10-Q 1 thrm-10q_20170930.htm 10-Q thrm-10q_20170930.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, 2017

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

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

  (Do not check if a small reporting company)

Smaller reporting company

Emerging growth company

 

 

 

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

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

At October 27, 2017, there were 36,680,528 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

 

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

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

September 30,
2017

 

 

December 31,
2016

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

147,626

 

 

$

177,187

 

Accounts receivable, less allowance of $1,082 and $1,391, respectively

 

182,236

 

 

 

170,084

 

Inventory:

 

 

 

 

 

 

 

Raw materials

 

59,399

 

 

 

60,525

 

Work in process

 

19,382

 

 

 

13,261

 

Finished goods

 

34,604

 

 

 

31,288

 

Inventory, net

 

113,385

 

 

 

105,074

 

Derivative financial instruments

 

1,542

 

 

 

18

 

Prepaid expenses and other assets

 

37,034

 

 

 

32,000

 

Total current assets

 

481,823

 

 

 

484,363

 

Property and equipment, net

 

190,825

 

 

 

172,052

 

Goodwill

 

54,287

 

 

 

51,735

 

Other intangible assets, net

 

52,520

 

 

 

57,557

 

Deferred financing costs

 

1,008

 

 

 

1,221

 

Deferred income tax assets

 

44,564

 

 

 

35,299

 

Other non-current assets

 

37,561

 

 

 

40,803

 

Total assets

$

862,588

 

 

$

843,030

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

80,322

 

 

$

84,511

 

Accrued liabilities

 

65,519

 

 

 

105,625

 

Current maturities of long-term debt

 

3,445

 

 

 

2,092

 

Derivative financial instruments

 

 

 

 

1,395

 

Total current liabilities

 

149,286

 

 

 

193,623

 

Pension benefit obligation

 

8,170

 

 

 

7,419

 

Other liabilities

 

5,207

 

 

 

4,092

 

Long-term debt, less current maturities

 

142,446

 

 

 

169,433

 

Deferred income tax liabilities

 

6,674

 

 

 

8,058

 

Total liabilities

 

311,783

 

 

 

382,625

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common Stock:

 

 

 

 

 

 

 

No par value; 55,000,000 shares authorized, 36,677,528 and 36,534,464 issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

262,935

 

 

 

262,251

 

Paid-in capital

 

14,206

 

 

 

10,323

 

Accumulated other comprehensive loss

 

(25,223

)

 

 

(69,091

)

Accumulated earnings

 

298,887

 

 

 

256,922

 

Total shareholders’ equity

 

550,805

    

 

 

460,405

 

Total liabilities and shareholders’ equity

$

862,588

 

 

$

843,030

 

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,

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Product revenues

 

$

235,853

 

 

$

232,625

 

 

$

728,498

 

 

$

681,059

 

 

Cost of sales

 

 

165,624

 

 

 

155,931

 

 

 

494,704

 

 

 

464,628

 

 

Gross margin

 

 

70,229

 

 

 

76,694

 

 

 

233,794

 

 

 

216,431

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net research and development expenses

 

 

19,721

 

 

 

19,745

 

 

 

60,633

 

 

 

54,552

 

 

Acquisition transaction expenses

 

 

 

 

 

22

 

 

 

 

 

 

693

 

 

Selling, general and administrative expenses

 

 

34,331

 

 

 

29,512

 

 

 

96,912

 

 

 

81,533

 

 

Total operating expenses

 

 

54,052

 

 

 

49,279

 

 

 

157,545

 

 

 

136,778

 

 

Operating income

 

 

16,177

 

 

 

27,415

 

 

 

76,249

 

 

 

79,653

 

 

Interest expense

 

 

(1,250

)

 

 

(660

)

 

 

(3,633

)

 

 

(2,287

)

 

Foreign currency (loss) gain

 

 

(7,340

)

 

 

(873

)

 

 

(21,920

)

 

 

88

 

 

Other (expense) income

 

 

(403

)

 

 

359

 

 

 

6

 

 

 

754

 

 

Earnings before income tax

 

 

7,184

 

 

 

26,241

 

 

 

50,702

 

 

 

78,208

 

 

Income tax expense

 

 

630

 

 

 

6,018

 

 

 

10,233

 

 

 

27,646

 

 

Net income

 

$

6,554

 

 

$

20,223

 

 

$

40,469

 

 

$

50,562

 

 

Basic earnings per share

 

$

0.18

 

 

$

0.55

 

 

$

1.10

 

 

$

1.39

 

 

Diluted earnings per share

 

$

0.18

 

 

$

0.55

 

 

$

1.10

 

 

$

1.38

 

 

Weighted average number of shares – basic

 

 

36,742

 

 

 

36,477

 

 

 

36,713

 

 

 

36,426

 

 

Weighted average number of shares – diluted

 

 

36,805

 

 

 

36,595

 

 

 

36,831

 

 

 

36,558

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

6,554

 

 

$

20,223

 

 

$

40,469

 

 

$

            50,562

 

Other comprehensive income (loss), gross of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments gain

 

 

13,251

 

 

 

2,230

 

 

 

42,051

 

 

 

2,866

 

Unrealized (loss) gain on foreign currency derivative securities

 

 

(1,234

)

 

 

(868

)

 

 

2,541

 

 

 

(624

)

Unrealized gain on commodity derivative securities

 

 

136

 

 

 

139

 

 

 

184

 

 

 

544

 

Other comprehensive income, gross of tax

 

$

12,153

 

 

$

1,501

 

 

$

44,776

 

 

$

2,786

 

Other comprehensive income (loss), related tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments gain

 

 

(49

)

 

 

(13

)

 

 

(158

)

 

 

1,087

 

Unrealized (loss) gain on foreign currency derivative securities

 

 

331

 

 

 

233

 

 

 

(683

)

 

 

168

 

Unrealized gain on commodity derivative securities

 

 

(50

)

 

 

(51

)

 

 

(67

)

 

 

(201

)

Other comprehensive income (loss), related tax effect

 

$

232

 

 

$

169

 

 

$

(908

)

 

$

1,054

 

Other comprehensive income, net of tax

 

$

12,385

 

 

$

1,670

 

 

$

43,868

 

 

$

3,840

 

Comprehensive income

 

$

18,939

 

 

$

21,893

 

 

$

84,337

 

 

$

54,402

 

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,

 

 

2017

 

  

2016

 

Operating Activities:

 

 

 

 

 

 

 

Net income

$

40,469

 

 

$

50,562

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

32,663

 

 

 

27,724

 

Deferred income taxes

 

(9,059

)

 

 

(1,933

)

Stock compensation

 

8,559

 

 

 

6,856

 

Defined benefit plan expense

 

96

 

 

 

151

 

Provision of doubtful accounts

 

(353

)

 

 

385

 

Loss on sale of property and equipment

 

868

 

 

 

291

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(5,581

)

 

 

(22,835

)

Inventory

 

(4,407

)

 

 

(5,647

)

Prepaid expenses and other assets

 

(555

)

 

 

2,826

 

Accounts payable

 

(7,433

)

 

 

6,508

 

Accrued liabilities

 

(39,896

)

 

 

6,123

 

Net cash provided by operating activities

 

15,371

 

 

 

71,011

 

Investing Activities:

 

 

 

 

 

 

 

Proceeds from the sale of property and equipment

 

41

 

 

 

45

 

Acquisition of subsidiary, net of cash acquired

 

(2,000

)

 

 

(73,593

)

Purchases of property and equipment

 

(37,181

)

 

 

(50,742

)

Net cash used in investing activities

 

(39,140

)

 

 

(124,290

)

Financing Activities:

 

 

 

 

 

 

 

Borrowing of debt

 

 

 

 

75,000

 

Repayments of debt

 

(25,906

)

 

 

(32,368

)

Excess tax expense from equity awards

 

 

 

 

(277

)

Cash paid for financing costs

 

 

 

 

(650

)

Cash paid for the cancellation of restricted stock

 

(1,100

)

 

 

(1,196

)

Cash paid for the repurchase of common stock

 

(5,326

)

 

 

 

Proceeds from the exercise of Common Stock options

 

2,434

 

 

 

1,038

 

Net cash (used in) provided by financing activities

 

(29,898

)

 

 

41,547

 

Foreign currency effect

 

24,106

 

 

 

66

 

Net decrease in cash and cash equivalents

 

(29,561

)

 

 

(11,666

)

Cash and cash equivalents at beginning of period

 

177,187

 

 

 

144,479

 

Cash and cash equivalents at end of period

$

147,626

 

 

$

132,813

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for taxes

$

67,160

 

 

$

18,183

 

Cash paid for interest

$

3,171

 

 

$

1,963

 

Supplemental disclosure of non-cash transactions:

 

 

 

 

 

 

 

Common Stock issued to Board of Directors and employees

$

3,873

 

 

$

3,507

 

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

 

 

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

Total

 

Balance at December 31, 2016

 

36,534

 

 

$

262,251

 

 

$

10,323

 

 

$

(69,091

)

 

$

256,922

 

 

$

460,405

 

Cumulative effect of accounting change due to adoption of ASU 2016-09

 

 

 

 

 

 

 

 

 

 

 

 

 

1,496

 

 

 

1,496

 

Stock repurchase

 

(164

)

 

 

(5,326

)

 

 

 

 

 

 

 

 

 

 

 

(5,326

)

Exercise of Common Stock options for cash

 

187

 

 

 

3,237

 

 

 

(803

)

 

 

 

 

 

 

 

 

2,434

 

Cancellation of restricted stock

 

(32

)

 

 

(1,100

)

 

 

 

 

 

 

 

 

 

 

 

(1,100

)

Stock option compensation

 

 

 

 

 

 

 

4,686

 

 

 

 

 

 

 

 

 

4,686

 

Common Stock issued to Board of Directors and employees

 

153

 

 

 

3,873

 

 

 

 

 

 

 

 

 

 

 

 

3,873

 

Currency translation, net

 

 

 

 

 

 

 

 

 

 

41,893

 

 

 

 

 

 

41,893

 

Foreign currency hedge, net

 

 

 

 

 

 

 

 

 

 

1,858

 

 

 

 

 

 

1,858

 

Commodity hedge, net

 

 

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

117

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

40,469

 

 

 

40,469

 

Balance at September 30, 2017

 

36,678

 

 

$

262,935

 

 

$

14,206

 

 

$

(25,223

)

 

$

298,887

 

 

$

550,805

 

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. 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.  

North American Reorganization

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.

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 Form 10-Q.

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, 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 nine months ended September 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.

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 – Continued

Balance Sheet Reclassification

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.

Derivatives and Hedging

In August, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expands the number and type of nonfinancial and interest rate risk components an entity has the ability to designate as the hedged risk in a qualifying hedging relationship.  ASU 2017-12 requires entities to present the earnings  effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedge item is reported. This approach simplifies the financial statement reporting for qualifying hedging relationships by eliminating the requirement to separately report the portion of the hedge deemed to be ineffective.  For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income and reclassified to earnings when the hedged item affects earnings.  Furthermore, income statement effects from fair value and cash flow hedges are to be presented in tabular disclosure.

ASU 2017-12 is effective for annual and any interim periods beginning after December 15, 2018. Early adoption of the amendments in this update are permitted. For cash flow hedges existing at the date of adoption, an entity should apply a cumulative catch-up adjustment related to eliminating the separate measurement of ineffectiveness to accumulative other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year  that an entity adopts the amendments in this update. We are currently in the process of determining the impact the implementation of ASU 2017-12 will have on the Company’s financial statements.

Share-Based Payment Awards

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:

 

1.

The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs of the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.

 

2.

The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

 

3.

The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

ASU 2017-09 is effective for annual and any interim periods beginning after December 15, 2017. Early adoption of the amendments in this update is 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 when it is adopted in the first quarter of 2018.

 


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

Goodwill Impairment

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. Early adoption of the amendments in this update is permitted. 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.

Business Combinations

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.

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.

Income Taxes

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. The update will be adopted during the first quarter of 2018 and is expected to increase the Company’s 2018 effective tax rate by approximately 3% to 5%.

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 will be recognized on the balance sheet.  

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

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.

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. The Company will adopt the amendments in this update during the first quarter of 2018.

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.  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 have chosen to use 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.


11


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

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 will be to our automotive business unit and 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. Based on our progress executing the five-step contract review process, we believe the implementation of ASU 2014-09 and any corresponding amendments will have an immaterial impact on the financial results of the Company.

Note 3 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,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Weighted average number of shares for calculation of basic EPS

 

36,742,168

 

 

 

36,477,044

 

 

 

36,713,294

 

 

 

36,425,626

 

Stock options under equity incentive plans

 

62,908

 

 

 

117,537

 

 

 

117,919

 

 

 

132,737

 

Weighted average number of shares for calculation of diluted EPS

 

36,805,076

 

 

 

36,594,581

 

 

 

36,831,213

 

 

 

36,558,363

 

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,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Stock options outstanding for equity incentive plans

 

1,845,784

 

 

 

1,455,534

 

 

 

1,845,784

 

 

 

1,455,534

 

Note 4 – Segment Reporting

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

The Company’s reportable segments are as follows:

 

Automotive – this segment represents the design, development, manufacturing and sales of automotive 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”), Cincinnati Sub-Zero Products, LLC (“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.

 


12


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 4 – Segment Reporting – Continued

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, 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 September 30, 2017, goodwill assigned to our Automotive and Industrial segments were $23,514 and $30,773, respectively. As of September 30, 2016, goodwill assigned to our Automotive and Industrial segments were $22,362 and $30,573, respectively.

 

Three Months Ended September 30,

  

Automotive

 

  

Industrial

 

  

Reconciling
Items

 

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

215,175

 

 

$

20,678

 

 

$

 

 

$

235,853

 

Depreciation and amortization

 

 

9,423

 

 

 

1,334

 

 

 

715

 

 

 

11,472

 

Operating income (loss)

 

 

37,179

 

 

 

(5,607

)

 

 

(15,395

)

 

 

16,177

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

212,369

 

 

$

20,256

 

 

$

 

 

$

232,625

 

Depreciation and amortization

 

 

8,631

 

 

 

989

 

 

 

557

 

 

 

10,177

 

Operating income (loss)

 

 

54,408

 

 

 

(4,899

)

 

 

(22,094

)

 

 

27,415

 

 

Nine Months Ended September 30,

  

Automotive

 

  

Industrial

 

  

Reconciling
Items

 

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

652,820

 

 

$

75,678

 

 

$

 

 

$

728,498

 

Depreciation and amortization

 

 

26,602

 

 

 

4,040

 

 

 

2,021

 

 

 

32,663

 

Operating income (loss)

 

 

128,018

 

 

 

(10,741

)

 

 

(41,028

)

 

 

76,249

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

634,636

 

 

$

46,423

 

 

$

 

 

$

681,059

 

Depreciation and amortization

 

 

23,566

 

 

 

2,578

 

 

 

1,580

 

 

 

27,724

 

Operating income (loss)

 

 

133,271

 

 

 

(14,628)

 

 

 

(38,990

)

 

 

79,653

 

Total product revenues information by geographic area is as follows:

 

 

Three Months Ended September 30,

 

 

2017

 

 

2016

 

United States

$

104,033

 

 

 

44

%

 

$

117,815

 

 

 

51

%

China

 

25,741

 

 

 

11

%

 

 

21,573

 

 

 

9

%

Germany

 

17,711

 

 

 

8

%

 

 

17,670

 

 

 

8

%

South Korea

 

16,569

 

 

 

7

%

 

 

16,295

 

 

 

7

%

Japan

 

15,727

 

 

 

7

%

 

 

10,532

 

 

 

4

%

Canada

 

10,667

 

 

 

5

%

 

 

9,440

 

 

 

4

%

Czech Republic

 

9,175

 

 

 

4

%

 

 

9,302

 

 

 

4

%

United Kingdom

 

8,143

 

 

 

3

%

 

 

6,824

 

 

 

3

%

Mexico

 

5,706

 

 

 

2

%

 

 

5,288

 

 

 

2

%

Other

 

22,381

 

 

 

9

%

 

 

17,886

 

 

 

8

%

Total Non U.S.

 

131,820

 

 

 

56

%

 

 

114,810

 

 

 

49

%

 

$

235,853

 

 

 

100

%

 

$

232,625

 

 

 

100

%

13


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 4 – Segment Reporting – Continued

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

United States

$

337,697

 

 

 

46

%

 

$

332,693

 

 

 

49

%

China

 

66,168

 

 

 

9

%

 

 

57,983

 

 

 

9

%

Germany

 

53,273

 

 

 

7

%

 

 

54,261

 

 

 

8

%

South Korea

 

50,714

 

 

 

7

%

 

 

56,443

 

 

 

8

%

Japan

 

43,103

 

 

 

6

%

 

 

32,545

 

 

 

5

%

Canada

 

32,709

 

 

 

5

%

 

 

28,513

 

 

 

4

%

Czech Republic

 

29,826

 

 

 

4

%

 

 

29,264

 

 

 

4

%

United Kingdom

 

26,250

 

 

 

4

%

 

 

20,561

 

 

 

3

%

Mexico

 

16,398

 

 

 

2

%

 

 

16,848

 

 

 

2

%

Other

 

72,360

 

 

 

10

%

 

 

51,948

 

 

 

8

%

Total Non U.S.

 

390,801

 

 

 

54

%

 

 

348,366

 

 

 

51

%

 

$

728,498

 

 

 

100

%

 

$

681,059

 

 

 

100

%

 

 

Note 5 – Debt

Amended Credit Agreement

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 September 30, 2017, Gentherm had approximately $221 available to borrow under the U.S. Revolving Note, net of outstanding letters of credit totaling $330.  

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 September 30, 2017) plus 0.50%, Bank of America’s prime rate (4.25% at September 30, 2017), or a one month Eurocurrency rate (0.00% at September 30, 2017) plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (1.23% at September 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:


14


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 5 – Debt – Continued

DEG China Loan

The first DEG loan, a loan we used to fund capital investments in China (the “DEG China Loan”), is subject to semi-annual principal payments that began March, 2015 and 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.

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.

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

 

 

September 30, 2017

 

  

December 31,
2016

 

 

Interest
Rate

 

 

Principal
Balance

 

  

Principal
Balance

 

Credit Agreement:

 

 

 

 

 

 

 

 

 

 

 

Revolving Note (U.S. Dollar Denominations)

 

2.99

%

 

$

129,000

 

 

$

154,000

 

DEG China Loan

 

4.25

%

 

 

1,891

 

 

 

2,525

 

DEG Vietnam Loan

 

5.21

%

 

 

15,000

 

 

 

15,000

 

Total debt

 

 

 

 

 

145,891

 

 

 

171,525

 

Current portion

 

 

 

 

 

(3,445

)

 

 

(2,092

)

Long-term debt, less current maturities

 

 

 

 

$

142,446

 

 

$

169,433

 

 

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

 

Year

 

Revolving
Note       (U.S. Dollar)

 

 

DEG
China
Note

 

 

DEG
Vietnam
Note

 

 

Total

  

Remainder of 2017

 

$

 

 

$

 

 

$

1,250

 

 

$

1,250

 

2018

 

 

 

 

 

945

 

 

 

2,500

 

 

 

3,445

 

2019

 

 

 

 

 

946

 

 

 

2,500

 

 

 

3,446

 

2020

 

 

 

 

 

 

 

 

2,500

 

 

 

2,500

 

2021

 

 

129,000

 

 

 

 

 

 

2,500

 

 

 

131,500

 

2022

 

 

 

 

 

 

 

 

2,500

 

 

 

2,500

 

Thereafter

 

 

 

 

 

 

 

 

1,250

 

 

 

1,250

 

Total

 

$

129,000

 

 

$

1,891

 

 

$

15,000

 

 

$

145,891

 

Principal outstanding under the Revolving Note will be due and payable in full on March 17, 2021. As of September 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.

15


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 6 – 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 $28,856 and $29,538 outstanding as of September 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 $1,617 and $407 outstanding at September 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 September 30, 2017 is as follows:  

 

 

 

 

 

 

 

Asset Derivatives

 

Net Asset

 

 

 

Hedge Designation

 

Fair Value Hierarchy

 

Balance Sheet Location

 

 

Fair Value

 

 

 

Foreign currency derivatives

 

Cash flow hedge

 

Level 2

 

 

Current assets

 

 

$

1,340

 

$

1,340

 

Commodity derivatives

 

Cash flow hedge

 

Level 2

 

 

Current assets

 

 

$

202

 

$

202

 

          


16


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 6 – Derivative Financial Instruments – Continued  

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

 

 

 

Location

 

Three Months

Ended

September 30,

2017

 

 

Three Months

Ended

September  30,

2016

 

 

Nine Months

Ended

September  30,

2017

 

 

Nine Months

Ended

September  30,

2016

 

Foreign currency derivatives

 

Product revenues

 

$

54

 

 

$

 

 

$

54

 

 

$

 

 

 

Cost of sales

 

1,424

 

 

(112

)

 

1,303

 

 

23

 

 

 

Selling, general and administrative

 

 

 

 

 

 

(216

)

 

139

 

 

 

Other comprehensive income

 

(1,234

)

 

 

(868

)

 

 

2,541

 

 

(624

)

 

 

Foreign currency (loss) gain

 

 

15

 

 

(41

)

 

 

(62

)

 

108

 

Total foreign currency derivatives

 

 

 

$

259

 

 

$

(1,021

)

 

$

3,620

 

 

$

(354

)

Commodity derivatives

 

Cost of sales

 

$

(4

)

 

$

(157

)

 

$

25

 

 

$

(510

)

 

 

Other comprehensive income

 

136

 

 

139

 

 

184

 

 

544

 

Total commodity derivatives

 

 

 

$

132

 

 

$

(18

)

 

$

209

 

 

$

34

 

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

Note 7 – 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 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 September 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 September 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 September 30, 2017, the carrying values of the DEG Vietnam Loan and DEG China Loan were $15,000 and $1,891, respectively, as compared to an estimated fair value of $15,100 and $1,900, 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 September 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.

17


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

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 September 30, 2017 and September 30, 2016 are as follows:

 

 

  

Defined Benefit Pension Plans

 

  

Foreign Currency Translation Adjustments

 

  

Commodity Hedge Derivatives

 

 

Foreign Currency Hedge Derivatives

 

 

 

 

Total

 

Balance at June 30, 2017

 

$

(2,550

)

 

$

(37,071

)

 

$

272

 

 

$

1,741

 

 

$

(37,608

)

Other comprehensive income before reclassifications

 

 

 

 

 

13,251

 

 

 

153

 

 

 

106

 

 

 

 

13,510

 

 

Income tax effect of other comprehensive income before reclassifications

 

 

 

 

 

(49

)

 

 

(56

)

 

 

(29

)

 

 

 

(134

 

)

Amounts reclassified from accumulated other comprehensive income into net income

 

 

 

 

 

 

 

 

(17

 

 

)

a

 

(1,340

 

 

)

 

 

a

 

 

 

(1,357

 

 

)

Income taxes reclassified into net income

 

 

 

 

 

 

 

 

6

 

 

 

360

 

 

 

366

 

Net current period other comprehensive income

 

 

 

 

 

13,202

 

 

 

86

 

 

 

(903

)

 

 

 

12,385

 

Balance at September 30, 2017

 

$

(2,550

)

 

$

(23,869

)

 

$

358

 

 

$

838

 

 

$

(25,223

)

 

(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, 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

 

 

 

 

 

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.

18


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 8 – 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, 2017 and September 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

 

 

 

 

 

42,051

 

 

 

231

 

 

 

3,071

 

 

 

 

45,353

 

Income tax effect of other comprehensive income before reclassifications

 

 

 

 

 

(158

)

 

 

(84

)

 

 

(825

)

 

 

 

(1,067

 

)

Amounts reclassified from accumulated other comprehensive income into net income

 

 

 

 

 

 

 

 

(47

)

a

 

(530

)

a

 

 

 

(577

 

 

)

Income taxes reclassified into net income

 

 

 

 

 

 

 

 

17

 

 

 

142

 

 

 

159

 

Net current period other comprehensive income

 

 

 

 

 

41,893

 

 

 

117

 

 

 

1,858

 

 

 

43,868

 

Balance at September 30, 2017

 

$

(2,550

)

 

$

(23,869

)

 

$

358

 

 

$

838

 

 

$

(25,223

)

 

(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 December 31, 2015

 

$

(2,060

)

 

$

(49,381

)

 

$

(229

)

 

$

 

 

$

(51,670

)

Other comprehensive income (loss) before reclassifications

 

 

 

 

 

2,866

 

 

 

94

 

 

 

(117

)

 

 

 

2,843

 

 

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

 

 

 

 

 

1,087

 

 

 

(35

)

 

 

32

 

 

 

 

1,084

 

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

 

 

 

 

 

 

 

 

450

 

 

a

 

 

 

(507

)

 

 

a

 

 

 

(57

 

 

)

Income taxes reclassified into net income