10-Q 1 thrm-10q_20160930.htm FORM 10-Q thrm-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission File Number: 0-21810

 

GENTHERM INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Michigan

 

95-4318554

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

21680 Haggerty Road, Northville, MI

 

48167

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (248) 504-0500

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

At October 27, 2016, there were 36,510,338 issued and outstanding shares of Common Stock of the registrant.

 

 

 

 

 


 

GENTHERM INCORPORATED

TABLE OF CONTENTS

 

Cover

 

Table of Contents

 

 

 

Part I. Financial Information

  

3

 

 

Item 1.

 

 

Financial Statements (Unaudited)

 

3

 

 

 

 

Consolidated Condensed Balance Sheets

 

3

 

 

 

 

Consolidated Condensed Statements of Income

 

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income

 

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows

 

6

 

 

 

 

Consolidated Condensed Statement of Changes in Shareholders’ Equity

 

7

 

 

 

 

Notes to Unaudited Consolidated Condensed Financial Statements

 

8

 

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

Item 4.

 

 

Controls and Procedures

 

30

 

Part II. Other Information

  

31

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

Item 1A.

 

Risk Factors

 

31

 

 

Item 6.

 

Exhibits

 

31

 

Signatures

  

32

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

September 30,
2016

 

 

December 31,
2015

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

132,813

 

 

$

144,479

 

Accounts receivable, less allowance of $1,698 and $955, respectively

 

178,965

 

 

 

142,610

 

Inventory:

 

 

 

 

 

 

 

Raw materials

 

64,185

 

 

 

50,371

 

Work in process

 

12,909

 

 

 

4,150

 

Finished goods

 

30,110

 

 

 

29,662

 

Inventory, net

 

107,204

 

 

 

84,183

 

Deferred income tax assets

 

7,335

 

 

 

6,716

 

Prepaid expenses and other assets

 

38,679

 

 

 

42,620

 

Total current assets

 

464,996

 

 

 

420,608

 

Property and equipment, net

 

167,336

 

 

 

119,157

 

Goodwill

 

52,935

 

 

 

27,765

 

Other intangible assets, net

 

62,947

 

 

 

48,461

 

Deferred financing costs

 

849

 

 

 

310

 

Deferred income tax assets

 

21,882

 

 

 

22,094

 

Other non-current assets

 

38,608

 

 

 

8,403

 

Total assets

$

809,553

 

 

$

646,798

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

88,814

 

 

$

77,115

 

Accrued liabilities

 

111,355

 

 

 

60,823

 

Current maturities of long-term debt

 

899

 

 

 

4,909

 

Deferred tax liabilities

 

229

 

 

 

211

 

Derivative financial instruments

 

806

 

 

 

725

 

Total current liabilities

 

202,103

 

 

 

143,783

 

Pension benefit obligation

 

6,933

 

 

 

6,545

 

Other liabilities

 

3,107

 

 

 

5,026

 

Long-term debt, less current maturities

 

140,673

 

 

 

92,832

 

Deferred income tax liabilities

 

11,623

 

 

 

14,321

 

Total liabilities

 

364,439

 

 

 

262,507

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common Stock:

 

 

 

 

 

 

 

No par value; 55,000,000 shares authorized, 36,495,338 and 36,321,775 issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

260,598

 

 

 

256,919

 

Paid-in capital

 

1,460

 

 

 

(1,282

)

Accumulated other comprehensive loss

 

(47,830

)

 

 

(51,670

)

Accumulated earnings

 

230,886

 

 

 

180,324

 

Total shareholders’ equity

 

445,114

    

 

 

384,291

 

Total liabilities and shareholders’ equity

$

809,553

 

 

$

646,798

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

3


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended

September 30,

 

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

Product revenues

 

$

232,625

 

 

$

223,818

 

 

$

681,059

 

 

$

644,168

 

 

Cost of sales

 

 

155,931

 

 

 

148,892

 

 

 

464,628

 

 

 

436,967

 

 

Gross margin

 

 

76,694

 

 

 

74,926

 

 

 

216,431

 

 

 

207,201

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net research and development expenses

 

 

19,745

 

 

 

14,934

 

 

 

54,552

 

 

 

44,459

 

 

Acquisition transaction expenses

 

 

22

 

 

 

 

 

 

693

 

 

 

 

 

Selling, general and administrative expenses

 

 

29,512

 

 

 

22,543

 

 

 

81,533

 

 

 

71,546

 

 

Total operating expenses

 

 

49,279

 

 

 

37,477

 

 

 

136,778

 

 

 

116,005

 

 

Operating income

 

 

27,415

 

 

 

37,449

 

 

 

79,653

 

 

 

91,196

 

 

Interest expense

 

 

(660

)

 

 

(759

)

 

 

(2,287

)

 

 

(1,867

)

)

Revaluation of derivatives

 

 

 

 

 

(134

)

 

 

 

 

 

(1,151

)

 

Foreign currency (loss) gain

 

 

(873

)

 

 

420

 

 

 

88

 

 

 

748

 

 

Other income

 

 

359

 

 

 

487

 

 

 

754

 

 

 

944

 

 

Earnings before income tax

 

 

26,241

 

 

 

37,463

 

 

 

78,208

 

 

 

89,870

 

 

Income tax expense

 

 

6,018

 

 

 

9,798

 

 

 

27,646

 

 

 

22,891

 

 

Net income

 

$

20,223

 

 

$

27,665

 

 

$

50,562

 

 

$

66,979

 

 

Basic earnings per share

 

$

0.55

 

 

$

0.77

 

 

$

1.39

 

 

$

1.86

 

 

Diluted earnings per share

 

$

0.55

 

 

$

0.76

 

 

$

1.38

 

 

$

1.84

 

 

Weighted average number of shares – basic

 

 

36,477

 

 

 

36,110

 

 

 

36,426

 

 

 

35,951

 

 

Weighted average number of shares – diluted

 

 

36,595

 

 

 

36,482

 

 

 

36,558

 

 

 

36,390

 

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

4


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

20,223

 

 

$

27,665

 

 

$

50,562

 

 

$

66,979

 

Other comprehensive loss, gross of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments gain (loss)

 

 

2,230

 

 

 

(4,429

)

 

 

2,866

 

 

 

(19,312

)

Unrealized loss on foreign currency derivative securities

 

 

(868

)

 

 

(460

)

 

 

(624

)

 

 

(1,237

)

Unrealized gain (loss) on commodity derivative securities

 

 

139

 

 

 

(373

)

 

 

544

 

 

 

(421

)

Other comprehensive income (loss), gross of tax

 

$

1,501

 

 

$

(5,262

)

 

$

2,786

 

 

$

(20,970

)

Other comprehensive income (loss), related tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments gain (loss)

 

 

(13

)

 

 

51

 

 

 

1,087

 

 

 

764

 

Unrealized loss on foreign currency derivative securities

 

 

233

 

 

 

125

 

 

 

168

 

 

 

335

 

Unrealized gain (loss) on commodity derivative securities

 

 

(51

)

 

 

155

 

 

 

(201

)

 

 

155

 

Other comprehensive income (loss), related tax effect

 

$

169

 

 

$

331

 

 

$

1,054

 

 

$

1,254

 

Other comprehensive income (loss), net of tax

 

$

1,670

 

 

$

(4,931

)

 

$

3,840

 

 

$

(19,716

)

Comprehensive income

 

$

21,893

 

 

$

22,734

 

 

$

54,402

 

 

$

47,263

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

5


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine Months Ended September 30,

 

 

2016

 

  

2015

 

Operating Activities:

 

 

 

 

 

 

 

Net income

$

50,562

 

 

$

66,979

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

27,724

 

 

 

23,123

 

Deferred income tax benefit

 

(1,933

)

 

 

(4,262

)

Stock compensation

 

6,856

 

 

 

4,687

 

Defined benefit plan expense

 

151

 

 

 

284

 

Provision of doubtful accounts

 

385

 

 

 

309

 

Gain on revaluation of financial derivatives

 

 

 

 

(951

)

Loss on write-off or intangible assets

 

 

 

 

358

 

Loss (gain) on sale of property and equipment

 

291

 

 

 

(41

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(22,835

)

 

 

(24,442

)

Inventory

 

(5,647

)

 

 

(3,829

)

Prepaid expenses and other assets

 

2,826

 

 

 

(1,313

)

Accounts payable

 

6,508

 

 

 

1,722

 

Accrued liabilities

 

6,123

 

 

 

3,712

 

Net cash provided by operating activities

 

71,011

 

 

 

66,336

 

Investing Activities:

 

 

 

 

 

 

 

Proceeds from the sale of property and equipment

 

45

 

 

 

226

 

Acquisition of subsidiary, net of cash acquired

 

(73,593

)

 

 

(47

)

Purchases of property and equipment

 

(50,742

)

 

 

(35,728

)

Net cash used in investing activities

 

(124,290

)

 

 

(35,549

)

Financing Activities:

 

 

 

 

 

 

 

Borrowing of debt

 

75,000

 

 

 

15,000

 

Repayments of debt

 

(32,368

)

 

 

(4,156

)

Excess tax (expense) benefit from equity awards

 

(277

)

 

 

1,220

 

Cash paid for financing costs

 

(650

)

 

 

 

Cash paid for the cancellation of restricted stock

 

(1,196

)

 

 

(1,475

)

Proceeds from the exercise of Common Stock options

 

1,038

 

 

 

6,468

 

Net cash provided by financing activities

 

41,547

 

 

 

17,057

 

Foreign currency effect

 

66

 

 

 

(4,372

)

Net (decrease) increase in cash and cash equivalents

 

(11,666

)

 

 

43,472

 

Cash and cash equivalents at beginning of period

 

144,479

 

 

 

85,700

 

Cash and cash equivalents at end of period

$

132,813

 

 

$

129,172

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for taxes

$

18,183

 

 

$

23,870

 

Cash paid for interest

$

1,963

 

 

$

1,420

 

Supplemental disclosure of non-cash transactions:

 

 

 

 

 

 

 

Common Stock issued to Board of Directors and employees

$

3,507

 

 

$

2,287

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

6


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance at December 31, 2015

 

36,322

 

 

$

256,919

 

 

$

(1,282

)

 

$

180,324

 

 

$

(51,670

)

 

$

384,291

 

Exercise of Common Stock options for cash

 

67

 

 

 

1,368

 

 

 

(330

)

 

 

 

 

 

 

 

 

1,038

 

Tax benefit from exercises of Common Stock options

 

 

 

 

 

 

 

(277

)

 

 

 

 

 

 

 

 

(277

)

Cancellation of restricted stock

 

(28

)

 

 

(1,196

)

 

 

 

 

 

 

 

 

 

 

 

(1,196

)

Stock option compensation

 

 

 

 

 

 

 

3,349

 

 

 

 

 

 

 

 

 

3,349

 

Common Stock issued to Board of Directors and employees

 

134

 

 

 

3,507

 

 

 

 

 

 

 

 

 

 

 

 

3,507

 

Currency translation, net

 

 

 

 

 

 

 

 

 

 

 

 

 

3,953

 

 

 

3,953

 

Foreign currency hedge, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(456

)

 

 

(456

)

Commodity hedge, net

 

 

 

 

 

 

 

 

 

 

 

 

 

343

 

 

 

343

 

Net income

 

 

 

 

 

 

 

 

 

 

50,562

 

 

 

 

 

 

50,562

 

Balance at September 30, 2016

 

36,495

 

 

$

260,598

 

 

$

1,460

 

 

$

230,886

 

 

$

(47,830

)

 

$

445,114

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

7


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

 

Note 1 – The Company and Subsequent Events

Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies and automotive cable systems.  Unless the context otherwise requires, the terms “Company”, “we”, “us” and “our” used herein refer to Gentherm Incorporated and its consolidated subsidiaries. Our products provide solutions for automotive passenger comfort and convenience, battery thermal management, remote power generation, patient temperature management, and other consumer and industrial temperature control needs. 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 in order to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets.   We concentrate our research on the development of new technologies that will enable new products, improve overall effectiveness of existing products and maximize customer satisfaction.  We also focus on developing new design applications from our existing technologies to create new products and market opportunities for thermal comfort solutions.  

North American Reorganization

On January 4, 2016 and January 5, 2016, the Company completed reorganization transactions (the “Reorganization”) related to our North American business (the “Windsor Operations”).  As part of our original integration plan to eliminate redundancies associated with the 2011 acquisition of Gentherm GmbH (formally named W.E.T. Automotive Systems AG), the Windsor Operations have been consolidated into our existing European and North American facilities.  As a result of the Reorganization, some of the business activities previously performed by the Windsor Operations will now be performed by other subsidiaries.

Related to the Reorganization, the Company declared an intercompany dividend, incurred and paid a related withholding tax to the Canadian Revenue Agency and recorded a tax expense of approximately $6,300, during the first quarter of 2016.  Later during the quarter, a further intercompany dividend was declared and paid resulting in an additional $1,300 withholding tax being paid and expensed and the Company changed its assessment of the potential for further dividends and accrued and expensed, but did not pay, an estimated final withholding tax amount totaling $2,000.  This estimate is expected to cover the amount of all future intercompany dividends needed to distribute the remaining earnings of the subsidiary to its parent in conjunction with the final liquidation of the subsidiary.  

In addition to the $9,600 in combined withholding taxes, the Reorganization will require the Company to make a one-time income tax payment of approximately $32,000.  The one-time income tax payment was accrued during the first quarter of 2016; however, the Company also recorded an offsetting deferred charge for approximately the same amount because the one-time income tax payment will result in tax deductions against income taxes in future periods. Therefore, the income tax payment did not have a material impact on the Company’s earnings during the first quarter of 2016 and is not expected to have a material impact in any future fiscal quarter.  The income tax payment will be paid during 2017 and is included in accrued liabilities as of September 30, 2016.  The deferred charge is included in other non-current assets as of September 30, 2016.

Cincinnati Sub-Zero

On April 1, 2016, we acquired all of the equity of privately-held Cincinnati Sub-Zero Products, LLC (“CSZ”) and related assets in an all-cash transaction.  CSZ manufactures both high quality patient temperature management systems for the health care industry and custom testing equipment used by a wide range of industrial manufacturing companies for product testing.  CSZ’s world headquarters and manufacturing operations are located in Cincinnati, Ohio.  See Note 3, “Cincinnati Sub-Zero Acquisition” for additional information regarding CSZ.

Subsequent Events

We have evaluated subsequent events through the date that our consolidated condensed financial statements are issued.  No events have taken place that meet the definition of a subsequent event requiring adjustments to or disclosures in this filing.

 


8


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 2 – Basis of Presentation and New Accounting Pronouncements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in the audited annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of our results of operations, financial position and cash flows have been included. The balance sheet as of December 31, 2015 was derived from audited annual consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  Certain reclassifications of prior year’s amounts have been made to conform with the current year’s presentation.  Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These consolidated condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Financial Instruments

In January, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”  ASU 2016-01 requires equity investments not accounted for under the equity method of accounting or which result in consolidation of an investee, that have readily determinable fair values, to be measured at fair value with changes in the fair value recognized in net income.  The update simplifies the impairment assessment for equity investments without readily determinable fair values by requiring assessment for impairment qualitatively, similar to the impairment assessment currently used for long-lived assets, goodwill and indefinite-lived intangible assets.  The amendments in this update also change the disclosure requirements for financial instruments, including eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized costs on the balance sheet.  

ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017 and early adoption of the amendments in this update are not permitted.  ASU 2016-01 is not expected to significantly impact the Company.  

Leases

In February, 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  ASU 2016-02 requires lessees to recognize on their balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. Payments to be made in optional periods should be included in the measurement of lease assets and liabilities if the lessee is reasonably certain it will exercise an option to extend the lease or not exercise an option to terminate the lease.  While ASU 2016-02 continues to differentiate between finance or capital leases and operating leases, the principal change from current lease accounting guidance is that lease assets and liabilities arising from operating leases should be recognized on the balance sheet.  

  ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of the amendments in this update are permitted.  Lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of practical expedients, including the ability to use hindsight in evaluating lessee options to extend or terminate a lease.  An entity that elects to apply the practical expedients will be required to recognize a right-of-use asset and lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payment that were tracked and disclosed under previous GAAP.  We are currently in the process of determining the impact the implementation of ASU 2016-02 will have on the Company’s financial statements.

 


9


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 2 – Basis of Presentation and New Accounting Pronouncements – Continued

Stock Compensation

In March, 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  ASU 2016-09 involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.  An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.  Excess tax benefits should be classified along with other income tax cash flows as an operating activity.  In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.

ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption of the amendments in this update are permitted. The Company is currently evaluating the guidance to determine the Company's adoption method and the effect it will have on the Company's consolidated financial statements. 

Statement of Cash Flows

In August, 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”  ASU 2016-15 provides guidance on the classification of eight specific cash receipt and cash payment transactions in the statement of cash flows. The Company is currently evaluating the following transactions to determine the effect ASU 2016-15 will have on the Company’s Consolidated Statements of Cash Flows:

 

1)

Debt extinguishment payments and debt prepayments are to be shown as cash outflows for financing activities.  Presently, Gentherm classifies debt extinguishment payments within operating activities.  

 

2)

Payments made to settle contingent consideration liabilities not made soon after the acquisition date of a business combination should be recognized as cash outflows for financing activities up to the amount of the liability recognized at the acquisition date.  Payments, or the portion of a payment, to settle contingent consideration liabilities that exceed the amount of the liability recognized at the acquisition date will be recognized as cash outflows for operating activities.

 

3)

Cash receipts from the settlement of insurance claims, excluding those related to corporate-owned life insurance policies  shall be classified on the basis of the related insurance coverage.  For example, proceeds received to cover claims issued under product recall liability insurance would be classified as cash inflows from operating activities.

 

4)

Cash receipts from the settlement of corporate-owned life insurance policies shall be classified as cash inflows from investing activities.  

The other cash receipt and cash payment transactions addressed by this update are not expected to impact the Company. For public companies, ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017 and must be applied retrospectively to all periods presented. Early adoption of the amendments in this update are permitted.

Revenue from Contracts with Customers

In May, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.”  ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The update’s core principal is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Companies are to use a five-step contract review model to ensure revenue gets recognized, measured and disclosed in accordance with this principle. In April, 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” to, amongst other things, reduce the cost and complexity it takes to identify performance obligations in a contract (step two in the five-step contract review model).  As a result, entities are not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract.

10


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 2 – Basis of Presentation and New Accounting Pronouncements – Continued

In June, 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date.”  As a result of this update, ASU 2014-09 and ASU 2016-10 will be effective for fiscal years and interim periods beginning after December 15, 2017. The amendments in these updates will be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect recognized at the date of initial application. Gentherm has developed a plan to complete the five-step contract review process for all existing contracts with customers.  We are currently in the process of determining the impact the implementation of ASU 2014-09 and ASU 2016-10 will have on the Company’s financial statements.

Inventory – Simplifying the Measurement of Inventory

In July, 2015, the FASB issued ASU 2015-11, “ Inventory (Topic 330) Simplifying the Measurement of Inventory.” The update requires that inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method shall be measured at the lower of cost and net realizable value.  

ASU 2015-11 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption of the amendments in this update are permitted. ASU 2015-11 is not expected to significantly impact the Company.

Balance Sheet Classification of Deferred Taxes

In November, 2015, the FASB issued ASU 2015-17, “ Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 no longer requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet.  Instead, for each tax paying component and within each tax jurisdiction all deferred tax liabilities and assets, as well as related valuation allowance, shall be offset and presented as a single noncurrent amount.  Entities will continue to not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.  

ASU 2015-17 is effective for fiscal years and interim periods beginning after December 15, 2016, though earlier application is permitted.  The update can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  We anticipate adoption of ASU 2015-17 will impact our presentation of deferred tax liabilities and assets on the consolidated condensed balance sheets.

11


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 3 – Cincinnati Sub-Zero Acquisition

CSZ develops, manufactures and sells patient temperature management systems and product testing equipment.  The patient temperature management systems regulate the body temperature of medical patients during and after surgery.  The product testing equipment simulates temperature, humidity, altitude and vibration conditions and is customized for use in a wide variety of industrial manufacturing applications.  

Results of operations for CSZ are included in the Company’s consolidated condensed financial statements beginning April 1, 2016.  CSZ contributed $31,925 in product revenues and a net loss of $1,551 for the nine month periods ended September 30, 2016.  

Purchase Price Allocation

The purchase price of $73,593, net of cash acquired of $985, has been allocated to the values of assets acquired and liabilities assumed as of April 1, 2016.  The allocation of the purchase price is preliminary.  The Company is in the process of obtaining additional information required to finalize the valuation.  An appraisal is currently underway by an independent third party valuation firm to assist management in determining the fair value of acquired assets and assumed liabilities, including identifiable intangible assets.  The final purchase price allocation may be materially different than the preliminary allocation recorded.  The purchase price allocation is expected to be finalized by December 31, 2016.  The preliminary allocation as of April 1, 2016 was as follows:

 

 

 

 

 

 

 

Accounts receivable

 

$

10,790

 

Inventory

 

 

16,284

 

Prepaid expenses and other assets

 

 

1,143

 

Property and equipment

 

 

12,919

 

Customer relationships

 

 

11,700

 

Technology

 

 

3,200

 

Trade name

 

 

6,370

 

Goodwill

 

 

24,422

a

Assumed liabilities

 

 

(13,235

)

 

 

 

 

 

Net assets acquired

 

 

73,593

 

Cash acquired

 

 

985

 

 

 

 

 

 

Purchase price

 

$

74,578

 

   

 

(a)

The preliminary amount recorded to goodwill includes an estimate of consideration owed to the seller for a tax gross up.

The gross contractual amount due of accounts receivable is $11,126 of which $336 is expected to be uncollectible.  

The purchase price allocation includes an approximate $4,000 step-up in the underlying net book value of the inventory to its fair value.  This inventory was sold to customers and expensed to cost of sales during the three month period ended June 30, 2016.

12


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 3 – Cincinnati Sub-Zero Acquisition – Continued

Supplemental Pro Forma Information

The unaudited pro forma combined historical results including the amounts of CSZ’s revenue and earnings that would have been included in the Company’s consolidated condensed statements of income had the acquisition date been January 1, 2016 or January 1, 2015 are as follows:

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2015

 

 

2016

 

 

2015

 

Product revenues

 

$

237,690

 

 

$

696,964

 

 

$

687,327

 

Net income

 

$

25,182

 

 

$

50,955

 

 

$

65,054

 

Basic earnings per share

 

$

0.70

 

 

$

1.40

 

 

$

1.81

 

Diluted earnings per share

 

$

0.69

 

 

$

1.39

 

 

$

1.79

 

The pro forma information includes adjustments for the effect of the amortization of intangible assets recognized in the acquisition.  This pro forma information is not indicative of future operating results.

Goodwill

We recorded goodwill of approximately $24,422 arising from the acquisition. The acquired goodwill represents intangible assets that do not qualify for separate recognition. It is estimated that all of the goodwill recognized will be deductible for income tax purposes.  

Intangible Assets

In conjunction with the acquisition, intangible assets of $21,270 were recorded. The Company’s estimate of the fair value of these assets at the time of the acquisition is preliminary and will be determined with the assistance of an independent third-party valuation firm. As part of the estimated valuation, an estimated useful life for the assets was determined.

Intangible assets, net consisted of the following:

 

 

 

September 30, 2016

 

  

Gross Value

  

 

Accumulated
Amortization

 

  

Net Value

  

  

Useful Life

Customer relationships

 

$

11,700

 

 

$

390

 

 

$

11,310

 

 

15 yrs

Technology

 

 

3,200

 

 

 

260

 

 

 

2,940

 

 

5 -7 yrs

Trade name

 

 

6,370

 

 

 

 

 

 

6,370

 

 

Indefinite

Total

 

$

21,270

 

 

$

650

 

 

$

20,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense of $327 and $650 for the three and nine months ended September 30, 2016 was recorded as follows:

 

 

 

Three Months Ended
September 30, 2016

 

 

 

 

 

Nine Months Ended
September 30, 2016

 

Product revenues

 

$

197

 

$

390

 

Selling, general and administrative expense

 

 

130

 

 

260

 

13


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 3 – Cincinnati Sub-Zero Acquisition – Continued

Amortization expense for the prospective five years is estimated to be as follows:

 

October 1, 2016 through December 31, 2016

 

$

325

 

2017

 

$

1,300

 

2018

 

$

1,300

 

2019

 

$

1,300

 

2020

 

$

1,300

 

2021

 

$

1,135

 

Property, Plant & Equipment

Property and equipment consist of the following:

 

Asset category

 

Useful life

 

Amount

 

Land

 

Indefinite

 

$

1,630

 

Buildings

 

20 yrs

 

 

6,024

 

Machinery and equipment

 

5-7 yrs

 

 

3,718

 

Computer hardware and software

 

3-5 yrs

 

 

586

 

Assets under construction

 

 

 

 

961

 

 

 

 

 

 

 

 

 

 

 

 

$

12,919

 

Note 4 Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted average number of shares of stock outstanding during the period. The Company’s diluted earnings per share give effect to all potential Common Stock outstanding during a period that do not have an anti-dilutive impact to the calculation. In computing the diluted earnings per share, the treasury stock method is used in determining the number of shares assumed to be issued from the exercise of Common Stock equivalents.

The following summarizes the Common Stock included in the basic and diluted shares, as disclosed on the face of the consolidated condensed statements of income:

 

 

Three Months
Ended September 30,

 

 

Nine Months
Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Weighted average number of shares for calculation of basic EPS

 

36,477,044

 

 

 

36,110,360

 

 

 

36,425,626

 

 

 

35,951,430

 

Stock options under equity incentive plans

 

117,537

 

 

 

371,351

 

 

 

132,737

 

 

 

438,612

 

Weighted average number of shares for calculation of diluted EPS

 

36,594,581

 

 

 

36,481,711

 

 

 

36,558,363

 

 

 

36,390,042

 

The accompanying 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.

 

 

Three Months
Ended September 30,

 

 

Nine Months
Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock options outstanding for equity incentive plans

 

1,455,534

 

 

 

5,534

 

 

 

1,455,534

 

 

 

5,534

 

 


14


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 5 – Segment Reporting

Segment information is used by management for making strategic operating decisions for the Company. As discussed in Note 3, Gentherm acquired CSZ on April 1, 2016.  The acquisition enhances key elements of our business strategy by expanding the breadth of products derived from core thermal technologies and the markets in which they are applied, such as medical equipment and environmental chamber testing.  

Management evaluates the performance of the Company’s segments based primarily on operating income or loss.

The Company’s reportable segments are as follows:

 

Automotive – this segment represents the design, development, manufacturing and sales of automotive seat comfort systems, specialized automotive cable systems and certain automotive and non-automotive thermal convenience products.

 

Industrial – the combined operating results of Gentherm Global Power Technologies (“GPT”), CSZ and Gentherm’s advanced research and development division.  Advanced research and development includes efforts focused on improving the efficiency of thermoelectric technologies and advanced heating wire technology as well as other applications.  The segment includes government sponsored research projects.

 

Reconciling Items – include corporate selling, general and administrative costs and acquisition transaction costs.

The tables below present segment information about the reported product revenues, depreciation and amortization and operating income (loss) of the Company for three and nine month periods ended September 30, 2016 and 2015. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level. As of September 30, 2016, goodwill assigned to our Automotive and Industrial segments were $22,362 and $30,573, respectively. As of September 30, 2015, goodwill assigned to our Automotive and Industrial segments were $22,218 and $6,305, respectively.

 

Three Months Ended September 30,

  

Automotive

 

  

Industrial

 

  

Reconciling
Items

 

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

212,566

 

 

$

20,059

 

 

$

 

 

$

232,625

 

Depreciation and amortization

 

 

8,631

 

 

 

989

 

 

 

557

 

 

 

10,177

 

Operating income (loss)

 

 

54,408

 

 

 

(4,899

)

 

 

(22,094

)

 

 

27,415

 

2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

202,734

 

 

$

21,084

 

 

$

 

 

$

223,818

 

Depreciation and amortization

 

 

6,956

 

 

 

450

 

 

 

394

 

 

 

7,800

 

Operating income (loss)

 

 

42,123

 

 

 

3,871

 

 

 

(8,545

)

 

 

37,449

 

 

Nine Months Ended September 30,

  

Automotive

 

  

Industrial

 

  

Reconciling
Items

 

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

634,642

 

 

$

46,417

 

 

$

 

 

$

681,059

 

Depreciation and amortization

 

 

23,566

 

 

 

2,578

 

 

 

1,580

 

 

 

27,724

 

Operating income (loss)

 

 

133,271

 

 

 

(14,628

)

 

 

(38,990

)

 

 

79,653

 

2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

603,131

 

 

$

41,037

 

 

$

 

 

$

644,168

 

Depreciation and amortization

 

 

20,157

 

 

 

1,343

 

 

 

1,623

 

 

 

23,123

 

Operating income (loss)

 

 

124,875

 

 

 

959

 

 

 

(34,638

)

 

 

91,196

 


15


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 5 – Segment Reporting – Continued

Total product revenues information by geographic area is as follows:

 

 

Three Months Ended September 30,

 

 

2016

 

 

2015

 

United States

$

117,815

 

 

 

51

%

 

$

99,833

 

 

 

45

%

China

 

21,573

 

 

 

9

%

 

 

24,092

 

 

 

11

%

Germany

 

17,670

 

 

 

8

%

 

 

18,449

 

 

 

8

%

South Korea

 

16,295

 

 

 

7

%

 

 

18,271

 

 

 

8

%

Japan

 

10,532

 

 

 

4

%

 

 

10,965

 

 

 

5

%

Canada

 

9,440

 

 

 

4

%

 

 

7,353

 

 

 

3

%

Czech Republic

 

9,302

 

 

 

4

%

 

 

7,522

 

 

 

3

%

United Kingdom

 

6,824

 

 

 

3

%

 

 

6,199

 

 

 

3

%

Mexico

 

5,288

 

 

 

2

%

 

 

12,441

 

 

 

6

%

Other

 

17,886

 

 

 

8

%

 

 

18,693

 

 

 

8

%

Total Non U.S.

 

114,810

 

 

 

49

%

 

 

123,985

 

 

 

55

%

 

$

232,625

 

 

 

100

%

 

$

223,818

 

 

 

100

%

 

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

United States

$

332,693

 

 

 

49

%

 

$

293,904

 

 

 

45

%

China

 

57,983

 

 

 

9

%

 

 

58,452

 

 

 

9

%

South Korea

 

56,443

 

 

 

8

%

 

 

62,347

 

 

 

10

%

Germany

 

54,261

 

 

 

8

%

 

 

56,088

 

 

 

9

%

Japan

 

32,545

 

 

 

5

%

 

 

33,482

 

 

 

5

%

Czech Republic

 

29,264

 

 

 

4

%

 

 

20,757

 

 

 

3

%

Canada

 

28,513

 

 

 

4

%

 

 

18,928

 

 

 

3

%

United Kingdom

 

20,561

 

 

 

3

%

 

 

19,825

 

 

 

3

%

Mexico

 

16,848

 

 

 

2

%

 

 

23,200

 

 

 

4

%

Other

 

51,948

 

 

 

8

%

 

 

57,185

 

 

 

9

%

Total Non U.S.

 

348,366

 

 

 

51

%

 

 

350,264

 

 

 

55

%

 

$

681,059

 

 

 

100

%

 

$

644,168

 

 

 

100

%

 

 

Note 6 – Debt

Credit Agreement

On March 17, 2016, the Company, together with certain direct and indirect subsidiaries, executed the Second Amendment to the Credit Agreement (the “Amended Credit Agreement”) with a consortium of lenders and Bank of America, N.A., as administrative agent.  

The Amended Credit Agreement eliminated without penalty the U.S. Term and Europe Term Loans and increased the aggregate principal amount available for borrowing under the U.S. Revolving Note from $100,000 to $250,000.  New subsidiary borrowers and guarantors were added under the Amended Credit Agreement and related pledge and security agreement.  The security agreement grants a security interest in substantially all of the personal property of 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-US subsidiaries).  The Amended Credit Agreement restricts the amount of dividend payments the Company can make to shareholders.  


16


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 6 – Debt – Continued  

The Amended Credit Agreement replaced the Company’s requirement to maintain a minimum Consolidated Fixed Charge Coverage Ratio with a minimum Consolidated Interest Coverage Ratio. The Company must also maintain a maximum Consolidated Leverage Ratio.  Definitions for these financial ratios, and a description of modifications made to other covenants to which the Company and its subsidiaries are subject, are included in the Amended Credit Agreement.  

Under the Amended Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate”) or Eurocurrency rate (“Eurocurrency Rate”), plus a margin (“Applicable Rate”).   The Base Rate is equal to the highest of the Federal Funds Rate (0.29% at September 30, 2016) plus 0.50%, Bank of America’s prime rate (3.50% at September 30, 2016), or a one month Eurocurrency rate (0.00% at September 30, 2016) plus 1.00%. The Eurocurrency Rate for loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (0.53% at September 30, 2016).   All loans denominated in a currency other than the U.S. Dollar must be Eurocurrency Rate Loans.  Interest is payable quarterly.  

The Applicable Rate from the initial period of March 17, 2016 through the fiscal quarter ending September 30, 2016 is 1.50% per annum for Eurocurrency Rate Loans and 0.50% per annum for Base Rate Loans.  After the initial period, the Applicable Rate will vary 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 2.00%, respectively, for Eurocurrency Rate Loans and 0.25% and 1.00%, respectively, for Base Rate Loans.

The Company also has two fixed interest rate loans with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank:

DEG China Loan

The first DEG loan, a loan we used to fund capital investments in China (the “DEG China Loan”), is subject to semi-annual principal payments beginning March, 2015 and ending September, 2019. Under the terms of the DEG China Loan, the Company must maintain a minimum Debt-to-Equity Ratio, Current Ratio and Debt Service Coverage Ratio, as defined by the DEG China Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Automotive Systems (China) Limited.

DEG Vietnam Loan

The Company’s second fixed interest rate loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”). The DEG Vietnam Loan is subject to semi-annual principal payments beginning November, 2017 and ending May, 2023. Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum Current Ratio, 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.

 


17


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 6 – Debt – Continued  

The following table summarizes the Company’s debt at September 30, 2016 and at December 31, 2015.

 

 

September 30, 2016

 

  

December 31,
2015

 

 

Interest
Rate

 

 

Principal
Balance

 

  

Principal
Balance

 

Credit Agreement:

 

 

 

 

 

 

 

 

 

 

 

U.S. Term Loan

 

 

 

 

$

 

 

$

46,875

 

Europe Term Loan

 

 

 

 

 

 

 

 

20,369

 

Revolving Note (U.S. Dollar Denominations)

 

2.02

%

 

 

123,875

 

 

 

12,000

 

DEG China Loan

 

4.25

%

 

 

2,697

 

 

 

3,497

 

DEG Vietnam Loan

 

5.21

%

 

 

15,000

 

 

 

15,000

 

Total debt

 

 

 

 

 

141,572

 

 

 

97,741

 

Current portion

 

 

 

 

 

(899

)

 

 

(4,909

)

Long-term debt, less current maturities

 

 

 

 

$

140,673

 

 

$

92,832

 

The scheduled principal maturities of our debt as of September 30, 2016 are as follows:

 

Year

 

Revolving
Note       (U.S. Dollar)

 

 

DEG
China
Note

 

 

DEG
Vietnam
Note

 

 

Total

  

2016

 

$

 

 

$

 

 

$

 

 

$

 

2017

 

 

 

 

 

899

 

 

 

1,250

 

 

 

2,149

 

2018

 

 

 

 

 

899

 

 

 

2,500

 

 

 

3,399

 

2019

 

 

 

 

 

899

 

 

 

2,500

 

 

 

3,399

 

2020

 

 

 

 

 

 

 

 

2,500

 

 

 

2,500

 

2021

 

 

123,875

 

 

 

 

 

 

2,500

 

 

 

126,375

 

Thereafter

 

 

 

 

 

 

 

 

3,750

 

 

 

3,750

 

Total

 

$

123,875

 

 

$

2,697

 

 

$

15,000

 

 

$

141,572

 

Principal outstanding under the Revolving Note will be due and payable in full on March 17, 2021. As of September 30, 2016, we were in compliance with all terms as outlined in the Amended Credit Agreement, DEG China Loan and DEG Vietnam Loan.

Note 7 – Derivative Financial Instruments

We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to our debt obligations under our Amended Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in the location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the European Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.

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 $29,234 and $0 outstanding as of September 30, 2016 and December 31, 2015, respectively.  

18


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 7 – Derivative Financial Instruments – Continued

The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years.  We had copper commodity swap contracts with a notional value of $1,628 and $4,885 outstanding at September 30, 2016 and December 31, 2015, respectively.

We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts which can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to accumulated other comprehensive loss in the consolidated 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 statement 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 recurring fair value measurement of derivative instruments in our consolidated condensed balance sheet as of September 30, 2016 is as follows:  

 

 

 

 

 

 

 

Liability Derivatives

 

 

Net 

Liabilities

 

 

 

Hedge 
Designation

 

Fair Value
Hierarchy

 

Balance Sheet
Location

 

Fair
Value

 

 

 

 

Foreign currency derivatives

 

Cash flow hedge

 

Level 2

 

Current liabilities

 

$

(625

)

 

$

(625

)

Commodity derivatives

 

Cash flow hedge

 

Level 2

 

Current liabilities

 

$

(181

)

 

$

(181

)

Information relating to the effect of derivative instruments on our consolidated condensed statements of income is as follows:

 

 

 

Location

 

Three Months
Ended
September 30,
2016

 

 

Three Months
Ended
September 30,
2015

 

 

Nine Months
Ended
September 30,
2016

 

 

Nine Months
Ended
September 30,
2015

 

Foreign currency derivatives                

 

Revaluation of derivatives

 

$

 

 

$

(2,526

)

 

$

 

 

$

3,752

 

 

 

Cost of sales

 

 

(112

)

 

 

(694

)

 

 

23

 

 

 

(1,014

)

 

 

Selling, general and administrative

 

 

 

 

 

(235

)

 

 

139

 

 

 

(189

)

 

 

Other comprehensive income

 

 

(868

)

 

 

(460

)

 

 

(624

)

 

 

(1,237

)

 

 

Foreign currency gain

 

 

(41

)

 

 

31

 

 

 

108

 

 

 

320

 

Total foreign currency derivatives

 

 

 

$

(1,021

)

 

$

(3,884

)

 

$

(354

)

 

$

1,632

 

Currency related interest rate swap

 

Revaluation of derivatives

 

 

 

 

 

    2,392

 

 

 

 

 

 

(4,903

)

Commodity derivatives

 

Cost of sales

 

$

(157

)

 

$

 

 

$

(510

)

 

$

 

 

 

Other comprehensive income

 

 

139

 

 

 

(373

)

 

 

544

 

 

 

(421

)

Total commodity derivatives

 

 

 

$

(18

)

 

$

(373

)

 

$

34

 

 

$

(421

)

We did not incur any hedge ineffectiveness during the three and nine months ended September 30, 2016 and 2015.

 


19


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 8 – Fair Value Measurement

The Company bases fair value on a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have adopted a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.

Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.

Except for derivative instruments (see Note 7), pension liabilities, pension plan assets and a corporate owned life insurance policy, the Company has no material financial assets and liabilities that are carried at fair value at September 30, 2016 and December 31, 2015. The carrying amounts of financial instruments comprising cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the relatively short maturity of such instruments. The Company uses an income valuation technique to measure the fair values of its debt instruments by converting amounts of future cash flows to a single present value amount using rates based on current market expectations (Level 2 inputs).  The carrying values of the Company’s Amended Credit Agreement indebtedness for the periods ending September 30, 2016 and December 31, 2015, respectively, were not materially different than their estimated fair values because the interest rates on variable rate debt approximated rates currently available to the Company (see Note 6).  Discount rates used to measure the fair value of Gentherm’s DEG Vietnam Loan and DEG China Loan are based on quoted swap rates.  As of September 30, 2016, the carrying values of the DEG Vietnam Loan and DEG China Loan were $15,000 and $2,697, respectively, as compared to an estimated fair value of $15,500 and $2,800 respectively. As of December 31, 2015, the carrying value of the DEG Vietnam Loan and DEG China Loan were $15,000 and $3,497, respectively, as compared to an estimated fair value of $15,100 and $3,600, respectively.

Certain Company assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. As of September 30, 2016 and December 31, 2015, the Company did not realize any changes to the fair value of these assets due to the non-occurrence of events or circumstances that could negatively impact their recoverability.

 


20


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 9 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the three months ended September 30, 2016 and September 30, 2015 are as follows:

 

 

  

Defined Benefit Pension Plans

 

  

Foreign Currency Translation Adjustments

 

  

Commodity Hedge Derivatives

 

 

Foreign Currency Hedge Derivatives

 

 

 

 

Total

 

Balance at June 30, 2016

 

$

(2,060

)

 

$

(47,645

)

 

$

26

 

 

$

179

 

 

$

(49,500

)

Other comprehensive income (loss) before reclassifications

 

 

 

 

 

2,230

 

 

 

(8

)

 

 

(818

)

 

 

 

1,404

 

 

Income tax effect of other comprehensive income (loss) before reclassifications

 

 

 

 

 

(13

)

 

 

3

 

 

 

220

 

 

 

 

210

 

Amounts reclassified from accumulated other comprehensive income (loss) into net income

 

 

 

 

 

 

 

 

147

 

 

a

 

 

(50

)

 

 

a

 

 

 

97

 

Income taxes reclassified into net income

 

 

 

 

 

 

 

 

(54

)

 

 

13

 

 

 

(41

)

Net current period other comprehensive income (loss)

 

 

 

 

 

2,217

 

 

 

88

 

 

 

(635

)

 

 

 

1,670

 

Balance at September 30, 2016

 

$

(2,060

)

 

$

(45,428

)

 

$

114

 

 

$

(456

)

 

$

(47,830

)

 

(a)

The amounts reclassified from accumulated other comprehensive income (loss) are included in cost of sales.

 

 

  

Defined Benefit Pension Plans

 

  

Foreign Currency Translation Adjustments

 

  

Commodity Hedge Derivatives

 

 

Foreign Currency Hedge Derivatives

 

 

 

 

Total

 

Balance at June 30, 2015

 

$

(2,673

)

 

$

(37,230

)

 

$

(48

)

 

$

(577

)

 

$

(40,528

)

Other comprehensive income (loss) before reclassifications

 

 

 

 

 

(4,429

)

 

 

(392

)

 

 

(873

)

 

 

 

(5,694

 

)

Income tax effect of other comprehensive income (loss) before reclassifications

 

 

 

 

 

51

 

 

 

162

 

 

 

237

 

 

 

 

450

 

Amounts reclassified from accumulated other comprehensive income (loss) into net income

 

 

 

 

 

 

 

 

19

a

 

 

413

 

 

a

 

 

 

 

432

 

Income taxes reclassified into net income

 

 

 

 

 

 

 

 

(7

)

 

 

(112

)

 

 

(119

)

Net current period other comprehensive income (loss)

 

 

 

 

 

(4,378

)

 

 

(218

)

 

 

(335

)

 

 

(4,931

)

Balance at September 30, 2015

 

$

(2,673

)

 

$

(41,608

)

 

$

(266

)

 

$

(912

)

 

$

(45,459

)

 

(a)

The amounts reclassified from accumulated other comprehensive income (loss) are included in cost of sales.


21


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 9 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss) – Continued

Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the nine months ended September 30, 2016 and September 30, 2015 are as follows: