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EX-31.1 - EX-31.1 - GENTHERM Incthrm-ex311_201506309.htm
EX-31.1 - EX-31.1 - GENTHERM Incthrm-ex311_201506308.htm
EX-31.2 - EX-31.2 - GENTHERM Incthrm-ex312_201506306.htm
EX-32.2 - EX-32.2 - GENTHERM Incthrm-ex322_201506307.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2015

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, Ste. 101, Northville, MI

 

48167

(Address of principal executive offices)

 

(Zip Code)

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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

x

  

Accelerated filer

¨

Non-accelerated filer

¨

  

Smaller reporting company

¨

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

At July 31, 2015, there were 36,058,152 issued and outstanding shares of Common Stock of the registrant.

 

 

 

 

 

 


 

GENTHERM INCORPORATED

TABLE OF CONTENTS

 

Cover

 

Table of Contents

 

 

 

Part I. Financial Information

  

3

 

 

Item 1.

 

 

Financial Statements (Unaudited)

 

3

 

 

 

 

Consolidated Condensed Balance Sheets

 

3

 

 

 

 

Consolidated Condensed Statements of Income

 

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income

 

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows

 

6

 

 

 

 

Consolidated Condensed Statement of Changes in Shareholders’ Equity

 

7

 

 

 

 

Notes to Unaudited Consolidated Condensed Financial Statements

 

8

 

Item 2.

 

 

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

 

15

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

19

 

Item 4.

 

 

Controls and Procedures

 

22

 

Part II. Other Information

  

23

 

 

Item 1.

 

Legal Proceedings

 

23

 

 

Item 1A.

 

Risk Factors

 

23

 

 

Item 6.

 

Exhibits

 

23

 

Signatures

  

24

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

June 30,
2015

 

 

December 31,
2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

101,643  

 

 

$

85,700

 

Accounts receivable, less allowance of $3,005 and $2,847, respectively

 

149,426  

 

 

 

136,183

 

Inventory:

 

 

 

 

 

 

 

Raw materials

 

49,559  

 

 

 

48,678

 

Work in process

 

4,905  

 

 

 

4,009

 

Finished goods

 

25,152

 

 

 

24,956

 

Inventory, net

 

79,616

 

 

 

77,643

 

Derivative financial instruments

 

2,195  

 

 

 

145

 

Deferred income tax assets

 

5,738

 

 

 

6,247

 

Prepaid expenses and other assets

 

33,624

 

 

 

29,107

 

Total current assets

 

372,242  

 

 

 

335,025

 

Property and equipment, net

 

101,804

 

 

 

91,727

 

Goodwill

 

28,472  

 

 

 

30,398

 

Other intangible assets

 

56,916

 

 

 

68,129

 

Deferred financing costs

 

356

 

 

 

406

 

Deferred income tax assets

 

22,745

 

 

 

18,843

 

Derivative financial instruments

 

5,094

 

 

 

1,345

 

Other non-current assets

 

12,125

 

 

 

12,019

 

Total assets

$

599,754

 

 

$

557,892

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

82,869

 

 

$

71,434

 

Accrued liabilities

 

62,972

 

 

 

68,387

 

Current maturities of long-term debt

 

4,505

 

 

 

5,306

 

Deferred tax liabilities

 

21

 

 

 

 

Derivative financial instruments

 

5,296

 

 

 

2,466

 

Total current liabilities

 

155,663

 

 

 

147,593

 

Pension benefit obligation

 

9,867

 

 

 

10,321

 

Other liabilities

 

7,163

 

 

 

2,788

 

Long-term debt, less current maturities

 

81,078

 

 

 

85,469

 

Derivative financial instruments

 

9,499

 

 

 

6,698

 

Deferred income tax liabilities

 

9,636

 

 

 

10,804

 

Total liabilities

 

272,906

 

 

 

263,673

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common Stock:

 

 

 

 

 

 

 

No par value; 55,000,000 shares authorized, 36,055,652 and 35,696,334 issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

249,661

 

 

 

243,255

 

Paid-in capital

 

(6,530

)

 

 

(8,224

)

Accumulated other comprehensive loss

 

(40,528

)

 

 

(25,743

)

Accumulated earnings

 

124,245

 

 

 

84,931

 

Total shareholders’ equity

 

326,848  

 

 

 

294,219

 

Total liabilities and shareholders’ equity

$

599,754

 

 

$

557,892

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

3


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Product revenues

 

$

213,441

 

 

$

206,182

 

 

$

420,350

 

 

$

400,120

 

Cost of sales

 

 

147,736

 

 

 

145,425

 

 

 

288,075

 

 

 

282,338

 

Gross margin

 

 

65,705

 

 

 

60,757

 

 

 

132,275

 

 

 

117,782

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net research and development expenses

 

 

14,977

 

 

 

14,550  

 

 

 

29,525

 

 

 

27,595

 

Acquisition transaction expenses

 

 

 

 

 

 

 

 

 

 

 

1,075

 

Selling, general and administrative

 

 

24,058

 

 

 

21,693

 

 

 

49,003

 

 

 

39,560

 

Total operating expenses

 

 

39,035

 

 

 

36,243

 

 

 

78,528

 

 

 

68,230

 

Operating income

 

 

26,670

 

 

 

24,514

 

 

 

53,747

 

 

 

49,552

 

Interest expense

 

 

(544

)

 

 

(970

)

 

 

(1,108

)

 

 

(1,901

)

Revaluation of derivatives loss

 

 

(53

)

 

 

(340

)

 

 

(1,017

)

 

 

(587

)

Foreign currency (loss) gain

 

 

(107

)

 

 

(320

)

 

 

328

 

 

 

(1,843

)

Gain from equity investment

 

 

 

 

 

 

 

 

 

 

 

785

 

Other income (expense)

 

 

262

 

 

 

41

 

 

 

457

 

 

 

(200

)

Earnings before income tax

 

 

26,228

 

 

 

22,925

 

 

 

52,407

 

 

 

45,806

 

Income tax expense

 

 

6,734

 

 

 

6,502

 

 

 

13,093

 

 

 

12,804

 

Net income

 

$

19,494

 

 

$

16,423

 

 

$

39,314

 

 

$

33,002

 

Basic earnings per share

 

$

0.54

 

 

$

0.46        

 

 

$

1.10

 

 

$

0.94

 

Diluted earnings per share

 

$

0.53

 

 

$

0.46  

 

 

$

1.08  

 

 

$

0.92

 

Weighted average number of shares – basic

 

 

35,971

 

 

 

35,361

 

 

 

35,871

 

 

 

35,213

 

Weighted average number of shares – diluted

 

 

36,585

 

 

 

36,094

 

 

 

36,429

 

 

 

35,841

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

4


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

19,494

 

 

$

16,423

 

 

$

39,314

 

 

$

33,002

 

Other comprehensive income (loss), gross of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments gain (loss)

 

 

4,722

 

 

 

(730

)

 

 

(14,883

)

 

 

(3,355

)

Unrealized (loss) gain on foreign currency derivative securities

 

 

(430

)

 

 

99

 

 

 

(777

)

 

 

160

 

Unrealized loss on commodity derivative securities

 

 

(124

)

 

 

 

 

 

(48

)

 

 

 

Unrealized gain on interest rate derivative securities

 

 

 

 

 

 

 

 

 

 

 

39

 

Other comprehensive income (loss), gross of tax

 

$

4,168

 

 

$

(631

)

 

$

(15,708

)

 

$

(3,156

)

Other comprehensive income, related tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

246

 

 

 

280

 

 

 

713

 

 

 

854

 

Unrealized gain on foreign currency derivative securities

 

 

121

 

 

 

 

 

 

210

 

 

 

 

Other comprehensive income, related tax effect

 

$

367

 

 

$

280

 

 

$

923

 

 

$

854

 

Other comprehensive income (loss), net of tax

 

$

4,535

 

 

$

(351

)

 

$

(14,785

)

 

$

(2,302

)

Comprehensive income

 

$

24,029

 

 

$

16,072

 

 

$

24,529

 

 

$

30,700

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

5


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

2015

 

  

2014

 

Operating Activities:

 

 

 

 

 

 

 

Net income

$

39,314

 

 

$

33,002

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

15,323

 

 

 

15,931

 

Deferred income tax benefit

 

(4,765

)

 

 

(6,309

)

Stock compensation

 

2,983

 

 

 

2,225

 

Defined benefit plan expense

 

105

 

 

 

28

 

Provision of doubtful accounts

 

252

 

 

 

(330

)

Gain on revaluation of financial derivatives

 

(150

)

 

 

(217

)

Gain from equity investment

 

 

 

 

(785

)

(Gain) loss on sale of property and equipment

 

(41

)

 

 

28

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(16,711

)

 

 

(17,456  

)

Inventory

 

(4,433

)

 

 

5,024

 

Prepaid expenses and other assets

 

(6,674

)

 

 

(6,959

)

Accounts payable

 

13,148

 

 

 

(1,312

)

Accrued liabilities

 

1,421

 

 

 

1,496

 

Net cash provided by operating activities

 

39,772

 

 

 

24,366

 

Investing Activities:

 

 

 

 

 

 

 

Acquisition and investment in subsidiary, net of cash acquired

 

(47

)

 

 

(31,739

)

Proceeds from the sale of property and equipment

 

225

 

 

 

44

 

Purchases of property and equipment

 

(23,029

)

 

 

(15,489

)

Net cash used in investing activities

 

(22,851

)

 

 

(47,184

)

Financing Activities:

 

 

 

 

 

 

 

Borrowing of debt

 

 

 

 

13,455

 

Repayments of debt

 

(2,801

)

 

 

(12,470

)

Excess tax benefit from equity awards

 

1,462

 

 

 

4,155

 

Cash paid for the cancellation of restricted stock

 

(467

)

 

 

 

Proceeds from the exercise of Common Stock options

 

4,122

 

 

 

3,406

 

Net cash provided by financing activities

 

2,316

 

 

 

8,546

 

Foreign currency effect

 

(3,294

)

 

 

2,541

 

Net increase (decrease) in cash and cash equivalents

 

15,943

 

 

 

(11,731

)

Cash and cash equivalents at beginning of period

 

85,700

 

 

 

54,885

 

Cash and cash equivalents at end of period

$

101,643

 

 

$

43,154

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for taxes

$

19,384

 

 

$

9,889

 

Cash paid for interest

$

890

 

 

$

1,308

 

Supplemental disclosure of non-cash transactions:

 

 

 

 

 

 

 

Common Stock issued to Board of Directors and employees

$

1,389

 

 

$

1,330

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

6


 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance at December 31, 2014

 

35,697

 

 

$

243,255

 

 

$

(8,224

)

 

$

84,931

 

 

$

(25,743

)

 

$

294,219

 

Exercise of Common Stock options for cash

 

272    

 

 

 

5,484  

 

 

 

(1,362

)

 

 

 

 

 

 

 

 

4,122

 

Tax benefit from exercises of Common Stock options

 

 

 

 

 

 

 

1,462

 

 

 

 

 

 

 

 

 

1,462

 

Cancelation of restricted stock

 

(11

)

 

 

(467

)

 

 

 

 

 

 

 

 

 

 

 

(467

)

Stock option compensation

 

 

 

 

 

 

 

1,594

 

 

 

 

 

 

 

 

 

 

1,594

 

Common Stock issued to Board of Directors and employees

 

98

 

 

 

1,389

 

 

 

 

 

 

 

 

 

 

 

 

1,389

 

Currency translation, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,170

)

 

 

(14,170

)

Commodity hedge, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(48

)

 

 

(48

)

Foreign currency hedge, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(567

)

 

 

(567

)

Net income

 

 

 

 

 

 

 

 

 

 

39,314  

 

 

 

 

 

 

39,314

 

Balance at June 30, 2015

 

36,056

 

 

$

249,661

 

 

$

(6,530

)

 

$

124,245

 

 

$

(40,528

)

 

$

326,848

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

7


 

GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 1 – The Company and Subsequent Events

Gentherm Incorporated is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies.  Unless the context otherwise requires, the terms “Company”, “we”, “us” and “our” used herein refer to Gentherm Incorporated and its consolidated subsidiaries. Our products can be found on the vehicles of nearly all major automotive manufacturers, spanning all major automotive markets.  We operate in locations aligned with our major customers’ product strategies in order to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets.   We concentrate our research on the development of new technologies that will improve overall product effectiveness and customer satisfaction.  We also focus on developing new design applications from our existing technologies to create products and market opportunities for thermal comfort solutions.  

Subsequent Events

We have evaluated subsequent events through the date that our consolidated condensed financial statements are issued.  No events have occurred that would require adjustment to or disclosure in the consolidated condensed financial statements.

Note 2 – Basis of Presentation and New Accounting Pronouncements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in the audited annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of our results of operations, financial position and cash flows have been included. The balance sheet as of December 31, 2014 was derived from audited annual consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for the six months ended June 30, 2015 is not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These consolidated condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Debt Issuance Costs

In April, 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.”   To simplify the presentation of debt issuance costs and improve consistency with International Financial Reporting Standards, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of a Company’s corresponding debt liability, similar to the current presentation of a debt discount or premium.   Amortization of debt issuance costs will be reported as interest expense.  

ASU 2015-03 is effective for fiscal and interim periods beginning after December 15, 2015.  Early adoption of the amendments in this update is permitted.  Entities are required to comply with the applicable disclosures for a change in an accounting principle, including a description of prior period information that has been retrospectively adjusted.  We believe adoption of ASU 2015-03 will impact the presentation of debt issuance costs on the Company’s consolidated condensed balance sheet.  We are still in the process of determining the impact.  

Revenue from Contracts with Customers

In May, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.”  ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The update’s core principal is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Companies are to use a five-step contract review model to ensure revenue gets recognized, measured and disclosed in accordance with this principle.  

8


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

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

ASU 2014-09 was to be effective for fiscal years and interim periods beginning after December 15, 2016.  On July 9, 2015, the FASB decided to defer by one year the effective date for both public and nonpublic entities.  As a result, ASU 2014-09 is now effective for fiscal years and interim periods beginning after December 15, 2017.   The amendments in this update will be applied retrospectively either to each prior reporting period presented or to disclose the cumulative effect recognized at the date of initial application.  Gentherm has developed a plan to complete the five-step contract review process for all existing contracts with customers.  We are still in the process of determining the impact the implementation of ASU 2014-09 will have on the Company’s financial statements.

Note 3 Earnings per Share

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

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

 

 

Three Months
Ended June 30,

 

 

Six Months
Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average number of shares for calculation of basic EPS

 

35,970,992

 

 

 

35,360,957

 

 

 

35,870,649

 

 

 

35,213,135

 

Stock options under the 2006, 2011 and 2013 equity plans

 

613,858

 

 

 

732,643

 

 

 

557,858

 

 

 

628,093

 

Weighted average number of shares for calculation of diluted EPS

 

36,584,850

 

 

 

36,093,600

 

 

 

36,428,507

 

 

 

35,841,228

 

All stock options outstanding at both the three and six month periods ended June 30, 2015 and 2014 are included in the calculation of diluted shares.

Note 4 – Segment Reporting

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

The Company’s reportable segments are as follows:

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

Industrial – the combined operating results of Gentherm Global Power Technologies and Gentherm’s advanced research and development division.  Advanced research and development includes efforts focused on improving the efficiency of thermoelectric technologies and advanced heating wire technology as well as other applications.  The segment includes government sponsored research projects, including those sponsored by the U.S. Department of Energy, the Germany Ministry of Economics and Technology and the European Union.

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

9


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 4 – Segment Reporting – Continued

The tables below present segment information about the reported product revenues, depreciation and amortization and operating income (loss) of the Company for three and six month periods ended June 30, 2015 and 2014. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level. As of June 30, 2015, goodwill assigned to our Automotive and Industrial segments were $22,167  and $6,305, respectively.  As of June 30, 2014, goodwill assigned to our Automotive and Industrial segments were $25,646 and $6,601, respectively.  

 

Three Months Ended June 30,

  

Automotive

 

  

Industrial

 

  

Reconciling
Items

 

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

200,954

 

 

$

12,487

 

 

$

 

 

$

213,441

 

Depreciation and amortization

 

 

6,885

 

 

 

404

 

 

 

575

 

 

 

7,864

 

Operating income (loss)

 

 

42,070

 

 

 

(1,806

)

 

 

(13,594

)

 

 

26,670

 

2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

198,008

 

 

$

8,174

 

 

$

 

 

$

206,182

 

Depreciation and amortization

 

 

6,918

 

 

 

664

 

 

 

876

 

 

 

8,458

 

Operating income (loss)

 

 

38,525

 

 

 

(3,051

)

 

 

(10,960

)

 

 

24,514

 

 

Six Months Ended June 30,

  

Automotive

 

  

Industrial

 

  

Reconciling
Items

 

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

400,397

 

 

$

19,953

 

 

$

 

 

$

420,350

 

Depreciation and amortization

 

 

13,201

 

 

 

893

 

 

 

1,229

 

 

 

15,323

 

Operating income (loss)

 

 

82,752

 

 

 

(2,912

)

 

 

(26,093

)

 

 

53,747

 

2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

391,946

 

 

$

8,174

 

 

$

 

 

$

400,120

 

Depreciation and amortization

 

 

13,400

 

 

 

771

 

 

 

1,760

 

 

 

15,931

 

Operating income (loss)

 

 

73,699

 

 

 

(4,601

)

 

 

(19,546

)

 

 

49,552

 

Total product revenues information by geographic area is as follows:

 

 

Three Months Ended June 30,

 

 

2015

 

 

2014

 

United States

$

98,767

 

 

 

46

%

 

$

88,850

 

 

 

43

%

South Korea

 

21,213

 

 

 

10

%

 

 

24,039

 

 

 

12

%

Germany

 

18,799

 

 

 

9

%

 

 

25,486

 

 

 

12

%

China

 

16,390

 

 

 

8

%

 

 

17,349

 

 

 

8

%

Japan

 

11,332

 

 

 

5

%

 

 

11,856

 

 

 

7

%

Czech Republic

 

7,076

 

 

 

3

%

 

 

6,855

 

 

 

3

%

United Kingdom

 

6,638

 

 

 

3

%

 

 

6,199

 

 

 

3

%

Malaysia

 

6,108

 

 

 

3

%

 

 

 

 

 

0

%

Canada

 

6,090

 

 

 

3

%

 

 

4,569

 

 

 

2

%

Other

 

21,028

 

 

 

10

%

 

 

20,979

 

 

 

10

%

Total Non U.S.

 

114,674

 

 

 

54

%

 

 

117,332

 

 

 

57

%

 

$

213,441

 

 

 

100

%

 

$

206,182

 

 

 

100

%

 

10


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 4 – Segment Reporting – Continued

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

United States

$

194,071

 

 

 

46

%

 

$

173,917

 

 

 

43

%

South Korea

 

44,076

 

 

 

10

%

 

 

45,954

 

 

 

11

%

Germany

 

37,639

 

 

 

9

%

 

 

47,962

 

 

 

12

%

China

 

34,360

 

 

 

8

%

 

 

33,293

 

 

 

8

%

Japan

 

22,517

 

 

 

5

%

 

 

22,321

 

 

 

6

%

United Kingdom

 

13,626

 

 

 

3

%

 

 

12,799

 

 

 

3

%

Czech Republic

 

13,235

 

 

 

3

%

 

 

12,941

 

 

 

3

%

Canada

 

11,575

 

 

 

3

%

 

 

7,731

 

 

 

2

%

Mexico

 

10,759

 

 

 

3

%

 

 

9,761

 

 

 

2

%

Other

 

38,492

 

 

 

10

%

 

 

33,441

 

 

 

10

%

Total Non U.S.

 

226,279

 

 

 

54

%

 

 

226,203

 

 

 

57

%

 

$

420,350

 

 

 

100

%

 

$

400,120

 

 

 

100

%

 

 

Note 5 – Debt

Credit Agreement

The Company, together with certain direct and indirect subsidiaries have an outstanding Credit Agreement (the “Credit Agreement”) with a syndicate of banks led by Bank of America.  

The Credit Agreement provides for a $50,000 secured term loan facility for Gentherm (the “US Term Loan”), and a €20,000 secured term loan facility for Gentherm GmbH (the “Europe Term Loan”), and a $100,000 secured revolving credit facility (the “US Revolving Note”) with specific borrowing limits for foreign subsidiaries party to such agreement.  The Credit Agreement allows the Company to increase the revolving credit facility or incur additional secured term loans in an aggregate amount of $50,000, subject to specific conditions.

All obligations under the Credit Agreement (including all the obligations of any US or non-US loan party) are unconditionally guaranteed by Gentherm and specified US subsidiaries.  Additionally, such parties entered into a pledge and security agreement, granting a security interest in substantially all of their personal property to secure their respective obligations under the Credit Agreement, including the stock and membership interests of specified subsidiaries (limited to 66% of the stock in the case of certain non-US subsidiaries).  Further, specified foreign subsidiaries guarantee all obligations of the non-US loan parties under the Credit Agreement.

The Company must maintain certain financial ratios consisting of a minimum Consolidated Fixed Charge Coverage Ratio and a maximum Consolidated Leverage Ratio as defined by the Credit Agreement.  The Credit Agreement places specific restrictions on the amount of dividend payments to shareholders.

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”).  Base Rate Loans are equal to the highest of the Federal Funds Rate (0.08% at June 30, 2015) plus 0.50%, Bank of America’s prime rate (3.25% as of June 30, 2015), or a one month Eurocurrency rate plus 1.00%.  Eurocurrency Rate Loans denominated in US Dollars or European Euros (“Euros”) are equal to the London Interbank Offered Rate and the Canadian Dealer Offered Rate for Canadian Dollar denominations.  All loans denominated in a currency other than the US Dollar, including the Europe Term Loan, must be Eurocurrency Rate Loans.  Interest is payable at least quarterly.  

The Applicable Rate varies based on the Consolidated Leverage Ratio of the Company, as defined by the Credit Agreement. 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 1.50% and 2.00%, respectively, for Eurocurrency Rate Loans and 0.50% and 1.00%, respectively, for Base Rate Loans.   Our leverage ratio as of June 30, 2015 qualified us for the lowest Applicable Rate available.  

11


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 5 – Debt – Continued

DEG Loan

The Company has a fixed interest rate loan with the German Investment Corporation, a subsidiary of KfW banking group (“DEG”), a German government-owned development bank (“DEG Loan”). The DEG Loan is subject to semi-annual principal payments beginning March, 2015 and ending September, 2019. Under the terms of the DEG Loan, the Company must maintain a minimum Debt-to-Equity Ratio, Current Ratio and Debt Service Coverage Ratio based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Automotive Systems (China) Limited, as defined by the DEG Loan agreement.

The following table summarizes the Company’s debt at June 30, 2015 and at December 31, 2014.

 

 

June 30, 2015

 

  

December 31,
2014

 

 

Interest
Rate

 

 

Principal
Balance

 

  

Principal
Balance

 

Credit Agreement:

 

 

 

 

 

 

 

 

 

 

 

US Term Loan

 

1.78

%

 

$

48,125

 

 

$

49,375

 

Europe Term Loan

 

1.50

%

 

 

21,447

 

 

 

23,963

 

US Revolving Note

 

1.69

%

 

 

12,000

 

 

 

12,000

 

DEG Loan

 

4.25

%

 

 

4,011

 

 

 

4,805

 

Capital leases

 

 

 

 

 

 

 

 

632

 

Total debt

 

 

 

 

 

85,583

 

 

 

90,775

 

Current portion

 

 

 

 

 

(4,505

)

 

 

(5,306

)

Long-term debt, less current maturities

 

 

 

 

$

81,078

 

 

$

85,469

 

As of June 30, 2015, we were in compliance with all terms as outlined in the Credit Agreement and DEG Loan agreement.

On June 24, 2015, we entered into a loan agreement with DEG (“Vietnam Loan”) for a long-term senior loan in an amount of $15,000,000 to finance the construction and set up of the Vietnam production facility.  Interest on the loan will be paid at an aggregate interest rate of 3.65% plus the six months LIBOR rate.  The interest rate will be fixed on the date the funds are drawn.  We expect to draw the funds during the third quarter of the fiscal year ended December 31, 2015. The Vietnam Loan is subject to semi-annual principal payments beginning November, 2017 and ending May, 2023.  Under the terms of the Vietnam Loan, the Company must maintain a minimum Current Ratio, Equity Ratio and Enhanced Equity Ratio based on the financial statements of Gentherm’s  wholly owned subsidiary, Gentherm Vietnam Co. LTD, each as defined by the Vietnam Loan agreement.

Note 6 – Derivative Financial Instruments

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

The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year.  We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency (loss) gain in the consolidated condensed statements of income. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.

12


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 6 – Derivative Financial Instruments – Continued

The Company uses a market approach to value derivative instruments, analyzing observable benchmark rates at commonly quoted intervals for the instrument’s full term.

In March, 2008, Gentherm GmbH, entered into a 10 year currency related interest rate swap (“CRS”) having a notional value of €10,000, or $11,141 as of June 30, 2015, in order to offset the interest rate risk associated with a debt financing which was repaid prior to our acquisition of Gentherm GmbH in 2011. The counterparty to the CRS was HypoVereinsbank AG (now UniCredit Bank AG, “UniCredit”), its main bank at the time. Under this agreement, Gentherm GmbH receives interest equal to the six month Euro Interbank Offered Rate (“EURIBOR”), 0.05% at June 30, 2015, plus 1.40% and pays interest equal to the six month EURIBOR when the exchange rate between the European Euro (“EUR”) and the Swiss Franc (“CHF”) equals or exceeds 1.46 EUR to the CHF.  When the exchange rate is less than 1.46 (it was 1.05 at June 30, 2015), Gentherm GmbH pays interest equal to the six month EURIBOR plus a premium. The premium is calculated as [(1.46 – current EUR/CHF rate)/current EUR/CHF rate] x 100.

In 2011, Gentherm GmbH brought forth a lawsuit against UniCredit, because of the recommendation to enter into the CRS. On March 25, 2013, the District Court in Munich, Germany ruled in favor of Gentherm GmbH, asserting that UniCredit had a conflict of interest as financial advisor and counterparty to the CRS and violated its duty to disclose the initial negative market value of the CRS. The Munich District Court ruled that UniCredit must (1) pay €144 to Gentherm GmbH and (2) bear the costs of all future obligations under the CRS, which were €12,532 or $13,962 as of June 30, 2015, plus additional accrued liabilities for past due payments under the CRS of approximately €9,065, or $10,099 as of June 30, 2015. UniCredit has appealed the decision. The appeal is pending. As a result, the Company cannot be certain that any portion of the award by the Munich District Court will be upheld. Gentherm GmbH has entered into an offsetting derivative contract designed to limit the market risk of payments due under the CRS through the end of the CRS agreement, in 2018.

 

Information related to the recurring fair value measurement of derivative instruments in our consolidated condensed balance sheet as of June 30, 2015 is as follows:  

 

 

 

 

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

Net Asset/
(Liabilities)

 

 

 

Hedge 
Designation

 

Fair Value
Hierarchy

 

Balance Sheet
Location

 

 

Fair
Value

 

 

Balance Sheet
Location

 

Fair
Value

 

 

 

 

CRS

 

Not a hedge

 

Level 2

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

(4,463

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current 
liabilities

 

 

(9,499

)

 

 

 

 

Total CRS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(13,962

)

 

$

(13,962

)

Foreign currency derivatives

 

Cash flow hedge

 

Level 2

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

(785

)

 

$

(785

)

Foreign currency derivatives

 

Not a hedge

 

Level 2

 

 

Current assets

 

 

$

2,195

 

 

 

 

 

 

 

 

$

2,195

 

 

 

 

 

 

 

 

Non-current
assets

 

 

 

5,094

 

 

 

 

 

 

 

 

 

5,094

 

Total foreign currency derivatives

 

 

 

 

 

 

 

 

 

$

7,289

 

 

 

 

$

(785

)

 

$

6,504

 

Commodity derivatives

 

Cash flow hedge

 

Level 2

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

(48

)

 

$

(48

)

 

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

 

 

 

Location

 

Three Months
Ended
June 30,
2015

 

 

Six Months
Ended
June 30,
2015

 

 

Three Months
Ended
June 30,
2014

 

 

Six Months
Ended
June 30,
2014

 

Foreign currency derivatives

 

Revaluation of derivatives

 

$

81

 

 

$

6,278

 

 

$

(421

)

 

$

(159

)

 

 

Cost of sales

 

 

(192

)

 

 

(320

)

 

 

83

 

 

 

30

 

 

 

Selling, general and administrative

 

 

25

 

 

 

46

 

 

 

(20

)

 

 

(68

)

 

 

Other comprehensive income

 

 

(430

)

 

 

(777)

 

 

 

99

 

 

 

160

 

 

 

Foreign currency (loss) gain

 

 

82

 

 

 

289

 

 

 

5

 

 

 

(448

)

Total foreign currency derivatives

 

 

 

$

(434

)

 

$

5,516

 

 

$

(254

)

 

$

(485

)

CRS

 

Revaluation of derivatives

 

$

(134

)

 

$

(7,295

)

 

$

82

 

 

$

(427

)

Interest rate derivatives

 

Revaluation of derivatives

 

$

 

 

$

 

 

$

(1

)

 

$

(1

)

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

39

 

Commodity derivatives

 

Other comprehensive income

 

$

(124

)

 

$

(48

)

 

$

 

 

$

 

13


GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 6 – Derivative Financial Instruments – Continued

We did not incur any hedge ineffectiveness during the six months ended June 30, 2015 and 2014.

Note 7 Fair Value Measurement

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

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

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

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

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

Except for derivative instruments (see Note 6), the Company has no financial assets and liabilities that are carried at fair value at June 30, 2015 and December 31, 2014. The carrying amounts of financial instruments comprising cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the relatively short maturity of such instruments. The fair values of the Company’s debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company’s borrowing rate (Level 1 and 3 inputs).  As of June 30, 2015 and December 31, 2014, the carrying value of the Company’s Credit Agreement was not materially different than its fair value because the interest rates on variable rate debt approximated rates currently available to the Company (see Note 5).  

Certain Company assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. As of June 30, 2015 and 2014, the Company did not realize any changes to the fair value of these assets due to the non-occurrence of events or circumstances that could negatively impact their recoverability.

 

 

 

14


 

ITEM 2.

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

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. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives and other forward-looking statements included in this “Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other places in this Report. 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 and are based on management’s current expectations and beliefs.  Such statements are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements, including risks and uncertainties set forth in this Report, and under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein 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.

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our financial statements and related notes thereto included elsewhere in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2014.

Overview

Gentherm is a global technology and industry leader in the design, development, and manufacturing of innovative thermal management technologies and automotive cable systems.  Our products can be found on the vehicles of nearly all major automotive manufacturers, spanning all major automotive markets.  We operate in locations aligned with our major customers’ product strategies in order to provide locally enhanced design, integration and production capabilities and identify future climatic comfort product opportunities in both automotive and other markets.   We concentrate our research on the development of new technologies that will improve overall product effectiveness and customer satisfaction.  We also focus on developing new design applications from our existing technologies to create new products and market opportunities for thermal comfort solutions.  

Our products are primarily sold to automobile and light truck original equipment manufacturers or their tier one suppliers. Inherent in this 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. These customers in turn sell our product, as a component of an entire seat or seating system, to automotive original equipment manufacturers.

Second Quarter 2015 Compared with Second Quarter 2014

Product Revenues. Our product revenues for the three months ended June 30, 2015 (“Second Quarter 2015”) were $213,441,000 compared with product revenues of $206,182,000 for the three months ended June 30, 2014 (“Second Quarter 2014”), an increase of $7,259,000, or 4%.  A portion of our product revenues come from sales to customers in Europe much of which are denominated in European Euros (“Euro”).  Since the end of Second Quarter 2014, the relative market value of the Euro declined significantly against the US Dollar, our reporting currency.  During the Second Quarter 2015 the average exchange rate between these currencies was 1.11 US Dollars to the Euro whereas during the Second Quarter 2014 the average exchange rate was 1.37.  Consequently, our Euro dominated revenues, which have increased by 7% in Euros, have resulted in a decrease in our US Dollar reported product revenues. The strong US Dollar against other currencies had similar impacts to our reporting product revenues. Had the 2015 average exchange rates for these currencies been the same as the 2014 average exchange rates, our product revenues would have been $13,661,000 higher than that reported for Second Quarter 2015.  Adjusting for this unfavorable currency translation impact, our Second Quarter 2015 product revenues would have been $227,102,000 or 10% higher than the Second Quarter 2014, reflecting higher unit volumes in substantially all of our markets and products.  Higher revenue volumes were primarily driven by higher sales for Gentherm Global Power Technologies (“GPT”), which product revenues totaling $12,500,000 were 54% higher during Second Quarter 2015 as compared with Second Quarter 2014, and continued strong shipments of climate controlled seats (“CCS”).  CCS revenue increased by $10,051,000, or 12%, to $95,914,000, during Second Quarter 2015.  This increase resulted from new program launches since Second Quarter 2014, strong production volumes and related sales of vehicles equipped with CCS systems, particularly vehicles in the luxury segment of the automotive market.  One example of a new vehicle launch is the newly redesigned Ford Mustang, which now offers CCS for the first time. Our seat heater revenue decreased by $7,963,000, or 10%, to $74,148,000.  This decrease reflected the unfavorable impact of the declining Euro exchange rate.  Our seat heater product sales in Europe are denominated in Euro, whereas

15


 

our CCS sales in Europe are primarily denominated in US Dollars.  Therefore, the unfavorable impact of the lower Euro translation rate is focused primarily on our seat heater product sales.  Adjusted for the decline in the value of the Euro, our seat heater sales actually increased due to market penetration on certain vehicle programs and stronger vehicle production volumes including those in Europe.  We also have significant growth in our heated steering wheel product which showed an increase of $1,318,000, or 15%, to $10,256,000.

Cost of Sales. Cost of sales increased to $147,736,000 during Second Quarter 2015 from $145,425,000 during Second Quarter 2014. This increase of $2,311,000 or 2% was due to increased sales volume partially offset by higher gross margin percentages.  A favorable change in product mix, greater coverage of fixed costs at the higher volume levels, and foreign currency impact on production expenses in the Mexican Peso (“MXN”) and Ukrainian Hryvnia (“UAH”) increased historical gross profit percentage during Second Quarter 2015 to 30.8% compared with 29.5% during Second Quarter 2014.  The favorable product mix was primarily attributable to the greater sales growth in CCS products on which we have historically had better margin performance.  Our manufacturing plants are located in the Ukraine, Mexico, Canada and China.  As a result, our production labor costs are incurred in the local currency of each of those countries.  During the Second Quarter 2015, MXN and UAH decreased in value as compared to the USD by 15% and 45%, respectively, resulting in lower production costs totaling $4,300,000.

Net Research and Development Expenses. Net research and development expenses were $14,977,000 during Second Quarter 2015 compared to $14,550,000 during Second Quarter 2014, an increase of $427,000, or 3%. This increase was primarily driven by 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.  New product development includes automotive heated and cooled storage devices, automotive interior thermal management devices, medical thermal management devices, battery thermal management devices and other potential products.  

We classify development and prototype costs and related 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.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $24,058,000 during Second Quarter 2015 from $21,693,000 during Second Quarter 2014, an increase of $2,365,000, or 11%.  The increase in expenses was due to increased management incentive compensation costs, higher general legal, audit and travel costs, as well as wages and benefits costs resulting from new employee hiring and merit increases. Our management incentive program includes various forms of equity compensation including stock options, restricted stock and stock appreciation rights (“SARs”).  Stock options and restricted stock are accounted for using the equity method and are valued at the grant date fair value and amortized over the respective service period of the employee beneficiary.  SARs 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 our Common Stock.  Since our Common Stock appreciated significantly during Second Quarter 2015, we recorded SAR related compensation expense totaling $2,792,000 for the period.  The SAR related compensation expense increased $557,000 from $2,235,000 during Second Quarter 2014.

Income Tax Expense. We recorded an income tax expense of $6,734,000 during Second Quarter 2015 representing an effective tax rate of 25.7% on earnings before income tax of $26,228,000. We recorded an income tax expense of $6,502,000 during Second Quarter 2014 representing an effective tax rate of 28.4% on earnings before income tax of $22,925,000. The effective tax rates for Second Quarter 2015 and Second Quarter 2014 were lower than the US Federal rate of 34% primarily due to the impact of lower statutory rates for our subsidiaries operating in foreign jurisdictions.

First Half  2015 Compared with First Half 2014

Product Revenues. Our product revenues for the six months ended June 30, 2015 (“First Half 2015”) were $420,350,000 compared with product revenues of $400,120,000 for the six months ended June 30, 2014 (“First Half 2014”), an increase of $20,230,000 or 5%.  A portion of our product revenues come from sales to customers in Europe much of which are denominated in Euros.  Since the end of First Half 2014, the relative market value of the Euro declined significantly against the US Dollar, our reporting currency.  During the First Half 2015 the average exchange rate between these currencies was 1.12 US Dollars to the Euro whereas during the First Half 2014 the average exchange rate was 1.37.  Consequently, our Euro dominated revenues which have increased by 7%, in Euros, have resulted in a decrease in our US Dollar reported product revenues.  The strong US Dollar against certain other currencies had similar impacts to our reporting product revenues. Had the First Half 2015 average exchange rate been the same as the First Half 2014 average exchange rate for these currencies, our product revenues would have been $25,349,000 higher than that reported for First Half 2015.  Adjusting for this unfavorable currency translation impact, our First Half 2015 product revenues would have been $445,699,000 or 11% higher than the First Half 2014, reflecting higher unit volumes in substantially all of our markets and products.  Higher revenue volumes were primarily driven by continued strong shipments of CCS and higher revenue from GPT.  GPT had increased revenue during Second Quarter 2015 as compared to Second Quarter 2014 totaling $4,378,000 or 54% and had First Quarter 2015 revenue of $7,466,000 as compared to zero for First Quarter 2014 since it was acquired on April 1, 2014 and therefore did not report product revenue as part of Gentherm during that period.  CCS revenue increased by $22,164,000, or 13%,

16


 

to $190,338,000, during First Half 2015.  This increase resulted from new program launches since First Half 2014, strong production volumes and related sales of vehicles equipped with CCS systems, particularly vehicles in the luxury segment of the automotive market.  One example of a new vehicle launch is the newly redesigned Ford Mustang, which now offers CCS for the first time. Our seat heater revenue decreased by $15,643,000, or 10%, to $147,879,000.  This decrease reflected the unfavorable impact of the declining Euro exchange rate.  Our seat heater product sales in Europe are denominated in Euro, whereas our CCS sales in Europe are primarily denominated in US Dollars.  Therefore, the unfavorable impact of the lower Euro translation rate is focused primarily on our seat heater product sales.  Adjusted for the decline in the value of the Euro, our seat heater sales actually increased due to market penetration on certain vehicle programs and stronger vehicle production volumes including those in Europe.  We also have significant growth in our heated steering wheel product which showed an increase of $2,314,000, or 13%, to $20,029,000.

Cost of Sales. Cost of sales increased to $288,075,000 during First Half 2015 from $282,338,000 during First Half 2014. This increase of $5,737,000 or 2% was due to increased sales volume, including that of GPT, partially offset by higher gross margin percentages.  A favorable change in product mix, greater coverage of fixed costs at the higher volume levels, and foreign currency impact on production expenses in MXN and UAH increased historical gross profit percentage during First Half 2015 to 31.5% compared with 29.4% during First Half 2014.  The favorable product mix was primarily attributable to the greater sales growth in CCS products on which we have historically had better margin performance.  Our manufacturing plants are located in the Ukraine, Mexico, Canada and China.  As a result, our production labor costs are incurred in the local currency of each of those countries.  During First Half 2015, MXN and UAH decreased in value as compared to the USD by 13% and 50%, respectively, resulting in lower production costs totaling $9,800,000.

Net Research and Development Expenses. Net research and development expenses were $29,525,000 during First Half 2015 compared to $27,595,000 during First Half 2014, an increase of $1,930,000, or 7%. This increase was primarily driven by 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.  New product development includes automotive heated and cooled storage devices, automotive interior thermal management devices, medical thermal management devices, battery thermal management devices and other potential products.  Net research and development expenses also increased due to the acquisition of GPT which had net research and development expenses during First Quarter 2015 of $289,000 but no such expense during First Quarter 2014 as it was acquired on April 1, 2014.

We classify development and prototype costs and related 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.

Acquisition Transaction Expenses. During First Half 2014, we incurred $1,075,000 in fees and expenses associated with the acquisition of GPT. We did not incur any acquisition transaction expenses during First Half 2015.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $49,003,000 in First Half 2015 from $39,560,000 during First Half 2014, an increase of $9,443,000, or 24%.  The increase in selling, general and administrative expenses includes First Quarter 2015 expenses of GPT totaling $2,035,000 as compared with no such expenses during First Quarter 2014 due to acquisition timing. The remaining increase in expenses was due to increased management incentive compensation costs, higher general legal, audit and travel costs, as well as wages and benefits costs resulting from new employee hiring and merit increases. Our management incentive program includes various forms of equity compensation including stock options, restricted stock and SARs.  Stock options and restricted stock are accounted for using the equity method and are valued at the grant date fair value and amortized over the respective service period of the employee beneficiary.  SARs 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 our Common Stock.  Since our Common Stock appreciated significantly during First Half 2015, we recorded SAR related compensation expense totaling $6,500,000 for the period.  The SAR related compensation expense increased $4,265,000 from $2,235,000 during First Half 2014.

Income Tax Expense. We recorded an income tax expense of $13,093,000 during First Half 2015 representing an effective tax rate of 25.0% on earnings before income tax of $52,407,000. We recorded an income tax expense of $12,804,000 during First Half 2014 representing an effective tax rate of 28.0% on earnings before income tax of $45,806,000. The effective tax rates for First Half 2015 and First Half 2014 were lower than the US Federal rate of 34% primarily due to the impact of lower statutory rates for our subsidiaries operating in foreign jurisdictions.

Liquidity and Capital Resources

The Company has funded its financial needs primarily through cash flows from operating activities and equity and debt financings. Based on its current operating plan, management believes cash and cash equivalents at June 30, 2015, together with cash flows from operating activities, are sufficient to meet operating and capital expenditure needs, and to service 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

17


 

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, it is likely that we will 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.  

The following table represents our cash and cash equivalents and short-term investments which are available for our business operations:

 

 

June 30,
2015

 

  

December 31,
2014

 

 

(In thousands)

 

Cash and cash equivalents

$

101,643

 

 

$

85,700

 

We manage our cash, cash equivalents and short-term investments in order to fund operating requirements and preserve liquidity to take advantage of future business opportunities. Cash and cash equivalents increased by $15,943,000 during First Half 2015. Cash provided by operating activities during First Half 2015 was $39,772,000 and was attributable to net income of $39,314,000, plus non-cash adjustments.  Non-cash adjustments included depreciation and amortization of $15,323,000, stock compensation of $2,983,000 and other items.  Partially offsetting these positive cash flows from operating activities was a net increase in net operating assets and liabilities of $13,249,000, including working capital items, deferred income tax benefit of $4,765,000 and gains on the revaluation of derivatives of $150,000.

As of June 30, 2015, working capital was $216,579,000 as compared to $187,432,000 at December 31, 2014, an increase of $29,147,000, or 16%.  Aside from the impact of cash and cash equivalents, this increase was primarily related to increases in accounts receivable, inventory, prepaid expenses and other assets and a decrease in the current portion of long-term debt totaling $16,711,000, $4,433,000, $6,674,000, and $801,000, respectively.  These increases in working capital were partially offset by an increase in accounts payable, accrued liabilities, and net current derivative financial instrument liabilities of $13,148,000, $1,421,000 and $780,000.  Accounts receivable primarily increased as a result of increases in product revenues and timing differences between when sales were realized during First Half 2015 compared with sales realized during 2014.  Working capital was also affected by changes in currency exchange rates. As a result, amounts presented are different than amounts calculable from the balance sheet.  

Cash used in investing activities was $22,851,000 during First Half 2015, reflecting the acquisition of property and equipment totaling $23,029,000.  Purchases of property and equipment for the period related to expansion of production capacity, replacement of existing equipment and construction of new production facilities in Vietnam and Macedonia.  These new facilities will begin to expand our manufacturing capacities in Asia and Europe by the end of 2015.  

Cash provided by financing activities was $2,316,000 during First Half 2015, reflecting proceeds from the exercise of Common Stock options and excess tax benefit from equity awards of $4,122,000 and $1,462,000, respectively.  These proceeds were offset by payment of principal on the US Term Loan, Europe Term Loan, DEG Loan and capital lease totaling $2,801,000.  Cash was also paid for the tax related to the cancellation of restricted stock awards totaled $467,000.  See Note 5 to the consolidated condensed financial statements included herein for information about borrowings under the Credit Agreement.

On June 24, 2015, we entered into a loan agreement with DEG (“Vietnam Loan”) for a long-term senior loan in an amount of $15,000,000 to finance the construction and set up of the Vietnam production facility.  Interest on the loan will be paid at an aggregate interest rate of 3.65% plus the six months LIBOR rate.  The interest rate will be fixed on the date the funds are drawn.  We expect to draw the funds during the third quarter of the fiscal year ended December 31, 2015. The Vietnam Loan is subject to semi-annual principal payments beginning November, 2017 and ending May, 2023.  Under the terms of the Vietnam Loan, the Company must maintain a minimum Current Ratio, Equity Ratio and Enhanced Equity Ratio based on the financial statements of Gentherm’s  wholly owned subsidiary, Gentherm Vietnam Co. LTD, each as defined by the Vietnam Loan agreement.

18


 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to our debt obligations under our Credit Agreement and obligations from currency related interest rate swaps. We have in the past, and may in the future, make investments in bank certificates of deposits, debt instruments of the U. S. government, and in high-quality corporate issuers to mitigate the risks from short-term interest rate fluctuations. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in the location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the European Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Vietnamese Dong, and Macedonian Denar.

We regularly enters into derivative contracts with the objective of managing our financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year. We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency (loss) gain in the consolidated condensed statements of income. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.

In March, 2008, Gentherm GmbH, entered into a 10 year currency related interest rate swap (“CRS”) having a notional value of €10,000,000, or $11,141,000 as of June 30, 2015, in order to offset the interest rate risk associated with a debt financing which was repaid prior to our acquisition of Gentherm GmbH. The counterparty of the CRS was HypoVereinsbank AG (now UniCredit Bank AG, “UniCredit”), its main bank at the time. Under this agreement, Gentherm GmbH receives interest equal to the six month Euro Interbank Offered Rate (“EURIBOR”), 0.05% at June 30, 2015, plus 1.40% and pays interest equal to the six month EURIBOR when the exchange rate between the European Euro (“EUR”) and the Swiss Franc (“CHF”) equals or exceeds 1.46 EUR to the CHF.  When the exchange rate is less than 1.46 (it was 1.05 at June 30, 2015), Gentherm GmbH pays interest equal to the six month EURIBOR plus a premium. The premium is calculated as [(1.46 – current EUR/CHF rate)/current EUR/CHF rate] x 100.

In 2011, Gentherm GmbH brought a lawsuit against UniCredit, because of the recommendation to enter into the CRS. On March 25, 2013, the District Court in Munich, Germany ruled in favor of Gentherm GmbH, asserting that UniCredit had a conflict of interest as financial advisor and counterparty to the CRS and violated its duty to disclose the initial negative market value of the CRS. The Munich District Court ruled that UniCredit must (1) pay €144,000 to Gentherm GmbH and (2) bear the costs of all future obligations under the CRS, which were €12,532,000 or $13,962,000 as of June 30, 2015, plus additional accrued liabilities for past due payments under the CRS of approximately €9,065,000, or $10,099,000 as of June 30, 2015. UniCredit has appealed the decision. The appeal is pending. As a result, the Company cannot be certain that any portion of the award by the Munich District Court will be upheld. Gentherm GmbH has entered into an offsetting derivative contract designed to limit the market risk of payments due under the CRS through the end of the CRS agreement, in 2018.

Information related to the fair values of all derivative instruments in our consolidated condensed balance sheet as of June 30, 2015 is set forth in Note 6 to the consolidated condensed financial statements included herein.

19


 

Interest Rate Sensitivity

The table presents principal cash flows and related weighted average interest rates by expected maturity dates for each of the Company’s debt obligations. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency. The instruments actual cash flows are denominated in U.S. dollars ($USD) or European Euros (€EUR), as indicated in parentheses.

June 30, 2015

 

 

Expected Maturity Date

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

Total

 

 

Fair
Value

 

 

(In thousands except rate information)

 

Liabilities

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate (€EUR)

$

447

 

 

$

891

 

 

$

891

 

 

$

891

 

 

$

891

 

 

$

4,011

 

 

$

4,011

 

Average Interest Rate

 

4.25

%

 

 

4.25

%

 

 

4.25

%

 

 

4.25

%

 

 

4.25

%

 

 

4.25

%

 

 

 

 

Variable Rate ($USD)

$

1,250

 

 

$

2,813

 

 

$

3,750

 

 

$

4,062

 

 

$

48,250

 

 

$

60,125

 

 

$

60,125

 

Average Interest Rate

 

1.76

%

 

 

1.76

%

 

 

1.76

%

 

 

1.76

%

 

 

1.76

%

 

 

1.76

%

 

 

 

 

Variable Rate (€EUR)

$

558

 

 

$

1,253

 

 

$

1,671

 

 

$

1,810

 

 

$

16,155

 

 

$

21,447

 

 

$

21,447

 

Average Interest Rate

 

1.50

%

 

 

1.50

%

 

 

1.50

%

 

 

1.50

%

 

 

1.50

%

 

 

1.50

%

 

 

 

 

Exchange Rate Sensitivity

The table below provides information about the Company’s foreign currency forward exchange rate agreements that are sensitive to changes in foreign currency exchange rates.  The table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates for each type of foreign currency forward exchange agreement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.

June 30, 2015

 

 

 

Expected Maturity or Transaction Date

 

Anticipated Transactions And Related Derivatives

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

Thereafter

 

 

Total

 

 

Fair
Value

 

 

 

(In thousands except rate information)

 

Euro functional currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Exchange Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Receive HUF/Pay EUR€)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contract Amount (€)

 

1,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,812

 

 

(6

)

Average Contract Rate

 

 

314.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

314.50

 

 

 

 

 

(Receive CHF/Pay EUR€)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contract Amount (€)

 

6,218

 

 

12,437

 

 

12,302

 

 

6,151

 

 

 

 

 

 

 

 

 

 

37,108  

 

 

6,542

 

Average Contract Rate

 

 

1.20

 

 

 

1.20

 

 

 

1.20

 

 

 

1.20

 

 

 

 

 

 

 

 

 

1.20  

 

 

 

 

 

$US functional currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Exchange Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Receive MXN/Pay USD$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contract Amount ($)

 

$

15,979