NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note 1 – Overview
Gentherm Incorporated is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. Unless the context otherwise requires, the terms “Gentherm”, “Company”, “we”, “us” and “our” used herein refer to Gentherm Incorporated and its consolidated subsidiaries. Our products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well as patient temperature management within the health care industry. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America, Europe and Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities and to identify future thermal technology product opportunities in both automotive and other markets. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and to create new product applications for existing and new markets.
Basis of Presentation
The unaudited consolidated condensed financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The information furnished in the consolidated condensed financial statements include all adjustments (consisting of only normal, recurring adjustments), considered necessary to present fairly the results of operations, financial position and cash flows of the Company. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Certain amounts in the prior period’s financial statements have been reclassified to conform with the current period presentation. Notably, $2,565 and $7,883 in customer relationship amortization was reclassified from product revenues to selling, general and administrative expenses for the three and nine months ended September 30, 2018, respectively.
In preparing these financial statements, management was required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates.
Note 2 – New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842)” (as amended, “ASU 2016-02”). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease, and is measured as the present value of the lease payments. The right-of-use asset represents the lessee’s right to use a specified asset for the lease term, and is measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. Leases are to be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the statement of income (loss).
The Company adopted ASU 2016-02 on January 1, 2019, by applying the modified retrospective method and recognized a cumulative-effect adjustment to the opening balance in retained earnings. Financial information has not been updated and disclosure under the new standard have not been provided to dates and periods before January 1, 2019, and the Company’s reporting for the comparative periods in the consolidated financial statements will continue to be in accordance with Accounting Standards Codification Topic 840, Leases (“ASC 840”).
9
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
ASU 2016-02 did not have an impact on our consolidated condensed statements of income for the three and nine months ended September 30, 2019, but had a significant impact on our consolidated condensed balance sheet as of September 30, 2019. The cumulative effects of the changes made to the Company’s consolidated condensed balance sheet as of January 1, 2019 for the adoption of ASU 2016-02 were as follows:
|
|
Balance as of
December 31,
2018
|
|
|
Adjustments
due to adoption
of ASU 2016-02
|
|
|
Balance as of
January 1,
2019
|
|
|
Prepaid expenses and other assets
|
|
54,271
|
|
|
|
(74
|
)
|
|
|
54,197
|
|
|
Assets held for sale
|
|
69,699
|
|
|
|
4,127
|
|
|
|
73,826
|
|
|
Operating lease right-of-use assets
|
|
—
|
|
|
|
13,019
|
|
|
|
13,019
|
|
|
Liabilities held for sale
|
|
13,062
|
|
|
|
4,136
|
|
|
|
17,198
|
|
|
Deferred tax liabilities
|
|
1,177
|
|
|
|
114
|
|
|
|
1,291
|
|
|
Non-current lease liabilities
|
|
—
|
|
|
|
12,561
|
|
|
|
12,561
|
|
|
Accumulated earnings
|
|
363,965
|
|
|
|
261
|
|
|
|
364,226
|
|
The Company elected the package of practical expedients provided in ASU 2016-02, which permits a lessee to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Gentherm elected the use-of-hindsight to determine whether lease terms included periods covered by the lessee’s option to extend or terminate a lease, whether to purchase the underlying asset at the end of the lease agreement, and in assessing impairment of operating lease right-of-use assets. Finally, Gentherm elected to not assess whether existing or expired land easements that were not previously accounted for as leases are or contain a lease. Land easements previously accounted for as leases were not eligible for this practical expedient.
Recently Issued Accounting Pronouncements Not Yet Adopted
Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments in this update is permitted. We are currently in the process of determining the impact the implementation of ASU 2016-13 will have on the Company’s financial statements and note disclosures.
Cloud Computing Arrangements That Are Service Contracts
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments in this update is permitted. We are currently in the process of determining the impact the implementation of ASU 2018-15 will have on the Company’s financial statements and note disclosures.
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU 2018-14 removes certain disclosure requirements, including (i) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, and (ii) the amount and timing of plan assets expected to be returned to the employer. ASU 2018-14 also adds new disclosure requirements, including (i) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and (ii) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for annual periods
10
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
ending after December 15, 2020. Early adoption of the amendments in this update is permitted. We are currently in the process of determining the impact the implementation of ASU 2018-14 will have on the Company’s financial statement note disclosures.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 removes certain disclosure requirements, including (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfer between levels, and (iii) the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds new disclosure requirements, including (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption of disclosures that are removed is permitted, but adoption is delayed for the new additional disclosures until their effective date. We are currently in the process of determining the impact the implementation of ASU 2018-13 will have on the Company’s financial statement note disclosures.
Note 3 – Acquisitions and Divestitures
Divestiture of Cincinnati Sub-Zero Industrial Chamber Business (CSZ-IC)
On February 1, 2019, as part of the Company’s Fit-for-Growth initiative to eliminate investments in non-core businesses, we completed the sale of the Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”) and former Cincinnati Sub-Zero headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47,500, including $2,500 of cash proceeds placed into an escrow account for a period of up to one year as partial security for the Company’s obligations under the sale agreement. In connection with the sale, Gentherm entered into an operating lease agreement for a portion of the office and manufacturing building space purchased by Weiss Technik North America, Inc. The Company recognized a $4,970 pre-tax gain on the sale of CSZ-IC during the nine months ended September 30, 2019.
Acquisition of Stihler Electronic GmbH
On April 1, 2019, Gentherm acquired Stihler Electronic GmbH (“Stihler”), a leading developer and manufacturer of patient and blood temperature management systems, for a purchase price of $15,476, net of cash acquired and including $653 of contingent consideration to be paid upon achievement of a milestone that must be completed by September 2020. In addition, the purchase agreement includes a contingent payment of $653 to be paid if the selling shareholder remains employed by Stihler through December 2020. This amount will be recorded as a component of selling, general and administrative expenses ratably over the service period. The results of operations of Stihler are reported within the Company’s Industrial segment from the date of acquisition. During the three and nine months ended September 30, 2019, the Company incurred acquisition-related costs of approximately $19 and $399, respectively. These amounts were recorded as incurred, within the Company's consolidated statements of income.
11
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available in the second quarter of 2019. The preliminary purchase price and related allocation to the acquired net assets of Stihler, based on their estimated fair values as of the acquisition date, are shown below:
|
Purchase price, cash consideration, net of cash acquired
|
|
$
|
14,823
|
|
|
Purchase price, fair value of contingent consideration
|
|
|
653
|
|
|
Total purchase price, net of cash acquired
|
|
|
15,476
|
|
|
Accounts receivable
|
|
$
|
883
|
|
|
Inventory
|
|
|
1,698
|
|
|
Prepaid expenses and other assets
|
|
|
241
|
|
|
Operating lease right-of-use assets
|
|
|
263
|
|
|
Property and equipment
|
|
|
260
|
|
|
Other intangible assets
|
|
|
4,380
|
|
|
Goodwill
|
|
|
9,816
|
|
|
Assumed liabilities
|
|
|
(2,065
|
)
|
|
Net assets acquired
|
|
$
|
15,476
|
|
Other intangible assets primarily include amounts recognized for the fair value of customer-related intangible assets, which will be amortized over their estimated useful lives of approximately 9 years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing an income approach. Goodwill recognized in this transaction is primarily attributable to intangible assets that do not qualify for separate recognition. It is estimated that $2,524 of the goodwill recognized will be deductible for income tax purposes.
The purchase price and related allocation are preliminary and could be revised for up to one year from the acquisition date as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets, and certain tax attributes.
The pro forma effect of the Stihler acquisition does not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements are presented.
12
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note 4 – Assets and Liabilities Held for Sale
During 2018, the Company determined that its Gentherm Global Power Technologies (“GPT”) business met the held for sale criteria and recognized $2,190 in impairment loss.
During 2019, the Company continued to assess the fair value of the GPT disposal group, less costs to sell, at each reporting period. As a result of these fair value measurements, the Company recorded additional impairment losses of $837 and $16,720 for the three and nine months ended September 30, 2019, respectively. Additionally, during the first quarter of 2019, the Company determined that an equity investment met the held for sale criteria and recognized impairment losses of $0 and $4,486 for the three and nine months ended September 30, 2019, respectively.
Subsequent to the end of the Company's third quarter, effective October 1, 2019, the Company completed the divesture of GPT. The Company expects to record approximately $6,000 pre-tax loss on sale, in the fourth quarter of 2019, which includes approximately $4,000 related to the release of previously deferred foreign currency translation losses recorded in accumulated other comprehensive loss.
The assets and liabilities of the GPT disposal group classified as held for sale as of September 30, 2019 are as follows:
|
Cash
|
|
$
|
1,422
|
|
|
Accounts receivable, net
|
|
|
2,238
|
|
|
Inventory, net
|
|
|
4,936
|
|
|
Prepaid expenses and other assets
|
|
|
215
|
|
|
Operating lease right-of-use assets
|
|
|
3,926
|
|
|
Investment
|
|
|
—
|
|
|
Property and equipment, net
|
|
|
7,356
|
|
|
Other intangible assets, net
|
|
|
1,033
|
|
|
Deferred income tax assets
|
|
|
4,371
|
|
|
Impairment loss
|
|
|
(18,910
|
)
|
|
Total assets held for sale
|
|
$
|
6,587
|
|
|
Accounts payable
|
|
|
420
|
|
|
Accrued liabilities
|
|
|
2,238
|
|
|
Operating lease liabilities
|
|
|
3,929
|
|
|
Total liabilities held for sale
|
|
$
|
6,587
|
|
The equity investment described above, does not have a readily determinable fair value and is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
Note 5 – Restructuring
Manufacturing Footprint Rationalization
On September 23, 2019, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. Under this plan, the Company will relocate and consolidate certain existing automotive manufacturing and, as a result, certain other activities, overall reducing the number of plants by two. During the third quarter of 2019, the Company recognized expense of $5,200 for employee separation costs that will be paid pursuant to the terms of statutory requirements of the affected locations. Additionally, the Company recognized $1,612 of accelerated depreciation and fixed asset impairment.
The Company expects to incur total costs of between $20,000 and $24,000, of which between $17,000 and $21,000 are expected to be cash expenditures. The total expected costs include employee separation costs of between $9,000 and $11,000, capital expenditures of between $4,500 and $5,500 and non-cash expenses for accelerated depreciation and impairment of fixed assets of approximately $3,000. The Company also expects to incur other transition costs including recruiting, relocation, and machinery and equipment move and set up costs of between $3,500 and $4,500. The actions under this plan are expected to be substantially completed by the end of 2021. The actual timing, costs and savings of the Plan may differ materially from the Company’s current expectations and estimates.
13
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Other Restructuring Activities
As part of the Company’s continued efforts to optimize its cost structure, the Company has undertaken several discrete restructuring actions. During the three and nine months ended September 30, 2019, the Company recognized $1,467 and $2,726 of employee separation costs, respectively, and $385 and $734 of other related costs, respectively. These restructuring expenses were primarily associated with restructuring actions focused on the rotation of our manufacturing footprint to lower cost locations and the reduction of global overhead costs. These discrete restructuring actions are expected to approximate the total cumulative costs for those actions. The Company will continue to explore opportunities to improve its future profitability and competitiveness. These actions may result in the recognition of additional restructuring charges that could be material.
During the three and nine months ended September 30, 2018, the Company recognized $3,303 and $5,040 of employee separation costs, respectively, and $1,332 and $2,831 of other related costs, respectively.
Advanced Research and Development Rationalization and Site Consolidation
In June 2018, Gentherm completed the sale of its battery management systems division located in Irvine, California. A loss on the sale of $1,107 was recognized in restructuring expenses during nine months ended September 30, 2018. An additional asset impairment loss of $0 and $425 was recognized during the three and nine months ended September 30, 2019.
During the three and nine months ended September 30, 2018, Gentherm recognized employees separation costs of $157 and $1,038, respectively, and $589 and $1,024 of other related costs associated with the closure of two leased facilities located in Azusa, California. The Company also recognized $50 and $1,250 for the three and nine months ended September 30, 2018, for the disposal of long-lived assets controlled and used in Azusa, California.
The Company has recorded approximately $4,669 of restructuring expenses since inception of this program and it is considered complete.
GPT and CSZ-IC
During 2018, Gentherm launched a program to actively market GPT and CSZ-IC. Costs associated with the divestiture process were classified as restructuring.
During the three and nine months ended September 30, 2019, the Company recognized $0 and $251 of employee separation costs, respectively, and $0 and $861 of other related costs, respectively.
During the three and nine months ended September 30, 2018, the Company recognized $262 and $472 of employee separation costs, and $125 and $125 of other related costs, respectively.
The Company has recorded approximately $2,173 of restructuring expenses since inception of this program and it is considered substantially complete.
Restructuring Expenses By Reporting Segment
The following table summarizes restructuring activity for the three and nine months ended September 30, 2019 and 2018 by reporting segment:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Automotive
|
|
$
|
7,820
|
|
|
$
|
2,919
|
|
|
$
|
9,016
|
|
|
$
|
4,038
|
|
|
Industrial
|
|
|
88
|
|
|
|
1,486
|
|
|
|
1,689
|
|
|
|
5,320
|
|
|
Reconciling Items
|
|
|
756
|
|
|
|
1,413
|
|
|
|
1,104
|
|
|
|
3,540
|
|
|
Total
|
|
$
|
8,664
|
|
|
$
|
5,818
|
|
|
$
|
11,809
|
|
|
$
|
12,898
|
|
14
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Restructuring Liability
Restructuring liabilities are classified as accrued liabilities on the consolidated condensed balance sheets. The following table summarizes restructuring activity for the nine months ended September 30, 2019:
|
|
|
Employee
Separation
Costs
|
|
|
Accelerated
Depreciation and
Asset Impairment
Charges
|
|
|
Other related
costs
|
|
|
Total
|
|
|
Balance at December 31, 2018
|
|
$
|
2,079
|
|
|
$
|
—
|
|
|
$
|
468
|
|
|
$
|
2,547
|
|
|
Additions, charged to restructuring expenses
|
|
|
8,177
|
|
|
|
2,037
|
|
|
|
1,595
|
|
|
|
11,809
|
|
|
Cash payments
|
|
|
(4,069
|
)
|
|
|
—
|
|
|
|
(1,458
|
)
|
|
|
(5,527
|
)
|
|
Non-cash utilization
|
|
|
—
|
|
|
|
(2,037
|
)
|
|
|
—
|
|
|
|
(2,037
|
)
|
|
Reclassification to lease liability
|
|
|
—
|
|
|
|
—
|
|
|
|
(193
|
)
|
|
|
(193
|
)
|
|
Balance at September 30, 2019
|
|
$
|
6,187
|
|
|
$
|
—
|
|
|
$
|
412
|
|
|
$
|
6,599
|
|
Note 6 – Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares of stock outstanding during the period. The Company’s diluted earnings per share give effect to all potential Common Stock outstanding during a period that do not have an anti-dilutive impact to the calculation. In computing the diluted earnings per share, the treasury stock method is used in determining the number of shares assumed to be issued from the exercise of Common Stock equivalents.
The following summarizes the Common Stock included in the basic and diluted shares, as disclosed on the face of the consolidated condensed statements of income:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Weighted average number of shares for calculation of basic
EPS
|
|
|
32,838,636
|
|
|
|
36,103,520
|
|
|
|
33,282,584
|
|
|
|
36,364,380
|
|
|
Stock options, restricted stock awards and restricted stock
units under equity incentive plans
|
|
|
94,043
|
|
|
|
344,642
|
|
|
|
135,971
|
|
|
|
105,379
|
|
|
Weighted average number of shares for calculation of
diluted EPS
|
|
|
32,932,679
|
|
|
|
36,448,162
|
|
|
|
33,418,555
|
|
|
|
36,469,759
|
|
The following table represents Common Stock issuable upon the exercise of certain stock options that have been excluded from the diluted earnings calculation because the effect of their inclusion would be anti-dilutive.
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock options outstanding for equity incentive plans
|
|
|
441,435
|
|
|
|
12,000
|
|
|
|
441,435
|
|
|
|
1,359,250
|
|
15
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note 7 – Segment Reporting
Segment information is used by management for making strategic operating decisions for the Company. Management evaluates the performance of the Company’s segments based primarily on operating income or loss.
The Company’s reportable segments are as follows:
|
|
•
|
Automotive – this segment represents the design, development, manufacturing and sales of automotive climate control seat (CCS) products, seat heaters, steering wheel heaters, automotive cables, battery thermal management (BTM), electronics and other automotive products.
|
|
|
•
|
Industrial – the combined operating results of GPT, Gentherm Medical and Gentherm’s advanced research and development division. We perform advanced research and development on thermal management systems, including those that utilize new proprietary comfort software algorithms, to enhance the efficiency and functionality of our automotive heating and cooling products. Unlike research and development that relates to a specific product application for a customer, advanced research and development activities affect products and technologies that are not currently generating product revenues. The segment includes government sponsored research projects.
|
|
|
•
|
Reconciling Items – include corporate selling, general and administrative costs and acquisition transaction costs.
|
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 months ended September 30, 2019 and 2018. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level.
|
Three Months Ended September 30,
|
|
Automotive
|
|
|
Industrial(1)
|
|
|
Reconciling
Items
|
|
|
Consolidated
Total
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
228,243
|
|
|
$
|
11,813
|
|
|
$
|
—
|
|
|
$
|
240,056
|
|
|
Depreciation and amortization
|
|
|
10,170
|
|
|
|
480
|
|
|
|
414
|
|
|
|
11,064
|
|
|
Operating income (loss)
|
|
|
36,629
|
|
|
|
(3,496
|
)
|
|
|
(12,804
|
)
|
|
|
20,329
|
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues(1)
|
|
$
|
238,849
|
|
|
$
|
22,655
|
|
|
$
|
—
|
|
|
$
|
261,504
|
|
|
Depreciation and amortization
|
|
|
11,060
|
|
|
|
1,170
|
|
|
|
668
|
|
|
|
12,898
|
|
|
Operating income (loss)
|
|
|
37,908
|
|
|
|
(4,335
|
)
|
|
|
(17,860
|
)
|
|
|
15,713
|
|
|
Nine Months Ended September 30,
|
|
Automotive
|
|
|
Industrial(1)
|
|
|
Reconciling
Items
|
|
|
Consolidated
Total
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
700,300
|
|
|
$
|
41,003
|
|
|
$
|
—
|
|
|
$
|
741,303
|
|
|
Depreciation and amortization
|
|
|
30,660
|
|
|
|
1,319
|
|
|
|
1,302
|
|
|
|
33,281
|
|
|
Operating income (loss)
|
|
|
114,456
|
|
|
|
(12,131
|
)
|
|
|
(40,094
|
)
|
|
|
62,231
|
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues(1)
|
|
$
|
724,420
|
|
|
$
|
68,070
|
|
|
$
|
—
|
|
|
$
|
792,490
|
|
|
Depreciation and amortization
|
|
|
32,839
|
|
|
|
3,822
|
|
|
|
2,060
|
|
|
$
|
38,721
|
|
|
Operating income (loss)
|
|
|
116,312
|
|
|
|
(18,896
|
)
|
|
|
(45,461
|
)
|
|
|
51,955
|
|
|
(1)
|
Industrial segment includes $3,418 and $30,460 in product revenues, $0 and $1,894 in depreciation and amortization, and $206 and $659 in operating income from CSZ-IC for the nine months ended September 30, 2019 and 2018, respectively.
|
16
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Automotive and Industrial segment product revenues by product category for the three and nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Climate Control Seats (CCS)
|
|
$
|
88,133
|
|
|
$
|
97,578
|
|
|
$
|
270,924
|
|
|
$
|
276,191
|
|
|
Seat Heaters
|
|
|
71,030
|
|
|
|
70,768
|
|
|
|
218,578
|
|
|
|
235,164
|
|
|
Steering Wheel Heaters
|
|
|
16,621
|
|
|
|
18,095
|
|
|
|
49,620
|
|
|
|
53,192
|
|
|
Automotive Cables
|
|
|
20,361
|
|
|
|
24,961
|
|
|
|
66,316
|
|
|
|
77,471
|
|
|
Battery Thermal Management (BTM)(a)
|
|
|
11,890
|
|
|
|
7,461
|
|
|
|
31,531
|
|
|
|
18,863
|
|
|
Electronics
|
|
|
11,729
|
|
|
|
12,590
|
|
|
|
36,035
|
|
|
|
44,409
|
|
|
Other Automotive
|
|
|
8,479
|
|
|
|
7,396
|
|
|
|
27,296
|
|
|
|
19,130
|
|
|
Subtotal Automotive
|
|
$
|
228,243
|
|
|
$
|
238,849
|
|
|
$
|
700,300
|
|
|
$
|
724,420
|
|
|
Remote Power Generation (GPT)
|
|
|
3,477
|
|
|
|
4,378
|
|
|
|
11,181
|
|
|
|
14,310
|
|
|
Industrial Chambers
|
|
|
—
|
|
|
|
9,829
|
|
|
|
3,418
|
|
|
|
30,460
|
|
|
Gentherm Medical
|
|
|
8,336
|
|
|
|
8,448
|
|
|
|
26,404
|
|
|
|
23,300
|
|
|
Subtotal Industrial
|
|
$
|
11,813
|
|
|
$
|
22,655
|
|
|
$
|
41,003
|
|
|
$
|
68,070
|
|
|
Total Company
|
|
$
|
240,056
|
|
|
$
|
261,504
|
|
|
$
|
741,303
|
|
|
$
|
792,490
|
|
|
a)
|
Battery Thermal Management or BTM product revenues include Gentherm’s automotive grade, low cost, heat resistant fans and blowers used by customer for battery cooling through ventilation and production level shipments of the advanced TED based active cool system.
|
Total product revenues information by geographic area is as follows (based on shipment destination):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
United States
|
|
$
|
111,570
|
|
|
$
|
125,936
|
|
|
$
|
340,656
|
|
|
$
|
369,798
|
|
|
Germany
|
|
|
20,379
|
|
|
|
22,681
|
|
|
|
63,889
|
|
|
|
68,670
|
|
|
Japan
|
|
|
20,508
|
|
|
|
16,672
|
|
|
|
59,102
|
|
|
|
43,520
|
|
|
China
|
|
|
17,591
|
|
|
|
22,756
|
|
|
|
49,598
|
|
|
|
71,887
|
|
|
South Korea
|
|
|
14,543
|
|
|
|
12,814
|
|
|
|
45,098
|
|
|
|
42,419
|
|
|
Czech Republic
|
|
|
8,805
|
|
|
|
10,742
|
|
|
|
30,956
|
|
|
|
33,563
|
|
|
Canada
|
|
|
8,833
|
|
|
|
7,778
|
|
|
|
29,226
|
|
|
|
33,482
|
|
|
United Kingdom
|
|
|
8,315
|
|
|
|
9,037
|
|
|
|
23,980
|
|
|
|
28,349
|
|
|
Other
|
|
|
29,512
|
|
|
|
33,088
|
|
|
|
98,798
|
|
|
|
100,802
|
|
|
Total Non-U.S.
|
|
$
|
128,486
|
|
|
$
|
135,568
|
|
|
$
|
400,647
|
|
|
$
|
422,692
|
|
|
|
|
$
|
240,056
|
|
|
$
|
261,504
|
|
|
$
|
741,303
|
|
|
$
|
792,490
|
|
17
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note 8 – Revenue Recognition
The aggregate amount of transaction price allocated to material rights that remain unsatisfied as of September 30, 2019 is $747. We expect to recognize into revenue, 42% of this balance in the next 3 months, and the remaining 33%, 9%, 9% and 7% in 2020, 2021, 2022 and 2023, respectively.
Unearned revenue related to the Automotive segment was $747 and $1,597 as of September 30, 2019 and December 31, 2018, respectively.
Changes in unearned revenue were as follows:
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,597
|
|
|
Additions to unearned revenue
|
|
|
549
|
|
|
Reclassified to revenue
|
|
|
(1,211
|
)
|
|
Reclassified to held for sale
|
|
|
(168
|
)
|
|
Currency impacts
|
|
|
(20
|
)
|
|
Balance, end of period
|
|
$
|
747
|
|
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.
Total costs to obtain a contract that were recognized on the consolidated condensed balance sheets as of September 30, 2019 and December 31, 2018 were immaterial.
Note 9 – Income Taxes
At the end of each interim period, the Company makes its best estimate of the annual expected effective income tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax provision or benefit related to unusual or infrequent items, if applicable, that will be separately reported or reported net of their related tax effects are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, judgment on the realizability of a beginning-of-the-year deferred tax asset in future years or income tax contingencies is recognized in the interim period in which the change occurs.
The computation of the annual expected effective income tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (and/or loss) earned and taxed in respective jurisdictions, permanent and temporary differences, and the likelihood of the realizability of deferred tax assets generated in the current year. Jurisdictions with a projected loss for the year or a year-to-date loss for which no tax benefit or expense can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the composition and timing of actual earnings compared to annual projections. The estimates used to compute the provision or benefit for income taxes may change as new events occur, additional information is obtained or as our tax environment changes. To the extent that the expected annual effective income tax rate changes, the effect of the change on prior interim periods is included in the income tax provision in the period in which the change in estimate occurs.
18
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
A summary of the provision for income taxes and the corresponding effective tax rate for the three and nine months ended September 30, 2019 and September 30, 2018, is shown below (in thousands, except effective tax rates):
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Income tax expense
|
|
$
|
6,771
|
|
|
$
|
3,688
|
|
|
$
|
19,214
|
|
|
$
|
9,807
|
|
|
Earnings before income tax
|
|
$
|
22,658
|
|
|
$
|
3,333
|
|
|
$
|
46,266
|
|
|
$
|
39,077
|
|
|
Effective tax rate
|
|
|
29.9
|
%
|
|
|
110.7
|
%
|
|
|
41.5
|
%
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense excluding impairment loss
|
|
$
|
6,771
|
|
|
$
|
3,688
|
|
|
$
|
19,214
|
|
|
$
|
9,807
|
|
|
Earnings before income tax excluding impairment loss
|
|
$
|
23,495
|
|
|
$
|
14,809
|
|
|
$
|
67,472
|
|
|
$
|
50,553
|
|
|
Effective tax rate excluding impairment loss
|
|
|
28.8
|
%
|
|
|
24.9
|
%
|
|
|
28.5
|
%
|
|
|
19.4
|
%
|
For the nine months ended September 30, 2019, the Company recognized a loss of $21,206 related to an impairment loss for which no tax benefit was provided. Similarly, for the nine months ended September 30, 2018, the Company recognized a loss of $11,476 related to a non-deductible impairment loss. Income tax expense, earnings before income tax and effective tax rate excluding the impairment loss are noted above.
The Company’s effective tax rate for the three months ended September 30, 2018 included a discrete benefit related to stock-based compensation. For the nine months ended September 30, 2018, the Company’s effective tax rate included a discrete benefit related to certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.
The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., U.S. taxes on foreign earnings, the realization of certain business tax credits, including research and development and foreign tax credits, and the applicable withholding taxes on the projected future repatriations of the earnings from the Company’s non-U.S. operations that are not considered permanently reinvested.
Note 10 – Goodwill
A summary of changes in the carrying amount of goodwill, by operating segment, for the nine months ended September 30, 2019 is as follows:
|
Nine Months Ended September 30, 2019
|
|
Automotive
|
|
|
Industrial
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
37,533
|
|
|
$
|
17,778
|
|
|
$
|
55,311
|
|
|
Stihler acquisition
|
|
|
—
|
|
|
|
9,816
|
|
|
|
9,816
|
|
|
Currency impact
|
|
|
(1,388
|
)
|
|
|
(238
|
)
|
|
|
(1,626
|
)
|
|
Balance, end of period
|
|
$
|
36,145
|
|
|
$
|
27,356
|
|
|
$
|
63,501
|
|
Note 11 – Debt
Amended Credit Agreement
As of December 31, 2018, the Company, together with certain direct and indirect subsidiaries, had a credit agreement (the “Credit Agreement”) which included a revolving credit note (“U.S. Revolving Note”) with a maximum borrowing capacity of $350,000.
On June 27, 2019, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Amended Credit Agreement amends and restates in its entirety the Credit Agreement. The outstanding principal and interest of the U.S. Revolving Note under the Credit Agreement continued and constitute obligations under the Amended Credit Agreement.
19
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
The Amended Credit Agreement increased the U.S. Revolving Note from $350,000 to $475,000 and extended the maturity from March 17, 2021 to June 27, 2024. Subject to specified conditions, the Company can increase the U.S. Revolving Note or incur secured term loans in an aggregate amount of $175,000.
The U.S. borrowers and guarantors participating in the Amended Credit Agreement have entered into a related amended and restated pledge and security agreement. The amended and restated security agreement grants a security interest to the lenders in substantially all of the personal property of the Company and its U.S. subsidiaries designated as borrowers to secure their respective obligations under the Amended Credit Agreement, including the stock and membership interests of specified subsidiaries (limited to 66% of the stock in the case of certain non-U.S. subsidiaries). In addition to the security obligations, all obligations under the Amended Credit Agreement are unconditionally guaranteed by certain of the Company’s subsidiaries. The Amended Credit Agreement restricts the amount of dividend payments the Company can make to shareholders.
The Amended Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, and contain customary events of default. The Amended Credit Agreement also requires the Company to maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio, as defined in the agreement.
Under the Amended Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate Loans”) or Eurocurrency rate (“Eurocurrency Rate Loans”), plus a margin (“Applicable Rate”). The rate for Base Rate Loans is equal to the highest of the Federal Funds Rate (1.90% at September 30, 2019) plus 0.50%, Bank of America’s prime rate (5.00% at September 30, 2019), or the Eurocurrency rate (0.00% at September 30, 2019) plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (2.02% at September 30, 2019). All loans denominated in a currency other than the U.S. Dollar must be Eurocurrency Rate Loans. Interest is payable at least quarterly.
The Applicable Rate varies based on the Consolidated Leverage Ratio reported by the Company. As long as the Company is not in default of the terms and conditions of the Amended Credit Agreement, the lowest and highest possible Applicable Rate is 1.25% and 2.25%, respectively, for Eurocurrency Rate Loans and 0.25% and 1.25%, respectively, for Base Rate Loans.
In connection with the Amended Credit Agreement, the Company incurred debt issuance costs of $1,278 which have been capitalized and will be amortized into interest expense over the term of the credit facility.
The Company also has two fixed interest rate loans with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank.
DEG China Loan
The first DEG loan, a loan we used to fund capital investments in China (the “DEG China Loan”), was subject to semi-annual principal payments that began March 2015 and ended in September 2019. During the third quarter of 2019, the DEG China Loan was paid in full.
DEG Vietnam Loan
The Company’s second fixed interest rate loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”). The DEG Vietnam Loan is subject to semi-annual principal payments that began November 2017 and will end May 2023. Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum Equity Ratio and Enhanced Equity Ratio, as defined by the DEG Vietnam Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Vietnam Co. Ltd.
20
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Undrawn borrowing capacity under the U.S. Revolving Note was $385,129 as of September 30, 2019. The following table summarizes the Company’s debt as of September 30, 2019 and December 31, 2018:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
Interest
Rate
|
|
|
Principal
Balance
|
|
|
Principal
Balance
|
|
|
Amended Credit Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Revolving Note (U.S. Dollar Denominations)
|
|
3.29%
|
|
|
$
|
70,000
|
|
|
$
|
122,000
|
|
|
U.S. Revolving Note (Euro Denominations)
|
|
1.25%
|
|
|
|
19,623
|
|
|
|
5,727
|
|
|
DEG China Loan
|
|
|
—
|
|
|
|
—
|
|
|
|
913
|
|
|
DEG Vietnam Loan
|
|
5.21%
|
|
|
|
10,000
|
|
|
|
11,250
|
|
|
Total debt
|
|
|
|
|
|
|
99,623
|
|
|
|
139,890
|
|
|
Current portion
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
(3,413
|
)
|
|
Long-term debt, less current maturities
|
|
|
|
|
|
$
|
97,123
|
|
|
$
|
136,477
|
|
The scheduled principal maturities of our debt as of September 30, 2019 are as follows:
|
Year
|
|
U.S.
Revolving
Note
|
|
|
DEG
Vietnam
Note
|
|
|
Total
|
|
|
Remainder of 2019
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
1,250
|
|
|
2020
|
|
|
—
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
2021
|
|
|
—
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
2022
|
|
|
—
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
2023
|
|
|
—
|
|
|
|
1,250
|
|
|
|
1,250
|
|
|
2024
|
|
|
89,623
|
|
|
|
—
|
|
|
|
89,623
|
|
|
Total
|
|
$
|
89,623
|
|
|
$
|
10,000
|
|
|
$
|
99,623
|
|
As of September 30, 2019, we were in compliance, in all material respects, with all terms as outlined in the Amended Credit Agreement and DEG Vietnam Loan.
Note 12 – Financial Instruments
Cash, cash equivalents and restricted cash
The Company has cash that is legally restricted as to use or withdrawal. A reconciliation of cash and cash equivalents on the consolidated condensed balance sheets to cash, cash equivalents and restricted cash presented on the consolidated condensed statements of cash flows is as follows:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
Cash and cash equivalents presented in the consolidated
condensed balance sheets
|
|
$
|
45,200
|
|
|
$
|
39,620
|
|
|
$
|
47,152
|
|
|
$
|
103,172
|
|
|
Restricted cash
|
|
|
2,504
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Cash, cash equivalents and restricted cash presented in the
consolidated condensed statements of cash flows
|
|
$
|
47,704
|
|
|
$
|
39,620
|
|
|
$
|
47,152
|
|
|
$
|
103,172
|
|
21
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Derivative Financial Instruments
We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to our debt obligations under our Amended Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in a location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the European Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.
The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year. We had foreign currency derivative contracts with a notional value of $25,210 and $33,250 outstanding as of September 30, 2019 and December 31, 2018, respectively.
The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years. No commodity swap contracts were outstanding at September 30, 2019 or at December 31, 2018.
We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts which can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to accumulated other comprehensive loss in the consolidated balance sheet. When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings in the consolidated statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency gain (loss) in the consolidated statements of income. See Note 14 for the amount of unrealized loss associated with foreign currency derivatives previously reported in accumulated other comprehensive loss that was reclassified into earnings during 2019. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.
The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounts such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term.
Information related to the recurring fair value measurement of derivative instruments in our consolidated condensed balance sheet as of September 30, 2019 is as follows:
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
Hedge
Designation
|
|
Fair Value
Hierarchy
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
|
Net Asset/
(Liabilities)
|
|
|
Foreign currency derivatives
|
|
Cash flow hedge
|
|
Level 2
|
|
Current assets
|
|
$
|
897
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
897
|
|
Information relating to the effect of derivative instruments on our consolidated condensed statements of income is as follows:
|
|
|
Location
|
|
Three Months Ended September 30, 2019
|
|
|
Three Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Foreign currency derivatives
|
|
Cost of sales
|
|
$
|
328
|
|
|
$
|
391
|
|
|
$
|
1,003
|
|
|
$
|
(214
|
)
|
|
|
|
Selling, general and administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
|
Other comprehensive income
|
|
|
(257
|
)
|
|
|
1,753
|
|
|
|
806
|
|
|
|
2,304
|
|
|
|
|
Foreign currency gain (loss)
|
|
|
18
|
|
|
|
11
|
|
|
|
(51
|
)
|
|
|
58
|
|
|
Total foreign currency derivatives
|
|
|
|
$
|
89
|
|
|
$
|
2,155
|
|
|
$
|
1,758
|
|
|
$
|
2,223
|
|
|
Commodity derivatives
|
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145
|
|
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(218
|
)
|
|
Total commodity derivatives
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(73
|
)
|
We did not incur any hedge ineffectiveness during the three and nine months ended September 30, 2019 and 2018.
22
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note 13 – Fair Value Measurements
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.
Items Measured at Fair Value on a Recurring Basis
Except for derivative instruments (see Note 12) and the held for sale disposal group (see Note 4), the Company had no material financial assets and liabilities that are carried at fair value at September 30, 2019 and December 31, 2018. The carrying amounts of financial instruments comprising cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values due to the relatively short maturity of such instruments.
Items Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included above. For further information related to assets and liabilities measured at fair value on a non-recurring basis, see Note 3, "Acquisitions and Divestitures" and Note 4, “Assets and Liabilities Held for Sale”.
As of September 30, 2019, there were no additional significant assets or liabilities measured at fair value on a non-recurring basis.
Items Not Carried at Fair Value
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, 2019, and December 31, 2018, the carrying values of the indebtedness under the Company’s Amended Credit Agreement and Credit Agreement, respectively, were not materially different than their estimated fair values because the interest rates on variable rate debt approximated rates currently available to the Company (see Note 11). Discount rates used to measure the fair value of the DEG Vietnam Loan and DEG China Loan are based on quoted swap rates. As of September 30, 2019, the carrying value and estimated fair value of the DEG Vietnam Loan were $10,000 and $10,213, respectively. As of December 31, 2018, the carrying value of the DEG Vietnam Loan and DEG China Loan were $11,250 and $913, respectively, as compared to an estimated fair value of $11,100 and $900, respectively.
23
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Note 14 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Reclassification adjustments and other activities impacting accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
|
Total
|
|
|
Balance at June 30, 2019
|
|
$
|
(2,339
|
)
|
|
$
|
(37,928
|
)
|
|
$
|
827
|
|
|
|
$
|
(39,440
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
(14,857
|
)
|
|
|
167
|
|
|
|
|
(14,690
|
)
|
|
Income tax effect of other comprehensive income (loss)
before reclassifications
|
|
|
—
|
|
|
|
(315
|
)
|
|
|
(36
|
)
|
|
|
|
(351
|
)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss) into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(424
|
)
|
a
|
|
|
(424
|
)
|
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
91
|
|
|
|
|
91
|
|
|
Net current period other comprehensive income (loss)
|
|
|
—
|
|
|
|
(15,172
|
)
|
|
|
(202
|
)
|
|
|
|
(15,374
|
)
|
|
Balance at September 30, 2019
|
|
$
|
(2,339
|
)
|
|
$
|
(53,100
|
)
|
|
$
|
625
|
|
|
|
$
|
(54,814
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive income (loss) are included in cost of sales.
|
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
|
Total
|
|
|
Balance at June 30, 2018
|
|
$
|
(2,406
|
)
|
|
$
|
(29,040
|
)
|
|
$
|
(397
|
)
|
|
|
$
|
(31,843
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
(3,266
|
)
|
|
|
1,586
|
|
|
|
|
(1,680
|
)
|
|
Income tax effect of other comprehensive income (loss)
before reclassifications
|
|
|
—
|
|
|
|
15
|
|
|
|
(491
|
)
|
|
|
|
(476
|
)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss) into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
167
|
|
a
|
|
|
167
|
|
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
|
(45
|
)
|
|
Net current period other comprehensive income (loss)
|
|
|
—
|
|
|
|
(3,251
|
)
|
|
|
1,217
|
|
|
|
|
(2,034
|
)
|
|
Balance at September 30, 2018
|
|
$
|
(2,406
|
)
|
|
$
|
(32,291
|
)
|
|
$
|
820
|
|
|
|
$
|
(33,877
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive income (loss) are included in cost of sales.
|
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
|
Total
|
|
|
Balance at December 31, 2018
|
|
$
|
(2,339
|
)
|
|
$
|
(37,157
|
)
|
|
$
|
(4
|
)
|
|
|
$
|
(39,500
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
(15,454
|
)
|
|
|
1,359
|
|
|
|
|
(14,095
|
)
|
|
Income tax effect of other comprehensive income (loss)
before reclassifications
|
|
|
—
|
|
|
|
(489
|
)
|
|
|
(296
|
)
|
|
|
|
(785
|
)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss) into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(553
|
)
|
a
|
|
|
(553
|
)
|
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
119
|
|
|
|
|
119
|
|
|
Net current period other comprehensive income (loss)
|
|
|
—
|
|
|
|
(15,943
|
)
|
|
|
629
|
|
|
|
|
(15,314
|
)
|
|
Balance at September 30, 2019
|
|
$
|
(2,339
|
)
|
|
$
|
(53,100
|
)
|
|
$
|
625
|
|
|
|
$
|
(54,814
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive income (loss) are included in cost of sales.
|
24
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Commodity
Hedge
Derivatives
|
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
|
Total
|
|
|
Balance at December 31, 2017
|
|
$
|
(2,366
|
)
|
|
$
|
(17,555
|
)
|
|
$
|
277
|
|
|
|
$
|
(800
|
)
|
|
|
$
|
(20,444
|
)
|
|
Cumulative effect of accounting change due to
adoption of ASU 2018-02
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(40
|
)
|
|
Other comprehensive income (loss) before
reclassifications
|
|
|
—
|
|
|
|
(14,519
|
)
|
|
|
—
|
|
|
|
|
2,048
|
|
|
|
|
(12,471
|
)
|
|
Income tax effect of other comprehensive income
(loss) before reclassifications
|
|
|
—
|
|
|
|
(217
|
)
|
|
|
—
|
|
|
|
|
(615
|
)
|
|
|
|
(832
|
)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss) into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(218
|
)
|
a
|
|
|
256
|
|
a
|
|
|
38
|
|
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(59
|
)
|
|
|
|
(69
|
)
|
|
|
|
(128
|
)
|
|
Net current period other comprehensive income
(loss)
|
|
|
(40
|
)
|
|
|
(14,736
|
)
|
|
|
(277
|
)
|
|
|
|
1,620
|
|
|
|
|
(13,433
|
)
|
|
Balance at September 30, 2018
|
|
$
|
(2,406
|
)
|
|
$
|
(32,291
|
)
|
|
$
|
—
|
|
|
|
$
|
820
|
|
|
|
$
|
(33,877
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive income (loss) are included in cost of sales.
|
We expect all of the existing gains and losses related to foreign currency derivatives reported in accumulated other comprehensive loss as of September 30, 2019 to be reclassified into earnings during the next twelve months. See Note 12 for additional information about derivative financial instruments and the effects from reclassification to net income (loss).
Note 15 – Leases
The Company has operating leases for office, manufacturing and research and development facilities, as well as land leases for certain manufacturing facilities that are accounted for as operating leases. We also have operating leases for office equipment and automobiles. Excluding land leases, our leases have remaining lease terms ranging from less than 1 year to 7 years and may include options to extend the lease for an additional term equal to the original term of the lease. Land leases have remaining lease terms that range from 41 to 44 years and some which specify that the end of the lease term is at the discretion of the lessee. We do not have lease arrangements with related parties.
Accounting Policy
The Company determines whether a contractual arrangement is or contains a lease at inception. Leases that are operating in nature are recognized in operating lease right-of-use assets, current lease liabilities and non-current lease liabilities on our consolidated condensed balance sheets. While Gentherm is not currently party to any leases that qualify as financing leases, right-of-use assets and liabilities recognized from financing leases would be presented separately from the right-of-use assets and liabilities recognized from operating leases on our consolidated condensed balance sheet.
Lease liabilities are measured initially at the present value of the sum of the future minimum rental payments at the commencement date of the lease. Lease payments that will vary in the future due to changes in facts and circumstances are excluded from the calculation of rental payments, unless those variable payments are based on an index or rate. Rental payments are discounted using an incremental borrowing rate based on the Company’s credit rating, determined on a fully collateralized loan basis from information available at commencement date, and the duration of the lease term (the “reference rate”). Judgement is used to assess the importance of risk factor inputs during the computation of the Company’s credit rating. For significant leases at foreign subsidiaries denominated in U.S. Dollars, a risk premium associated with the borrower subsidiary’s country is added to the reference rate. For significant leases at foreign subsidiaries denominated in a foreign currency, the U.S. Dollar risk free rate with a duration similar to that of the lease term is subtracted from the reference rate and a corresponding foreign currency risk free rate with a duration similar to that of the lease term is added to the reference rate. Judgement is used to determine whether foreign subsidiary leases are significant.
25
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Operating lease right-of-use assets are measured at the amount of the lease liability, adjusted for prepaid or accrued lease payments, lease incentive received, and initial direct costs incurred, as applicable. Periods covered by an option to extend the lease are initially included in the measurement of an operating lease right-of-use asset and lease liability only when it is reasonably certain we will exercise the option. Gentherm’s lease agreements do not contain residual value guarantees or impose restrictions or covenants on the Company.
For all classes of underlying assets, the Company accounts for leases that contain separate lease and nonlease components as containing a single lease component. The Company does not recognize lease right-of-use assets and lease liabilities from leases with an original lease term of 12 months or less and, instead, recognizes rent payments on a straight-line basis over the lease term in the Company’s consolidated condensed statements of income (loss). See Note 2 to our consolidated condensed financial statements for description of the impacts that resulted from the adoption of a new lease standard.
Components of lease expense for the nine months ended September 30, 2019 are as follows:
|
Lease cost:
|
|
|
|
|
|
Operating lease cost
|
|
$
|
4,477
|
|
|
Short-term lease cost
|
|
|
2,678
|
|
|
Sublease income
|
|
|
(91
|
)
|
|
Total lease cost
|
|
$
|
7,064
|
|
Weighted-average remaining lease term and discount rate is as follows:
|
Weighted Average Remaining Lease Term:
|
|
|
|
|
|
Operating leases
|
|
|
4.6
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
Operating leases
|
|
|
5.45
|
%
|
Other information:
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
Gain on sale and leaseback transactions, net
|
|
$
|
207
|
|
|
Cash paid for amounts included in the measurement of lease
liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
4,539
|
|
|
Right-of-use lease assets obtained in exchange for lease
obligations:
|
|
|
|
|
|
Operating leases
|
|
$
|
3,339
|
|
A summary of operating leases as of September 30, 2019, under all non-cancellable operating leases with terms exceeding one year is as follows:
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
1,393
|
|
|
2020
|
|
|
4,570
|
|
|
2021
|
|
|
2,674
|
|
|
2022
|
|
|
1,550
|
|
|
2023
|
|
|
790
|
|
|
2024 or later
|
|
|
2,600
|
|
|
Total future minimum lease payments
|
|
$
|
13,577
|
|
|
Less imputed interest
|
|
|
(1,703
|
)
|
|
Total
|
|
$
|
11,874
|
|
26
