l 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2015

OR

For the transition period from             to             .

Commission File Number: 0-21810

 

GENTHERM INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

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):

 

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 October 29, 2015, there were 36,210,905 issued and outstanding shares of Common Stock of the registrant.

 

 

 

 

 

---

 

GENTHERM INCORPORATED

TABLE OF CONTENTS

 

 

 

 

2

---

 

PART I. FINANCIAL INFORMATION

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

3

---

 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

4

---

 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

5

---

 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

See accompanying notes to the consolidated condensed financial statements.

 

 

 

6

---

 

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

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.  

In September 2015, we wrote off $317 related to patents because certain claims made under specific patents we own were determined to be unpatentable by the United States Patent and Trademark Office.  We determined, however, that the loss of this patent protection did not cause a significant change in our projected future cash flows, and therefore determined that no other assets were impaired due to the ruling.  The write-off was recorded to other intangible assets on Gentherm’s Consolidated Condensed Balance Sheet.

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 nine months ended September 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.  In August, ASU 2015-15, “Interest – Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” was issued to incorporate a Securities and Exchange Commission (SEC) Staff Announcement regarding ASU 2015-03.  The SEC staff noted that because ASU 2015-03 does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements, it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  

ASU 2015-03 and 2015-15 are effective for fiscal and interim periods beginning after December 15, 2015.  Early adoption of the amendments in these updates 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 and 2015-15 will have an immaterial impact on the presentation of debt on the Company’s consolidated condensed balance sheet.  

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

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.  

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:

 

 

The accompanying table represents Common Stock issuable upon the exercise of certain stock options that have been excluded from the diluted earnings calculation because the effect of their inclusion would be anti-dilutive.

 

 

9

---

GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

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:

The tables below present segment information about the reported product revenues, depreciation and amortization and operating income (loss) of the Company for three and nine month periods ended September 30, 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 September 30, 2015, goodwill assigned to our Automotive and Industrial segments were $22,218 and $6,305, respectively.  

 

 

 

10

---

GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 4 – Segment Reporting – Continued

Total product revenues information by geographic area is as follows:

 

 

 

 

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, N.A.  

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.

 

11

---

GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 5 – Debt – Continued

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, US 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 (0.07% at September 30, 2015) plus 0.50%, Bank of America’s prime rate (3.25% as of September 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 September 30, 2015 qualified us for the lowest Applicable Rate available.  

DEG China Loan

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

DEG Vietnam Loan

On June 24, 2015, we entered into the second loan agreement with DEG for a long-term senior loan in an amount of $15,000 to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”).  On August 27, 2015, the entire $15,000 was drawn and interest was fixed at 5.21% for the duration of the loan. The DEG Vietnam Loan is subject to semi-annual principal payments beginning November, 2017 and ending May, 2023.  Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum Current Ratio, Equity Ratio and Enhanced Equity Ratio based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Vietnam Co. LTD, each as defined by the DEG Vietnam Loan agreement.

 

12

---

GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 5 – Debt – Continued

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

 

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

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.  The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years.  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.

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

In March, 2008, Gentherm GmbH, entered into a 10 year currency related interest rate swap (“CRS”) having a notional value of €10,000, or $11,167 as of September 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”), 0.03% at September 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 1.09 at September 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.

 

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

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 €8,751 or $9,773 as of September 30, 2015, plus additional accrued liabilities for past due payments under the CRS of approximately €10,803, or $12,064 as of September 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 September 30, 2015 is as follows:  

 

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

 

 

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

 

14

---

GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

Note 7 – Fair Value Measurement

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

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

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

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

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

Except for derivative instruments (see Note 6), the Company has no financial assets and liabilities that are carried at fair value at September 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 Company uses an income valuation technique to measure the fair values of its debt instruments by converting amounts of future cash flows to a single present value amount using rates based on current market expectations (Level 2 inputs).  As of September 30, 2015 and December 31, 2014, the carrying values of the Company’s Credit Agreement indebtedness were not materially different than their estimated fair values because the interest rates on variable rate debt approximated rates currently available to the Company (see Note 5). Discount rates used to measure the fair value of Gentherm’s DEG Vietnam Loan and DEG China Loan are based on quoted swap rates.  As of September 30, 2015, the carrying values of the DEG Vietnam Loan and DEG China Loan were $15,000 and $3,574, respectively, as compared to an estimated fair value of $15,269 and $3,666, respectively. As of December 31, 2014, the carrying value of the DEG China Loan was $4,805, as compared to an estimated aggregate fair value of $4,937.    

Certain Company assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. As of September 30, 2015 and December 31, 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.

 

 

 

15

---

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.

Third Quarter 2015 Compared with Third Quarter 2014

Product Revenues. Our product revenues for the three months ended September 30, 2015 (“Third Quarter 2015”) were $223,818,000 compared with product revenues of $206,012,000 for the three months ended September 30, 2014 (“Third Quarter 2014”), an increase of $17,806,000, or 9%.  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 Third Quarter 2014, the relative market value of the Euro declined significantly against the US Dollar, our reporting currency.  During Third Quarter 2015 the average exchange rate between these currencies was 1.11 US Dollars to the Euro whereas during Third Quarter 2014 the average exchange rate was 1.33.  Consequently, our Euro denominated revenues, which have increased by 15% 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 Third Quarter 2015 average exchange rates for these currencies been the same as the Third Quarter 2014 average exchange rates, our product revenues would have been $13,131,000 higher than that reported for Third Quarter 2015.  Adjusting for this unfavorable currency translation impact, our Third Quarter 2015 product revenues would have been $236,949,000 or 15% higher than Third Quarter 2014, reflecting higher unit volumes in substantially all of our markets and products.  

16

---

 

Higher revenues were primarily driven by higher sales for Gentherm Global Power Technologies (“GPT”), which product revenues totaling $21,089,000 were 145% higher during Third Quarter 2015 as compared with Third Quarter 2014, and continued strong shipments of variable temperature climate controlled seats (“CCS”).  GPT benefited from favorable timing of several large programs delivered during the quarter, which we anticipate will result in lower sequential revenues for GPT during the fourth quarter of 2015.  CCS revenue increased by $5,303,000, or 6%, to $93,337,000, during Third Quarter 2015.  This increase resulted from new program launches since Third Quarter 2014, and strong vehicle 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. The CCS revenue increase was offset by a decrease in our seat heater revenue by $5,592,000, or 7%, to $74,082,000.  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 primarily affected 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 of certain vehicle programs and stronger vehicle production volumes including those in Europe.  We also had significant growth in our heated steering wheel and automotive cable products which showed increases of $1,900,000 and $1,628,000, respectively, or 21% and 8%, to $10,937,000 and $21,281,000, respectively.

Cost of Sales. Cost of sales increased to $148,892,000 during Third Quarter 2015 from $144,427,000 during Third Quarter 2014. This increase of $4,465,000, or 3%, 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 Third Quarter 2015 to 33.5% compared with 29.9% during Third Quarter 2014.  The favorable product mix was primarily attributable to the higher sales of GPT and partly due to the greater sales growth in CCS products, both of which historically have better margin performance.  Our manufacturing plants are located in the Ukraine, Macedonia, Mexico, Canada and China.  As a result, our production labor costs are incurred in the local currency of each of those countries.  During Third Quarter 2015, MXN and UAH decreased in value as compared to the USD resulting in lower production costs.

Net Research and Development Expenses. Net research and development expenses were $14,934,000 during Third Quarter 2015 compared to $15,278,000 during Third Quarter 2014, a decrease of $344,000, or 2%. This decrease was primarily driven by higher research and development reimbursements partially offset 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.  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 net research and development expenses. 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 $22,543,000 during Third Quarter 2015 from $22,181,000 during Third Quarter 2014, an increase of $362,000, or 2%.  The increase in expenses was due to higher general legal, audit and travel costs, as well as higher wages and benefits costs resulting from new employee hiring and merit increases partially offset by a decrease in management incentive compensation costs. 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 the trading price of our Common Stock decreased significantly during Third Quarter 2015, we recorded a reversal in SAR-related compensation expense totaling $1,274,000 for the period.  The SAR-related compensation expense reversal during the Third Quarter 2015 compares with an expense totaling $584,000 during Third Quarter 2014.

Income Tax Expense. We recorded an income tax expense of $9,798,000 during Third Quarter 2015 representing an effective tax rate of 26.1% on earnings before income tax of $37,463,000. We recorded an income tax expense of $6,852,000 during Third Quarter 2014 representing an effective tax rate of 28.4% on earnings before income tax of $24,140,000. The effective tax rates for Third Quarter 2015 and Third 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.

Year to Date 2015 Compared with Year to Date 2014

Product Revenues. Our product revenues for the nine months ended September 30, 2015 (“YTD 2015”) were $644,168,000 compared with product revenues of $606,132,000 for the nine months ended September 30, 2014 (“YTD 2014”), an increase of $38,036,000 or 6%.  A portion of our product revenues come from sales to customers in Europe much of which are denominated in

17

---

 

Euros.  Since the end of YTD 2014, the relative market value of the Euro declined significantly against the US Dollar, our reporting currency.  During YTD 2015 the average exchange rate between these currencies was 1.11 US Dollars to the Euro whereas during YTD 2014 the average exchange rate was 1.36.  Consequently, our Euro denominated revenues which have increased by 10% 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 average exchange rate during YTD 2015 been the same as the average exchange rate during YTD 2014 for these currencies, our product revenues would have been $38,977,000 higher than that reported for YTD 2015.  Adjusting for this unfavorable currency translation impact, our YTD 2015 product revenues would have been $683,145,000 or 13% higher than YTD 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.  The increase in GPT revenue totaling $24,336,000 to $41,042,000 during YTD 2015 was partially due to the fact that GPT was acquired on April 1, 2014 and consequently we did not report any revenue from GPT during the three months ended March 31, 2014 (“First Quarter 2014”).  GPT revenue for the three months ended March 31, 2015 (“First Quarter 2015”) totaled $7,466,000.  The remaining revenue increase of $16,870,000 is attributable to increased product revenue during the last two quarters of 2015.  These increases were primarily due to strong demand for GPT’s products, and also resulted from favorable timing of several large GPT programs delivered during Third Quarter 2015.  CCS revenue increased by $27,468,000, or 11%, to $283,675,000, during YTD 2015.  This increase resulted from new program launches since YTD 2014, and strong vehicle 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. The CCS revenue increase was partially offset by a decrease in our seat heater revenue by $21,236,000, or 9%, to $221,961,000.  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 primarily affected 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 had significant growth in our heated steering wheel product which showed an increase of $4,214,000, or 16%, to $30,966,000.

Cost of Sales. Cost of sales increased to $436,967,000 during YTD 2015 from $426,765,000 during YTD 2014. This increase of $10,202,000 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 YTD 2015 to 32.2% compared with 29.6% during YTD 2014.  The favorable product mix was primarily attributable to the greater sales growth in CCS products and the higher product revenues for GPT, both of which historically have had better margin performance.  Our manufacturing plants are located in the Ukraine, Macedonia, Mexico, Canada and China.  As a result, our production labor costs are incurred in the local currency of each of those countries.  During YTD 2015, MXN and UAH decreased in value as compared to the USD resulting in lower production costs.

Net Research and Development Expenses. Net research and development expenses were $44,459,000 during YTD 2015 compared to $42,873,000 during YTD 2014, an increase of $1,586,000, or 4%. 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.  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.

Acquisition Transaction Expenses. During YTD 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 YTD 2015.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $71,546,000 during YTD 2015 from $61,741,000 during YTD 2014, an increase of $9,805,000, or 16%.  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 YTD 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 higher 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 the trading price of our Common Stock increased significantly during YTD 2015, we recorded SAR-related compensation expense totaling $5,224,000 for the period as compared with $3,867,000 during YTD 2014, an increase of $1,357,000.

18

---

 

Income Tax Expense. We recorded an income tax expense of $22,891,000 during YTD 2015 representing an effective tax rate of 25.5% on earnings before income tax of $89,870,000. We recorded an income tax expense of $19,656,000 during YTD 2014 representing an effective tax rate of 28.1% on earnings before income tax of $69,946,000. The effective tax rates for YTD 2015 and YTD 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 September 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 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.  

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

 

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 $43,472,000 during YTD 2015. Cash provided by operating activities during YTD 2015 was $66,336,000 and was attributable to net income of $66,979,000, plus non-cash adjustments.  Non-cash adjustments included depreciation and amortization of $23,123,000, stock compensation of $4,687,000 and other items.  Partially offsetting these positive cash flows from operating activities was a net increase in net operating assets and liabilities of $24,150,000, including working capital items, deferred income tax benefit of $4,262,000 and gains on the revaluation of derivatives of $951,000.

As of September 30, 2015, working capital was $250,878,000 as compared to $187,432,000 at December 31, 2014, an increase of $63,446,000, or 34%.  Aside from the impact of cash and cash equivalents, this increase was primarily related to increases in accounts receivable, inventory, and prepaid expenses and other assets and a decrease in the current portion of long-term debt totaling $24,442,000, $3,829,000, $1,313,000, and $796,000, 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 $1,722,000, $3,712,000 and $1,666,000.  Accounts receivable primarily increased as a result of increases in product revenues and timing differences between when sales were realized during YTD 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 $35,549,000 during YTD 2015, reflecting the acquisition of property and equipment totaling $35,728,000.  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 $17,057,000 during YTD 2015, reflecting proceeds from the DEG Vietnam Loan, the exercise of Common Stock options and excess tax benefit from equity awards of $15,000,000, $6,468,000 and $1,220,000, respectively.  These proceeds were offset by payment of principal on the US Term Loan, Europe Term Loan, DEG China Loan and capital lease totaling $4,156,000 in aggregate.  Cash also was paid for the tax related to the cancellation of restricted stock awards totaling $1,475,000.  See Note 5 to the consolidated condensed financial statements included herein for information about borrowings under the Credit Agreement, DEG China Loan and DEG Vietnam Loan.

19

---

 

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 enter 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. The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years.  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 $11,167,000 as of September 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”), 0.03% at September 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 1.09 at September 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 €8,751,000 or $9,773,000 as of September 30, 2015, plus additional accrued liabilities for past due payments under the CRS of approximately €10,803,000, or $12,064,000 as of September 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 September 30, 2015 is set forth in Note 6 to the consolidated condensed financial statements included herein.

20

---

 

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 US dollars ($USD) or European Euros (€EUR), as indicated in parentheses.

September 30, 2015

 

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.

September 30, 2015

 

21

---

 

Commodity Price Sensitivity

The table below provides information about the Company’s futures contracts that are sensitive to changes in commodity prices, specifically copper prices. For the futures contracts the table presents the notional amounts in metric tons (MT), the weighted average contract prices, and the total dollar contract amount by expected maturity dates. Contract amounts are used to calculate the contractual payments and quantity of copper to be exchanged under the futures contracts.

September 30, 2015

 

 

22

---

 

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were effective to ensure the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods prescribed by the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

23

---

 

PART II OTHER INFORMATION

We are subject to litigation from time to time in the ordinary course of business, however there is no current material pending litigation to which we are a party and no material legal proceeding was terminated, settled or otherwise resolved during the three months ended September 30, 2015.  See Note 6 to the consolidated condensed financial statements for information regarding the dispute with UniCredit Bank AG and our currency related interest rate swaps.

There were no material changes in our risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.  You should carefully consider the risks and uncertainties described therein.

Exhibits to this Report are as follows:

 

 

24

---

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

25