10-K 1 thrm-10k_20181231.htm 10-K thrm-10k_20181231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2018

or

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                       to                      .

Commission file number 0-21810

 

GENTHERM INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Michigan

 

95-4318554

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

21680 Haggerty Road, Northville, MI

 

48167

(Address of principal executive offices)

 

(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock

 

The Nasdaq Global Select Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

  

Emerging growth company

 

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

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such Common Stock on The Nasdaq Global Select Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter, June 29, 2018, was $1,066,320,000. For purposes of this computation, the registrant has excluded the market value of all shares of its Common Stock reported as being beneficially owned by executive officers and directors and holders of more than 10% of the Common Stock on a fully diluted basis of the registrant; such exclusion shall not, however, be deemed to constitute an admission that any such person is an “affiliate” of the registrant.

As of February 25, 2019, there were 34,989,349 issued and outstanding shares of Common Stock of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2019 annual meeting of shareholders are incorporated by reference into Part III of this Report to the extent described herein.

 

 


TABLE OF CONTENTS

 

Part I

 

 

 

Item 1:

 

Business

  3

 

 

Item 1A:

 

Risk Factors

  13

 

 

Item 1B:

 

Unresolved Staff Comments

  29

 

 

Item 2:

 

Properties

  30

 

 

Item 3:

 

Legal Proceedings

  30

 

 

Item 4:

 

Mine Safety Disclosures

  30

 

 

Part II

  31

 

 

Item 5:

 

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

  31

 

 

Item 6:

 

Selected Financial Data

  32

 

 

Item 7:

 

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

  33

 

 

Item 7A:

 

Quantitative and Qualitative Disclosures About Market Risk

  51

 

 

Item 8:

 

Financial Statements and Supplementary Data

  54

 

 

Item 9:

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  54

 

 

Item 9A:

 

Controls and Procedures

  54

 

 

Item 9B:

 

Other Information

  56

 

 

Part III

  57

 

 

Item 10:

 

Directors, Executive Officers and Corporate Governance

  57

 

 

Item 11:

 

Executive Compensation

  57

 

 

Item 12:

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  57

 

 

Item 13:

 

Certain Relationships and Related Transactions and Director Independence

  57

 

 

Item 14:

 

Principal Accounting Fees and Services

  57

 

 

Part IV

  58

 

 

Item 15:

 

Exhibits and Financial Statement Schedules

  58

 

 

 

 


GENTHERM INCORPORATED

PART I

 

ITEM 1.

BUSINESS

Unless otherwise indicated, references to “Gentherm”, “the Company”, “we”, “our” and “us” in this Annual Report on Form 10-K refer to Gentherm Incorporated and its consolidated subsidiaries.

Except to the extent expressly noted herein, the content of our website or the websites of other third parties noted herein are not incorporated by reference in this Report.

Forward-Looking Statements

This Report contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as our ability to execute our new strategic plan, our ability to finance sufficient working capital, the amount of availability under our credit facility, our ability to continue to maintain or increase sales and profits of our operations, and the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs.  Reference is made in particular to forward-looking statements included in “Item 1. Business,”, “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar terms, variations of such terms or the negative of such terms.  The forward-looking statements included in this Report are made as of the date hereof or as of the date specified and are based on management’s reasonable expectations and beliefs.  Such statements are subject to a number of assumptions, risks, uncertainties and other factors, which are set forth in “Item 1A. Risk Factors” and elsewhere in this Report, and subsequent reports filed with or furnished to the Securities and Exchange Commission, and which could cause actual results to differ materially from that described in the forward looking statements.  Except as required by law, we expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

General

Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies.  Our products provide solutions for automotive passenger comfort and convenience, battery thermal management, remote power generation, patient temperature management, and other consumer and industrial temperature control needs. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America, Europe and Asia. We operate in locations aligned with our major customers’ product strategies in order to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets. We concentrate our research on the development of new technologies and new applications from existing technologies to create product and market opportunities for a wide array of thermal management solutions.  

The Company has two reportable segments for financial reporting purposes: Automotive and Industrial.

Automotive

The Automotive reporting segment is comprised of the results from our global automotive businesses. Operating results from our climate comfort systems, specialized automotive cable systems, battery thermal management, and automotive electronic and software systems are all reported in the Automotive segment because of their complementary focus on automotive content, passenger thermal comfort and convenience.  The operating results of Etratech, a business acquired in November 2017 (see “Recent Acquisition and Dispositions” below) are included within Gentherm’s Automotive segment due to the concentration of product applications within the automotive, RV and marine industries.

Climate comfort system solutions include seat heaters, variable temperature Climate Control Seats (“CCS”) designed to provide individualized thermal comfort to automobile passengers, and integrated electronic components, such as blowers and electronic control units and that utilize our proprietary electronics technology and software.  Other climate comfort system solutions include

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steering wheel heaters, neck climate control systems and surface climate control system products for doors, armrests, cupholders and storage bins.

Industrial

The Industrial reporting segment represents the combined results from our remote power generation systems business, our patient temperature management systems business, our environmental testing equipment business and our advanced research and product development division.  Our remote power generation systems business is managed by our subsidiary Gentherm Global Power Technologies (“GPT”) and our patient temperature management and environment test equipment businesses are managed by our subsidiary Cincinnati Sub-Zero (“CSZ”). The advanced research and product development division is engaged in projects to improve the efficiency and functionality of thermal management technologies and to develop, market, and distribute products based on these new technologies.  The operating results from these businesses and division are presented together as one reporting segment because of their joint concentration on identifying new markets and product applications based on thermal management technologies.

In June 2018, as part of a new strategic plan intended to improve business performance and position the Company to deliver above-market growth and improved profitability to its shareholders, Gentherm launched the Fit-for-Growth cost-savings initiative. One key objective for Fit-for-Growth is to eliminate non-core areas of investment within the industrial reporting segment, including elimination of our investment in GPT, Cincinnati Sub-Zero’s industrial chamber business (“CSZ-IC”), and our battery management systems division in Irvine, California. We also completed the site consolidation plan for our advanced research and development operations and vacated two leased facilities in Azusa, California. See Note 1 of the consolidated financial statements for more information about the new strategic plan and Fit-for-Growth.  

See Note 9 of the consolidated financial statements for information regarding the Company’s segment revenues from external customers, including geographic composition, operating income, depreciation and amortization, and goodwill. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at the segment level.

Corporate Information

We are incorporated under the laws of the State of Michigan. We were originally incorporated in California in 1991 and we reincorporated in Michigan in 2005. Our internet website is www.gentherm.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge through our website, www.gentherm.com, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission. These reports are also available on the Securities and Exchange Commission’s website, www.sec.gov.

Business Strategy

Across the globe, we produce and deliver advanced thermal solutions for automotive and patient thermal management markets that positively impact lives. To achieve our goals and capitalize on opportunities within the automotive and patient thermal management segments, we are implementing four strategies:

Focus Growth

The focused growth strategy includes of four key areas:

 

Accelerate growth in our core automotive climate and comfort businesses by leveraging human thermophysiology to offer personalized passenger comfort and improve efficiency,

 

Introduce an innovative microclimate solution, ClimateSenseTM, that offers personalized thermal comfort in one intelligent and integrated system,

 

Drive battery thermal management with increased focus on active battery heating and cooling, passive battery cooling, battery heaters, and cell connecting board solutions, and

 

Expand patient thermal solutions that leverage synergies between our automotive climate and comfort businesses.

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These areas of the focused growth strategy are underpinned and enabled by electronics and software systems.

Extend Technology Leadership

Continue to expand our technology leadership with focused investments in key core technologies and competencies, including thermophysiology, software and electronics, simulation, thermal engines and integration.  

Expand Gross Margin and Return on Invested Capital

Strengthen operational discipline and execution to expand gross margin and return on invested capital. This strategy centers around building a culture of performance that includes a focus on high-return growth opportunities, the Fit-for-Growth cost rationalization program, and divestiture of non-core investments.

Optimize Capital Allocation

Optimize capital allocation to drive shareholder returns while also allowing us to reinvest in our business to drive continued growth. Make investments to grow our businesses through capital expenditure projects, focused research and development investments, and potential acquisitions that will enhance other business strategies.

Recent Acquisitions and Dispositions

As part of our plan to make strategic acquisitions and dispositions, we have completed the following significant acquisitions and dispositions in the recent past:

On April 1, 2016, we acquired Cincinnati Sub-Zero Products, LLC to expand our temperature management activities into the medical, industrial and testing fields. In June 2018, we determined CSZ’s industrial chamber and testing business and our GPT business were not aligned with the Company’s strategic growth plan and should be eliminated. Both businesses were classified as held for sale as of December 31, 2018. On February 1, 2019, we completed the sale of CSZ’s industrial chamber and testing business and the CSZ headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million.

On November 1, 2017, we acquired Etratech Enterprises Inc. to expand our electronics capabilities, including in the automotive, consumer and commercial markets.

Research and Development

Our research and development activities are an essential part of our efforts to develop new, innovative products and introduce them to the market.  Through both internal and external research and development programs, we are working to develop a comprehensive knowledge of thermal management systems that can demonstrate functionality and performance.  These activities are critical to optimizing energy and production efficiencies, improving effectiveness in our products, and minimizing the cost to integrate our products with those of our customers.

We perform advanced research and development on thermal management systems, including those that utilize new proprietary comfort software algorithms, to enhance the efficiency and functionality of our automotive heating and cooling products. We believe there are substantial opportunities to integrate innovative thermal management systems into current and future product applications.

Research and development activities are expensed as incurred. These expenses include direct expenses for wages, materials and services associated with particular engineering activities, net of reimbursements from customers and research sponsors.  Any related reimbursements for costs, whether for advanced research or a specific product application, are accounted for as a reduction of research and development expense.  

Research and development is conducted around the globe, including at our world headquarters in Northville, Michigan, our test laboratory in Farmington Hills, Michigan, our European research facilities in Odelzhausen, Germany and Budapest, Hungary, our Asian research facility in Langfang, China, our industrial application research facility in Calgary, Canada, our medical application research facility in Cincinnati, Ohio and our electronics design and advanced testing facilities in Shanghai, China and Burlington,

5


Canada.  During 2018, as part of the Fit-for-Growth cost-savings initiative, Gentherm completed a sale of the advanced battery research facility in Irvine, California and vacated advanced materials research facilities in Azusa, California.  See Note 1 of the consolidated financial statement for more information about the new strategic plan, Fit-for-Growth and other restructuring activities undertaken by the Company.  

Additional product development is performed at all of our manufacturing facilities to support customers.  We believe the localized development model employed at our global design and manufacturing facilities improves our ability to effectively serve our customers and increases our innovative capacity in the future.

Net research and development expense in 2018, 2017 and 2016 was $79,900,000, $82,478,000, and $72,923,000, respectively. Because of changing levels of research and development activity, our research and development expenses fluctuate from period to period.

Core Technologies

Gentherm’s expertise in thermal management is focused on two general areas: managing the thermal conditions of people and objects and managing the thermal energy conversion to electrical energy.  

Thermoelectric Technologies

Many of our thermal products manage the thermal conditions of people and objects using our internally developed advanced thermoelectric device technology (“TED”). A TED is a solid-state circuit that has the capability to produce both hot and cold thermal conditions by use of the Peltier effect. The advantages of advanced TEDs over conventional compressed gas systems are that they are environmentally friendly and less complex as they have no moving parts and are compact and light weight.  For the last 18 years, our work on this technology has yielded great improvements in areas of efficiency, durability and performance.

Resistive Heaters

Resistive heater technologies are comprised of wire, carbon fiber or positive thermal coefficient (“PTC”) heating elements which quickly and effectively deliver heat to people and objects.  Wire heating elements are designed from stainless steel, copper, our proprietary carbon fiber woven lattice technology called Carbotex® or printed circuit PTC heaters based on the specifications for a particular product application.

ClimateSenseTM

ClimateSense is an integrated comfort system designed to create a personalized microclimate for passengers using localized convective, conductive and radiative heating and cooling products.  Using self-regulating sensing technology and cloud data management, ClimateSense offers the ability to personalize and improve overall thermal comfort, improve time to comfort with (all-electric) pre-conditioning, provide comfort with less energy consumption thereby lowering carbon dioxide emissions, and extending range for electrified powertrains through a reduction in central HVAC system usage.

Electronics

Gentherm manufactures and supplies electronics to our core climate comfort solution products.  We also supply electronics for products outside this core set and have a contract to supply value-added electronic products to third parties for adjacent areas within the automotive interior, which is scheduled to launch in 2019.  Our 2017 acquisition of Canadian-based Etratech Enterprises expanded our electronics capabilities in automotive and consumer products.

Automotive Cable Systems

Gentherm produces automotive cable systems used to connect automotive components to sources of power. The automotive cable systems are an important element in the production of virtually all of our products and form a significant component in how we generate value to our customers by being an efficient, low-cost and high-quality manufacturer. We offer cable systems as integrated parts of our products and also as stand-alone components for other automotive applications, such as oxygen sensors.  Our cable

6


systems business includes both ready-made individual cables and ready-to-install cable networks. Sales of products that utilize our automotive cable systems technology represented 9% of our total product revenues for each of the twelve-month periods ending December 31, 2018, 2017 and 2016.

Air Moving Devices

Our highly durable and quiet air moving devices, including our proprietary blower and fan designs, are essential to all of our products that require air movement.  Production of integrated air moving devices is an example of our expanding manufacturing capabilities and is an important step toward our goal of becoming a full-service provider of sub-systems.

Products

Climate Comfort Solutions – Seat Comfort

Climate Control Seat® (“CCS”)

Our CCS products utilize exclusive patented technology to regulate temperature and enhance the comfort of vehicle passengers. The most advanced CCS models use one or more TEDs to generate heating or cooling depending upon the direction of the current applied to the device.

A TED is the heart of a compact heat pump used in our active CCS products. Air is forced through the heat pump and thermally conditioned in response to electronic switch input from the seat occupant. The conditioned air circulates by one of our specially designed air moving devices through a proprietary air distribution system installed in the seat cushion and seat back, so that the seat surface can be heated or cooled. Each seat has individual electronic controls to adjust the level of heating or cooling. Active CCS products substantially improve comfort compared with conventional air conditioners by focusing cooling directly on the passenger through the seat rather than waiting until ambient air cools the seat surface beneath the passenger.  A heated and ventilated variant of the CCS utilizes ambient cabin air to provide cooling comfort instead of a TED to actively cool the seat. In the heating mode, the vent-only system is supplemented with resistive heating elements.  

Heated and ventilated CCS products provide a lower level of cooling capability than our active CCS solution, but at a lower price. By offering different models of the CCS product, our customers have the opportunity to purchase a wider range of climate control products at different price points. Sales of CCS products contributed 36%, 39% and 45% to our total product revenues for the twelve-month periods ending December 31, 2018, 2017 and 2016, respectively.  

Heated Seat

Heated seats, based on our resistive heater core technology, are seamlessly integrated into automotive seat designs, and are constructed using materials that offer the best capacity, installation characteristics and durability.  Our capabilities allow customers to choose among a variety of resistive heater materials based on their individual vehicle specifications. Sales of heated seat products contributed 29%, 31% and 32% to our total product revenues for the twelve-month periods ending December 31, 2018, 2017 and 2016, respectively.  

Neck Climate Control Systems

Neck climate control systems ventilate warm or temperature-controlled air directly onto the passenger’s neck area. The system combines electronics, air moving device technologies and a heating element into a compact, integrated headrest design that can be adjusted to suit the body size of the passenger.  

Climate Comfort Solutions – Surface Climate Control Systems

Heated Steering Wheel

Heated steering wheels deliver heating comfort to automobile drivers through resistive elements. This product can be applied to both leather and wood steering wheels.  A solution for drivers in cold and mild weather climates, the heated steering wheel is designed for the global automotive market.  

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Heated Surfaces

Gentherm’s thermally conductive or radiative surfaces, such as door panel armrest and center console armrest products, are powered by our core technologies. The system is thermally managed by a heating control system which can be discretely located in the door panel or seat of the vehicle.  Heated door panels and armrests complement our climate-controlled seat and steering wheel products and provide a superior level of thermal comfort to the driving experience.  

Battery Sub-Systems

Thermoelectric Battery Thermal Management (BTM)

Thermal management is critically important for the long-term operation of advanced automotive batteries.  The expansion of electrified vehicle applications, such as 48-volt electrical networks, start-stop systems, regenerative braking systems and other micro-hybrid battery implementations, have drastically increased the demand for BTM systems solutions which enable wider operating temperature ranges, enhanced driving range and prolonged life of the battery.  Gentherm’s BTM system can provide precision battery cooling on pack or cell-level using patented TED technology.  The BTM system maintains the temperature of the lithium-ion battery or other advanced chemistry battery within an acceptable temperature range without the use of chilled liquids or refrigerant loops, making it a light weight, highly scalable, compact solution ideal for automotive applications. Gentherm’s proprietary BTM system is compact and energy efficient, resulting in a minimal energy budget, which is important for an electrified vehicle.  The performance improvements realized with this product have been validated through the award of production BTM systems by two flagship original equipment manufacturers (“OEMs”). We are currently working with other OEMs in an effort to secure more production contracts.

Cell Connecting Systems

Cell connecting systems provide secure connections between advanced automotive batteries to transmit a continuous flow of information about battery temperature and cell voltage during the charging and discharging process to monitor battery system performance.

Climate Comfort Solutions – Thermal Convenience

TrueThermTM Cup Holder

The TrueTherm cup holder applies Gentherm’s patented TED technologies to keep beverages of automobile drivers and passengers either warm or cool.  We have developed a range of cup holder models with varying degrees of functionality, designed to be packaged in multiple configurations to accommodate different console environments.  Our dual independent design provides separate temperature settings in each holder allowing the driver and passenger to individually maintain a heated or cooled beverage.  

TrueThermTM Storage Unit

Gentherm’s TrueTherm storage units provide for food or beverage cooling for the global automotive market.  Using patented TED or refrigeration technologies, the TrueTherm cool storage unit provides temperature control independently from a vehicle’s heating and air conditioning system.  It can be custom designed to accommodate tight interior spaces, such as the front floor console of a sport utility vehicle (SUV) and provide additional cooling capacity to those who have long work commutes or transport multiple passengers.  

Remote Power Generation

Gentherm is a leading provider of remote electric power generation systems, primarily serving large upstream and midstream oil and gas markets.  Using our unique industrial TEG technologies, our generation systems deliver ultra-reliable power for long-term unattended operation in geographically remote applications that are critical to our customers’ operations, such as wellhead automation, valve automation and cathodic protection of pipelines.  We design and produce turnkey systems that are highly customized for application, load, power and fuel source, and location requirements.  Other applications for our remote power generation systems include mobile telecommunications, security and surveillance and scientific monitoring.  Our revenues from this product include large custom systems projects ranging from $200,000 to over $2,000,000.  Quarterly results from our remote power generation business can vary significantly due to delivery timing of these custom systems to customers, among other factors.

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Patient Temperature Management Systems

Gentherm provides a full line of patient temperature management systems utilizing multiple modalities, including our Blanketrol® hyper-hypothermia system, our WarmAir® convective warming system and our FilteredFlo® warming blankets, designed to manage patient body temperatures in operating rooms, recovery rooms, intensive care units and other areas of hospitals, our as well as for use in the home healthcare market.  Our systems offer simple programmable body temperature regulations to establish and maintain stable patient temperature. We also offer the industry-leading Hemotherm® blood temperature management solutions that delivers reliable, effective blood temperature management control during cardiopulmonary by-pass and other related cardiovascular procedures. Revenues from the sale of patient temperature management systems began in April 2016 in connection with the acquisition of CSZ.

Environmental Testing Equipment and Testing Services

Gentherm provides standard and custom designed environmental test chambers that execute reliability tests by subjecting products to environmental extremes like temperature, humidity, altitude, and vibration.  Our chambers are available in a variety of sizes with capabilities ranging from basic temperature cycling to accelerated stress testing.  Gentherm designs and sells environmental test chambers for a variety of industries, which include the pharmaceutical, automotive, electronics, medical, telecommunications, aerospace and defense industries.  Revenues from the sale of environment testing equipment and testing services began in April 2016 in connection with the acquisition of CSZ.  On February 1, 2019, we completed the sale of these divisions to Weiss Technik North America, Inc. for total cash proceeds of $47,500,000.

Sponsored Research

In April 2016, the Company was selected as a subcontractor in a U.S. Air Force sponsored program award for the engineering and development of a non-invasive warming and cooling device. The device will be incorporated as medical equipment in the Air Force Expeditionary Medicine Support and Air Force Theater Hospital units supporting overseas contingency operations. Once operational testing is complete and the manufacturing processes for initial production are fully matured, the device will be submitted to the U.S. Food and Drug Administration for certification. The 30-month, $5.7 million project will be fully funded by the U.S. Air Force. As a subcontractor, Gentherm’s share of the award is approximately $2.6 million. Gentherm received $750,000, $1.2 million and $300,000 in program funding during 2018, 2017 and 2016, respectively. We expect to collect the remaining $350,000 in funding during the first quarter of 2019.

Marketing, Customers and Sales

Our Automotive segment customers include light vehicle OEMs, commercial vehicle OEMs, and first tier (“Tier 1”) suppliers to the automotive OEMs, including automotive seat manufacturers.  We also directly supply CCS and seat heaters to aftermarket seat distributors and installers.

The Company’s automotive marketing is directed primarily at automotive manufacturers and their Tier 1 suppliers and focuses on the enhanced value consumers attribute to vehicles with climate comfort products.  If interested, the manufacturers direct us to work with their suppliers to integrate our products into the vehicle’s seat or interior design. These customers will sell our product, as a component of an entire seat or seating system, to automotive OEMs. Once the integration work is complete, prototypes are sent to the manufacturer for evaluation and testing. If a manufacture accepts our product, a program can then be launched for a particular model on a production basis, but it normally takes two to three years from the time a manufacturer decides to include any of our products in a vehicle model to actual volume production for that vehicle. During this process, we derive funding from prototype sales but obtain no significant revenue until mass production begins. Inherent to the automotive supplier market are costs and commitments that are incurred well in advance of the receipt of orders and resulting revenues from customers.

The volume of products we sell is significantly affected by the levels of new vehicle sales and the general business conditions in the automotive industry.

For 2018, our revenues from sales to our three largest customers, Lear, Adient and Bosch Automotive were $181.0 million, $166.9 million, and $79.9 million, respectively, representing 17%, 16%, and 8% of our total revenues, respectively. Revenues from Adient and Lear represent sales of our climate comfort products.  Revenues from Bosch Automotive represent product sales based on

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our automobile cable system technology and is used primarily in the production of automotive oxygen sensors. The loss of any one of these customers is likely to have a material adverse impact on our business; however, as noted above, our approach is to market climate comfort solutions, battery thermal management and cable technology products to the OEMs who then direct their suppliers, such as Adient and Lear, to work with us. It is, therefore, relevant to understand how our revenues are divided among the OEMs, as shown below.

Our revenues, including those from sales of our automotive cable systems products, for each of the past three years were divided among automotive OEMs as follows:

 

Manufacturer

 

2018

 

 

2017

 

 

2016

 

General Motors

 

 

14

%

 

 

15

%

 

 

18

%

Ford Motor Company

 

 

10

 

 

 

11

 

 

 

12

 

Volkswagen

 

 

9

 

 

 

10

 

 

 

10

 

Fiat Chrysler Automobiles

 

 

9

 

 

 

9

 

 

 

10

 

Hyundai

 

 

7

 

 

 

8

 

 

 

10

 

Honda

 

 

6

 

 

 

6

 

 

 

6

 

Daimler

 

 

5

 

 

 

4

 

 

 

4

 

Renault/Nissan

 

 

5

 

 

 

6

 

 

 

6

 

BMW

 

 

4

 

 

 

5

 

 

 

6

 

Toyota Motor Corporation

 

 

3

 

 

 

4

 

 

 

4

 

Jaguar/Land Rover

 

 

3

 

 

 

3

 

 

 

2

 

Other

 

 

25

 

 

 

19

 

 

 

12

 

Total

 

 

100

%

 

 

100

%

 

 

100

%

Non-automotive revenues of 9% in 2018, 11% in 2017 and 8% for 2016 are included within the Other category.  

Our power generation systems are used by oil and gas customers for cathodic pipeline protection and other remote applications around the world.  

Patient temperature management systems customers include hospitals and other health care service providers.  Customers purchase our products at prices negotiated by exclusive medical equipment distributors or, if they are a named participant, a group purchasing organization.

Our environmental testing equipment and testing services are sold to a wide variety of customer in many different industries.

Our non-automotive electronics products are sold to a variety of industrial customers, including an elevator door manufacturer and an irrigation systems company.

Outsourcing, Production and Suppliers

Our global manufacturing facilities are located close to our key customers.  Our European manufacturing operations are located at our Hungarian, Macedonian and Ukrainian sites. In North America, we operate two manufacturing production sites in Acuña, Mexico, one in Celaya, Mexico, one in Cincinnati, Ohio, one in Alberta, Canada and one in Ontario, Canada. In Asia, we operate production facilities in Langfang, China, and Ha Nam, Vietnam and two electronics production facilities in Shenzhen, China.

We rely on various domestic and foreign vendors and suppliers to supply components for our products through purchase orders, with no guaranteed supply arrangements. Components for certain products, including TEDs, are only available from a limited number of suppliers in the world. The loss of any significant supplier, in the absence of a timely and satisfactory alternative arrangement, or an inability to obtain essential components on reasonable terms or at all, could materially adversely affect our business, operations and cash flows. Our business and operations could also be materially adversely affected by delays in deliveries from our suppliers.

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Proprietary Rights and Patents

The development of new technologies is critical to the execution of our business strategy. Patents obtained for new technologies form an important basis for the success of the Company and underpin the success of our research and development efforts. We have adopted a policy of obtaining, where practical, the exclusive rights to use technology related to our products through patents or licenses for proprietary technologies or processes. We adapt and commercialize such technologies in products for mass production. We also have developed technologies or furthered the development of acquired technologies through internal research and development efforts.

As of December 31, 2018, Gentherm held 636 issued patents, of which 273 were U.S. patents and 363 were non-U.S. patents.  A total of 17 patents were held jointly with other companies. Gentherm held 454 patents directed to climate control products and thermoelectric technologies, 139 patents directed at heating elements and technologies, 26 patents directed to air moving devices, 12 patents directed at patient temperature management systems and 5 patents directed to environmental test chambers and technologies.

Competition

The automotive components and systems business is highly competitive. We have several important competitors in the heated seat business and certain vehicle manufacturers have, for some time, offered options on certain models that combine heated seats with circulation of ambient air or cooled air from the car’s air conditioning system which works similar to our heated and ventilated seat system products.  It is possible that our competitors will be able to expand or modify their current products to more directly compete with our CCS products. We believe that there are other potential competitors that are working to develop systems for heating and cooling of automotive car seats.

We may experience additional competition directly from automobile manufacturers or other major suppliers, most of which have the capability to manufacture competing products. We believe that our products will compete successfully on the basis of performance, quality, and price.

Additionally, we may experience competition from non-traditional participants that introduce new technologies, such as advanced driver assistance technologies, as well as new products or services, such as autonomous vehicles, car- and ride-sharing and transportation as a service.

See “Risk Factors” for further information regarding the significant competition in the automotive industry.

Our power generation systems compete with other technologies, such as photovoltaic solar panels and fuel cells, to deliver power to different types of oil and gas market applications.  Our products have earned a reputation for delivering highly reliable power under extreme climatic and weather conditions to locations that do not offer access to an electrical grid.  In addition to quality and performance, our ability to design and support custom solutions that integrate directly with an application’s existing infrastructure gives our products a competitive advantage over products based on other technologies.

The patient temperature management market has seven segments: convective warming, blood warming, fluid warming, surface warming, invasive warming, non-invasive cooling and invasive cooling.  Gentherm specializes in the convective warming, blood warming, surface warming and non-invasive cooling.  We compete based on the quality of our products and service to our customers and are working to develop and market the next generation of advanced temperature management systems that complies with the rules and regulations of the U.S. Food and Drug Administration and other government regulatory bodies.

Gentherm’s environment test chamber business compete globally on the basis of performance, customization, quality and service. Our ability to modify our standard product lines to meet customer specifications helped differentiate Gentherm’s chambers from other competitive offerings. On February 1, 2019, we completed the sale of this business.

Risk Attendant to Foreign Operations

We internally manufacture the majority of our products at our production facilities in foreign countries.  Other products we sell are manufactured by third parties in foreign countries.  See “Risk Factors” for a description of risks attendant to our foreign operations.

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See Note 9 of the consolidated financial statements for information regarding the Company’s segment revenues by geographic composition.

Seasonality

Our principal operations are directly related to the automotive industry. Consequently, we have historically experienced seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants close for model year changeovers and in December when many customer plants close for the holidays. See Item 8 “Financial Statements and Supplementary Data” for selected quarterly financial data.  

Employees

As of December 31, 2018 and 2017, Gentherm’s employment levels worldwide were as follows:

 

Region

 

2018

 

 

2017

 

United States and Canada

 

 

1,059

 

 

 

1,155

 

Mexico

 

 

5,494

 

 

 

4,693

 

Germany

 

 

246

 

 

 

255

 

Hungary

 

 

259

 

 

 

251

 

United Kingdom

 

 

4

 

 

 

3

 

Ukraine

 

 

1,959

 

 

 

2,219

 

Malta

 

 

13

 

 

 

12

 

Macedonia

 

 

1,771

 

 

 

1,358

 

China

 

 

2,173

 

 

 

2,392

 

Korea

 

 

39

 

 

 

45

 

Japan

 

 

21

 

 

 

20

 

Vietnam

 

 

717

 

 

 

666

 

 

 

 

13,755

 

 

 

13,069

 

Despite higher worldwide employment at December 31, 2018 as compared to December 31, 2017, the Company’s Fit-for-Growth cost savings initiative realized a 9% reduction in salaried positions during 2018. Gentherm retains the services of outside contractors from time to time. None of our employees is subject to collective bargaining agreements. We consider our employee relations to be satisfactory.

Executive Officers of the Registrant

Our current executive officers are as follows:

Phillip Eyler, 47, was appointed President and Chief Executive Officer, and to the Company’s Board of Directors, in December 2017. Prior to joining Gentherm, Mr. Eyler served as President of the $3 billion Connected Car division at Harman, a subsidiary of Samsung since 2015. As President of the Connected Car division, Mr. Eyler oversaw an organization of more than 8,000 employees dedicated to the development of highly integrated connected car systems encompassing infotainment, telematics, connected safety and cyber security solutions, among others. Mr. Eyler joined Harman in 1997 and held various senior management positions, including Senior Vice-President and General Manager of Harman’s Global Automotive Audio business from 2011 to 2015. Mr. Eyler received a Bachelor of Science degree in mechanical engineering from Purdue University and an MBA from the Fuqua School of Business at Duke University.

Frithjof Oldorff, 52, was appointed President of the Automotive business unit in July 2013.  Prior to this appointment, Mr. Oldorff served as the Chief Operating Officer of Gentherm GmbH since 2008. He previously was a Director of Operations for Freudenberg from 2005 to 2007 and held various positions at Faurecia from 1995 to 2005. Mr. Oldorff received a master’s degree from Darmstadt Technical University (Germany) in Industrial and Mechanical Engineering.

Matteo Anversa, 47, was appointed Executive Vice President Finance, Chief Financial Officer and Treasurer in January 2019. Prior to joining Gentherm, Mr. Anversa served as Executive Vice President and Chief Financial Officer of Myers Industries since

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December 2016. Prior to Myers Industries, Mr. Anversa worked since 2013 at Fiat Chrysler Automobiles where he held several executive management positions, including Vice President, Group FP&A Fiat Chrysler and Chief Financial Officer for Ferrari SpA where he helped prepare Ferrari for its initial public offering.  Mr. Anversa began his career with General Electric where he held various leadership roles during his 16-year tenure. Mr. Anversa holds a degree in Mechanical Engineering from the University of Parma, Italy.

Kenneth J. Phillips, 45, was appointed Senior Vice President, General Counsel and Secretary in June 2012. Prior to joining Gentherm, Mr. Phillips was a Partner in the Detroit, Michigan office of the law firm Honigman LLP. Mr. Phillips graduated with a J.D. from Wayne State University and a bachelor’s degree in Accounting and Finance from Oakland University. Mr. Phillips is also a Certified Public Accountant.

Mark A. Potesta, 55, was appointed Senior Vice President and Chief Technology Officer in November 2018. Prior to joining Gentherm, Mr. Potesta worked since 2017 at Panasonic Automotive Systems as Executive Vice President of Engineering and Chief Technology Officer.  Prior to 2017, Mr. Potesta worked at Delphi Corporation starting in 1999, where he held positions of increasing responsibility in engineering as well as business unit leadership for electrical and electronic architectures.  Mr. Potesta graduated with master’s and bachelor’s degrees in Electrical Engineering from Youngstown State University.

Barbara J. Runyon, 48, was appointed Senior Vice President and Chief Human Resources Officer in August 2018.  Prior to joining Gentherm, Ms. Runyon worked as Vice President and Chief Human Resources Officer at La-Z-Boy Incorporated since 2015. Prior to La-Z-Boy, Ms. Runyon held roles of increasing responsibility for at PepsiCo/The Pepsi Bottling Group for over 14 years.  Ms. Runyon graduated with an MBA with emphasis in Organizational Development from Wayne State University and a BS in Human Resources from Michigan State University.

Ryan Gaul, 43, was appointed Senior Vice President of Operations in July 2018.  Mr. Gaul has spent most of his professional career with Gentherm, serving in diverse roles in Gentherm’s locations in North America, Europe and Asia. He started his career in IT, and moved into roles of increasing responsibility within the IT organization, serving as CIO from 2005 to 2009. From 2009 to 2014, he served as Managing Director of Operations for Gentherm’s Asian business. From 2014 to 2018, he served as Vice President of Strategy and Marketing.  Mr. Gaul received his bachelor’s degree from the University of Missouri.

Yijing Brentano, 47, was appointed Senior Vice President of Investor Relations and Corporate Communications in February 2018.  Before joining Gentherm, Ms. Brentano served as the Vice President of Investor Relations and Corporate Strategy at Harman International, a Samsung company, from 2015 to 2017.  Prior to that, she spent 17 years at Sprint Corporation in multiple executive positions, including Vice President of Strategic Initiatives and Mobile Health, General Manager of International Wholesale, Vice President of Investor Relations and business unit CFO roles.  Ms. Brentano started her career at Ernst & Young and is a Certified Treasury Professional.  She holds a Bachelor of Science degree from the University of Kansas and an MBA from the University of Chicago Booth School of Business.

Paul Giberson, 38, was appointed Senior Vice President of Sales in November 2018.  Mr. Giberson has worked at Gentherm since 2006, starting as an account manager and moving to roles of ever-increasing responsibility, including Director of Sales and Marketing for North American and Vice-President of Automotive Sales.  Mr. Giberson holds a bachelor’s degree from the University of Windsor.

Officers of the Company serve at the pleasure of the Board of Directors and, to the extent applicable, in accordance with the terms of their individual Service Agreements.

ITEM 1A.

RISK FACTORS

You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this Report, as well as any amendments or updates reflected in subsequent filings or furnishings with the SEC.  We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity.  

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Risks Relating to Our Business

Numerous general economic and industry factors which we do not control have significant impacts on the automotive industry, our primary market, and resulting difficulties in the automotive industry or for our key customers and suppliers would have a material and adverse effect on our business, results of operations and financial condition

Our Automotive segment represents 91%, 89% and 92% of our product revenues for the years ended December 31, 2018, 2017 and 2016, respectively.  Demand for our automotive products is directly related to automotive vehicle production, which is impacted by numerous general economic and industry factors which we do not control and is highly cyclical.  In 2018, our product orders were adversely impacted by lower than expected vehicle production in North America, Europe, and Asia, and any prolonged decrease in vehicle production may have a material adverse effect on our business, results of operations and financial condition.

In particular, the automotive industry has been susceptible historically in the U.S. and globally to economic recessions, labor disputes, volatile fuel prices, complex and evolving regulatory requirements, trade agreements and government initiatives and uncertain availability and cost of credit. In addition to the continuation of these trends, future automotive vehicle production may be materially impacted by additional industry or consumer behaviors, including the development and use of autonomous and electric vehicles and increasing use of car- and ride-sharing and on-demand transportation as a service. We rely in part on market analysis, including from our customers and the IHS Markit reports on vehicle production, to make operational and strategic decisions, and increased market volatility makes it more difficult to obtain reliable data. Further, disruptions in the global economy and volatility in the financial markets may cause, among other things, lower levels of liquidity, increased borrowing rates, increased rates of default and bankruptcy, lower consumer and business spending, and lower consumer net worth, all of which may reduce demand for our products and have a material adverse effect on our business, results of operations and financial condition.  We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations, difficulties if we overstrain our resources, and our long-term business approach that necessitates we remain in position to respond when market conditions improve.

Unfavorable economic or industry conditions could result in the financial distress of our customers and suppliers.  If our customers experience an actual decline or project a future decline in vehicle sales generally, or in sales of models for which we supply products, we may experience reductions in orders from these customers, experience difficulties in obtaining new business, incur write-offs of accounts receivable, incur impairment charges or require restructuring actions.  In addition, if any of our significant customers experiences a material work stoppage, the customer may halt or limit the purchase of our products.  This could require us to shut down or significantly reduce production at facilities relating to such products, which could have a material adverse effect on our business and harm our profitability.  

The automotive component industry, as well as the automotive industry generally, is subject to intense competition and our current automotive products may be rendered obsolete by future technological developments

The automotive component industry, from which we derive a substantial majority of our revenues, is subject to intense competition. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, timely delivery, technological innovation and service.  In addition, customers often demand periodic price reductions during a vehicle’s life that require us to continually assess, redefine and improve our operations, products and manufacturing capabilities to maintain and improve profitability. Many of our competitors are substantially larger in size and have substantially greater financial, marketing and other resources than we do, and therefore may be more effective in adapting to customer requirements while being profitable.

We must also be responsive to the entrance of non-traditional participants in the automotive industry. These non-traditional participants may seek to disrupt the historic business model of the industry through the introduction of new technologies, such as advanced driver assistance technologies, as well as new products or services, such as autonomous vehicles, car- and ride-sharing and on-demand transportation as a service. As our business evolves, the pressure to innovate will encompass a wider range of products and services, including products and services that may be outside of our historically core business. If we do not accurately predict, prepare for and respond to new kinds of technological innovations, market developments and changing customer needs, our sales, profitability and long-term competitiveness may be harmed.  In addition, there can be no assurance that we will successfully differentiate our products from those of our competitors, that the marketplace will consider our current or proposed products to be superior or even comparable to those of our competitors, or that we can succeed in establishing new or maintaining existing relationships with automobile manufacturers.

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Due to the rapid pace of technological change, as with any technology-based product, our ability to compete successfully will depend on our ability to develop and license improved technologies on a rapid and cost-efficient basis. For example, in the automotive industry, we believe the development of new products featuring our new ClimateSenseTM technology will increase our value as an integral part of the overall vehicle climate solution.  Our business will therefore require extensive capital expenditures and investment in product development, manufacturing and management information systems.  Further, certain of our products may be rendered obsolete by future technologies, including from competitors in our products or widespread use of autonomous vehicles, or consumer preferences.  Our operations, financial results and competitive position would be materially and adversely affected if we were unable to anticipate such future developments and develop, or obtain access to, critical new technologies at a reasonable cost, or adapt to changes in the automotive industry generally.  An inability to compete successfully may also hinder our ability to complete acquisitions or financings on reasonable terms or at all.

Additionally, many advanced technologies developing in the automotive industry present novel issues with which domestic and foreign regulators have only limited experience and will be subject to evolving regulatory frameworks. Any current and future regulations in these areas could impact whether and how these technologies are designed and integrated into our products and may ultimately subject us to increased costs and uncertainty.

Our inability to effectively manage the timing, quality and costs of new program launches could adversely affect our financial performance.

The launch of a new program is a complex process, the success of which depends on a wide range of factors, including the production readiness of our and our suppliers' manufacturing facilities and manufacturing processes, as well as factors related to tooling, equipment, employees, initial product quality and other factors. Given the complexity of new program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp up of costs; however, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could have a materially adversely effect on our operations, financial condition and operating results.

If our expansion efforts are not successfully implemented, they may adversely impact our business and results of operations

Over the past few years, we have opened or acquired new manufacturing facilities in Vietnam, Macedonia, Mexico and China, to support our customers’ global operations. Opening new, or expanding existing, manufacturing facilities entail a number of risks, including our ability to successfully manage the demands placed on our management resources and engineering and quality teams, our ability to continue production at levels, quality and within the cost and timeframe estimated, the continuing implementation of internal controls and compliance, varied local regulations, and our ability to attract and maintain a sufficient number of skilled workers at the requisite locations to meet the needs of the facilities.  Our results of operations could also be adversely impacted by start-up costs until production levels at the facilities reach planned levels, as well as any legacy issues with acquired or existing facilities.  

These newly developed or acquired facilities, as well as our other production facilities around the world, could have significant unused capacity if our product revenues do not continue to increase.  Significant unused capacity would result in overhead costs that would need to be absorbed by a smaller than expected revenue base, which could materially and adversely impact our financial results.

While there are currently no active projects to construct new manufacturing facilities, or agreements to acquire other manufacturing facilities, or plans to materially expand existing facilities, we regularly consider such opportunities and any future construction or acquisition activities, particularly in foreign countries, could entail the risks noted above.  If we experience construction or regulatory delays or increased costs, our estimates and assumptions are incorrect, or other unforeseen events occur, our business, financial conditions and results of operations could be adversely impacted.  

Our ability to market our automotive products is subject to a lengthy sales and acceptance cycle, which requires significant investment prior to significant sales revenue, and non-automotive products may be subject to similar time lags

The sales cycle for our automotive products is lengthy because an automobile manufacturer must develop a high degree of assurance that the products it buys will meet consumer needs, interface as easily as possible with the other parts of a vehicle and with the automobile manufacturer’s production and assembly process, and have minimal warranty, safety and service problems. As a result,

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from the time that a manufacturer develops a strong interest in our products for a specified vehicle, it normally will take several years before our products are available to consumers in that vehicle.

In the automotive components industry, products typically proceed through five stages of research and development. Initial research on the product concept comes first, to assess its technical feasibility and economic costs and benefits. This stage often includes development of an internal prototype for the component supplier’s own evaluation. If the product appears feasible, the component supplier manufactures a functioning prototype to demonstrate and test the product’s features. These prototypes are then marketed and sold to automotive companies for testing and evaluation. If an automobile manufacturer shows interest in the product, it typically works with the component supplier to refine the product, then purchases second and subsequent generation engineering prototypes for further evaluation. Finally, the automobile manufacturer either decides to purchase the component for a production vehicle or terminates the program.  

The time required to progress through these five stages to commercialization varies widely. Generally, the more a component must be integrated with other vehicle systems, the longer the process takes. Further, products that are installed by the factory usually require extra time for evaluation because other vehicle systems are affected, and a decision to introduce the product into the vehicle is not easily reversed. Because our automotive products affect other vehicle systems and are factory-installed items, the process usually takes several years from conception to commercialization.

While we currently have active development programs with various seat manufacturers and automotive OEMs for our thermal management products, no assurance can be given that our products will be implemented in any particular vehicles.  During this development process, we derive minimal funding from prototype sales but generally obtain no significant revenue until mass production begins, which could have a material adverse effect on our liquidity.  If our products are not selected after a lengthy development process, our results of operations and financial condition could be materially and adversely affected.  

Non-automotive products that we develop or significantly update are also likely to have a lengthy sales cycle. Because the use of our proprietary technology in other markets is new and evolving, and because customers will likely require any new product or significantly changed product that we develop to pass certain feasibility, safety and economic viability tests before committing to purchase, it is expected that any new or significantly changed products we develop in non-automotive markets also will take several years before they are sold to customers, if at all.

Our ability to market our products successfully depends on acceptance of our products by existing and potential customers and consumers, as well as the success of our customers

We have been, and will continue to be, required to educate potential customers and demonstrate that the merits of our existing products justify the costs associated with them.  Similar efforts will be required with potential customers for additional products we develop using technologies we develop or license.  Manufacturers will only include our products if there appears to be demand for our products from the consumers.  For our automotive products, we rely on OEMs and applicable dealer networks to market our products to consumers, and we do not have any control over the marketing budget or messaging nor the training of employees and agents regarding our products.  Further, OEMs and dealer networks may market products offered by our competitors, including products manufactured by such OEMs.  If customers or consumers conclude that temperature control seats or our other automotive products are unnecessary or too expensive or that our competitors offer more favorable terms or better products, OEMs and other manufacturers may reduce availability or decline to include our products in their vehicles.

In addition, the vehicle market is highly competitive among OEMs, which drives continual cost-cutting initiatives by our customers.  It is possible that pricing pressures beyond our expectations could intensify as OEMs pursue restructuring and cost cutting initiatives.  If we are unable to generate sufficient production cost savings in the future to offset such price reductions, our gross margin, rate of profitability and cash flows could be materially and adversely affected.  

We must also satisfy the timing, performance and quality standards of our customers and consumers during mass production.  Further, we are dependent upon the timing and success of our customers’ continuation of existing vehicles and introduction of new vehicles which include our products.  If such vehicles are not successful in the marketplace, our results of operations and financial condition could be materially and adversely affected.

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Significant increases in the market prices and restrictions on the availability of certain raw materials may materially and adversely affect our business

Many of our products include TEDs which contain certain raw materials that generally cannot be substituted. The prices for these raw materials fluctuate depending on market conditions.  We generally have no contractual price protections with our suppliers and customers regarding raw material costs.  Substantial increases in the prices for our raw materials increase our operating costs and could reduce our profitability if we cannot recover these increases from our customers.  As an example, Tellurium is a raw material used in TEDs. If the market price for this raw material significantly increases, as it has in the past, our gross profit may be adversely impacted as our suppliers pass those price increases on to us. Other key raw materials include copper, silver and petroleum based engineered plastics. In addition, the availability of raw materials fluctuates from time to time due to factors outside our control, including as a result of catastrophic events, which may adversely impact our ability to meet customer commitments or needs. Our business, results of operations and financial condition could be materially and adversely affected by shortages or significant price increases of key raw materials.  

The disruption or loss of relationships with vendors and suppliers for the components for our products could materially and adversely affect our business

Our ability to manufacture and market our products successfully is dependent on relationships with both third party vendors and suppliers. We rely on various vendors and suppliers for the components of our products and procure these components through purchase orders, with no guaranteed supply arrangements. Certain components are only available from a limited number of suppliers. The loss of any significant supplier, in the absence of a timely and satisfactory alternative arrangement, or an inability to obtain essential components on reasonable terms or at all, could materially and adversely affect our business, results of operations and financial condition.

Our business also could be materially and adversely affected by delays in deliveries from suppliers because we carry minimal inventory of product components.  Automobile manufacturers, in particular, demand on-time delivery of quality products, and some have required the payment of substantial financial penalties for failure to deliver components to their plants on a timely basis.  Such penalties, as well as costs to avoid them, such as overtime costs and overnight air freighting of parts that normally are shipped by other less expensive means of transportation due to our global production operations, could have a material adverse effect on our business, results of operations and financial condition. Moreover, the inability to meet demand for our products on a timely basis would materially and adversely affect our reputation and future commercial prospects.

In addition, financial difficulties or solvency problems with our suppliers, which may be exacerbated by the cost of remediating quality issues with these items, could lead to uncertainty in our supply chain or cause supply disruptions for us which could, in turn, disrupt our operations, including production.

Further, we engage outside contractors to perform product assembly and other production functions for certain of our products. Our reliance upon third party contractors for certain production functions reduces our control over the manufacture of our products and makes us dependent in part upon such third parties to deliver our products in a timely manner, with satisfactory quality controls and on a competitive basis.  If we are unable to meet commitments to our customers due to third party services in production, our business, results of operations, financial condition and reputation could be materially and adversely affected.

Our business is subject to risks associated with manufacturing processes

We internally manufacture a large and growing portion of our products at our fourteen production facilities.  See Item 2. below for information regarding our significant properties.  Other products we sell are manufactured by third parties.  A catastrophic loss of the use of all or a portion of our facilities due to accident, fire, explosion, labor issues, civil unrest, weather conditions, other natural disaster or otherwise, whether short or long-term, could have a material adverse effect on our business, results of operations and financial condition.  This risk is exacerbated by the fact that our primary manufacturing locations are in Mexico, China, Vietnam, Macedonia and Ukraine, all countries that have historically experienced a heightened degree of political, civil and labor uncertainty.

Political conflict and related demonstrations and violence in Ukraine in recent years, for example, highlights the risks to our foreign manufacturing facilities.  Although our manufacturing facility in Ukraine is located approximately 700 miles by road from Kiev, and approximately the same distance from the activities along the border of Ukraine and Russia where fighting has occurred, we

17


cannot be certain that similar demonstrations, unrest and international tensions will not affect our facility in the future, including due to electrical outages and periodic battles with separatists closer to our facility. In addition, certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. Furthermore, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers.  If that border crossing were to be closed or restricted for any reason, we would essentially experience a loss of the use of our Ukrainian facility, which would have a material adverse effect on our business.

Unexpected failures of our equipment and machinery also may result in production delays, revenue loss and significant repair costs, injuries to our employees, and customer claims. Any interruption in production capability may require us to delay fulfilling orders, utilize less efficient internal facilities on a temporary basis and make large capital expenditures to remedy the situation, which could have a negative impact on our profitability and cash flows.

We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss.  However, any recovery under our insurance policies may not be offset the lost sales or increased costs that may be experienced during the disruption of operations, and such proceeds may be received and accounted for in a different reporting period, which could materially and adversely affect our business, financial condition, results of operations and cash flow generally or for a specific reporting period.

Our global operations subject us to risks that may harm our operations and financial results

In 2018, 53% of our product revenue was generated from sales to customers outside the United States. We have significant personnel, property, equipment and operations in a number of countries outside of the United States, including Canada, China, Germany, Hungary, Macedonia, Mexico, Ukraine and Vietnam.  We have also engaged third parties to produce products for us in China and Japan. We and these third parties maintain production facilities in lower-cost countries for cost containment reasons.  Our exposure to the risks described below is substantial and increasing.  We also derive a significant portion of revenues from Europe and Asia and conduct certain investing and financing activities in local currencies.

In addition to the general risks relating to our operations, our international operations are subject to unique risks inherent in doing business abroad, including:

 

exposure to local economic conditions and infrastructure;

 

different and complex local laws and regulations and enforcement thereof, including those relating to governance, taxes, litigation, anti-corruption, employment, employee benefits, environmental, competition, permitting, investment, product regulations, repatriation, and export/import restrictions or requirements, such as the recently implemented revised emissions test procedure in Europe referred to as the Worldwide Harmonized Light Vehicles Test Procedure that has limited the production of certain vehicles as OEMs have struggled to meet the new requirements;

 

increased uncertainty regarding social, political, immigration and trade policies in the U.S. and abroad, such as recent U.S. legislation and policies regarding NAFTA and tariffs and the U.K.’s pending Brexit (as defined below);

 

political, economic and civil instability (including acts of terrorism, civil unrest, drug-cartel related and other forms of violence and outbreaks of war);

 

expropriation, nationalization or other protectionist activities;

 

currency exchange rate fluctuations and currency controls; in particular, a significant portion of our revenues and expenses are denominated in currencies other than the U.S. Dollar, including the Euro, the Chinese Renminbi, the Vietnamese Dong, the Hungarian Forint, the Macedonian Denar, the Ukrainian Hryvnia, and the Mexican Peso;

 

increases in working capital requirements and greater potential for production and delivery delays due to extended logistics and geo-political developments;

 

local business and cultural factors that differ from our customary standards and practices, including business practices that we are prohibited from engaging in due to anti-corruption laws and regulations; and

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global sovereign fiscal matters and creditworthiness, including potential defaults and the related impacts on economic activity, including the possible effects on credit markets, currency values, monetary unions, international treaties and fiscal policies.

See “Our business is subject to risks associated with manufacturing processes” above for a description of certain specific risks associated with our facility in Ukraine.

Modification of the North American Free Trade Agreement (“NAFTA”) or other international trade agreements, and the imposition of significant tariffs on imports into the United States, could have a material and adverse effect on our business

A significant portion of our business activities are conducted in foreign countries, including Mexico.  As a result of changes to U.S. administrative policy, there may be changes to existing trade agreements, like NAFTA and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”) which is still subject to approval by the U.S., Mexico and Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the U.S., particularly tariffs on products manufactured in Mexico, among other possible changes.

Additionally, during 2018, the U.S. and China applied significant tariffs to certain of each other’s exports. The institution of trade tariffs, both globally and between the U.S. and China specifically, carries the risk of negatively impacting overall economic conditions, which could have negative repercussions on the Company. More directly, imposition of tariffs has caused and could cause further increases in the costs of our raw materials which we may not be able to pass on to our customers in part or in full, which would directly and negatively impact our business.  We purchase a significant amount of raw material components, including products manufactured in our China facilities, which are subject to the recently-enacted tariffs.  The imposition of tariffs has caused and could cause further increases in the costs of our raw materials, and we may not be able to mitigate the impact from these tariffs or additional future tariffs.

It remains unclear what the U.S. administration or foreign governments, including Mexico and China, will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies.  A trade war, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently manufacture and sells products, and any resulting negative sentiments towards the U.S. as a result of such changes, likely would have an adverse effect on our business, financial condition or results of operations.

Political and economic uncertainty arising from the outcome of the referendum on the membership of the United Kingdom in the European Union could adversely impact our financial results

In June 2016, the United Kingdom (U.K.) voted to exit the European Union (“Brexit”) in a referendum vote. In March, 2017, the U.K. formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty, which provides a two-year time period through March 2019 for the U.K. and the European Union countries to negotiate a withdrawal. The announcement of Brexit and the ongoing negotiations for the withdrawal of the U.K. from the European Union has created and may continue to create global economic uncertainty, which may continue to impact global light vehicle production, and affect the business of and/or our relationships with our customers and suppliers, as well as alter the relationship among tariffs and currencies. The long-term effects of Brexit remain uncertain, and Brexit has and may continue to contribute to volatility in stock prices of companies that have significant operations in Europe, and on currency exchange rates.  Significant currency fluctuations may negatively impact our operations; we generate certain revenues in Euro, but do not generate revenues denominated in the British Pound. In addition, Brexit could result in legal uncertainty and potentially divergent national laws and regulations as new legal relationships between the United Kingdom and the European Union are established.  The ultimate effects of Brexit on us also will depend on the terms of any agreements the U.K. and the European Union make to retain access to each other's respective markets either during a transitional period or more permanently.

Significant price volatility, or uncertainty in future pricing, or oil and natural gas may materially and adversely impact our Gentherm Global Power Technologies (GPT) business

A large portion of our GPT products are sold to companies in the oil and gas industry, in particular, pertaining to new oil and gas pipelines and wells.  Prices for oil and natural gas historically have been volatile and are expected to continue to be volatile.

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Significant changes in the price of oil and natural gas or uncertainty as to future pricing can adversely impact the number of new oil explorations and installations, and cause the postponement or cancellation of existing projects, any of which would adversely affect our GPT business, and adversely impact our ability to sell the business on favorable terms or at all.

Tax matters, including the changes in corporate tax rates, disagreement with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.

We are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives. On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law by President Trump. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small business), limitation of the deduction for net operation losses (“NOLs”) to 80% of current year taxable income and elimination of NOL carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), new taxes on certain foreign earnings, a new minimum tax related to payment to foreign subsidiaries and affiliates, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. It is uncertain if, and to what extent, various states will conform to the new tax law and foreign countries will react by adopting tax legislation or taking other actions.  

We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our result of operations and financial position.

We also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other changes in the application or interpretation of the Tax Act, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.

Our patient temperature management systems business is subject to extensive industry regulation and failure to comply with all applicable rules and regulation may adversely impact us

Our patient temperature management products are subject to extensive, complex, costly and evolving government regulation. In the United States, this is principally administered by the Food and Drug Administration (“FDA”).  Various regulatory agencies in foreign countries where our medical products are sold also regulate that business.  Under these regulations, we are subject to periodic inspection of our facilities, procedures and operations and testing of our products. Following such inspections, we may receive observations, notices, citations and/or warning letters that could require us to modify certain activities identified during the inspection, possibly at a significant cost. We are also required to report adverse events associated with our medical products to the FDA and other regulatory authorities. Unexpected or serious health or safety concerns could result in liability claims, recalls, market withdrawals or other regulatory actions.

The process for obtaining governmental approval to manufacture and market new medical devices is time-consuming and costly. We are dependent on receiving FDA and other governmental or third-party approvals prior to manufacturing, marketing and shipping any new medical products. We cannot be certain that any new medical products we develop will receive FDA or other necessary approvals.

Any failure to comply with anti-corruption laws and regulations could have a material and adverse effect on our reputation, business and financial results

Our operations outside of the United States require us to comply with various anti-bribery and anti-corruption regulations, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act and the China Anti-Unfair Competition Law.  Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both U.S. and non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. We operate in many parts of the world that are recognized as having governmental and commercial corruption and local customs and practices that can be inconsistent with anti-bribery laws. We have internal control

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policies and procedures, and we have implemented training and compliance programs for our employees and agents, with respect to these regulations.  However, our policies, procedures and programs may not always protect us from negligent, reckless or criminal acts committed by our employees or agents.  We could incur significant expenses in investigating any potential violation and could incur severe criminal or civil sanctions and/or fines as a result of violations or settlements regarding such laws.  In addition, any allegations, settlements or violations could materially and adversely impact our reputation and our relationships with current and future customers, suppliers, employees and agents.  Also, some of our competitors may not be subject to, or similarly comply with, the same anti-corruption laws, which could provide them a competitive advantage.  

We are subject to significant currency risk related to our global operations

A significant portion of our global transactions is conducted in currencies other than the U.S. Dollar. While we sometimes employ financial instruments to hedge some of our transactional foreign exchange exposure, developing an effective and economical foreign currency risk strategy is complex and expensive and no strategy can completely insulate us from those exposures.  Hedging arrangements also may expose us to additional risks, including that a counterparty may fail to honor its obligations, and additional costs, including transaction fees and breakage costs.  Changes in the exchange rates of foreign currencies could significantly affect our reported results of operations and financial condition.

In addition, concerns persist regarding the debt burden of certain European countries that have adopted the Euro currency (the "Euro Zone") and their ability to meet future financial obligations, as well as concerns regarding the overall stability of the Euro to function as a single currency among the diverse economic, social and political circumstances within the Euro Zone. For example, the announcement of the United Kingdom’s decision to exit the European Union continues to cause significant volatility in currency exchange rates, especially between the U.S. dollar and British pound sterling.  If one of the Euro Zone countries were to default on its debt or other Euro Zone countries withdraw from the Euro currency, the impact on global markets, and on our business, results of operations and financial condition, could be significant, and that impact would intensify substantially if the Euro currency were dissolved entirely. Such a development could also cause financial and capital markets across the globe to constrict, reducing liquidity and increasing borrowing costs, and could have a significant negative impact on consumer confidence and spending.

Any failure to protect our intellectual property developed or licensed could harm our business and competitive position

We believe that patents and proprietary rights have been and will continue to be very important in enabling us to compete.  If our patents are circumvented, rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded to our products would be impaired, which could significantly impede our ability to market our products, negatively affect our competitive position and materially and adversely affect our business and results of operations.

There can be no assurance that any new or pending patents will be issued, that our or our licensors’ proprietary rights will not be challenged, invalidated, circumvented or rendered unenforceable, or that our patents will provide us with meaningful competitive advantages. Furthermore, there can be no assurance that others will not independently develop similar products or will not design around any patents that have been or may be issued to our licensors or us. Also, failure to seek or obtain patents in certain foreign countries may materially and adversely affect our ability to compete effectively in those international markets.  Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, such as China, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them.  Foreign governments may adopt regulations—and foreign governments or courts may render decisions—requiring compulsory licensing of intellectual property rights, or foreign governments may require products to meet standards that serve to favor local companies.

Because of rapid technological developments in the automotive industry and the competitive nature of the market, the patent position of any component manufacturer is subject to uncertainties and may involve complex legal and factual issues. Consequently, although we either own or have licenses to certain patents, and are currently processing a significant number of additional patent applications, it is possible that no patents will issue from any pending applications or that claims allowed in any existing or future patents issued or licensed to us will be challenged, invalidated, circumvented, or that any rights granted under such patents will not provide us adequate protection. There is an additional risk that we may be required to participate in interference proceedings to determine the priority of inventions or may be required to commence litigation to protect our rights, which could result in substantial costs and divert the attention of management and technical and engineering personnel.  

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In addition to patents, we rely on a combination of trademarks, copyrights, know-how, confidentiality provisions and licensing agreements to establish and protect our proprietary rights. We cannot guarantee, however, that the steps we have taken to protect our intellectual property will be adequate to prevent infringement of our rights or misappropriation thereof.

To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our proposed projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. Additionally, with respect to licensed technology, there can be no assurance that the licensor of the technology will have the resources, financial or otherwise, or desire to defend against any challenges to the rights of such licensor to its patents.

Our products may conflict with patents that have been or may be granted to competitors or others

Other persons could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of our products for allegedly conflicting with patents held by them. Any such litigation could result in substantial cost to us, divert the attention of management and engineering and technical personnel, and harm our reputation. If any such actions are successful, in addition to any potential liability for damages, we could be required to cease selling or using infringing products, obtain a license in order to continue to manufacture or market the affected products, or redesign the infringing products. There can be no assurance that we would prevail in any such action, that any license required under any such patent would be made available on acceptable terms, if at all, or that we could redesign such products on a timely basis and at a reasonable cost, if at all. Failure to obtain needed patents, licenses or proprietary information held by others may have a material adverse effect on our business, results of operations and financial condition. From time to time, we receive notices from third parties suggesting that our products infringe on the proprietary rights of others and historically we have had litigation regarding such matters. While we do not believe that any current claim of patent infringement is valid and material, we must spend time and resources reviewing, defending and resolving such claims.

We rely on trade secret protection through confidentiality agreements and the agreements could be breached or information may be otherwise stolen

We rely on trade secrets that we seek to protect, in part, through confidentiality and non-disclosure agreements with employees, customers and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known to or independently developed by competitors.

The theft or unauthorized use or publication of our trade secrets and other confidential business information could harm our competitive position and reduce acceptance of our products, as well as the value of our investment in research and development, product development and marketing.  In addition, third parties might make claims against us related to losses of confidential or proprietary information, end-user data or system reliability. These incidents and claims could severely disrupt our business, and we could suffer losses, including the cost of product recalls and returns and reputational harm.  In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Our most significant customers typically reserve the right unilaterally to cancel contracts or reduce prices, and the exercise of such right could reduce or eliminate any financial benefit to us anticipated from such contract

Due to their purchasing size, automotive customers typically reserve the right unilaterally to cancel contracts completely or to require price reductions during the term of the contract. Although these customers generally agree as a commercial practice to reimburse companies for actual out-of-pocket costs incurred with respect to the particular contract up to the point of cancellation, these reimbursements typically do not cover costs associated with acquiring general purpose assets, such as facilities and capital equipment, or for increases in employee count and related costs, and may be subject to negotiation and substantial delays in receiving payment on such actual out-of-pocket costs. Any unilateral cancellation of, or price reduction with respect to, any contract could reduce or eliminate any financial benefits anticipated from such contract.  If we are not able to offset pricing reductions through improved operating efficiencies and reduced expenditures, such price reduction could have a material adverse effect on our financial condition and results of operations.

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The third parties that have agreed to reimburse portions of our research and development expenses generally also reserve the right to unilaterally terminate those contracts. There can be no assurance that we will continue to receive the third party reimbursements for any of our research and development efforts.

A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers, or an investigation regarding vehicle safety generally, could materially and adversely affect our financial performance

In the event that our products fail to perform as expected, whether allegedly due to our fault or that of one of our suppliers, and such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims or we may be required or requested by our customers or regulators to participate in a recall or other corrective action involving such products.  We also are a party to agreements with certain of our customers, whereby these customers may pursue claims against us for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims.  We carry insurance for certain product liability claims, but such coverage may be limited.  In addition, we may not be successful in recovering amounts from third parties, including suppliers, in connection with these claims.  These types of claims could materially and adversely affect our financial condition, operating results and cash flows.

Over the past couple of years, there has been a significant increase in the level of scrutiny given to vehicle safety issues. Inquiries are being conducted not only by traditional regulators but also by state Attorneys General. Furthermore, the U.S. Department of Justice has commenced investigations and U.S. Congressional hearings have also been conducted in which vehicle manufacturers and in some cases suppliers are being called to testify as to particular safety risks. This increased scrutiny could materially and adversely affect the business of our customers and suppliers and subject us to fines, penalties, sanctions and/or investigations.

We are involved from time to time in various legal and regulatory proceedings and claims, which could adversely affect our financial performance

We are involved in various legal and regulatory proceedings and claims that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our customers, suppliers or competitors, intellectual property matters, personal injury claims, environmental matters, tax matters, employment matters and antitrust matters. No assurances can be given that such proceedings and claims will not adversely affect our financial condition, operating results and cash flows.

Our success will depend in large part on retaining key personnel and effective succession planning

Our success will depend to a large extent upon the continued contributions of key personnel. The loss of the services of one or more of our executive officers could have a material adverse effect on the success of our business. Effective succession planning is also important to our long-term success.  Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. Further, our success will depend, in part, upon our ability to retain qualified engineering and other technical and marketing personnel. There is significant competition for technologically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel.

We are required to comply with environmental laws and regulations that could cause us to incur significant costs

Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment inside and outside the United States, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future. We may also assume, or be deemed to assume, significant environmental liabilities in acquisitions.  Environmental liability may be imposed without regard to fault, and under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation.  Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. No assurance can be given that all environmental liabilities have been identified or that no prior owner or operator of our properties or former properties has created an environmental condition not known to us.  Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Violations of these requirements could result in fines or sanctions, obligations to investigate or remediate contamination, third party property damage or personal injury claims due to the migration of contaminants off-site, or modification or revocation of our operating permits, which could materially and adversely affect our financial condition, operating results and cash flows.

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We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations

In 2018, we announced significant restructuring and cost reduction actions to lower our operating costs in response to difficult market and operating conditions in various parts of the world. These actions included workforce reductions, asset impairment, plant closures, and minimization or elimination of investments in non-core areas. As we continue to assess our performance throughout various regions, we may take additional restructuring actions to rationalize our operations, which may result in impairments and reduce our profitability in the periods incurred. In addition, we may not realize anticipated savings or benefits from past or future cost reduction actions in full or in part or within the time periods we expect. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with our cost reduction actions. Failure to realize anticipated savings or benefits from our cost reduction actions could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.

We may not realize significant benefits from acquisitions or joint ventures because of integration difficulties and other challenges

We regularly consider acquisitions to expand the breadth of products derived from core thermal technologies as well as the markets in which they are applied.  Identifying suitable potential acquisitions, conducting due diligence, successfully negotiating and closing an acquisition and the acquisition integration process are complex, costly and time-consuming. The difficulties of completing and integrating an acquisition include, among others:

 

incurring additional debt and/or issuing additional securities, increasing leverage risks or dilution;

 

unsatisfactory returns on our investments and our inability to realize the expected benefits of such acquisitions or joint ventures;

 

difficulties in implementing our business plan for the combined business, including achieving anticipated synergies in amount and on time;

 

required significant capital expenditures to integrate our operations and pursue synergies;

 

unanticipated issues in integrating manufacturing, logistics, financial and other internal controls, communications and other systems;

 

diversion of management attention and capital from ongoing business concerns to integration matters;

 

challenges assimilating management and other personnel, including because of differences in culture, language and background for international acquisitions;

 

difficulty maintaining oversight over internal controls and preventing misconduct or other violations of applicable laws by any investment which we do not exercise control;

 

the size of operations acquired relative to our existing business;

 

unanticipated changes in applicable laws and regulations;

 

failure to obtain regulatory or other approvals;

 

failure to retain key employees, customers and suppliers of the combined business;

 

assumption of known and unknown liabilities, some of which may be difficult or impossible to quantify; and

 

non-cash impairment charges or other accounting charges relating to the acquired assets.

To the extent we complete an acquisition in a new industry, the above risks will be heightened due to our lack of familiarity with such business.

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In the future, we may not be able to successfully identify suitable acquisition or joint venture opportunities or complete any particular acquisition, combination, joint venture or other transaction on acceptable terms. Our identification of suitable acquisition candidates and joint venture opportunities and the integration of acquired business operations involve risks inherent in assessing the values, strengths, weaknesses, risks and profitability of these opportunities, as well as significant competition for such acquisition opportunities. Our focus on acquisition opportunities may require significant financial, management and related resources that would otherwise be used for the ongoing development of our existing operations and internal expansion.

We may not generate enough liquid assets to fund our ongoing operations and investments and service our debt

Based on our current business plan, we believe our cash on hand along with cash flows from operating activities will be sufficient to meet operating and capital expenditure needs and to service our debt for the foreseeable future.  However, if cash flows from operations decline, we may need to obtain alternative sources of capital and reduce or delay capital expenditures, acquisitions and investments, all of which could impede the implementation of our business strategy and materially and adversely affect our results of operations and financial condition.  In addition, we may need to complete one or more equity or debt financings if we consummate any significant acquisitions.  There can be no assurance that such capital will be available at all or on reasonable terms, which could materially and adversely affect our future operations and business strategy.


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We may not be able to generate sufficient cash flows to meet our substantial debt service obligations, and such substantial debt service obligations could materially and adversely affect our business, results of operations and financial condition

Our ability to make payments on and to refinance our debt obligations depends on our ability to generate cash flows from operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all.

If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. Additionally, we may not be able to affect such actions, if necessary, on commercially reasonable terms, or at all.

Our debt obligations could have important consequences to our business, results of operations and financial condition. For example:

 

we may be more vulnerable to general adverse economic and industry conditions;

 

we may be required to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of cash flows for other purposes, including for working capital, dividends, capital expenditures, business development efforts and to finance mergers and acquisitions;

 

our ability to borrow additional debt for operations, working capital or to finance future mergers and acquisitions may be limited;

 

our ability to refinance or repay other debt obligations when they become due may be limited;

 

we are exposed to the risk of increased interest rates because a portion of our borrowings, including under our credit facilities, are at variable rates of interest; and

 

our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate may be limited, thereby placing us at a competitive disadvantage compared to our competitors that have less indebtedness.

Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: incur additional debt, make certain payments or distributions, engage in mergers or consolidations, make certain dispositions and transfers of assets, enter into transactions with affiliates and guarantee indebtedness. While not unusual for financings of the type that we have, the restrictions in our credit facilities may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute our business plans, take advantage of business opportunities, or react to changing industry conditions.

Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable, which may cause cross-defaults under our other debt obligations. If our lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to all lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our credit facilities, the lenders would have the right to foreclose on certain of our assets, which could have a material adverse effect on our business, results of operations and financial condition.

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Our results of operations and financial condition may be adversely impacted from a decrease in or cessation or clawback of government incentives related to investments

We receive economic benefits from national, state, and local governments in various regions of the world in the form of incentives designed to encourage manufacturers to establish, maintain, or increase investment, workforce, or production. These incentives may take various forms, including grants, loan subsidies, and tax abatements or credits.  The impact of these incentives can be significant in a particular market during a reporting period. A decrease in, expiration without renewal of, or other cessation or clawback of government incentives for any of our business units, as a result of administrative decision or otherwise, could have an adverse impact on our results of operations and financial condition, as well as our ability to fund new investments.

Security breaches and other disruptions to our information technology networks and systems, including a disruption related to cybersecurity, could interfere with our operations and could compromise the confidentiality of our proprietary information

We rely upon information technology networks and systems, some of which are managed or hosted by third-parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including electronic communications among our locations around the world and between Company personnel and our customers and suppliers, supply chain management, manufacturing, and invoicing and collection of payments. We use these information technology network and systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the proprietary business information of our customers and suppliers, as well as personally identifiable information of our employees, customers and suppliers, in data centers, on information technology networks and systems, some of which are operated by third parties and third party locations. The secure operation of these data centers, information technology networks, and systems and the processing, maintenance, confidentiality, integrity and availability of this information, is critical to our business operations and strategy.

The Company maintains an information risk management program which is supervised by information technology management and reviewed by a cross-functional committee. As part of this program, reports that include analysis of emerging risks as well as the Company’s plans and strategies to address them are regularly prepared and presented to senior management and the Board of Directors. Despite security measures, such as disaster recovery and business continuity plans, including those measures related to cybersecurity, these data centers, our information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures, geopolitical events, or natural disasters or other catastrophic events.

Cyber threats are constantly evolving, thereby increasing the difficulty of detecting and successfully defending against them. The occurrence of any of the aforementioned events, many of which are outside our control, could compromise our systems or networks and the information stored there, which may include confidential or proprietary information or personal information of third parties, could be accessed, publicly disclosed, compromised, corrupted, lost or stolen. Any such access, disclosure or other loss or corruption of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, cause a loss of confidence in our reputation, goodwill, products and services, reduce the competitive advantage we expect to derive from our investment in advanced technologies and adversely affect our financial condition, operating results, and cash flows. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems.

We may face particular privacy, data security and data protection risks due to the new European General Data Protection Regulation

Legislators and/or regulators in countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws. In particular, the European Union’s General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018, imposes additional obligations and risk upon our business and which increases substantially the penalties to which we could be subject in the event of any non-compliance. The GDPR requires companies to satisfy new requirements regarding the handling of personal data, including its use, protection and the rights of affected persons regarding their data. Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue. The GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including finds or demands or orders that we modify or cease existing business practices. The Company has

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taken measures to ensure compliance with the GDPR. Due to the lack of experience with the interpretation of this new regulation and its enforcement of our current measures might not satisfy the best practices that will be established in the coming years. As personal data is processed using information technology, the risks disclosed with respect to “Security breaches and other disruptions” apply accordingly.

Risks Related to Our Common Stock

We have anti-takeover defenses that could make it more difficult for a third party to acquire a majority of our outstanding voting stock, which could cause the market price of our Common Stock to decline

Various provisions of our articles of incorporation and bylaws, as well as the Michigan Business Corporation Act (the “MBCA”), could have the effect of discouraging, delaying or preventing a third party from accumulating a large block of our capital stock, engaging in a tender offer and making offers to acquire us, and of inhibiting a change in control, all of which could adversely affect our shareholders’ ability to receive a premium for their shares in connection with any such transaction. For example, our Articles of Incorporation authorize our Board of Directors (our “Board”) to issue up to 4,991,000 shares of Preferred Stock and to determine the price, rights (including conversion rights), preferences and privileges of those shares without any further vote or action by the shareholders.   If we issue preferred stock in the future that has preference over our Common Stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Common Stock, the rights of holders of our Common Stock or the market price of our Common Stock could be adversely affected.

In addition, the anti-takeover provisions of Michigan law impose various impediments to the ability of a third party to acquire control of Gentherm, even if a change of control would be beneficial to our existing shareholders.  For example, the Company is subject to Chapter 7A of the MBCA, which prohibits us from engaging in a business combination with an interested shareholder for a period of five years after the person becomes an interested shareholder, unless certain conditions are satisfied.  

We are currently prohibited from making dividend payments on our Common Stock. Furthermore, we do not anticipate paying dividends on our Common Stock in the future

Our bank credit facilities generally prohibit payment of dividends on our Common Stock so long as such facilities are outstanding. We have never paid any cash dividends on our Common Stock and do not anticipate paying dividends in the near future.

The price of our Common Stock may fluctuate significantly

The price of our Common Stock on the Nasdaq Global Select Market may fluctuate significantly in response to many factors, including:

 

general market and economic conditions;

 

actual or anticipated variations in our quarterly operating results due to such factors as acceptance of our product by automotive manufacturers and consumers, timing of our product introductions, availability and pricing of components from third parties, competition, timing of orders, foreign currency exchange rates, new product development, material acquisitions or dispositions, technological changes, resources spent on litigation activities and economic conditions generally;

 

changes in earnings guidance by us or earnings estimates by securities analysts with respect to us;

 

publication of research reports about us, the automotive industry generally or automotive component industry, and recommendations by securities or financial analysts with respect to us or other automotive suppliers;

 

adverse market reaction to the amount of our outstanding debt at any time, the amount of our maturing debt in the near and medium term and our ability to refinance such debt and the terms thereof or our plans to incur additional debt in the future;

 

the ability of our customers to pay us and meet their other obligations to us under current contract terms and our ability to hold and expand our customer base;

 

changes in market valuations of similar companies;

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adverse market reaction to any securities we may register or issue or additional debt we incur in the future;

 

additions or departures of key management personnel;

 

actions by institutional shareholders;

 

speculation in the press or investment community;

 

continuing high levels of volatility in the capital and credit markets; and

 

the realization of any of the risk factors included in, or incorporated by reference to, this Annual Report on Form 10-K.

Many of the factors listed above are beyond our control. These factors may cause the market price of our Common Stock to decline, regardless of our financial performance and condition and prospects. It is impossible to provide any assurance that the market price of our Common Stock will not fall in the future, and it may be difficult for holders to resell shares of our Common Stock at prices they find attractive, or at all. We expect that the market price of our Common Stock will continue to fluctuate. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may materially and adversely affect the market price of our Common Stock.

Our shareholders may experience dilution if we issue additional equity securities

Subject to the limitations set forth in our Articles of Incorporation, we are not restricted from issuing additional shares of our Common Stock or preferred stock, including securities convertible or exchangeable for, or that represent the right to receive, Common Stock or preferred stock.  In most circumstances, common shareholders will not be entitled to vote on whether or not we issue additional equity securities.  Future issuances of Common Stock will reduce the percentage of our Common Stock owned by shareholders who do not participate in such issuances.  In addition, depending on the terms and pricing of additional offerings of our Common Stock and the value of our assets, our shareholders may experience dilution in the book value and fair value of their shares.  The market price of our Common Stock could decline as a result of sales of substantial amounts of additional shares of our Common Stock in the public market or in connection with future acquisitions, or the perception that such sales could occur. This could also impair our ability to raise additional capital through the sale of equity securities at a time and price favorable to us.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 


29


ITEM 2.

PROPERTIES

The following table presents the Company’s significant properties as of December 31, 2018:

 

Facility

 

Location

 

Purpose

 

Segment

 

Sq.
Footage

 

 

Owned
or leased

 

Monthly Rent

 

 

Lease
Expiration

 

Gentherm Headquarters

 

Northville, MI U.S.A.

 

Corporate headquarters

 

Automotive

 

 

82,000

 

 

Owned

 

$

 

 

 

Gentherm North America

 

Farmington Hills, MI U.S.A.

 

Research and development

 

Automotive and Industrial

 

 

44,000

 

 

Owned

 

$

 

 

 

CSZ Headquarters(a)

 

Cincinnati, OH U.S.A.

 

CSZ headquarters

 

Industrial

 

 

265,300

 

 

Owned

 

$

 

 

 

Gentherm GmbH

 

Odelzhausen, Germany

 

Customer service center

 

Automotive

 

 

170,600

 

 

Owned

 

$

 

 

 

Gentherm Hungary

 

Pilisszentivan, Hungary

 

Customer service center and warehouse

 

Automotive

 

 

298,700

 

 

Owned

 

$

 

 

 

Gentherm Ukraine

 

Vinogradov, Ukraine

 

Manufacturing and warehouse

 

Automotive

 

 

209,500

 

 

Owned

 

$

 

 

 

Gentherm Macedonia

 

Prilep, Macedonia

 

Manufacturing

 

Automotive

 

 

403,539

 

 

Owned

 

$

 

 

 

Gentherm China

 

Langfang, China

 

Manufacturing

 

Automotive

 

 

279,900

 

 

Owned

 

$

 

 

 

Gentherm Asia Electronics

 

Shenzhen, China

 

Manufacturing

 

Automotive

 

 

74,400

 

 

Leased

 

$

54,800

 

 

December 31, 2019

 

Gentherm Asia Electronics

 

Shenzhen, China

 

Manufacturing

 

Automotive

 

 

49,300

 

 

Leased

 

$

24,600

 

 

November 30, 2022

 

Gentherm Vietnam

 

Ha Nam, Vietnam

 

Manufacturing

 

Automotive

 

 

245,300

 

 

Owned

 

$

 

 

 

Gentherm Mexico

 

Acuña, Mexico

 

Manufacturing

 

Automotive

 

 

101,100

 

 

Leased

 

$

27,900

 

 

June 1, 2020

 

Gentherm Mexico

 

Acuña, Mexico

 

Manufacturing

 

Automotive

 

 

101,100

 

 

Leased

 

$

44,700

 

 

July 1, 2020

 

Gentherm Mexico

 

Celaya, Mexico

 

Manufacturing

 

Automotive

 

 

143,700

 

 

Leased

 

$

65,300

 

 

October 1, 2025

 

GPT(b)

 

Calgary, Canada

 

GPT headquarters

 

Industrial

 

 

61,400

 

 

Leased

 

$

54,500

 

 

January 31, 2026

 

GPT(b)

 

Bassano, Canada

 

Manufacturing

 

Industrial

 

 

36,000

 

 

Owned

 

$

 

 

 

Etratech Canada

 

Burlington, Canada

 

Etratech manufacturing

 

Automotive

 

 

46,000

 

 

Leased

 

$

21,800

 

 

October 24, 2022

 

 

a)

The CSZ headquarters facility was classified as held for sale as of December 31, 2018. On February 1, 2019, Gentherm sold the CSZ-IC business and CSZ headquarters facility. On February 1, 2019, a portion of the facility utilized by Gentherm Medical, consisting of 34,000 square feet of office space and 50,000 square feet of manufacturing space, was leased from the purchaser of the facility. Monthly rent expense for this lease is $52,000.

b)

The GPT headquarters and manufacturing facilities were classified as held for sale as of December 31, 2018.

 

ITEM 3.

LEGAL PROCEEDINGS

We are subject to litigation from time to time in the ordinary course of our business, however there is no current material pending litigation to which we are a party and no material legal proceedings were terminated, settled or otherwise resolved during the fourth quarter of the fiscal year ended December 31, 2018.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

 

 

 

30


PART II

 

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Common Stock trades on the Nasdaq Global Select Market under the symbol “THRM.” The following table sets forth the high and low sale prices for our Common Stock as reported on the Nasdaq Global Select Market for each quarterly period from January 1, 2017 through December 31, 2018.

 

 

  

High

 

  

Low

 

2017

  

 

 

 

  

 

 

 

1st Quarter

  

$

39.25

  

  

$

33.15

  

2nd Quarter

  

 

39.45

  

  

 

34.65

  

3rd Quarter

  

 

40.70

  

  

 

29.90

  

4th Quarter

  

 

37.55

  

  

 

31.75

  

2018

  

 

 

 

  

 

 

 

1st Quarter

  

$

34.20

  

  

$

30.65

  

2nd Quarter

  

 

39.50

  

  

 

33.75

  

3rd Quarter

  

 

49.45

  

  

 

39.55

  

4th Quarter

  

 

46.43

  

  

 

37.37

  

Holders

As of February 25, 2019, our Common Stock was held by 63 stockholders of record. A substantially greater number of holders are beneficial owners whose shares of record are held by banks, brokers and other nominees.

Dividends

We have not paid any Common Stock cash dividends since formation and we do not expect to pay any in the foreseeable future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon business conditions, our earnings and financial condition and other factors.  Currently, our bank credit facilities limit payment of dividends on our Common Stock.

Stock Repurchase Program

In December 2016, the Board of Directors authorized a three-year, $100 million stock repurchase program. In June 2018, our Board of Directors authorized an increase in the stock repurchase plan to $300 million and extended the stock repurchase plan until December 2020.

Under the program, we may repurchase, from time to time, our common stock in amounts and at prices as we deem appropriate, taking into account market conditions, applicable legal requirements, debt covenants and other considerations. The number of shares repurchased and the time of the repurchases under the stock repurchase program will be determined by our management. Repurchases may be made on the open market or in privately negotiated transactions. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under securities laws. The authorization of this stock repurchase program does not require we repurchase any specific dollar value or number of shares and may be modified, extended or terminated by our Board of Directors at any time.

31


Issuer Purchases of Equity Securities During Fourth Quarter 2018

 

Period

  

  

(a)

Total Number of Shares Purchased (1)

 

  

(b)

Average Price Paid per Share

 

  

 

(c)

Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs

  

  

(d)

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2)

October 1, 2018 to October 31, 2018

  

 

  

 

888,457

 

 

 

$

41.80

 

 

 

 

888,457

 

 

 

$

190,187,084

November 1, 2018 to November 30, 2018

  

 

  

 

380,967

 

 

 

$

44.48

 

 

 

 

380,967

 

 

 

$

173,242,300

December 1, 2018 to December 31, 2018

  

 

  

 

634,090

 

 

 

$

42.02

 

 

 

 

634,090

 

 

 

$

146,599,982

 

(1)

All shares were purchased on the open-market in accordance with Gentherm’s Stock Repurchase Program, including, in part, pursuant to a plan adopted by the Company in accordance with Rule 10b5-1 promulgated by the U.S. Securities and Exchange Commission.

(2)

The Stock Repurchase Program, as amended, authorizes Gentherm to repurchase shares up to $300 million.

 

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth selected financial data and should be read in conjunction with the consolidated financial statements and the notes thereto, as well as Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Report.

 

 

 

Year Ended December 31,

 

 

 

(In thousands except per share data)

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Product revenues

 

$

1,038,259

 

 

$

985,683

 

 

$

917,600

 

 

$

856,445

 

 

$

811,300

 

Operating income

 

 

72,788

 

 

 

97,098

 

 

 

106,119

 

 

 

121,319

 

 

 

98,434

 

Net income

 

 

41,899

 

 

 

35,227

 

 

 

76,598

 

 

 

95,393

 

 

 

70,119

 

Basic earnings per share

 

 

1.17

 

 

 

0.96

 

 

 

2.10

 

 

 

2.65

 

 

 

1.98

 

Diluted earnings per share

 

 

1.16

 

 

 

0.96

 

 

 

2.09

 

 

 

2.62

 

 

 

1.95

 

 

 

 

As of December 31,

 

 

 

(In thousands)

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Working capital(a)(b)

 

$

267,679

 

 

$

289,754

 

 

$

295,130

 

 

$

270,320

 

 

$

187,432

 

Total assets(b)

 

 

803,047

 

 

 

883,405

 

 

 

843,030

 

 

 

648,343

 

 

 

555,911

 

Long term obligations

 

 

147,952

 

 

 

158,216

 

 

 

189,002

 

 

 

118,596

 

 

 

112,465

 

Accumulated earnings

 

 

363,965

 

 

 

293,645

 

 

 

256,922

 

 

 

180,324

 

 

 

84,931

 

 

a)

Represents current assets less current liabilities.

b)

Total assets for all prior periods presented have been adjusted to conform with the current year presentation. Working capital and total assets for the years ended December 31, 2018, 2017, 2016 and 2015 reflect the noncurrent presentation of deferred tax liabilities and assets, as well as related valuation allowance. For the year ended December 31, 2014, working capital and total assets include $6,247 in current deferred tax assets and $0 in current deferred tax liabilities.


32


 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (and notes related thereto) and other more detailed financial information appearing elsewhere in this Report. Further, you should read the following discussion and analysis of our financial condition and results of operations together with the “Risk Factors” included elsewhere in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Forward-Looking Statements” in Item 1 of this Report.

Overview

Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies.  Our products provide solutions for automotive passenger comfort and convenience, battery thermal management, remote power generation, patient temperature management, and other consumer and industrial temperature control needs. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America, Europe and Asia. We operate in locations aligned with our major customers’ product strategies in order to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets. We concentrate our research on the development of new technologies and new applications from existing technologies to create product and market opportunities for a wide array of thermal management solutions.  

Our automotive products are sold to automobile and light truck OEMs or their tier one suppliers. Inherent to the automotive supplier market are costs and commitments that are incurred well in advance of the receipt of orders and resulting revenues from customers. This is due in part to automotive manufacturers requiring the design, coordination and testing of proposed new components and sub-systems. Revenues from these expenditures are typically not realized for two to three years due to this development cycle.

Reportable Segments

The Company has two reportable segments for financial reporting purposes: Automotive and Industrial.  See Note 9 to the consolidated financial statements for a description of our reportable segments as well as their proportional contribution to the Company’s reported product revenues and operating income.  The financial information used by our chief operating decision maker to assess operating performance and allocate resources is based on these reportable segments.

New Strategic Plan

On June 25, 2018, Gentherm announced a new strategic plan intended to improve business performance and position the company to deliver above-market growth and improved profitability to its shareholders. An important element of the strategy is the Fit-for-Growth initiative that focuses on purchasing excellence, rationalization of research and development activities and expenses, reducing selling, general and administrative expense, minimization or elimination of investments in non-core areas and developing a manufacturing footprint commensurate with the new plan. Non-core areas of investment under the Fit-for-Growth initiative are concentrated in the following areas of Gentherm’s industrial segment: Gentherm Global Power Technologies (“GPT”), Cincinnati Sub Zero’s Industrial Chamber business (“CSZ-IC”) and our battery management systems division in Irvine, California. We also completed the site consolidation plan for our advanced research and development operations and vacated two lease facilities in Azusa, California. On February 1, 2019, we completed the sale of CSZ-IC to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million.

The strategy also identified several product categories the Company has now exited, including furniture, aviation, battery management electronics, industrial battery packs, automotive thermoelectric generators and other non-core electronics.

See Note 1 to our consolidated financial statements for information about our Fit-for-Growth initiative, related cost savings and related restructuring costs.

33


Etratech

On November 1, 2017, we acquired substantially all of the assets and assumed substantially all of the operating liabilities of Etratech Inc., an Ontario corporation and all of the outstanding shares of Etratech Hong Kong, an entity organized under the laws of Hong Kong, in an all-cash transaction.  Etratech manufactures advanced electronic controls and control systems for the automotive, RV and marine, security, medical and other industries. Etratech’s world headquarters and North American manufacturing operations are located in Burlington, Canada. See Note 17 to the consolidated financial statements for additional information regarding the acquisition of Etratech.  

North American Reorganization

On January 4, 2016 and January 5, 2016, the Company completed reorganization transactions (the “Reorganization”) related to our North American business (the “Windsor Operations”).  As part of our original integration plan to eliminate redundancies associated with the 2011 acquisition of Gentherm GmbH (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 $7.6 million during 2016.  Additionally, the Company incurred income tax expense of $2.5 million 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 $7.6 million of withholding tax and $2.5 million of income taxes, the Reorganization required the Company to make a one-time income tax payment of approximately $32.6 million.  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 $2.5 million and $32.6 million were paid during the first quarter of 2017.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. These estimates and assumptions include, but are not limited to:

 

Product revenues;

 

Impairments of goodwill and other intangible assets

 

Accrued warranty costs;

 

Litigation reserves;

 

Allowances for doubtful accounts;

 

Inventory reserves;

 

Income taxes;

 

Stock compensation; and

 

Pension plans

 

Product Revenues

Revenue is recognized from agreements containing enforceable rights and obligations when promised goods are delivered or services are completed, the price is fixed or determinable, and payment has been received or is collectable. The amount of revenue

34


recognized is net of the Company’s obligation for returns, rebates, discounts, taxes, if any, collected from customers, and consideration that is paid to a customer, unless such payment is in exchange for a distinct good or service. The amount of revenue recognized from a contract with a customer reflects the amount of consideration expected to be received in exchange for the transfer of good or services.

Automotive Revenues

The Company sells automotive seat comfort systems, specialized automotive cable systems and automotive thermal convenience products under long-term supply agreements (“LTAs”) and, for arrangements that are less than one year in length, purchase orders. LTAs are multiple-year business awards to provide custom designed parts for a particular automotive vehicle program in quantities and at intervals of the customer’s choosing.  LTAs are often multiple-element agreements. The main element in LTAs are production parts; distinct promises from which the customer can benefit separately from other promises or elements in the contract. A second element in LTAs are production part purchase options that provide customers the ability to purchase additional parts at set prices in the future. Judgement is used to determine whether a production part purchase option represents a material right to the customer and should be accounted for as a separate performance obligation.  LTAs that provide customers with a purchase option discount incrementally higher than the range discounts typically given to automotive customers contain a material right. The magnitude of change in the year-over-year option prices and the total number of units expected to be ordered are important factors in the calculation of the option’s fair value and the allocation of transaction price.

The price for parts is set at the point in time the customer exercises its option to purchase additional parts from the Company. A firm order, stating the number of each production part to be delivered, is an independent contract with a discrete transaction price. Revenues are allocated to production parts based on the relative standalone selling prices observed on the LTAs. As a practical alternative to estimating the standalone selling price of an option that provides a customer with a material right, the Company allocates transaction price to options by reference to the production part volumes expected to be ordered and the consideration expected to be received. The Company satisfies its obligation to provide product parts to the customer upon shipment.

When an option to purchase additional production parts in the future represents a material right, the customer effectively is paying Gentherm in advance for production parts each time it exercises the option by placing a firm order commitment. Revenue from options containing a material right are recognized on the basis of direct measurement of the value of production parts transferred to date relative to the total number of production parts expected to be delivered over the life of the vehicle program. Judgement is required to determine the pattern and timing with which an option containing a material right is satisfied and the production part is transferred to a customer.

Industrial Revenues

Our industrial business unit generates revenue from the sale of products and services by our wholly-owned subsidiaries CSZ and GPT. Industrial business unit revenues and medical business unit revenues discussed below are reported within the Company’s industrial reportable segment (see Note 9). Industrial business unit customers commonly enter into multiple-element agreements for the purchase of products and services.  Installation services, for example, are separate and distinct performance obligations that are often included in contracts to purchase customized environmental test chambers. Depending on the application, delivery of an environmental test chamber or remote power generation system to the customer’s place of business can range from two weeks to nine months from commencement of the contract. Installation services, while reliant on the specifications and timing from the customer, rarely remain incomplete more than two months after delivery.

Revenues allocated to environmental test chambers or remote power systems are based on the stand alone selling price of products themselves. Judgement is used to determine the degree to which early pay discounts and other credits are utilized in the calculation of standalone selling price, and only included to the extent it is probable that a significant reversal of any incremental revenue will not occur. Revenues are recognized at the point in time the chamber or power system is shipped to the customer. For contracts that also include a promise for installation, the portion of total transaction price allocated to the installation is recognized as revenue at the point in time the installation is complete.  

Revenues from our medical business unit are generated from the sale of products and equipment. Our medical products and equipment focus on body and blood temperature management. The Company sells medical products and equipment primarily through distributor and group purchasing organization agreements. These agreements allow member participants to the distributor or group

35


purchasing organization to make purchases at discounted prices negotiated by the distributor or group purchasing organization.  A rebate is incurred at the point in time a member participant purchases product covered under these types of agreements. Rebates are accounted for as variable consideration, using an expected value, probability weighted approach, based on the level of sales to the distributor and the time lag between the initial sale and the rebate claim in determining the transaction price of a contract.  Revenue is recognized at the point in time the medical products or equipment is transferred to the customer.

Impairments of Goodwill and Other Intangible Assets

Whenever events or changes in circumstances indicate that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The fair value of a reporting unit is estimated by analyzing internal inputs (level 3) to calculate forward values and discounting those values to the present value.

Accrued Warranty Costs

The Company accrues warranty obligations for products sold based on management estimates of future failure rates and current claim cost experience, with support from the sales, engineering, quality and legal functions.  While we believe our warranty reserve is adequate and that the judgment applied is appropriate, such estimates could differ materially from what will actually transpire in the future. The warranty policy is reviewed by management annually. Using historical information available to the Company, including claims already filed by customers, the warranty accrual is adjusted quarterly to reflect management’s best estimate of future claims.

Litigation Reserves

We record estimated future costs related to new or ongoing litigation based on input from legal counsel and our best estimate of probable loss. These estimates include costs associated with attorney fees and potential claims and assessments less any amounts we anticipate are recoverable under insurance policies. Final resolution of the litigation contingencies could result in amounts different from current accruals and, therefore, have an impact on our consolidated financial results in future reporting periods.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts once exposure to collection risk of an accounts receivable is specifically identified. We analyze the length of time an account receivable is outstanding, as well as a customer’s payment history to determine the need for and amount of an allowance for doubtful accounts.

Inventory Reserves

We recognize a reserve for obsolete and slow moving inventories based on estimates of future sales and an inventory item’s capacity to be repurposed for a different use. We consider the number of months supply on hand based on current planned requirements, uncommitted future projections and historical usage in estimating the inventory reserve.  Additional provisions are made for supplier claims for obsolete materials, prototype inventory, spare or customer service inventory and, for all periods other than at year-end, estimates for physical inventory adjustments.

Income Taxes

We record income tax expense using the liability method which specifies that deferred tax assets and liabilities be measured each year based on the difference between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided for deferred tax assets when management considers it more likely than not that the asset will not be realized.   At December 31, 2018 and 2017, a valuation allowance has been provided for certain deferred tax assets which we have concluded are more likely than not to not be realized.  If future annual taxable income were to be significantly less than current and projected levels, there is a risk that certain of our deferred tax assets not already provided for by the valuation allowance would expire prior to utilization.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties related to income tax matters in income tax expense.

36


Stock Based Compensation

We account for grants of employee stock options, time-based restricted stock units and restricted stock as compensation expense based upon the fair value on the date of grant and such expense is recognized over the vesting condition, either based on a period of service of based on the performance of a specific achievement. For awards measured at fair value, the fair value is determined using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates certain assumptions, such as expected volatility, expected life of options, risk-free interest rate and expected dividend yield, in order to arrive at a fair value estimate. Expected volatilities are based on the average of the historical volatility of the Company’s Common Stock and that of an index of companies in our industry group. To evaluate our assumptions for the expected lives of options, we consider the average holding period of previously exercised options and the remaining terms of outstanding options. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s history of having never issued a dividend, the limitations to issue a dividend under the Amended Credit Agreement and management’s current expectation regarding future dividends. We believe that the assumptions selected by management are reasonable; however, significant changes could materially impact the results of the calculation of fair value.  We also have granted restricted stock units measured based on either a target return on invested capital ratio (“ROIC”), as defined in the award agreement, for a specified fiscal year, or the Company’s common stock market price returning a target total shareholder return (“TSR”), as defined, during a specific three-year measurement period. Upon achievement of the performance measurement, performance based restricted stock units vest over a three-year period.

Stock appreciation rights (“SARs”) are also an award type granted under out management incentive program and they are accounted for using the liability method since they are settled in cash, which requires mark-to-market adjustments based on the current trading price of Gentherm Common Stock to be recognized in statement of income.

Pension Plans

The Company’s obligations and expenses for its pension plans are substantially dependent on the Company’s selection of discount rate and, for the Gentherm GmbH Plan, expected long-term rate of return on plan assets assumptions used by actuaries to calculate these amounts.  Actual results that differ from assumptions used are accumulated and amortized over future periods and generally affect recognized expense in future periods. As such, assumptions used to calculate benefit obligations as of the annual measurement date directly impact the expense to be recognized in future periods.

Results of Operations Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Product revenues. Product revenues by product category, in thousands, for the years ended December 31, 2018 and 2017 are as follows:

 

 

 

Year Ended December 31,

 

 

 

 

2018

 

 

 

2017

 

 

%

Change

Climate Control Seats (CCS)

 

$

374,816

 

 

$

387,961

 

 

(3.4

)

%

Seat Heaters

 

 

305,337

 

 

 

307,309

 

 

(0.6

)

%

Steering Wheel Heaters

 

 

69,845

 

 

 

62,125

 

 

12.4

 

%

Automotive Cables

 

 

98,931

 

 

 

92,093

 

 

7.4

 

%

Battery Thermal Management (BTM)(a)

 

 

28,472

 

 

 

10,043

 

 

183.5

 

%

Etratech

 

 

54,267

 

 

 

8,398

 

 

(1.3

)

%(b)

Other Automotive

 

 

16,924

 

 

 

11,528

(c)

 

46.8

 

%

Subtotal Automotive

 

$

948,592

 

 

$

879,457

 

 

7.9

 

%

Remote Power Generation (GPT)

 

 

19,222

 

 

 

31,891

 

 

(39.7

)

%

Cincinnati Sub-Zero Products (CSZ)

 

 

70,445

 

 

 

74,335

 

 

(5.2

)

%

Subtotal Industrial

 

$

89,667

 

 

$

106,226

 

 

(15.6

)

%

Total Company

 

$

1,038,259

 

 

$

985,683

 

 

5.3

 

%

 

 

a)

Battery Thermal Management or BTM product revenues include Gentherm’s automotive grade, low cost, heat resistant fans and blowers used by customer for battery cooling through ventilation and production level shipments of the advanced TED based active cool system which began during the fourth quarter of 2017.

37


 

b)

Amount represents the pro-forma growth for Etratech by comparing the amount of revenue during 2018 to Etratech’s revenue during 2017 which totaled $54,987, and which was not all included in Gentherm’s revenue since the acquisition did not occur until November 1, 2017.

 

c)

Includes $2.0 million rebate to customer during 2017.

Product revenues for 2018 were $1,038.3 million compared with product revenues of $985.7 million for 2017, an increase of $52.6 million, or 5.3%.  The increase included higher product revenues in the automotive segment, which increased $69.1 million, or 7.9%, to $948.6 million, partially offset by lower industrial segment product revenues which decreased $16.6 million, or 15.6%, to $89.7 million. Automotive product revenues for 2018 included $54.3 million from Etratech compared to only $8.4 million in 2017.  Gentherm acquired Etratech on November 1, 2017 and recognized product revenues from Etratech during last two months of 2017.  

Our automotive segment revenues outperformed automotive vehicle product volumes during 2018.  Global automotive production decreased 1% during 2018 as compared to 2017. On a combined basis and weighted for the Company’s revenue in each region, automotive vehicle production declined by 1.3% in the Company’s key regions. These lower rates were partially attributable to the negative impact of the new Worldwide Harmonized Light Vehicle Test Procedure (“WLTP”) regulations in Europe. Authorities have been taking longer than expected to certify OEM vehicles under the new WLTP emissions tests, causing production delays.

Adjusting for the impact from currency translation and the Etratech acquisition, automotive segment revenues increased 1% in 2018 as compared to 2017. Gentherm achieved higher revenues in our BTM, steering wheel heaters and automotive cable product categories which were partially offset by lower revenues in our CCS and seat heater product categories. BTM revenues contributed the largest increase totaling $18.4 million, or 183.5%, due to the 2018 launches of the actively cooled version on the Mercedes S-Class and the Jeep Wrangler. Other products that experienced significant growth in revenue during 2018 included automotive steering wheel heaters which increased by $7.7 million, or 12.4%, and automotive cables which increased by $6.8 million, or 7.4%.  The growth in steering wheel heater product revenues is due to new program awards, which included the Nissan Pathfinder, Nissan Murano, and the Audi A6 and Audi A8 vehicle programs. The growth in automotive cables product revenues is attributable to an increase in Oxygen Sensor business with Bosch, totaling $5.1 million. CCS revenues decreased by $13.1 million, or 3.4%, to $374.8 million due to an unfavorable mix between the higher priced active cooling technology and the lower priced heated and ventilated version. The decrease of $2.0 million, or 1%, in seat heater revenues was concentrated in Europe and Asia due to lower production volumes in those regions in 2018 as compared to 2017.

Lower revenues in the industrial segment in 2018 were attributable to decreased revenue of GPT and the CSZ industrial chamber business of $12.7 million, or 39.7%, and $3.7 million, or 8.4%, respectively. During 2018, GPT earned significantly lower revenue due to a decrease in the shipment of custom projects. Lower CSZ industrial chamber business revenues were mainly due to lower product revenues on custom climate testing chambers in 2018.  In June 2018, Gentherm announced that GPT and the CSZ industrial chamber business (“CSZ-IC”) would be sold.  Both businesses were classified as held for sale on December 31, 2018.  See Note 1 to our consolidated financial statements for additional information about Gentherm’s new strategic growth plan and, specifically, the February 2019 sale of CSZ-IC and the planned sale of GPT.  

Cost of sales. Cost of sales increased to $743.6 million during 2018 from $674.8 million during 2017, an increase of $68.8 million, or 10.2%.  Higher cost of sales were primarily due to changes in product mix favoring low margin products, including BTM and Etratech products, and lower quantities of higher margin products, including CCS and automotive seat heaters. The low margin realized on BTM product revenues during 2018 was partially due to higher than expected launch phase costs for the new actively cooled technology programs and higher fixed overhead costs, including depreciation expense, that were incurred in anticipation of higher, post-launch phase volumes.  Freight costs were $4.2 million higher in 2018 compared to 2017 and were attributable to the ramp-up of production at our Celaya Mexico facility. During 2018, labor costs grew $7.2 million compared to 2017 primarily due to higher sales, higher incurred overtime and higher wage rates at our production facilities in Mexico and Ukraine. Lastly, global tariffs, which became effective during the second half of 2018, contributed $1.3 million in additional costs of sales as compared to 2017.  

Net research and development expenses. Net research and development expenses were $79.9 million during 2018 compared to $82.5 million in 2017, a decrease of $2.6 million, or 3.1%. The decrease in net research and development expenses was primarily driven by the impact of the Fit-for-Growth cost reduction initiatives and higher-than-normal development and tooling cost reimbursements for new production applications. Research and development reimbursement totaled $18.8 million during 2018 and $12.0 million during 2017, an increase of $6.8 million, or 57%. We classify development and prototype costs and related

38


reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Research and development expenses increased $4.1 million, or 4%, to 98.7 million in 2018 due to higher costs for additional resources, including personnel, that are focused on the development of new products, including a program to develop the next generation of seat comfort products, and application engineering for production programs of existing products. The increase also included $1.4 million in foreign currency transaction and research and development expenses of Etratech, which totaled $2.2 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $3.4 million, or 2.6%, to $127.2 million during 2018 from $130.5 million during 2017. The decrease was due to CEO transition expenses of $6.7 million during 2017 and savings associated with cost reduction activities of the Company’s Fit-for-Growth initiative of $3.3 million. This decrease was partially offset by selling, general and administrative expenses associated with Etratech totaling $4.9 million, higher mark-to-market adjustment on cash-settled stock options of $2.9 million and higher expenses related to currency translation of $800 thousand.

Restructuring expenses. The Company recognized $14.8 million in restructuring expense during 2018 as a result of completed actions associated with the Fit-for-Growth cost savings initiative as more fully described above. The completed Fit-for-Growth actions are expected to deliver annualized saving of approximately $37.0 million.  In 2018, $65.0 million in savings opportunities were identified and we expect to achieve our $75.0 million overall savings target by 2021. No restructuring charges were incurred during 2017.

Foreign currency gain (loss). During 2018, we incurred a net foreign currency gain of $622 thousand which included a net realized gain of $33 thousand and a net unrealized gain of $589 thousand. During 2017, we incurred a net foreign currency loss of $23.1 million which included an unrealized loss of $21.8 million, The unrealized gain in 2018 and the unrealized loss in 2017 was primarily the result of holding significant amount of U.S. Dollar (“USD”) cash at our subsidiaries in Europe which have the European Euro (“EUR”) as the functional currency and due to certain intercompany relationships between these European subsidiaries and our U.S. based companies. The USD strengthened relative to the EUR in 2018 but had significantly weakened during 2017. If the USD continues to strengthen, we will likely have unrealized gains, but if the USD weaken, we will likely have unrealized losses.

Impairment loss. During 2018, the Company recorded an impairment loss totaling $11.5 million associated with the Company’s plans to divest GPT and CSZ-IC, both of which are included in the industrial segment.  The loss is not expected to be fully deductible for income tax purposes. No impairment loss was recorded in 2017.

Income tax expense. We recorded an income tax expense of $16.2 million during 2018 representing an effective tax rate of 28% on earnings before income tax of $58.1 million.  The pre-tax earnings amount included the non-deductible impairment loss of $11.5 million.  Adjusting for the impairment loss, the effective tax rate was 23% for 2018.  The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the international provisions of the U.S. tax reform, such as global intangible low-tax income (“GILTI”), enacted in December 2017, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.  We recorded an income tax expense of $34.0 million during 2017 which included the one-time transition tax of $20.2 million relating to the 2017 Tax Cut and Jobs Act (the “Tax Act”). Excluding this one-time expense, our income tax expense would have been $13.8 million representing an effective tax rate of 20% on earnings before income tax of $69.3 million. 

Industrial segment operating loss. The industrial segment, which includes GPT, CSZ and our advanced research and development activities, reported an operating loss totaling $22.5 million and $14.8 million during 2018 and 2017, respectively. We incurred these losses for several reasons.  First, the advanced research and development activities, the total cost for which were $15.6 million and $13.9 million during 2018 and 2017, respectively, are focused on products and technologies that are currently not generating product revenues. Second, in conjunction with the Fit-for-Growth initiative, a number of advanced research activities have been curtailed or ceased and we have executed site consolidations at our Irvine, California and Azusa, California facilities.  These changes are expected to lead to lower spending rates in future periods. We expect advanced research activities focused on our core technologies to continue and to generate profitable revenue in future periods, a significant portion of which we expected will be recognized in the Automotive segment. Lastly, CSZ incurred $5.2 million in expenses in 2018 associated with a new direct sale force for the medical business unit that has yet to be fully offset by a corresponding increase in the amount of revenue and related operating income. We continue to believe the direct sales force will lead to higher medical product revenues in future periods that will generate operating profits in excess of the costs for the direct sales team.


39


Results of Operations Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Product revenues. Product revenues by product category, in thousands, for the years ended December 31, 2017 and 2016 are as follows:

 

 

Year Ended December 31,

 

 

 

 

2017

 

 

 

2016

 

 

%

Change

Climate Control Seats (CCS)

 

$

387,961

 

 

$

405,795

 

 

(4.4

)

%

Seat Heaters

 

 

307,309

 

 

 

288,939

 

 

6.4

 

%

Steering Wheel Heaters

 

 

62,125

 

 

 

49,516

 

 

25.5

 

%

Automotive Cables

 

 

92,093

 

 

 

85,283

 

 

8.0

 

%

Battery Thermal Management (BTM)(a)

 

 

10,043

 

 

 

6,546

 

 

53.4

 

%

Etratech

 

 

8,398

 

 

 

 

 

 

 

Other Automotive

 

 

11,528

(b)

 

 

11,349

 

 

1.6

 

%

Subtotal Automotive

 

$

879,457

 

 

$

847,428

 

 

3.8

 

%

Remote Power Generation (GPT)

 

 

31,891

 

 

 

18,628

 

 

71.2

 

%

Cincinnati Sub-Zero Products (CSZ)

 

 

74,335

 

 

 

51,544

 

 

44.2

 

%

Subtotal Industrial

 

$

106,226

 

 

$

70,172

 

 

51.4

 

%

Total Company

 

$

985,683

 

 

$

917,600

 

 

7.4

 

%

 

 

a)

Battery Thermal Management or BTM product revenues include Gentherm’s automotive grade, low cost, heat resistant fans and blowers used by customer for battery cooling through ventilation and production level shipments of the advanced TED based active cool system which began during the fourth quarter of 2017.

 

b)

Includes $2.0 million rebate to customer during 2017.

Product revenues for 2017 were $985.7 million compared with product revenues of $917.6 million for 2016, an increase of $68.1 million, or 7.4%.  This increase included the full year effect of the 2016 acquisition of CSZ, which operated as a part of Gentherm for a full year in 2017 but only for nine months during 2016, $8.4 million in additional revenue attributable to the 2017 acquisition of Etratech after it was acquired on November 1, 2017, and a $5 million favorable impact of foreign currency translation.  Adjusting for these effects, our pro-forma product revenue growth was 4.6% and included a 2.7% increase in Automotive segment product revenues to $879.5 million and a 23.4% increase in Industrial segment product revenue to $106.2 million.

The increase in the Automotive segment occurred despite lower global automotive production volumes and a special rebate of $2.0 million recorded during 2017.  The increases included higher revenue volume for heated seat products, totaling $18.4 million, or 6.4%, heated steering wheels of $12.6 million, or 25.5%, automotive cable systems of $6.8 million, or 8.0%, and battery thermal management products of $3.5 million, or 53.4%.  These higher amounts were attributable to new program awards, higher vehicle application rates and higher component content.  Higher component content in heat seat products, for example, included a greater number of programs for which Gentherm provides the electronic controlling device along with the heating element.  These increases were partially offset by lower CCS product revenues which decreased by $17.8 million, or 4.4%.  CCS product revenue was disproportionately impacted by the lower global production volumes which were more unfavorable in our primary CCS market, North America, which was down by 4%, compared to an increase of 2% for the global automotive industry.  CCS revenues were also reduced as a result of certain vehicle programs changing technologies from the higher priced active cooling seat application to the lower priced heated and ventilated seat technology. 

Product revenues from GPT totaled $31.9 million which represented an increase of $13.3 million, or 71%.  Continuing market weakness in North America was more than offset by higher sales to other markets.  Product sales in this business unit are typically large custom remote power systems having long lead times and, during 2017, there were more shipments than in the prior year.  During 2016, demand for GPT’s products sold in North America was unfavorably impacted by lower oil prices.  While we do not generally sell our products for oil exploration, production or transportation activities, the impact of lower oil prices reduced capital investments for the natural gas industry being made by GPT’s principal customers.  As a result, those customers curtailed orders during that year.

40


CSZ product revenue increased by $22.8 million which included both an acquisition related increase of $15.9 million and organic growth of $6.9 million, or 10%.   This increase included higher revenue of environmental chamber products totaling $8.1 million or 22% partially offset by lower revenue of patient temperature management products of $1.2 million or 3.9%.  The higher revenue for environmental chambers included several large custom orders as well as stronger demand for standard chambers.  Patient temperature management product revenue equally benefited 2017 and 2016 from a temporary surge in demand for the Hemotherm product, a blood heater cooler used in hospital operating rooms during open heart surgery, but did not yet show improvements associated with a transition to a direct sales force that occurred throughout 2017.

Cost of sales. Cost of sales increased to $674.8 million in 2017 from $622.6 million in 2016. The increase of $52.2 million, or 8%, was due to increased sales volume, unfavorable inventory adjustments, other increased expenses and changes in product mix partially offset by a one-time $4.0 million expense from the purchase accounting effect of inventory for the CSZ acquisition which occurred in 2016.  The gross margin rate was 31.6% during 2017 representing a decrease of 60 basis points as compared with the 2016 gross margin rate of 32.2%.  This decrease was due to the special rebate and the inventory adjustments and the higher expenses.  The unfavorable inventory adjustments totaled $2.3 million and were mainly comprised of a reserve recorded for inventory held for the heated and cooled mattress product line based upon a reduced sales outlook.  Increased expenses totaling approximately $7.0 million included higher fixed costs associated with our new manufacturing facilities in Mexico and Macedonia, labor expense inflation at our Ukraine factory, and factory launch expenses for the new advanced battery thermal management product and electronics.

Net research and development expenses. Net research and development expenses were $82.5 million during 2017 compared to $72.9 million in 2016, an increase of $9.6 million, or 13%. This increase was primarily driven by higher costs for additional resources, including personnel focused on application engineering for new production programs of existing products, development of new products and a program to develop the next generation of seat comfort products. 

Increases in research and development were partially offset by research and development reimbursement totaling $12.0 million during 2017 and $6.7 million during 2016. 

Acquisition transaction expenses. During 2017, we incurred $789 thousand in fees and expenses associated with the acquisition of Etratech which was completed on November 1, 2017.  During 2016, we incurred $743 thousand in fees and expenses associated with the acquisition of CSZ which was completed on April 1, 2016.

Selling, general and administrative expenses. Selling, general and administrative expenses were $130.5 million , which included $1.1 million in selling, general and administrative expenses for Etratech and $6.1 million in higher expenses for CSZ due to the additional three months of operations during 2017 as compared to 2016, the year CSZ was acquired.   Excluding the Etratech expenses and additional CSZ expenses, selling, general and administrative expenses increased by $8.1 million, or 7%, from $115.3 million in the prior year. This increase was partly due to expenses associated with the transition to a new CEO, higher selling costs for CSZ’s medical products business, and increased management incentive compensation costs partially offset by a one-time expense associated with a management reorganization totaling $2.0 million incurred in 2016 but not 2017.  During 2017 our former CEO, Daniel R. Coker, retired and as a result, we recorded expenses totaling $6.7 million which included accelerated stock compensation amortization and accrued cash bonus.  The amount also included a signing bonus and a make whole bonus for Mr. Coker’s successor and fees associated with the recruitment process.  CSZ’s selling expenses include an increase of $3.9 million associated with a direct sales force for its medical division started during 2017.  Lastly, expenses for our management incentive program were $968 thousand higher during 2017 as compared to 2016.

Foreign currency gain (loss).  During 2017 we incurred a net foreign currency loss of $23.1 million which included a net realized loss of $1.3 million and a net unrealized loss of $21.8 million.  During 2016, we incurred a net foreign currency gain of $7.8 million which included a net realized gain of $1.7 million and a net unrealized gain of $6.1 million. The unrealized loss in 2017 and the unrealized gain in 2016 was primarily the result of holding significant amounts of U.S. Dollar (“USD”) cash at our subsidiaries in Europe which have the European Euro (“EUR”) as the functional currency and due to certain intercompany relationships between these European subsidiaries and our U.S. based companies.  During 2017, the USD significantly weakened relative to the EUR but strengthened during 2016. 

41


Income tax expense. We recorded an income tax expense of $34.0 million during 2017 which included the one-time transition tax of $20.1 million relating to the Tax Act.  Excluding this one-time expense, our income tax expense would have been $13.9 million representing an effective tax rate of 20% on earnings before income tax of $69.3 million.  We recorded an income tax expense of $34.0 million during 2016 which included the one-time withholding tax expense of $7.6 million and income tax expense of $2.5 million related to the Reorganization.  Excluding these one-time expenses, our income tax expense would have been $23.9 million representing an effective tax rate of 22% on earnings before income tax of $110.6 million.

The Tax Act was enacted on December 22, 2017.  The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  As of December 31, 2017, in accordance with guidance provided by Staff Accounting Bulletin No. 118 (SAB 118), we have not completed our accounting for the tax effects of the Tax Act; however, in certain cases, as described below, we have made a provisional estimate of the effects on our existing deferred tax balances and the one-time transition tax.  In the year ended December 31, 2017, the provision for income taxes includes a provisional income tax expense of $20.2 million related to items for which we were able to determine a reasonable estimate.  In all cases, we will continue to make and refine our calculations as additional analysis is completed.  In addition, our estimates may be affected as additional regulatory guidance is issued with respect to the Tax Act.  Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined, but in any event, no later than the fourth quarter of 2018, in accordance with SAB 118.  

Deferred tax assets and liabilities.  We remeasured our U.S. deferred tax assets and liabilities at 21%.  However, we were still analyzing certain aspects of the Tax Act and refining our calculations, which could have potentially affected the measurement of these balances or potentially give rise to new deferred tax amounts.  In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of $5.8 million related to the remeasurement of deferred tax balances.

Transition tax on deferred foreign earnings.  The one-time transition tax is based on our post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes.  In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of $23.9 million related to the one-time transition tax liability of our foreign subsidiaries.  We have not completed our calculation of the total post-1986 E&P for these foreign subsidiaries.  Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets.  This amount may change when we finalize the calculation of post-1986 E&P previously deferred from U.S. income taxes and the amounts held in cash or other specified assets.  A benefit of $9.6 million was included in the provision for income taxes to offset the one-time transition tax related to the previous deferred tax liability that existed for the undistributed foreign earnings that were not permanently reinvested.  However, we continue to recognize a deferred tax liability related to foreign withholding tax that will be incurred for undistributed foreign earnings that are not permanently reinvested. See Note 2 to our consolidated financial statements for additional information about the one-time transition tax.

Industrial segment operating loss.  The Industrial segment, which includes CSZ, GPT and our advanced research and development activities, reported an operating loss totaling $14.8 million and $16.7 million during 2017 and 2016, respectively.  The loss during 2016 included the one-time purchase accounting adjustment related to the CSZ acquisition.  After adjusting for this one-time expense, the 2017 loss was $2.0 million, or 16%, higher than the loss in the Industrial segment, as adjusted, in 2016.  We incurred these losses for three reasons.  First, the advanced research and development activities, the total cost for which were $13.9 million and $12.1 million, during 2017 and 2016, respectively, are focused on products and technologies that are currently not generating product revenues.  Second, CSZ incurred approximately $2.0 million in cost overruns on several large customer environmental test chambers during 2017.  These cost overruns are not expected to recur in future periods.  Finally, CSZ’s $3.9 million in higher expenses in 2017 associated with the new direct sales force was not yet offset by a corresponding increase in the amount of revenue and related operating income. 

Liquidity and Capital Resources

Cash and Cash Flows

The Company has funded its financial needs primarily through cash flows from operating activities and equity and debt financings.  Our new strategic plan sets forth a capital allocation strategy that includes a targeted debt-to-earnings leverage ratio and allows for some of our cash flow to be paid back to investors through Common Stock repurchases.  On June 25, 2018, our Board of Directors increased the Company’s stock repurchase authorization to $300 million, of which $146.6 million of availability remained

42


as of December 31, 2018.  This authorization expires on December 16, 2020. Based on its current operating plan, management believes cash and cash equivalents at December 31, 2018, together with cash flows from operating activities, and borrowing available under our credit agreement, are sufficient to meet operating and capital expenditure needs, and to service debt, for at least the next 12 months. However, if cash flows from operations decline, we may need to obtain alternative sources of capital and reduce or delay capital expenditures, acquisitions and investments, all of which could impede the implementation of our business strategy and adversely affect our results of operations and financial condition.  In addition, it is likely that we will need to complete one or more equity or debt financings if we consummate any significant acquisition or several smaller acquisitions.  There can be no assurance that such capital will be available at all or on reasonable terms, which could adversely affect our future operations and business strategy.  

The following table represents our cash and cash equivalents and short-term investments:

 

 

  

December 31,
2018

 

  

December 31,
2017

 

 

  

(in Thousands)

 

Cash and cash equivalents at beginning of period

 

$

103,172

 

 

$

177,187

 

Cash from operating activities

 

 

118,434

 

 

 

49,880

 

Cash used in investing activities

 

 

(40,757

)

 

 

(117,688

)

Cash from financing activities

 

 

(139,266

)

 

 

(31,564

)

Foreign currency effect on cash and cash equivalents

 

 

(1,963

)

 

 

25,357

 

Cash and cash equivalents at end of period

 

$

39,620

 

 

$

103,172

 

Cash Flows From Operating Activities

We manage our cash, cash equivalents and short-term investments to fund operating requirements and preserve liquidity to take advantage of future business opportunities. The following table compares the cash flows from operating activities earned during 2018 with those earned in 2017:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

Change

 

Operating Activities:

 

(in Thousands)

 

Net income

 

$

41,899

 

 

$

35,227

 

 

$

6,672

 

Non-cash adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

50,638

 

 

 

44,972

 

 

 

5,666

 

Deferred income taxes

 

 

6,699

 

 

 

5,135

 

 

 

1,564

 

Stock compensation

 

 

9,047

 

 

 

12,507

 

 

 

(3,460

)

Defined benefit pension plan expense

 

 

82

 

 

 

(23

)

 

 

105

 

Provision for doubtful accounts

 

 

(1

)

 

 

(469

)

 

 

468

 

Loss on sale of property and equipment

 

 

2,602

 

 

 

1,042

 

 

 

1,560

 

Impairment loss

 

 

11,476

 

 

 

 

 

 

11,476

 

Net income before non-cash adjustments

 

 

122,442

 

 

 

98,391

 

 

 

24,051

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,024

 

 

 

6,033

 

 

 

(3,009

)

Inventory

 

 

(7,689

)

 

 

(4,348

)

 

 

(3,341

)

Prepaid expenses and other assets

 

 

(4,428

)

 

 

(12,334

)

 

 

7,906

 

Accounts payable

 

 

12,380

 

 

 

(7,691

)

 

 

20,071

 

Accrued liabilities

 

 

(7,295

)

 

 

(30,171

)

 

 

22,876

 

Net cash provided by operating activities

 

 

118,434

 

 

 

49,880

 

 

 

68,554

 

43


Cash provided by operating activities during 2018 was $118.4 million representing an increase of $68.6 million from cash provided by operating activities during 2017, which was $49.9 million. The following table highlights significant differences between the operating cash flows for the periods ending December 31, 2018 and 2017, respectively:

 

(in Thousands)

Net cash provided by operating activities during 2017

$

49,880

 

Higher net income before changes in operating assets and liabilities

 

24,051

 

Changes in working capital, net

 

46,843

 

Changes in other assets and liabilities

 

(2,340

)

Net cash provided by operating activities during 2018

$

118,434

 

Net cash provided by operating activities before changes in operating assets and liabilities increased during 2018 due to higher revenues partially offset by higher cash based operating expenses and impairment losses recognized on goodwill, other intangible asset and assets held for sale of $6.2 million, $3.1 million and $2.2 million, respectively. Additionally, working capital, net provided favorable cash flows related to accounts receivable and accrued liabilities and unfavorable amounts related to inventory, prepaid expenses and other assets and accounts payable.

Working Capital

The following table illustrates changes in working capital during 2018:

 

(in Thousands)

Working capital at December 31, 2017

$

289,754

 

Decrease in cash

 

(61,768

)

Decrease in accounts receivable

 

(13,932

)

Decrease in inventory

 

(6,552

)

Increase in tax receivables, net

 

14,801

 

Increase in prepaid expenses and other assets

 

(722

)

Increase in accounts payable

 

(5,494

)

Decrease in accrued liabilities

 

1,743

 

Current assets classified as held for sale, net

 

10,717

 

Non-current assets classified as held for sale

 

46,833

 

Foreign currency effect on working capital

 

(7,701

)

Working capital at December 31, 2018

$

267,679

 

The following table highlights significant transactions that contributed to the decrease in cash experienced during the year ended December 31, 2018:

 

(in Thousands)

Net cash provided by operating activities

$

118,434

 

Purchases of property and equipment

 

(41,541

)

Repayments of Debt

 

(99,460

)

Borrowings from U.S. Revolving Note

 

94,679

 

Stock repurchases

 

(148,074

)

Proceeds from the exercise of Common Stock options

 

14,777

 

Other items

 

(583

)

Decrease in cash

$

(61,768

)

In addition to these transactions, working capital was impacted by decreases in accounts receivable, inventory, prepaid expenses and other assets, and accrued liabilities and increases in accounts payable.  The changes in current assets and liabilities reflects the classification of GPT and CSZ-IC (disposal group) as held for sale during 2018.  All assets and liabilities of the disposal group are classified as held for sale within current assets and current liabilities, respectively, on the Company’s consolidated balance sheet for the year ended December 31, 2018.  See Note 15 to our consolidated financial statement for additional information about the assets and liabilities classified as held for sale. Lastly, Gentherm recognized an increase in current tax receivable relating to timing of required payment to tax authorities.

44


Cash Flows From Investing Activities

Cash used in investing activities was $40.8 million during 2018, reflecting purchases of property and equipment related to the expansion of production capacity, including at our newest facilities in Mexico, Vietnam, Macedonia and our Etratech facility in Canada.

Cash Flows From Financing Activities

Cash used in financing activities was $139.3 million during 2018, reflecting payments of principal on the U.S. Revolving Note, the DEG China Loan and the DEG Vietnam Loan totaling $99.5 million in aggregate, partially offset by additional borrowings on the U.S. Revolving Note totaling $94.7 million. As of December 31, 2018, the total availability under the U.S. Revolving Note was $221.9 million. Cash was also paid to repurchase Common Stock totaling $148.1 million, and for cancellations of restricted stock awards totaling $1.2 million.

Debt

The Company, together with certain direct and indirect subsidiaries, has an outstanding credit agreement (the “Credit Agreement”) with a consortium of lenders and Bank of America, N.A., as administrative agent.  The Credit Agreement provides the Company a revolving credit note (“U.S. Revolving Note”) with a maximum borrowing capacity of $350 million.

All subsidiary borrowers and guarantors participating in the 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 Credit Agreement, including the stock and membership interest of specified subsidiaries (limited to 66% of the stock in case of certain non-US subsidiaries). The Credit Agreement restricts the amount of dividend payments the Company can make to shareholders.  

The Credit Agreement requires the Company to maintain a minimum Consolidated Interest Coverage Ratio and a Consolidated Leverage Ratio.  Definitions for these financial ratios are provided in the Credit Agreement.

Under the 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 base rate is equal to the highest of the Federal Funds Rate (2.40% at December 31, 2018) plus 0.50%, Bank of America’s prime rate (5.50% at December 31, 2018), or a one month Eurocurrency rate (0.00% at December 31, 2018) plus 1.00%. The Eurocurrency rate for loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (2.50% at December 31, 2018). In April 2018, the Credit Agreement was amended to establish a means for determining an alternative for LIBOR if it is determined that ascertaining LIBOR is no longer possible. 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 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 German government-owned development bank.  The first, a loan we used to fund capital investments in China (the “DEG China Loan”), is subject to semi-annual principal payments that began March, 2015 and will end September, 2019.  Under the terms of the DEG China Loan, the Company must maintain a minimum Debt-to-Equity Ratio, Current Ratio and Debt Service Coverage Ratio, as defined by the DEG China Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Automotive Systems (China) Ltd.

The Company’s second fixed interest rate senior loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”).  The DEG Vietnam Loan is subject to semi-annual principal payments that began November, 2017 and will end May, 2023.  Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum Currency Ratio, Equity Ratio and Enhanced Equity Ratio, each as defined by the DEG Vietnam Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Vietnam Co. Ltd.  

45


The following table summarizes the Company’s debt at December 31, 2018 (dollars in thousands).

 

 

 

  

Interest
Rate

 

 

Principal
Balance

 

Credit Agreement:

 

 

 

 

 

 

 

 

     U.S. Revolving Note (U.S. Dollar Denominations)

 

 

4.02

%

 

$

122,000

 

     U.S. Revolving Note (Euro Denominations)

 

 

1.50

%

 

 

5,727

 

DEG China Loan

 

 

4.25

%

 

 

913

 

DEG Vietnam Loan

 

 

5.21

%

 

 

11,250

 

Total debt

 

 

 

 

 

 

139,890

 

Current portion

 

 

 

 

 

 

(3,413

)

Long-term debt, less current maturities

 

 

 

 

 

$

136,477

 

As of December 31, 2018, we were in compliance with all terms as outlined in the Credit Agreement, DEG China Loan and DEG Vietnam Loan. Undrawn borrowing capacity under the U.S. Revolving Note was $221.9 million as of December 31, 2018.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update’s core principal is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. Issuers are to use a five-step contract review model to ensure revenue is measured, recognized, and disclosed in accordance with this principle. The FASB issued several amendments to the update, including a one-year deferral of the original effective date, and new methods for identifying performance obligations that are intended to reduce the cost and complexity of compliance.

We adopted ASU 2014-09 and related amendments effective January 1, 2018 using the cumulative catch-up transition method, which required us to disclose the cumulative effect of initially applying the update recognized at the date of initial application. We elected to apply the guidance in ASU 2014-09 to contracts that were not completed at January 1, 2018.

The most significant impact from adoption of ASU 2014-09 occurred within our Automotive segment and relates to our accounting for production part purchase options that grant customers a material right to purchase additional parts 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. Revenue recognition related to goods and services reported in the Industrial segment remains substantially unchanged.

46


The amount by which each financial statement line item was affected by application of ASU 2014-09 and related amendments during the period ended December 31, 2018, in thousands, is as follows:

 

 

  

Revenue Based on Previously Effective Guidance

 

  

New Revenue Standard Adjustment

 

  

Revenue Based on New Revenue Standard

 

Twelve Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

1,035,773

 

 

$

2,486

 

 

$

1,038,259

 

Income tax expense (benefit)

 

 

16,727

 

 

 

507

 

 

 

16,220

 

Net income

 

 

39,920

 

 

 

1,979

 

 

 

41,899

 

Basic earnings per share

 

 

1.11

 

 

 

0.06

 

 

 

1.17

 

Diluted earnings per share

 

 

1.10

 

 

 

0.06

 

 

 

1.16

 

 

 

  

Revenue Based on Previously Effective Guidance