in the consolidated statements of cash flows |
| $ | 52,948 |
|
| $ | 39,620 |
|
Derivative Financial Instruments
The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and commodity price fluctuations. Market risks for changes in interest rates relate primarily to its debt obligations under the 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 the Company hedges its exposure to foreign currency exchange risks is one year. The Company had foreign currency derivative contracts with a notional value of $14,449 and $33,250 outstanding at December 31, 2019 and 2018, respectively. The principal currency hedged by the Company was the Mexican Peso.
The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s 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 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 statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency hedging instruments, if any, to foreign currency gain (loss) in the consolidated statements of income.
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 financial instruments in the consolidated balance sheet as of December 31, 2019 is as follows:
|
|
|
|
|
| Asset Derivatives |
|
| Liability Derivatives |
|
|
|
|
| ||||||
|
| Hedge Designation |
| Fair Value Hierarchy |
| Balance Sheet Location |
| Fair Value |
|
| Balance Sheet Location |
| Fair Value |
|
| Net Asset/ (Liabilities) |
| |||
Foreign currency derivatives |
| Cash flow hedge |
| Level 2 |
| Other current assets |
| $ | 1,242 |
|
| Other current liabilities |
| $ | — |
|
| $ | 1,242 |
|
F-39
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Information related to the recurring fair value measurement of derivative financial instruments in the consolidated balance sheet as of December 31, 2018 is as follows:
|
|
|
|
|
| Asset Derivatives |
|
| Liability Derivatives |
|
|
|
|
| ||||||
|
| Hedge Designation |
| Fair Value Hierarchy |
| Balance Sheet Location |
| Fair Value |
|
| Balance Sheet Location |
| Fair Value |
|
| Net Asset/ (Liabilities) |
| |||
Foreign currency derivatives |
| Cash flow hedge |
| Level 2 |
| Other current assets |
| $ | 92 |
|
| Other current liabilities |
| $ | — |
|
| $ | 92 |
|
Information related to the effect of derivative instrument`s on the consolidated statements of income is as follows:
|
|
|
| Year Ended December 31, |
| |||||
|
| Location |
| 2019 |
|
| 2018 |
| ||
Foreign currency derivatives |
| Cost of sales |
| $ | 1,976 |
|
| $ | (444 | ) |
|
| Selling, general and administrative |
|
| — |
|
|
| 75 |
|
|
| Other comprehensive income |
|
| 1,151 |
|
|
| 1,096 |
|
|
| Foreign currency gain (loss) |
|
| (46 | ) |
|
| 50 |
|
Total foreign currency derivatives |
|
|
|
| 3,081 |
|
|
| 777 |
|
Commodity derivatives |
| Cost of sales |
|
| — |
|
|
| 145 |
|
|
| Other comprehensive income |
|
| — |
|
|
| (218 | ) |
Total commodity derivatives |
|
|
| $ | — |
|
| $ | (73 | ) |
The Company did 0t incur any hedge ineffectiveness during the years ended December 31, 2019 and 2018.
Note 15 — Fair Value Measurement
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on one or more of the following three valuation techniques:
Market: This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income: This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
Cost: This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
The Company uses the following fair value hierarchy 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 are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
F-40
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Items Measured at Fair Value on a Recurring Basis
Except for derivative financial instruments (see Note 14), pension plan assets (see Note 10) and a corporate owned life insurance policy (see Note 10), the Company has 0 material financial assets and liabilities that are carried at fair value at December 31, 2019 and 2018. 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.
Items Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. As further described in “Note 4, “Acquisitions and Divestitures", the Company utilized a third-party to assist in the Level 3 fair value estimates of $4,380 related to other intangible assets. The estimated fair values of these assets were based on third-party valuations and management’s estimates, generally utilizing the income approach.
As of December 31, 2019 and 2018, there were 0 additional significant assets or liabilities measured at fair value on a non-recurring basis.
Items Not Carried at Fair Value
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 December 31, 2019 and 2018, the carrying values of the Company’s Credit Agreement indebtedness 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 13). Discount rates used to measure the fair value of Gentherm’s DEG Vietnam Loan and DEG China Loan are based on quoted swap rates. As of December 31, 2019, the carrying value of the DEG Vietnam Loan was $8,750 as compared to an estimated fair value of $8,785. As of December 31, 2018, the carrying values 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.
Note 16 — Equity
Common Stock
The Company is authorized to issue up to 59,991,000 shares, of which 55,000,000 shares shall be common stock, without par value, and 4,991,000 shall be Preferred Stock, without par value. As of December 31, 2019, an aggregate of 32,674,354 of its common stock were issued and outstanding. As of December 31, 2019, there are 0 preferred stock shares issued or outstanding. The Company’s common stock is listed on the Nasdaq Global Select Market under the symbol, “THRM”, and has the following rights and privileges:
|
|
|
|
F-41
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
|
|
|
|
Stock Repurchase Program
In December 2016, the Board of Directors of Gentherm Incorporated (“Board of Directors”) authorized a three-year, $100 million stock repurchase program (“Stock Repurchase Program”). In June 2018, the Board of Directors authorized an increase and extension in the Stock Repurchase Program to $300 million, and extended the Stock Repurchase Program until December 2020. Repurchases under the Stock Repurchase Program may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. Repurchases under the Stock Repurchase Program may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. During the year ended December 31, 2019, the Company repurchased approximately $63 million of shares with an average price paid per share of $39.67 and have a remaining repurchase authorization of approximately $83 million.
Note 17 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the years ended December 31, 2019, December 31, 2018 and December 31, 2017 are as follows:
|
| Defined Benefit Pension Plans |
|
| Foreign Currency Translation Adjustments |
|
| Foreign Currency Hedge Derivatives |
|
| Total |
| ||||
Balance at December 31, 2018 |
| $ | (2,339 | ) |
| $ | (37,157 | ) |
| $ | (4 | ) |
| $ | (39,500 | ) |
Other comprehensive income (loss) before reclassifications |
|
| (1,264 | ) |
|
| (2,415 | ) |
|
| 2,259 |
|
| $ | (1,420 | ) |
Income tax effect of other comprehensive income (loss) before reclassifications |
|
| 232 |
|
|
| (393 | ) |
|
| (493 | ) |
| $ | (654 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) into net income |
|
| — |
|
|
| — |
|
|
| (1,108 | ) | a | $ | (1,108 | ) |
Income taxes reclassified into net income |
|
| — |
|
|
| — |
|
|
| 241 |
|
| $ | 241 |
|
Net current period other comprehensive income (loss) |
|
| (1,032 | ) |
|
| (2,808 | ) |
|
| 899 |
|
|
| (2,941 | ) |
Balance at December 31, 2019 |
| $ | (3,371 | ) |
| $ | (39,965 | ) |
| $ | 895 |
|
| $ | (42,441 | ) |
|
|
F-42
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
|
| Defined Benefit Pension Plans |
|
| Foreign Currency Translation Adjustments |
|
| Commodity Hedge Derivatives |
|
| Foreign Currency Hedge Derivatives |
|
| Total |
| |||||
Balance at December 31, 2017 |
| $ | (2,366 | ) |
| $ | (17,555 | ) |
| $ | 277 |
|
| $ | (800 | ) |
| $ | (20,444 | ) |
Cumulative effect of accounting change due to adoption of ASU 2018-02 |
|
| (49 | ) |
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| (40 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 18 |
|
|
| (19,212 | ) |
|
| — |
|
|
| 1,342 |
|
|
| (17,852 | ) |
Income tax effect of other comprehensive income (loss) before reclassifications |
|
| (15 | ) |
|
| (390 | ) |
|
| — |
|
|
| (337 | ) |
|
| (742 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) into net income |
|
| 73 |
|
|
| — |
|
|
| (218 | ) | a |
| (246 | ) | a |
| (391 | ) |
Income taxes reclassified into net income |
|
| — |
|
|
| — |
|
|
| (68 | ) |
|
| 37 |
|
|
| (31 | ) |
Net current period other comprehensive income (loss) |
|
| 27 |
|
|
| (19,602 | ) |
|
| (277 | ) |
|
| 796 |
|
|
| (19,056 | ) |
Balance at December 31, 2018 |
| $ | (2,339 | ) |
| $ | (37,157 | ) |
| $ | — |
|
| $ | (4 | ) |
| $ | (39,500 | ) |
|
|
|
| Defined Benefit Pension Plans |
|
| Foreign Currency Translation Adjustments |
|
| Commodity Hedge Derivatives |
|
| Foreign Currency Hedge Derivatives |
|
| Total |
| |||||
Balance at December 31, 2016 |
| $ | (2,550 | ) |
| $ | (65,762 | ) |
| $ | 241 |
|
| $ | (1,020 | ) |
| $ | (69,091 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 166 |
|
|
| 48,059 |
|
|
| 254 |
|
|
| 2,123 |
|
|
| 50,602 |
|
Income tax effect of other comprehensive income (loss) before reclassifications |
|
| (60 | ) |
|
| 148 |
|
|
| (93 | ) |
|
| (570 | ) |
|
| (575 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) into net income |
|
| 78 |
|
|
| — |
|
|
| (199 | ) | a |
| (1,822 | ) | a |
| (1,943 | ) |
Income taxes reclassified into net income |
|
| — |
|
|
| — |
|
|
| 74 |
|
|
| 489 |
|
|
| 563 |
|
Net current period other comprehensive income (loss) |
|
| 184 |
|
|
| 48,207 |
|
|
| 36 |
|
|
| 220 |
|
|
| 48,647 |
|
Balance at December 31, 2017 |
| $ | (2,366 | ) |
| $ | (17,555 | ) |
| $ | 277 |
|
| $ | (800 | ) |
| $ | (20,444 | ) |
|
|
We expect all of the existing gains and losses related to foreign currency and commodity derivatives reported in accumulated other comprehensive income as of December 31, 2019 to be reclassified into earnings during the twelve-month period ending December 31, 2020.
F-43
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 18 — Accounting for Stock Based Compensation
On May 16, 2013, the Compensation Committee of the Company’s Board of Directors (the “Board”) approved the Gentherm Incorporated 2013 Equity Incentive Plan (the “2013 Plan”), covering 3,500,000 shares of our Common Stock. On May 19, 2017, the 2013 Plan was amended, increasing the amount of available shares by 2,000,000. The 2013 Plan permits the granting of various awards including stock options (including both nonqualified options and incentive options), stock appreciation rights (“SARs”), restricted stock and restricted stock units, performance shares and certain other awards to employees, outside directors and consultants and advisors of the Company. All shares of our Common Stock that remained available for issuance under the Amended and Restated 2006 Stock Incentive Plan (the “2006 Plan”) and the Gentherm Incorporated 2011 Equity Incentive Plan (the “2011 Plan), were reduced to 0; however, some options under the 2006 Plan are still outstanding. As of December 31, 2019, the Company had an aggregate of 1,308,458 shares of Common Stock available to issue under the 2013 Plan.
All plans are administered by the Compensation Committee of the Board. The selection of participants, allotment of shares, determination of price and other conditions are determined by the Compensation Committee at its sole discretion, subject to the terms of the applicable plan, in order to attract and retain personnel instrumental to the success of the Company.Stock options, for example, granted under such plans have lives for a period of up to ten years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant.
During the three-year period ended December 31, 2019, the Company has outstanding stock options, stock appreciation rights (“SARs”), restricted stock awards and restricted stock units to employees, directors and consultants. These awards become available to the recipient upon the satisfaction of a vesting condition, either based on a period of service or based on the performance of a specific achievement. For equity-based awards with a service condition, the requisite service period typically ranges between three to five years for employees and consultants and one year for directors. As of December 31, 2019, there were 190,080 performance-based restricted stock units (“PSUs”) outstanding. These awards vest over a three-year period after the Company’s achievement of either a target return on invested capital ratio (“ROIC”), as defined in the award agreement, for a specified fiscal year, or the Company’s common stock market price returning a target total shareholder return (“TSR”), as defined, during a specific three-year measurement period. Approximately one-half of the PSUs are earned based on the ROIC condition, while the other one-half are earned based on the TSR condition. In each case, awards will be earned at 50% of the target number of shares for achieving a minimum threshold or up to 200% of the target number of shares for exceeding the target, with a linear adjustment between threshold and target or between target and stretch performance goals. All other outstanding, unvested equity-based awards were service based. Equity-based award vesting may be accelerated at the discretion of the Board under conditions specified in the applicable plan.
Under FASB ASC Topic 718, the provisions of the PSUs that vest upon the achievement of relative TSR are considered a market condition, and therefore the effect of that market condition is reflected in the grant date fair value for this portion award. A third party was engaged to complete a “Monte Carlo simulation” to account for the market condition. That simulation takes into account the beginning stock price of our common stock, the expected volatilities for the TSR comparator group, the expected volatilities for the Company’s stock price, correlation coefficients, the expected risk-free rate of return and the expected dividend yield of the Company and the comparator group. The single grant-date fair value computed by this valuation method is recognized by the Company in accounting for the awards regardless of the actual future outcome of the relative TSR feature. The grant date fair value of the other PSUs and RSUs are calculated as the closing price of our common stock as quoted on Nasdaq on the grant date multiplied by the number of shares subject to the award. ROIC is considered a performance condition and the grant-date fair value for ROIC PSUs corresponds with management's expectation of the probable outcome of the performance condition as of the grant date.
Total unrecognized compensation cost related to non-vested options, restricted stock and SARs outstanding under all of the Company’s equity plans was $13,168 and $15,932 as of December 31, 2019 and 2018, respectively. That cost is expected to be recognized over a weighted average period of two years. Compensation expense for the years ended December 31, 2019, 2018 and 2017 was $8,589, $12,177 and $12,727, respectively, and the related deferred tax benefit was $1,573, 2,434 and $4,339, respectively. No share-based payment arrangements expired during the three-year period ended December 31, 2019. If Gentherm were to realize expired shared-based payment arrangements, they would be reported as a forfeit in the activity roll forward tables below.
F-44
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Stock Options
The following table summarizes stock option activity during the three-year period ended December 31, 2019:
Options |
| Shares |
|
| Weighted-Average Exercise Price |
|
| Weighted-Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at December 31, 2016 |
|
| 2,103,470 |
|
| $ | 32.72 |
|
|
| 4.86 |
|
| $ | 12,265 |
|
Granted |
|
| 808,500 |
|
|
| 37.23 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (202,328 | ) |
|
| 13.62 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (57,500 | ) |
|
| 42.54 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017 |
|
| 2,652,142 |
|
| $ | 35.34 |
|
|
| 4.76 |
|
| $ | 6,964 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (615,358 | ) |
|
| 24.01 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (383,784 | ) |
|
| 39.59 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018 |
|
| 1,653,000 |
|
| $ | 38.53 |
|
|
| 4.28 |
|
| $ | 3,610 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (428,250 | ) |
|
| 38.66 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (355,750 | ) |
|
| 39.99 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 869,000 |
|
| $ | 37.87 |
|
|
| 3.51 |
|
| $ | 5,172 |
|
Exercisable at December 31, 2017 |
|
| 984,374 |
|
| $ | 29.84 |
|
|
| 3.44 |
|
| $ | 6,534 |
|
Exercisable at December 31, 2018 |
|
| 788,125 |
|
| $ | 38.15 |
|
|
| 3.71 |
|
| $ | 2,200 |
|
Exercisable at December 31, 2019 |
|
| 665,000 |
|
| $ | 38.10 |
|
|
| 3.23 |
|
| $ | 3,725 |
|
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model in order to measure the compensation cost associated with the award. This model incorporates certain assumptions for inputs including a risk-free interest rate, expected dividend yield of the underlying Common Stock, expected option life and expected volatility in the market value of the underlying Common Stock. The following assumptions were used for options issued in the following periods:
|
| 2019 |
| 2018 |
| 2017 |
|
Expected volatility |
| N/A |
| N/A |
| 33% |
|
Weighted-average expected volatility |
| N/A |
| N/A |
| 33% |
|
Expected lives |
| N/A |
| N/A |
| 3 years |
|
Risk-free interest rate |
| N/A |
| N/A |
| 1.49−1.93% |
|
Expected dividend yield |
| NaN |
| NaN |
| NaN |
|
N/A – NaN new stock options were granted during 2019 and 2018.
F-45
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Expected volatilities are based on the historical volatility of the Company’s Common Stock. The Company uses historical exercise data and several other factors in developing an assumption for the expected lives of stock options, including the average holding period of outstanding options and their remaining terms. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s history of having never issued a dividend, the limitations to issue a dividend under terms of the Amended Credit Agreement and management’s current expectation regarding future dividends. We do not expect any of the options granted to be forfeited for purposes of computing fair value.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2017 was $9.11. There were 0 stock options granted during the year ended December 31, 2019 and 2018. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $1,681, $5,061 and $4,715, respectively.
Restricted Stock
The following table summarizes restricted stock activity during the three-year period ended December 31, 2019:
Unvested Restricted Shares |
| Shares |
|
| Weighted-Average Grant Date Fair Value |
| ||
Outstanding at December 31, 2016 |
|
| 210,481 |
|
| $ | 39.02 |
|
Granted |
|
| 237,542 |
|
|
| 37.30 |
|
Exercised |
|
| (165,923 | ) |
|
| 37.99 |
|
Forfeited |
|
| — |
|
|
| — |
|
Outstanding at December 31, 2017 |
|
| 282,100 |
|
| $ | 38.06 |
|
Granted |
|
| 21,681 |
|
|
| 35.00 |
|
Exercised |
|
| (130,684 | ) |
|
| 38.62 |
|
Forfeited |
|
| (36,531 | ) |
|
| 37.60 |
|
Outstanding at December 31, 2018 |
|
| 136,566 |
|
| $ | 37.16 |
|
Granted |
|
| 19,920 |
|
|
| 40.16 |
|
Exercised |
|
| (91,566 | ) |
|
| 37.09 |
|
Forfeited |
|
| (30,000 | ) |
|
| 38.05 |
|
Outstanding at December 31, 2019 |
|
| 34,920 |
|
| $ | 38.31 |
|
The compensation cost associated with restricted shares is estimated on the date of grant using quoted market prices (Level 1 input). The total fair value of restricted shares vested in 2019, 2018 and 2017 was $3,697, $4,599 and $6,006, respectively.
Restricted Stock Units
The following table summarizes restricted stock unit activity during the two-year period ended December 31, 2019:
|
|
|
|
|
| Performance-Based Awards |
|
|
|
|
| |||||
Unvested Restricted Stock Units |
| Time Vesting Shares |
|
| ROIC Target Shares |
|
| TSR Target Shares |
|
| Total |
| ||||
Outstanding at December 31, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Granted |
|
| 86,392 |
|
|
| 64,785 |
|
|
| 64,792 |
|
|
| 215,969 |
|
Vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Outstanding at December 31, 2018 |
|
| 86,392 |
|
|
| 64,785 |
|
|
| 64,792 |
|
|
| 215,969 |
|
Granted |
|
| 107,391 |
|
|
| 56,380 |
|
|
| 56,375 |
|
|
| 220,146 |
|
Vested |
|
| (23,956 | ) |
|
| — |
|
|
| — |
|
|
| (23,956 | ) |
Forfeited |
|
| (28,086 | ) |
|
| (26,124 | ) |
|
| (26,128 | ) |
|
| (80,338 | ) |
Outstanding at December 31, 2019 |
|
| 141,741 |
|
|
| 95,041 |
|
|
| 95,039 |
|
|
| 331,821 |
|
F-46
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
No restricted stock units were granted prior to 2018.
Stock Appreciation Rights
The following table summarizes SARs activity during the three-year period ended December 31, 2019:
Stock Appreciation Rights |
| Shares |
|
| Weighted-Average Exercise Price |
|
| Weighted-Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at December 31, 2016 |
|
| 1,244,600 |
|
| $ | 36.11 |
|
|
| 4.80 |
|
| $ | 3,511 |
|
Granted |
|
| 235,000 |
|
|
| 38.05 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (94,250 | ) |
|
| 22.21 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (193,000 | ) |
|
| 32.53 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017 |
|
| 1,192,350 |
|
| $ | 38.17 |
|
|
| 4.36 |
|
| $ | 2,278 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (204,250 | ) |
|
| 26.35 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018 |
|
| 988,100 |
|
| $ | 40.61 |
|
|
| 3.57 |
|
| $ | 2,064 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (179,500 | ) |
|
| 32.84 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (254,350 | ) |
|
| 42.63 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 554,250 |
|
| $ | 39.41 |
|
|
| 2.84 |
|
| $ | 2,981 |
|
Exercisable at December 31, 2017 |
|
| 613,808 |
|
| $ | 37.68 |
|
|
| 3.72 |
|
|
| 1,904 |
|
Exercisable at December 31, 2018 |
|
| 683,600 |
|
| $ | 41.21 |
|
|
| 3.09 |
|
|
| 1,728 |
|
Exercisable at December 31, 2019 |
|
| 401,438 |
|
| $ | 39.62 |
|
|
| 2.46 |
|
|
| 2,135 |
|
The total intrinsic value of SARs converted during the years ended December 31, 2019, 2018 and 2017 was $1,588, $3,532 and $1,495, respectively.
Note 19 — Leases
Components of lease expense for the year ended December 31, 2019 are as follows:
|
| Year Ended |
| |
|
| December 31, 2019 |
| |
Lease cost: |
|
|
|
|
Operating lease cost |
| $ | 5,899 |
|
Short-term lease cost |
|
| 3,444 |
|
Sublease income |
|
| (128 | ) |
Total lease cost |
| $ | 9,215 |
|
F-47
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Other information related to leases is as follows:
|
| Year Ended |
| |
|
| December 31, 2019 |
| |
Supplemental cash flow information: |
|
|
|
|
Gain on sales and leaseback transactions, net |
| $ | 207 |
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows from operating leases |
| $ | 6,059 |
|
Right-of-use lease assets obtained in exchange for lease obligations: |
|
|
|
|
Operating leases |
| $ | 4,111 |
|
|
|
|
|
|
|
| December 31, 2019 |
| |
Weighted-average remaining lease term: |
|
|
|
|
Operating leases |
| 4.5 years |
| |
Weighted-average discount rate: |
|
|
|
|
Operating leases |
|
| 5.46 | % |
A summary of operating leases as of December 31, 2019, under all non-cancellable operating leases with terms exceeding one year is as follows:
2020 |
| $ | 4,847 |
|
2021 |
|
| 2,949 |
|
2022 |
|
| 1,602 |
|
2023 |
|
| 796 |
|
2024 |
|
| 790 |
|
2025 or later |
|
| 1,832 |
|
Total future minimum lease payments |
|
| 12,816 |
|
Less: imputed interest |
|
| (1,479 | ) |
Total |
| $ | 11,337 |
|
.
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018:
2019 |
| $ | 7,530 |
|
2020 |
|
| 5,016 |
|
2021 |
|
| 2,468 |
|
2022 |
|
| 2,152 |
|
2023 |
|
| 1,532 |
|
2024 or later |
|
| 4,021 |
|
Total |
| $ | 22,719 |
|
Note 20 — Commitments and Contingencies
The Company may be subject to various legal actions and claims in the ordinary course of its business, including those arising out of breach of contracts, product warranties, product liability, intellectual property rights, environmental matters, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion
F-48
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
that the ultimate resolution of these matters will not have a material adverse effect on its consolidated results of operations or financial position. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
Product Liability and Warranty Matters
The Company accrues warranty obligations for products sold based on management estimates of future failure rates and current claim cost experience, with support from the sales, engineering, quality and legal functions. Using historical information available to the Company, including claims already filed by customers, the warranty accrual is adjusted quarterly to reflect management’s best estimate of future claims. The Company maintains liability insurance coverage at levels based on commercial norms and historical claims experience. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend such claims.
The following is a reconciliation of the changes in accrued warranty costs:
|
| Year Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Balance at beginning of year |
| $ | 4,514 |
|
| $ | 5,382 |
|
Warranty claims paid |
|
| (584 | ) |
|
| (905 | ) |
Warranty expense for products shipped during the current period |
|
| 2,370 |
|
|
| 2,678 |
|
Adjustments to warranty estimates from prior periods |
|
| (1,660 | ) |
|
| (608 | ) |
Acquisition of business |
|
| 21 |
|
|
| — |
|
Reclassification to liabilities held for sale |
|
| — |
|
|
| (1,884 | ) |
Adjustments due to currency translation |
|
| (65 | ) |
|
| (149 | ) |
Balance at end of year |
| $ | 4,596 |
|
| $ | 4,514 |
|
Employees
Approximately 25% of the Company’s workforce are members of industrial trade unions and are employed under the terms of various labor agreements. NaN of these agreements expire in 2020.
Note 21 — Selected Quarterly Information (Unaudited)
|
| Three Months Ended, |
| |||||||||||||
|
| March 31, 2019 |
|
| June 30, 2019 |
|
| September 30, 2019 |
|
| December 31, 2019 |
| ||||
Product revenues |
| $ | 257,921 |
|
| $ | 243,326 |
|
| $ | 240,056 |
|
| $ | 230,381 |
|
Gross margin |
|
| 75,307 |
|
|
| 72,714 |
|
|
| 74,692 |
|
|
| 65,622 |
|
Net income |
|
| 8,414 |
|
|
| 2,751 |
|
|
| 15,887 |
|
|
| 10,454 |
|
Basic earnings per share |
| $ | 0.25 |
|
| $ | 0.08 |
|
| $ | 0.48 |
|
| $ | 0.32 |
|
Diluted earnings per share |
| $ | 0.25 |
|
| $ | 0.08 |
|
| $ | 0.48 |
|
| $ | 0.32 |
|
F-49
GENTHERM INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
|
| Three Months Ended, |
| |||||||||||||
|
| March 31, 2018 |
|
| June 30, 2018 |
|
| September 30, 2018 |
|
| December 31, 2018 |
| ||||
Product revenues (a) |
| $ | 264,586 |
|
| $ | 266,400 |
|
| $ | 261,504 |
|
| $ | 256,015 |
|
Gross margin |
|
| 81,242 |
|
|
| 77,092 |
|
|
| 75,704 |
|
|
| 70,820 |
|
Net income (loss) |
|
| 12,966 |
|
|
| 16,659 |
|
|
| (355 | ) |
|
| 12,629 |
|
Basic earnings (loss) per share |
| $ | 0.35 |
|
| $ | 0.46 |
|
| $ | (0.01 | ) |
| $ | 0.37 |
|
Diluted earnings (loss) per share |
| $ | 0.35 |
|
| $ | 0.45 |
|
| $ | (0.01 | ) |
| $ | 0.36 |
|
|
|
GENTHERM INCORPORATED
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2019, 20182022, 2021 and 20172020
(In thousands)
Description |
| Balance at |
|
| Charged to |
|
| Other Activity |
|
| Deductions |
|
| Balance at |
| |||||
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year Ended December 31, 2020 |
| $ | 1,193 |
|
| $ | 1,298 |
|
| $ | 33 |
|
| $ | (1,363 | ) |
| $ | 1,161 |
|
Year Ended December 31, 2021 |
|
| 1,161 |
|
|
| 1,066 |
|
|
| (12 | ) |
|
| (816 | ) |
|
| 1,399 |
|
Year Ended December 31, 2022 |
|
| 1,399 |
|
|
| 1,088 |
|
|
| — |
|
|
| (1,267 | ) |
|
| 1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Allowance for Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year Ended December 31, 2020 |
| $ | 17,316 |
|
|
| — |
|
| $ | 139 |
|
| $ | (258 | ) |
| $ | 17,197 |
|
Year Ended December 31, 2021 |
|
| 17,197 |
|
|
| 357 |
|
|
| (102 | ) |
|
| (1,362 | ) |
|
| 16,090 |
|
Year Ended December 31, 2022 |
|
| 16,090 |
|
|
| 2,482 |
|
|
| 18,099 |
| a |
| - |
|
|
| 36,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Reserve for Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year Ended December 31, 2020 |
| $ | 6,073 |
|
| $ | 1,768 |
|
| $ | 214 |
|
| $ | (914 | ) |
| $ | 7,141 |
|
Year Ended December 31, 2021 |
|
| 7,141 |
|
|
| 2,499 |
|
|
| (134 | ) |
|
| (3,492 | ) |
|
| 6,014 |
|
Year Ended December 31, 2022 |
|
| 6,014 |
|
|
| 15,923 |
|
|
| (133 | ) |
|
| (2,558 | ) |
|
| 19,246 |
|
Description |
| Balance at Beginning of Period |
|
| Charged to Costs and Expenses |
|
| Charged to Other Accounts |
|
| Deductions from Reserves |
|
| Balance at End of Period |
| |||||
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017 |
|
| 1,391 |
|
|
| 1,239 |
|
|
| 51 |
|
|
| (1,708 | ) |
|
| 973 |
|
Year Ended December 31, 2018 |
|
| 973 |
|
|
| 1,005 |
|
|
| (121 | ) |
|
| (1,006 | ) |
|
| 851 |
|
Year Ended December 31, 2019 |
|
| 851 |
|
|
| 969 |
|
|
| (8 | ) |
|
| (619 | ) |
|
| 1,193 |
|
Allowance for Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017 |
|
| 19,304 |
|
|
| 6,700 |
|
|
| 1,574 |
|
|
| — |
|
|
| 27,578 |
|
Year Ended December 31, 2018 |
|
| 27,578 |
|
|
| — |
|
|
| (14,009 | ) |
|
| (3,592 | ) |
|
| 9,977 |
|
Year Ended December 31, 2019 |
|
| 9,977 |
|
|
| 19,277 |
|
|
| (491 | ) |
|
| — |
|
|
| 28,763 |
|
Reserve for Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017 |
|
| 4,790 |
|
|
| 3,521 |
|
|
| 302 |
|
|
| (726 | ) |
|
| 7,887 |
|
Year Ended December 31, 2018 |
|
| 7,887 |
|
|
| 2,712 |
|
|
| (1,047 | ) |
|
| (3,282 | ) |
|
| 6,270 |
|
Year Ended December 31, 2019 |
|
| 6,270 |
|
|
| 1,679 |
|
|
| (56 | ) |
|
| (1,820 | ) |
|
| 6,073 |
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENTHERM INCORPORATED | |||
| By: | /S/ Phillip Eyler | |
Phillip Eyler | |||
Chief Executive Officer | |||
Date: February |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature |
| Capacity |
| Date |
|
| |||
/s/ PHILLIP EYLER | ||||
| Director, President and Chief | February | ||
| Executive Officer (Principal Executive Officer) | |||
/s/ | Executive Vice President, Chief | February | ||
| Financial Officer and Treasurer (Principal Financial | |||
| Chief Accounting Officer | February 24, 2023 | ||
NICHOLAS BREISACHER | (Principal Accounting Officer) | |||
* | Director, Chairman of the Board | February | ||
| ||||
* | Director | February | ||
| ||||
* | Director | February | ||
| ||||
* | Director | February | ||
| ||||
* | Director | February | ||
| ||||
* | Director | February | ||
| ||||
* | Director | February | ||
|
*By: | /s/ Phillip Eyler | |||
|
|
| ||
|
|
|
Phillip Eyler, Attorney-in-Fact |