thrm-10q_20170630.htm

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

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

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At July 28, 2017, there were 36,837,303 issued and outstanding shares of Common Stock of the registrant.

	June 30, 2017			December 31, 2016
ASSETS
Current Assets:
Cash and cash equivalents	$	164,177		$	177,187
Accounts receivable, less allowance of $1,424 and $1,391, respectively		181,273			170,084
Inventory:
Raw materials		58,364			60,525
Work in process		15,704			13,261
Finished goods		32,500			31,288
Inventory, net		106,568			105,074
Derivative financial instruments		2,545			18
Prepaid expenses and other assets		39,939			32,000
Total current assets		494,502			484,363
Property and equipment, net		187,391			172,052
Goodwill		53,497			51,735
Other intangible assets, net		54,356			57,557
Deferred financing costs		1,079			1,221
Deferred income tax assets		37,805			35,299
Other non-current assets		37,867			40,803
Total assets	$	866,497		$	843,030
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	83,719		$	84,511
Accrued liabilities		65,946			105,625
Current maturities of long-term debt		3,414			2,092
Derivative financial instruments		—			1,395
Total current liabilities		153,079			193,623
Pension benefit obligation		7,937			7,419
Other liabilities		5,355			4,092
Long-term debt, less current maturities		159,871			169,433
Deferred income tax liabilities		7,287			8,058
Total liabilities		333,529			382,625
Shareholders’ equity:
Common Stock:
No par value; 55,000,000 shares authorized, 36,821,656 and 36,534,464 issued and outstanding at June 30, 2017 and December 31, 2016, respectively		266,077			262,251
Paid-in capital		12,166			10,323
Accumulated other comprehensive loss		(37,608	)		(69,091	)
Accumulated earnings		292,333			256,922
Total shareholders’ equity		532,968			460,405
Total liabilities and shareholders’ equity	$	866,497		$	843,030

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Product revenues	$	243,378		$	232,720		$	492,645		$	448,434
Cost of sales		164,973			161,225			329,080			308,697
Gross margin		78,405			71,495			163,565			139,737
Operating expenses:
Net research and development expenses		21,407			19,111			40,912			34,807
Acquisition transaction expenses		—			634			—			671
Selling, general and administrative expenses		31,775			29,397			62,581			52,021
Total operating expenses		53,182			49,142			103,493			87,499
Operating income		25,223			22,353			60,072			52,238
Interest expense		(1,261	)		(950	)		(2,383	)		(1,627	)	)
Foreign currency (loss) gain		(13,251	)		2,796			(14,580	)		961
Other income		173			30			409			395
Earnings before income tax		10,884			24,229			43,518			51,967
Income tax expense		2,371			5,783			9,603			21,628
Net income	$	8,513		$	18,446		$	33,915		$	30,339
Basic earnings per share	$	0.23		$	0.51		$	0.92		$	0.83
Diluted earnings per share	$	0.23		$	0.50		$	0.92		$	0.83
Weighted average number of shares – basic		36,777			36,442			36,699			36,400
Weighted average number of shares – diluted		36,840			36,637			36,796			36,572

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income	$	8,513		$	18,446		$	33,915		$	30,339
Other comprehensive income (loss), gross of tax:
Foreign currency translation adjustments gain (loss)		23,285			(7,274	)		28,800			636
Unrealized gain (loss) on foreign currency derivative securities		815			(1,049	)		3,775			244
Unrealized gain on commodity derivative securities		16			109			48			405
Other comprehensive income (loss), gross of tax	$	24,116		$	(8,214	)	$	32,623		$	1,285
Other comprehensive income (loss), related tax effect:
Foreign currency translation adjustments gain (loss)		(106	)		(142	)		(109	)		1,100
Unrealized gain (loss) on foreign currency derivative securities		(219	)		282			(1,014	)		(65	)
Unrealized gain on commodity derivative securities		(6	)		(41	)		(17	)		(150	)
Other comprehensive income (loss), related tax effect	$	(331	)	$	99		$	(1,140	)	$	885
Other comprehensive income (loss), net of tax	$	23,785		$	(8,115	)	$	31,483		$	2,170
Comprehensive income	$	32,298		$	10,331		$	65,398		$	32,509

	Six Months Ended June 30,
	2017			2016
Operating Activities:
Net income	$	33,915		$	30,339
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		21,191			17,547
Deferred income taxes		(2,278	)		(3,707	)
Stock compensation		4,761			4,505
Defined benefit plan expense		94			117
Provision of doubtful accounts		6			274
Loss on sale of property and equipment		249			254
Changes in operating assets and liabilities:
Accounts receivable		(6,949	)		(12,668	)
Inventory		1,149			6,624
Prepaid expenses and other assets		(5,147	)		(6,890	)
Accounts payable		(2,932	)		1,749
Accrued liabilities		(37,944	)		13,029
Net cash provided by operating activities		6,115			51,173
Investing Activities:
Proceeds from the sale of property and equipment		34			27
Acquisition of subsidiary, net of cash acquired		(2,000	)		(73,666	)
Purchases of property and equipment		(25,750	)		(30,828	)
Net cash used in investing activities		(27,716	)		(104,467	)
Financing Activities:
Borrowing of debt		—			75,000
Repayments of debt		(8,428	)		(31,918	)
Excess tax expense from equity awards		—			(385	)
Cash paid for financing costs		—			(650	)
Cash paid for the cancellation of restricted stock		(1,100	)		(793	)
Cash paid for the repurchase of common stock		(53	)		—
Proceeds from the exercise of Common Stock options		2,061			566
Net cash (used in) provided by financing activities		(7,520	)		41,820
Foreign currency effect		16,111			(998	)
Net decrease in cash and cash equivalents		(13,010	)		(12,472	)
Cash and cash equivalents at beginning of period		177,187			144,479
Cash and cash equivalents at end of period	$	164,177		$	132,007
Supplemental disclosure of cash flow information:
Cash paid for taxes	$	58,831		$	13,400
Cash paid for interest	$	2,190		$	1,526
Supplemental disclosure of non-cash transactions:
Common Stock issued to Board of Directors and employees	$	2,229		$	2,432

										Accumulated
										Other
	Common Stock						Paid-in			Comprehensive			Accumulated
	Shares			Amount			Capital			Loss			Earnings		Total
Balance at December 31, 2016		36,534		$	262,251		$	10,323		$	(69,091	)	$	256,922	$	460,405
Cumulative effect of accounting change due to adoption of ASU 2016-09		—			—			—			—			1,496		1,496
Stock Repurchase		(2	)		(53	)		—			—			—		(53	)
Exercise of Common Stock options for cash		168			2,750			(689	)		—			—		2,061
Cancellation of restricted stock		(31	)		(1,100	)		—			—			—		(1,100	)
Stock option compensation		—			—			2,532			—			—		2,532
Common Stock issued to Board of Directors and employees		153			2,229			—			—			—		2,229
Currency translation, net		—			—			—			28,691			—		28,691
Foreign currency hedge, net		—			—			—			2,761			—		2,761
Commodity hedge, net		—			—			—			31			—		31
Net income		—			—			—			—			33,915		33,915
Balance at June 30, 2017		36,822		$	266,077		$	12,166		$	(37,608	)	$	292,333	$	532,968

Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies. Unless the context otherwise requires, the terms “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, environmental product testing 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 and new applications from existing technologies to create product and market opportunities for a wide array of thermal management solutions.

On January 4, 2016 and January 5, 2016, the Company completed reorganization transactions (the “Reorganization”) related to our North American business operated from Windsor, Ontario, Canada (the “Windsor Operations”). As part of our original integration plan to eliminate redundancies associated with the 2011 acquisition of Gentherm GmbH (formerly 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 are now being performed by other subsidiaries.

Related to the Reorganization, the Company declared intercompany dividends, incurred and paid withholding taxes to the Canadian Revenue Agency of $7,600 during 2016. Additionally, the Company incurred income tax expense of $2,500 related to the intercompany dividends. These amounts incurred are expected to cover all future intercompany dividends needed to distribute the remaining earnings of the subsidiary to its parent in conjunction with the potential future liquidation of the subsidiary.

In addition to the $7,600 of withholding tax and $2,500 of income taxes, the Reorganization required the Company to make a one-time income tax payment of approximately $32,600. 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 nor any subsequent quarter. The withholding tax payment was paid entirely in 2016. The income tax payments of $2,500 and $32,600 were paid during the first quarter of 2017.

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 Form 10-Q.

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, 2016 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. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

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

In June, 2017, the Company changed its classification of prepayments made during the construction of plant assets from prepaid expenses and other assets to other non-current assets on the consolidated condensed balance sheet. The Company reclassified $4,390 from prepaid expenses and other assets to other non-current assets on the December 31, 2016 consolidated condensed balance sheet in order to conform with the current year’s presentation.

In May, 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting, in accordance with Topic 718. An entity should account for the effect of a modification unless all of the following are met:

ASU 2017-09 is effective for annual and any interim periods beginning after December 15, 2017. Early adoption of the amendments in this update are permitted. The amendments in ASU 2017-09 should be applied on a prospective basis and in the initial period of adoption, entities must disclose the nature of and reason for the change in accounting principle. The Company has not historically made changes to the terms or conditions of shared-based payment awards and does not expect adoption of ASU 2017-09 to have a material impact the consolidated financial statements.

In January, 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 modified the concept of impairment of goodwill to be a condition that exists when the carrying value of a reporting unit that includes goodwill exceeds its fair value. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to that reporting unit. Entities no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination.

ASU 2017-04 is effective for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendments in ASU 2017-04 must be applied on a prospective basis and in the initial period of adoption, entities must disclose the nature of and reason for the change in accounting principle. The Company expects adoption of ASU 2017-04 will reduce the complexity of evaluating goodwill for impairment.

In January, 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. To be considered a business, the integrated set of activities and assets to be evaluated must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the integrated set or activities and assets is not considered a business. ASU 2017-01 provides a framework to assist entities in evaluating whether an integrated set of activities and assets include both an input and a substantive process when the assets’ fair value is not concentrated in a single identifiable asset or group of similar identifiable assets.

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

ASU 2017-01 is effective for fiscal years and interim periods beginning after December 15, 2017. The amendments in ASU 2017-01 should be applied on or after the effective date. No disclosure is required at adoption. The Company expects the impact from adopting this update to be immaterial to the consolidated financial statements.

In October, 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 modifies the current prohibition to recognize deferred income taxes from differences between the tax basis of assets in the buyer’s tax jurisdiction and their cost resulting from an intra-entity transfer from one tax-paying component to another tax-paying component of the same consolidated group. Under current GAAP, deferred income taxes for intra-entity asset transfers are not recognized until the asset is sold to an outside party. ASU 2016-16 allows entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.

ASU 2016-16 is effective for fiscal years and interim periods beginning after December 15, 2017. For entities that issue interim financial statements and whose current fiscal year end date is December 31, 2016, early adoption was permitted during the three month period ending March 31, 2017. The amendments in ASU 2016-16 must be applied on a modified retrospective basis through a cumulate-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We did not early adopt ASU 2016-16 during the three month period ending March 31, 2017. We are currently evaluating the amendments in this update to determine the effect it will have on the Company's consolidated financial statements.

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 will 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.

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:

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

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.

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. This update’s core principle 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 is recognized, measured and disclosed in accordance with this principle. The FASB has issued several amendments to the new standard, including a one-year deferral of the original effective date, and new methods for identifying performance obligations intended to reduce the cost and complexity of compliance.

This update permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting this update using the cumulative catch-up transition method. ASU 2014-09 will be effective for fiscal years and interim periods beginning after December 15, 2017. Early application is not permitted.

Gentherm is executing a plan to complete the five-step contract review process for all existing contracts with customers, across all business units. While we continue to assess all potential impacts from this update, we currently believe the most significant impact relates to our accounting for options that give customers the right to purchase additional goods under long-term supply agreements in the future. Due to the complexity of certain of our automotive supply contracts, the actual revenue recognition treatment for customer purchase options will depend on contract-specific terms and could vary from other contracts that are similar in nature. We are currently in the process of determining the total impact implementation of ASU 2014-09 and any corresponding amendments will have on the Company’s consolidated financial statements.

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:

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.

Segment information is used by management for making strategic operating decisions for the Company. Management evaluates the performance of the Company’s segments based primarily on operating income or loss.

The tables below present segment information about the reported product revenues, depreciation and amortization and operating income (loss) of the Company for three and six month periods ended June 30, 2017 and 2016. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level. As of June 30, 2017, goodwill assigned to our Automotive and Industrial segments were $22,724 and $30,773, respectively. As of June 30, 2016, goodwill assigned to our Automotive and Industrial segments were $22,119 and $28,890, respectively.

Three Months Ended June 30,	Automotive		Industrial			Reconciling Items			Consolidated Total

2017:
Product revenues	$	215,812	$	27,566		$	—		$	243,378
Depreciation and amortization		9,048		1,288			663			10,999
Operating income (loss)		40,082		(2,648	)		(12,211	)		25,223
2016:
Product revenues	$	211,833	$	20,887		$	—		$	232,720
Depreciation and amortization		7,652		1,199			532			9,383
Operating income (loss)		36,162		(7,113	)		(6,696	)		22,353

Six Months Ended June 30,	Automotive		Industrial			Reconciling Items			Consolidated Total

2017:
Product revenues	$	437,645	$	55,000		$	—		$	492,645
Depreciation and amortization		17,179		2,706			1,306			21,191
Operating income (loss)		90,839		(5,134	)		(25,633	)		60,072
2016:
Product revenues	$	422,267	$	26,167		$	—		$	448,434
Depreciation and amortization		14,935		1,589			1,023			17,547
Operating income (loss)		78,863		(9,729)			(16,896	)		52,238

	Three Months Ended June 30,
	2017				2016
United States	$	114,141	47	%	$	113,138	49	%
China		19,962	8	%		18,988	8	%
Germany		17,694	7	%		18,424	8	%
South Korea		17,754	7	%		21,053	9	%
Japan		13,093	5	%		9,779	4	%
Canada		11,113	5	%		10,091	4	%
Czech Republic		9,944	4	%		10,290	4	%
United Kingdom		8,439	4	%		7,071	3	%
Mexico		5,322	2	%		5,980	3	%
Other		25,916	11	%		17,906	8	%
Total Non U.S.		129,237	53	%		119,582	51	%
	$	243,378	100	%	$	232,720	100	%

	Six Months Ended June 30,
	2017				2016
United States	$	233,664	47	%	$	214,878	48	%
China		40,427	8	%		36,410	8	%
Germany		35,562	7	%		36,591	8	%
South Korea		34,145	7	%		40,149	9	%
Japan		27,376	6	%		22,013	5	%
Canada		22,042	5	%		19,073	4	%
Czech Republic		20,651	4	%		19,961	4	%
United Kingdom		18,107	4	%		13,738	3	%
Mexico		10,692	2	%		11,561	3	%
Other		49,979	10	%		34,060	8	%
Total Non U.S.		258,981	53	%		233,556	52	%
	$	492,645	100	%	$	448,434	100	%

The Company, together with certain direct and indirect subsidiaries, have an outstanding Credit Agreement (the “Credit Agreement”) with a consortium of lenders and Bank of America, N.A., as administrative agent. The Credit Agreement was most recently amended on December 15, 2016 (the “Amended Credit Agreement”). As a result of such amendment, the aggregate principal amount available for borrowing under the secured revolving credit facility increased from $250,000 to $350,000.

All subsidiary borrowers and guarantors participating in the Amended Credit Agreement have entered into a related pledge and security agreement. The security agreement grants a security interest to the lenders 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. As of June 30, 2017, Gentherm had approximately $203,000 available to borrow under the U.S. Revolving Note, net of outstanding letters of credit totaling $611.

The Amended Credit Agreement requires the Company to maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio, each defined therein.

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 (1.06% at June 30, 2017) plus 0.50%, Bank of America’s prime rate (4.25% at June 30, 2017), or a one month Eurocurrency rate (0.00% at June 30, 2017) plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (1.22% at June 30, 2017). 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 2.00%, 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:

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

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.

The following table summarizes the Company’s debt at June 30, 2017 and at December 31, 2016.

	June 30, 2017						December 31, 2016
	Interest Rate			Principal Balance			Principal Balance
Credit Agreement:
Revolving Note (U.S. Dollar Denominations)		2.98	%	$	146,000		$	154,000
DEG China Loan		4.25	%		2,285			2,525
DEG Vietnam Loan		5.21	%		15,000			15,000
Total debt					163,285			171,525
Current portion					(3,414	)		(2,092	)
Long-term debt, less current maturities				$	159,871		$	169,433

The scheduled principal maturities of our debt as of June 30, 2017 are as follows:

Year	Revolving Note (U.S. Dollar)		DEG China Note		DEG Vietnam Note		Total
Remainder of 2017	$	—	$	457	$	1,250	$	1,707
2018		—		914		2,500		3,414
2019		—		914		2,500		3,414
2020		—		—		2,500		2,500
2021		146,000		—		2,500		148,500
2022		—		—		2,500		2,500
Thereafter		—		—		1,250		1,250
Total	$	146,000	$	2,285	$	15,000	$	163,285

Principal outstanding under the Revolving Note will be due and payable in full on March 17, 2021. As of June 30, 2017, we were in compliance, in all material respects, with all terms as outlined in the Amended Credit Agreement, DEG China Loan and DEG Vietnam Loan.

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 $36,170 and $29,538 outstanding as of June 30, 2017 and December 31, 2016, respectively.

The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is one year. We had copper commodity swap contracts with a notional value of $2,830 and $407 outstanding at June 30, 2017 and December 31, 2016, 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 income (loss) in the consolidated condensed balance sheet. When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive income (loss) is recorded in earnings in the consolidated condensed statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency gain (loss) in the consolidated condensed statements of income. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.

The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounts such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term.

Information related to the recurring fair value measurement of derivative instruments in our consolidated condensed balance sheet as of June 30, 2017 is as follows:

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

	Location	Three Months Ended June 30, 2017			Three Months Ended June 30, 2016			Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Foreign currency derivatives	Cost of sales	$	351		$	100		$	(121	)	$	135
	Selling, general and administrative	—			—				(216	)	139
	Other comprehensive income	815				(1,049	)		3,775		244
	Foreign currency (loss) gain		(20	)	71				(77	)	149
Total foreign currency derivatives		$	1,146		$	(878	)	$	3,361		$	667
Commodity derivatives	Cost of sales	$	10		$	(142	)	$	29		$	(353	)
	Other comprehensive income	16			109			48			405
Total commodity derivatives		$	26		$	(33	)	$	77		$	52

We did not incur any hedge ineffectiveness during the three and six months ended June 30, 2017 and 2016.

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 6), 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 June 30, 2017 and December 31, 2016. 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 June 30, 2017 and December 31, 2016, 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 5). 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 June 30, 2017, the carrying values of the DEG Vietnam Loan and DEG China Loan were $15,000 and $2,285, respectively, as compared to an estimated fair value of $15,000 and $2,400 respectively. As of December 31, 2016, the carrying value of the DEG Vietnam Loan and DEG China Loan were $15,000 and $2,525, respectively, as compared to an estimated fair value of $14,900 and $2,600, 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 June 30, 2017 and December 31, 2016, 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.

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the three months ended June 30, 2017 and June 30, 2016 are as follows:

	Defined Benefit Pension Plans			Foreign Currency Translation Adjustments			Commodity Hedge Derivatives				Foreign Currency Hedge Derivatives				Total
Balance at March 31, 2017	$	(2,550	)	$	(60,250	)	$	262			$	1,145			$	(61,393	)
Other comprehensive income before reclassifications		—			23,285			28				1,092				24,405
Income tax effect of other comprehensive income before reclassifications		—			(106	)		(10	)			(293	)			(409	)
Amounts reclassified from accumulated other comprehensive income (loss) into net income		—			—			(12	)	^a		(277	)	^a		(289	)
Income taxes reclassified into net income		—			—			4				74				78
Net current period other comprehensive income		—			23,179			10				596				23,785
Balance at June 30, 2017	$	(2,550	)	$	(37,071	)	$	272			$	1,741			$	(37,608	)

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss) – Continued

	Defined Benefit Pension Plans			Foreign Currency Translation Adjustments			Commodity Hedge Derivatives			Foreign Currency Hedge Derivatives				Total
Balance at March 31, 2016	$	(2,060	)	$	(40,229	)	$	(42	)	$	946			$	(41,385	)
Other comprehensive income before reclassifications		—			(7,274	)		(12	)		(592	)			(7,878	)
Income tax effect of other comprehensive income before reclassifications		—			(142	)		4			159				21
Amounts reclassified from accumulated other comprehensive income (loss) into net income		—			—			121	^a		(457	)	^a		(336	)
Income taxes reclassified into net income		—			—			(45	)		123				78
Net current period other comprehensive income		—			(7,416	)		68			(767	)			(8,115	)
Balance at June 30, 2016	$	(2,060	)	$	(47,645	)	$	26		$	179			$	(49,500	)

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

Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the six months ended June 30, 2017 and June 30, 2016 are as follows:

	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 before reclassifications		—			28,800			78				2,965			31,843
Income tax effect of other comprehensive income before reclassifications		—			(109	)		(28	)			(796	)		(933)
Amounts reclassified from accumulated other comprehensive income (loss) into net income		—			—			(30	)	^a		810	^a		780
Income taxes reclassified into net income		—			—			11				(218	)		(207	)
Net current period other comprehensive income		—			28,691			31				2,761			31,483
Balance at June 30, 2017	$	(2,550	)	$	(37,071	)	$	272			$	1,741		$	(37,608	)

Note 8 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss) – Continued

	Defined Benefit Pension Plans			Foreign Currency Translation Adjustments			Commodity Hedge Derivatives			Foreign Currency Hedge Derivatives				Total
Balance at December 31, 2015	$	(2,060	)	$	(49,381	)	$	(229	)	$	—			$	(51,670	)
Other comprehensive income before reclassifications		—			636			102			701				1,439
Income tax effect of other comprehensive income before reclassifications		—			1,100			(38	)		(188	)			874
Amounts reclassified from accumulated other comprehensive income (loss) into net income		—			—			303	^a		(457	)	^a		(154	)
Income taxes reclassified into net income		—			—			(112	)		123				11
Net current period other comprehensive income		—


	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)


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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	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	27
Part II. Other Information			28
	Item 1.	Legal Proceedings	28
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 6.	Exhibits	29
Signatures			30

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Weighted average number of shares for calculation of basic EPS		36,776,545		36,442,296		36,698,618		36,399,635
Stock options under equity incentive plans		63,826		194,922		97,550		172,595
Weighted average number of shares for calculation of diluted EPS		36,840,371		36,637,218		36,796,168		36,572,230