NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, 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 in the vehicles of nearly all major automotive manufacturers operating in North America and Europe, and several major automotive manufacturers in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. We are also developing a number of new technologies and products that are expected to help enable improvements to existing products and to create new product applications for existing and new markets.
Basis of Presentation and Significant Accounting Policies
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, 2020. 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.
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. These estimates and assumptions are subject to an inherent degree of uncertainty. We are not presently aware of any events or circumstances that would require us to update such estimates and assumptions or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained. As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements.
Principles of consolidation
The consolidated condensed financial statements include the accounts of the Company, its wholly owned subsidiaries and those entities in which it has a controlling financial interest. The Company evaluates its relationship with other entities for consolidation and to identify whether such entities are variable interest entities (“VIE”) and to assess whether the Company is the primary beneficiary of such entities. Investments in affiliates in which Gentherm does not have control but does have the ability to exercise significant influence over operating and financial policies are accounted for under the equity method. When Gentherm does not have the ability to exercise significant influence (generally when ownership interest is less than 20%), investments in affiliates are measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
During the six months ended June 30, 2021, the Company invested $5,200 for an ownership interest in Carrar Ltd. (“Carrar”), an Israel-based technology developer of advanced thermal management systems for the electric mobility market. The Company determined that Carrar is a VIE; however, the Company does not have a controlling financial interest or have the power to direct the activities that most significantly affect the economic performance of the investment. Therefore, the Company has concluded that it is not the primary beneficiary. Gentherm’s investment in Carrar is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, and is recorded in Other non-current assets.
Revenue Recognition
The Company has no material contract assets or contract liabilities as of June 30, 2021.
8
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the benefits of those costs are expected to be realized for a period greater than one year. Total capitalized costs to obtain a contract were $1,598 and $1,805 as of June 30, 2021 and December 31, 2020, respectively. These amounts are recorded in Other non-current assets and are being amortized into Product revenues over the expected production life of the applicable program.
Impact of COVID-19
The COVID-19 pandemic began in China around December 2019. The impact of the outbreak quickly expanded beyond China and its surrounding region. The COVID-19 pandemic significantly disrupted and adversely impacted global economic activity and the global automotive markets in the first half of 2020, which had significant negative impacts on Gentherm’s financial performance in the first half of 2020. During the first quarter of 2020, customer plants in North America and Europe were closed beginning in the second half of March due to the pandemic. This resulted in temporary, partial closures of several of our manufacturing facilities in North America and Europe by the end of March 2020. During the second quarter of 2020, our manufacturing facilities in North America and Europe remained closed until the last week in May due to the pandemic, gradually resuming production to near full capacity in North America, and to about 70% capacity in Europe by the end of June. Customer plants and our manufacturing facilities in Asia were closed for several weeks in February and operated at reduced volumes in March 2020, resuming production to near full capacity by the end of the first quarter, which continued throughout the second quarter of 2020. Other adverse impacts of the pandemic include supply chain and production disruptions, workforce restrictions, travel restrictions and reduced consumer spending. We significantly recovered in the second half of 2020, with increased strong production volumes versus the first half of that year and stronger than pre-COVID levels. This recovery continued in the first and second quarters of 2021. However, the COVID-19 pandemic is ongoing globally and continues to have a significant impact on global automotive markets in 2021, in the form of supply chain and production disruptions, workforce restrictions and travel restrictions, among other factors, and we remain subject to related risks.
The increased consumer demand and vehicle production schedules in the second half of 2020, particularly in the fourth quarter, was unexpected in certain areas of our supply chain. This surge in demand, as well as a significant increased consumer demand for personal electronics, during the latter half of 2020 led to a worldwide semiconductor supply shortage in early 2021. Semiconductor suppliers have not been able to quickly reallocate production lines to serve the full capacity needs of the automotive industry. Other recent pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts and manufacturing delays. Our suppliers also have experienced plant closures and production delays, and may continue to experience delays in manufacturing the materials and products we require according to our schedule and specifications. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise. The consequences of the pandemic and adverse impact to the economy continue to evolve and the future adverse impact on our business and financial statements remains subject to significant uncertainty as of the date of this filing.
Segment Reporting
The Company has two reportable segments: Automotive, which includes automotive climate comfort systems, automotive cable systems, battery performance solutions and automotive electronic and software systems; and Medical.
In 2020, the previously-named Industrial reporting segment was renamed the Medical reporting segment to reflect the patient temperature management business as the focus and strategic direction of this segment. Also, during 2020, the advanced research and development costs not associated with the Medical segment were presented within the Automotive segment, as the advanced research and development organization primarily supports the Automotive related research and development activities following the divestitures of our former remote power generation systems business, Gentherm Global Power Technologies (“GPT”) and our former environmental test equipment business, Cincinnati Sub Zero industrial chamber business (“CSZ-IC”).
9
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Subsequent Events
On July 1, 2021, the Company’s Medical segment acquired the medical business unit of a German based developer and manufacturer of electronic control units for 2,400 Euros.
On July 22, 2021, the Company’s Automotive segment invested 2,000 Euros in a European automotive technology company that specializes in the development of hands on detection technology.
Note 2 – New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions previously included in the guidance. In addition, the ASU amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. The Company adopted ASU 2019-12 as of January 1, 2021 and there was no significant impact on its consolidated condensed financial statements and related disclosures as a result.
Recently Issued Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. In January 2021, the FASB subsequently issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2020-04 and ASU 2021-01 is effective as of March 12, 2020 through December 31, 2022 and may be applied retrospectively to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company will adopt this standard when LIBOR is discontinued and does not expect a material impact to its consolidated condensed financial statements.
Note 3 – 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 is relocating and consolidating certain existing automotive manufacturing and, as a result, reducing the number of plants by two. On March 20, 2020, the Company announced the initial phase of this restructuring plan, which includes the consolidation of all North American electronics manufacturing to Celaya, Mexico. This will result in the closure of the Burlington, Canada facility, and the transfer of electronics manufacturing from Acuña, Mexico. On December 10, 2020, the Company announced the consolidation of its electronics manufacturing in Asia to Bantian, Shenzhen, China, which will result in the closure of our Longgang, Shenzhen, China facility. During the three months ended June 30, 2021, production ceased at our Burlington, Canada facility, and electronics manufacturing continues to transition to Celaya, Mexico.
During the three and six months ended June 30, 2021, the Company recognized restructuring expense of $759 and $965 for employee separation costs, respectively, $97 and $192 for accelerated depreciation, respectively, and $488 and $652 for other costs,
10
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
respectively. During the three and six months ended June 30, 2020, the Company recognized restructuring expense of $(1,691) and $(1,443), respectively, for employee separation costs and $200 and $442, respectively, of accelerated depreciation and $16 and $16 for other costs. The net activity in 2020 was primarily related to a reduction in the estimates of previously recognized employee separation costs. The Company has recorded approximately $8,946 of restructuring expenses since the inception of this program.
The Company expects to incur total costs of between $16,000 and $19,000, of which between $13,000 and $16,000 are expected to be cash expenditures. The total expected costs include employee separation costs of between $6,500 and $7,500, capital expenditures of between $3,500 and $4,500 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 $3,000 and $4,000. The remaining 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.
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 six months ended June 30, 2021, the Company recognized $747 and $1,073, respectively, of employee separation costs. During the three and six months ended June 30, 2020, the Company recognized $860 and $3,914, respectively, of employee separation costs and $17 and $239 of other related costs. These restructuring expenses were primarily associated with restructuring actions focused on the rotation of our manufacturing footprint to best cost locations and the reduction of global overhead costs
Restructuring Expenses By Reporting Segment
The following table summarizes restructuring expense for the three months ended June 30, 2021 and 2020 by reporting segment:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Automotive
|
|
$
|
1,075
|
|
|
$
|
(619
|
)
|
|
$
|
1,866
|
|
|
$
|
2,503
|
|
Medical
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
100
|
|
Corporate
|
|
|
1,016
|
|
|
|
17
|
|
|
|
1,016
|
|
|
|
565
|
|
Total
|
|
$
|
2,091
|
|
|
$
|
(598
|
)
|
|
$
|
2,882
|
|
|
$
|
3,168
|
|
Restructuring Liability
Restructuring liabilities are classified as Other current liabilities in the consolidated condensed balance sheets. The following table summarizes restructuring liability for the six months ended June 30, 2021:
|
|
Employee Separation Costs
|
|
|
Accelerated Depreciation
|
|
|
Other Related Costs
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
5,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,627
|
|
Additions, charged to restructuring expenses
|
|
|
632
|
|
|
|
95
|
|
|
|
164
|
|
|
|
891
|
|
Cash payments
|
|
|
(1,439
|
)
|
|
|
—
|
|
|
|
(164
|
)
|
|
|
(1,603
|
)
|
Non-cash utilization
|
|
|
—
|
|
|
|
(95
|
)
|
|
|
—
|
|
|
|
(95
|
)
|
Change in estimate
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(100
|
)
|
Currency translation
|
|
|
(74
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(74
|
)
|
Balance at March 31, 2021
|
|
|
4,646
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,646
|
|
Additions, charged to restructuring expenses
|
|
|
1,478
|
|
|
|
97
|
|
|
|
488
|
|
|
|
2,063
|
|
Cash payments
|
|
|
(1,099
|
)
|
|
|
—
|
|
|
|
(488
|
)
|
|
|
(1,587
|
)
|
Non-cash utilization
|
|
|
—
|
|
|
|
(97
|
)
|
|
|
—
|
|
|
|
(97
|
)
|
Change in estimate
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
Currency translation
|
|
|
(92
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(92
|
)
|
Balance at June 30, 2021
|
|
$
|
4,961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,961
|
|
11
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Note 4 – Details of Certain Balance Sheet Components
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
$
|
11,388
|
|
|
$
|
19,200
|
|
Income tax and other tax receivable
|
|
|
10,077
|
|
|
|
10,514
|
|
Billable tooling
|
|
|
4,035
|
|
|
|
4,831
|
|
Prepaid expenses
|
|
|
8,007
|
|
|
|
3,930
|
|
Other
|
|
|
2,161
|
|
|
|
2,713
|
|
Total other current assets
|
|
$
|
35,668
|
|
|
$
|
41,188
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
Liabilities from discounts and rebates
|
|
$
|
28,221
|
|
|
$
|
22,910
|
|
Accrued employee liabilities
|
|
|
25,261
|
|
|
|
26,612
|
|
Income tax and other taxes payable
|
|
|
16,478
|
|
|
|
14,714
|
|
Restructuring
|
|
|
4,961
|
|
|
|
5,627
|
|
Accrued warranty
|
|
|
2,495
|
|
|
|
2,391
|
|
Other
|
|
|
6,084
|
|
|
|
9,155
|
|
Total other current liabilities
|
|
$
|
83,500
|
|
|
$
|
81,409
|
|
Note 5 – Goodwill and Other Intangibles
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, for the six months ended June 30, 2021 was as follows:
|
|
Automotive
|
|
|
Medical
|
|
|
Total
|
|
'Balance as of December 31, 2020
|
|
$
|
39,495
|
|
|
$
|
28,529
|
|
|
$
|
68,024
|
|
Exchange rate impact
|
|
|
(973
|
)
|
|
|
(341
|
)
|
|
|
(1,314
|
)
|
Balance as of June 30, 2021
|
|
$
|
38,522
|
|
|
$
|
28,188
|
|
|
$
|
66,710
|
|
12
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Other Intangible Assets
Other intangible assets and accumulated amortization balances as of June 30, 2021 and December 31, 2020 were as follows:
|
|
Gross
Carrying Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
94,501
|
|
|
$
|
(64,151
|
)
|
|
$
|
30,350
|
|
Technology
|
|
|
29,677
|
|
|
|
(24,400
|
)
|
|
|
5,277
|
|
Product development costs
|
|
|
21,359
|
|
|
|
(20,647
|
)
|
|
|
712
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
4,670
|
|
|
|
—
|
|
|
|
4,670
|
|
Balance as of June 30, 2021
|
|
$
|
150,207
|
|
|
$
|
(109,198
|
)
|
|
$
|
41,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
97,815
|
|
|
$
|
(63,432
|
)
|
|
$
|
34,383
|
|
Technology
|
|
|
30,615
|
|
|
|
(24,075
|
)
|
|
|
6,540
|
|
Product development costs
|
|
|
22,164
|
|
|
|
(21,336
|
)
|
|
|
828
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
4,670
|
|
|
|
—
|
|
|
|
4,670
|
|
Balance as of December 31, 2020
|
|
$
|
155,264
|
|
|
$
|
(108,843
|
)
|
|
$
|
46,421
|
|
On February 28, 2020, Gentherm acquired the automotive patents and technology of a development-stage technology company for $3,141. The investment was accounted for as an asset acquisition of defensive intangible assets and will be amortized over six years.
In addition to annual impairment testing, which is performed in the fourth quarter of each fiscal year, the Company continuously monitors for events and circumstances that could negatively impact the key assumptions used in determining fair value and therefore require interim impairment testing, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company's market capitalization, and general industry, market and macroeconomic conditions. We are not presently aware of any events or circumstances that would require us to revise the carrying value of our assets or liabilities as of June 30, 2021.
Note 6 – Debt
The following table summarizes the Company’s debt as of June 30, 2021 and December 31, 2020:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Interest
Rate
|
|
|
Principal
Balance
|
|
|
Interest
Rate
|
|
|
Principal
Balance
|
|
Credit Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Revolving Note (U.S. Dollar Denominations)
|
|
|
1.35
|
%
|
|
$
|
35,000
|
|
|
|
1.65
|
%
|
|
$
|
171,500
|
|
U.S. Revolving Note (Euro Denominations)
|
|
|
1.25
|
%
|
|
|
8,294
|
|
|
|
1.50
|
%
|
|
|
14,684
|
|
DEG Vietnam Loan
|
|
|
5.21
|
%
|
|
|
5,000
|
|
|
|
5.21
|
%
|
|
|
6,250
|
|
Total debt
|
|
|
|
|
|
|
48,294
|
|
|
|
|
|
|
|
192,434
|
|
Current maturities
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
Long-term debt, less current maturities
|
|
|
|
|
|
$
|
45,794
|
|
|
|
|
|
|
$
|
189,934
|
|
13
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Credit Agreement
On June 27, 2019, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent, which includes a revolving credit note (“U.S. Revolving Note”). The Credit Agreement has a maximum borrowing capacity of $475,000 and matures on June 27, 2024. The Credit Agreement also provides $15,000 availability for the issuance of letters of credit and a maximum of $40,000 for swing line borrowing. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the Credit Agreement. The Company had no outstanding letters of credit issued under the Credit Agreement as of June 30, 2021 and December 31, 2020.
The U.S. borrowers and guarantors participating in the Credit Agreement also entered into a related amended and restated pledge and security agreement. The amended and restated pledge and 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 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 Credit Agreement are unconditionally guaranteed by certain of the Company’s subsidiaries. The Credit Agreement restricts, among other things, the amount of dividend payments the Company can make to shareholders.
The Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets, merge with other companies or enter into certain other transactions outside the ordinary course of business, and (ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio (based on consolidated EBITDA for the applicable trailing 12-month period as defined in the Credit Agreement) as of the end of any fiscal quarter. The Credit Agreement also contains customary events of default. As of June 30, 2021, the Company was in compliance with the terms of the Credit Agreement.
Under the Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate Loans”) or Eurocurrency rate (“Eurocurrency Rate Loans”), plus a margin (“Applicable Rate”). The rate for Base Rate Loans is equal to the highest of the Federal Funds Rate (0.08% at June 30, 2021) plus 0.50%, Bank of America’s prime rate (3.25% at June 30, 2021), or the Eurocurrency rate plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (0.10% at June 30, 2021). All loans denominated in a currency other than the U.S. Dollar must be Eurocurrency Rate Loans. Interest is payable at least quarterly.
The Applicable Rate varies based on the Consolidated Leverage Ratio reported by the Company. As long as the Company is not in default of the terms and conditions of the Credit Agreement, the lowest and highest possible Applicable Rate is 1.25% and 2.25%, respectively, for Eurocurrency Rate Loans and 0.25% and 1.25%, respectively, for Base Rate Loans.
In March 2020, the Company increased its borrowings under the Credit Agreement by $169,546 as a safeguard to increase its cash position and provide additional financial flexibility due to the COVID-19 pandemic. The proceeds were used for working capital and for other general corporate purposes permitted by the Credit Agreement. As of the end of the first quarter of 2021, the Company repaid the full drawdown of $169,546 from March 2020 under the Credit Agreement. As of June 30, 2021, $43,294 was outstanding under the Credit Agreement. Borrowing availability is subject to, among other things, the Company’s compliance with the minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio as of the end of any fiscal quarter. Based upon consolidated EBITDA for the trailing twelve months calculated for purposes of the Consolidated Leverage Ratio, $431,625 remained available as of June 30, 2021 for additional borrowings under the Credit Agreement subject to specified conditions that Gentherm currently satisfies.
DEG Vietnam Loan
The Company also has a fixed interest rate loan with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank. The fixed interest rate senior loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”). The DEG Vietnam Loan is subject to semi-annual principal payments that began November 2017 and will end May 2023. Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum 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. As of
14
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
June 30, 2021, the Company was in compliance with the terms of the DEG Vietnam Loan.
The scheduled principal maturities of our debt as of June 30, 2021 were as follows:
|
|
DEG
Vietnam
Note
|
|
|
U.S.
Revolving
Note
|
|
|
Total
|
|
2021
|
|
$
|
1,250
|
|
|
$
|
—
|
|
|
$
|
1,250
|
|
2022
|
|
|
2,500
|
|
|
|
—
|
|
|
|
2,500
|
|
2023
|
|
|
1,250
|
|
|
|
—
|
|
|
|
1,250
|
|
2024
|
|
|
—
|
|
|
|
43,294
|
|
|
|
43,294
|
|
Total
|
|
$
|
5,000
|
|
|
$
|
43,294
|
|
|
$
|
48,294
|
|
Note 7 – Commitments and Contingencies
The Company may be subject to various legal actions and claims in the ordinary course of its business, including those arising out of breach of contracts, product warranties, product liability, intellectual property rights, environmental matters, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its consolidated condensed results of operations or financial position. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
Product Liability and Warranty Matters
The Company accrues warranty obligations for products sold based on management estimates of future failure rates and current claim cost experience, with support from the sales, engineering, quality and legal functions. Using historical information available to the Company, including claims already filed by customers, the warranty accrual is adjusted quarterly to reflect management’s best estimate of future claims. The Company maintains liability insurance coverage at levels based on commercial norms and historical claims experience. The Company may experience material claims in the future and may incur significant costs to defend such claims.
The following is a reconciliation of the changes in accrued warranty costs:
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance at the beginning of the period
|
|
$
|
2,391
|
|
|
$
|
4,596
|
|
Warranty claims paid
|
|
|
(599
|
)
|
|
|
(1,624
|
)
|
Warranty expense for products shipped during the current period
|
|
|
1,043
|
|
|
|
842
|
|
Adjustments to warranty estimates from prior periods
|
|
|
(314
|
)
|
|
|
(942
|
)
|
Adjustments due to currency translation
|
|
|
(26
|
)
|
|
|
(20
|
)
|
Balance at the end of the period
|
|
$
|
2,495
|
|
|
$
|
2,852
|
|
Note 8 –Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. The Company’s diluted earnings per share give effect to all potential shares of 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.
15
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
The following table illustrates earnings per share and the weighted average shares outstanding used in calculating basic and diluted earnings per share:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
24,791
|
|
|
$
|
(10,322
|
)
|
|
$
|
57,700
|
|
|
$
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares of Common Stock outstanding
|
|
|
33,100,230
|
|
|
|
32,579,549
|
|
|
|
33,025,432
|
|
|
|
32,635,322
|
|
Dilutive effect of stock options, restricted stock awards and restricted stock units
|
|
|
443,978
|
|
|
|
—
|
|
|
|
443,417
|
|
|
|
233,392
|
|
Diluted weighted average shares of Common Stock outstanding
|
|
|
33,544,208
|
|
|
|
32,579,549
|
|
|
|
33,468,849
|
|
|
|
32,868,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.75
|
|
|
$
|
(0.32
|
)
|
|
$
|
1.75
|
|
|
$
|
0.05
|
|
Diluted earnings per share
|
|
$
|
0.74
|
|
|
$
|
(0.32
|
)
|
|
$
|
1.72
|
|
|
$
|
0.05
|
|
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Anti-dilutive securities share impact
|
|
|
—
|
|
|
|
894,520
|
|
|
|
—
|
|
|
|
346,596
|
|
Note 9 – Financial Instruments
Derivative Financial Instruments
The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and commodity price fluctuations. Market risks for changes in interest rates relate primarily to its debt obligations under the 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 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 the Company hedges its exposure to foreign currency exchange risks is fifteen months. The Company had foreign currency derivative contracts with a notional value of $20,078 and $13,299 outstanding as of June 30, 2021 and December 31, 2020, respectively.
The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s 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 condensed balance sheets. When the underlying hedge transaction is realized, the gain or loss included in Accumulated other comprehensive loss is recorded in earnings in the consolidated condensed statements of income (loss) on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency hedging instruments, if any, to Foreign currency gain (loss) in the consolidated condensed statements of income (loss).
16
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounting 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 June 30, 2021 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
|
|
Other current assets
|
|
$
|
814
|
|
|
Other current liabilities
|
|
$
|
(35
|
)
|
|
$
|
779
|
|
Information related to the recurring fair value measurement of derivative instruments in our consolidated condensed balance sheet as of December 31, 2020 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
|
|
Other current assets
|
|
$
|
1,513
|
|
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
1,513
|
|
Information relating to the effect of derivative instruments on our consolidated condensed statements of income (loss) and the consolidated condensed statements of comprehensive income (loss) is as follows:
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
Location
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Foreign currency derivatives
|
|
Cost of sales
|
|
$
|
529
|
|
|
$
|
(796
|
)
|
|
$
|
1,007
|
|
|
$
|
(718
|
)
|
|
|
Other comprehensive income (loss)
|
|
|
(62
|
)
|
|
|
1,458
|
|
|
|
(729
|
)
|
|
|
(3,337
|
)
|
|
|
Foreign currency gain (loss)
|
|
|
36
|
|
|
|
(58
|
)
|
|
|
160
|
|
|
|
(129
|
)
|
Total foreign currency derivatives
|
|
|
|
$
|
503
|
|
|
$
|
604
|
|
|
$
|
438
|
|
|
$
|
(4,184
|
)
|
The Company did not incur any hedge ineffectiveness during the six months ended June 30, 2021 and 2020.
Accounts Receivable Factoring
In June 2021, the Company entered into a receivable factoring arrangement that provides for aggregate purchases of up to $41,300 of specified customer accounts in North America. The receivable factoring arrangement results in true sales of the transferred receivables, which are excluded from amounts reported in the consolidated condensed balance sheets when the receivables are transferred in accordance with ASC 860, "Transfers and Servicing." There were no receivables transferred during the three months ended June 30, 2021.
Note 10 – Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on one or more of the following three valuation techniques:
Market: This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income: This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
17
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Cost: This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
The Company uses the following fair value hierarchy 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.
Items Measured at Fair Value on a Recurring Basis
Except for derivative instruments (see Note 9), pension plan assets and a corporate owned life insurance policy, the Company had no material financial assets and liabilities that were carried at fair value at June 30, 2021 and December 31, 2020. 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 Nonrecurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. As of June 30, 2021 and December 31, 2020, there were no 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 June 30, 2021, and December 31, 2020, the carrying values of the indebtedness under the Company’s Credit Agreement were not materially different than the estimated fair values because the interest rates on variable rate debt approximated rates currently available to the Company (see Note 6). Discount rates used to measure the fair value of the DEG Vietnam Loan are based on quoted swap rates. As of June 30, 2021, the carrying value of the DEG Vietnam Loan was $5,000 as compared to an estimated fair value of $5,062. As of December 31, 2020, the carrying value of the DEG Vietnam Loan was $6,250 as compared to an estimated fair value of $6,360.
Note 11 – Equity
In December 2016, the Board of Directors of Gentherm Incorporated (“Board of Directors”) authorized a three-year, $100,000 stock repurchase program (“Stock Repurchase Program”). In June 2018, the Board of Directors authorized an increase in the Stock Repurchase Program to $300,000, and an extension of the Stock Repurchase Program until December 2020. The Stock Repurchase Program had $74,226 of repurchase authorization remaining at expiration. On December 11, 2020, the Board of Directors authorized a new stock repurchase program (the “2020 Stock Repurchase Program”) to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150,000 of its issued and outstanding common stock over a three-year period, expiring December 15, 2023.
Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. Repurchases may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The Company did not make any repurchases under the 2020 Stock Repurchase Program during the six months ended June 30, 2021.
18
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Note 12 – Reclassifications Out of Accumulated Other Comprehensive Loss
Reclassification adjustments and other activities impacting Accumulated other comprehensive loss during the three and six months ended June 30, 2021 and 2020 were as follows:
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
Total
|
|
Balance at March 31, 2021
|
|
$
|
(3,451
|
)
|
|
$
|
(25,789
|
)
|
|
$
|
584
|
|
|
$
|
(28,656
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
4,531
|
|
|
|
364
|
|
|
|
4,895
|
|
Income tax effect of other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(79
|
)
|
|
|
(82
|
)
|
Amounts reclassified from accumulated other comprehensive loss into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(426
|
)
|
a
|
|
(426
|
)
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
93
|
|
|
|
93
|
|
Net current period other comprehensive income (loss)
|
|
|
—
|
|
|
|
4,528
|
|
|
|
(48
|
)
|
|
|
4,480
|
|
Balance at June 30, 2021
|
|
$
|
(3,451
|
)
|
|
$
|
(21,261
|
)
|
|
$
|
536
|
|
|
$
|
(24,176
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive loss were included in cost of sales.
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
Total
|
|
Balance at March 31, 2020
|
|
$
|
(3,371
|
)
|
|
$
|
(48,705
|
)
|
|
$
|
(2,855
|
)
|
|
$
|
(54,931
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
5,911
|
|
|
|
572
|
|
|
|
6,483
|
|
Income tax effect of other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
36
|
|
|
|
(125
|
)
|
|
|
(89
|
)
|
Amounts reclassified from accumulated other comprehensive loss into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
886
|
|
a
|
|
886
|
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(194
|
)
|
|
|
(194
|
)
|
Net current period other comprehensive income
|
|
|
—
|
|
|
|
5,947
|
|
|
|
1,139
|
|
|
|
7,086
|
|
Balance at June 30, 2020
|
|
$
|
(3,371
|
)
|
|
$
|
(42,758
|
)
|
|
$
|
(1,716
|
)
|
|
$
|
(47,845
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive loss were included in cost of sales.
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
(3,451
|
)
|
|
$
|
(12,637
|
)
|
|
$
|
1,106
|
|
|
$
|
(14,982
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
—
|
|
|
|
(8,341
|
)
|
|
|
206
|
|
|
|
(8,135
|
)
|
Income tax effect of other comprehensive (loss) income before reclassifications
|
|
|
—
|
|
|
|
(283
|
)
|
|
|
(45
|
)
|
|
|
(328
|
)
|
Amounts reclassified from accumulated other comprehensive loss into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(935
|
)
|
a
|
|
(935
|
)
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
204
|
|
|
|
204
|
|
Net current period other comprehensive loss
|
|
|
—
|
|
|
|
(8,624
|
)
|
|
|
(570
|
)
|
|
|
(9,194
|
)
|
Balance at June 30, 2021
|
|
$
|
(3,451
|
)
|
|
$
|
(21,261
|
)
|
|
$
|
536
|
|
|
$
|
(24,176
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive loss were included in cost of sales.
|
19
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
|
|
Defined
Benefit
Pension
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Foreign
Currency
Hedge
Derivatives
|
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
(3,371
|
)
|
|
$
|
(39,965
|
)
|
|
$
|
895
|
|
|
$
|
(42,441
|
)
|
Other comprehensive loss before reclassifications
|
|
|
—
|
|
|
|
(2,776
|
)
|
|
|
(3,598
|
)
|
|
|
(6,374
|
)
|
Income tax effect of other comprehensive loss before reclassifications
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
784
|
|
|
|
767
|
|
Amounts reclassified from accumulated other comprehensive loss into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
261
|
|
a
|
|
261
|
|
Income taxes reclassified into net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Net current period other comprehensive loss
|
|
|
—
|
|
|
|
(2,793
|
)
|
|
|
(2,611
|
)
|
|
|
(5,404
|
)
|
Balance at June 30, 2020
|
|
$
|
(3,371
|
)
|
|
$
|
(42,758
|
)
|
|
$
|
(1,716
|
)
|
|
$
|
(47,845
|
)
|
|
(a)
|
The amounts reclassified from accumulated other comprehensive loss were included in cost of sales.
|
The Company expects all of the existing gains and losses related to foreign currency hedge derivatives reported in Accumulated other comprehensive loss as of June 30, 2021 to be reclassified into earnings during the next twelve months. See Note 9 for additional information about derivative financial instruments and the effects from reclassification to net income.
Note 13 – 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 for which no tax benefit 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.
A summary of the provision for income taxes and the corresponding effective tax rate for the three and six months ended June 30, 2021 and 2020, is shown below:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Income tax expense
|
|
$
|
5,748
|
|
|
$
|
205
|
|
|
$
|
13,313
|
|
|
$
|
5,611
|
|
Earnings (loss) before income tax
|
|
$
|
30,539
|
|
|
$
|
(10,117
|
)
|
|
$
|
71,013
|
|
|
$
|
7,162
|
|
Effective tax rate
|
|
|
18.8
|
%
|
|
|
(2.0
|
)%
|
|
|
18.7
|
%
|
|
|
78.3
|
%
|
Income tax expense was $5,748 for the three months ended June 30, 2021 on earnings before income tax of $30,539 representing an effective tax rate of 18.8%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to certain favorable tax effects on equity vesting and the impact of income taxes on foreign earnings taxed at rates varying from the
20
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
U.S. statutory rate in the second quarter of 2021, partially offset by the international provisions of the U.S. tax reform such as global intangible low-tax income (“GILTI”).
Income tax expense was $205 for the three months ended June 30, 2020 on loss before income tax of $10,117 representing an effective tax rate of (2)%. The tax amount included the effect of the settlement and closure of multi-year international audits of $3,383. Adjusted for the audit impacts, the effective rate was 31.4%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the international provisions of the U.S. tax reform, such as GILTI, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.
Income tax expense was $13,313 for the six months ended June 30, 2021 on earnings before income tax of $71,013 representing an effective tax rate of 18.7%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to certain favorable tax effects on equity vesting, intercompany transactions in 2021 and the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, partially offset by the international provisions of the U.S. tax reform, such as GILTI.
Income tax expense was $5,611for the six months ended June 30, 2020 on earnings before income tax of $7,162 representing an effective tax rate of 78.3%. The tax amount included the effect of the settlement and closure of multi-year international tax audits of $3,383. Adjusted for the audit impacts, the effective tax rate 31.1%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the international provisions of the U.S. tax law, such as GILTI, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.
Note 14 – 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 comfort systems, automotive cable systems, battery performance solutions, and automotive electronic and software systems.
|
|
•
|
Medical – this segment represents the combined results from our Medical business.
|
|
•
|
Corporate – includes corporate costs, selling, general and administrative costs and acquisition transaction costs. This segment was renamed during fourth quarter of 2020 to better align with the costs allocated to this segment. It was previously named ‘Reconciling Items’.
|
In 2020, the Industrial reporting segment was renamed the Medical reporting segment to reflect the patient temperature management business as the focus and strategic direction of this segment. Also, during 2020, the advanced research and development costs not associated with the Medical segment were presented within the Automotive segment, as the advanced research and development organization now primarily supports the Automotive related development activities following the divestitures of GPT and CSZ-IC. For comparability to the prior year, we have moved the portion of advanced research and development costs to the Automotive segment that were focused on technologies related to automotive in both the Depreciation and amortization and Operating income (loss) lines in the table below.
21
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
The tables below present segment information about the reported product revenues, depreciation and amortization and operating income (loss) of the Company for three and six months ended June 30, 2021 and 2020.
Three Months Ended June 30,
|
|
Automotive
|
|
|
Medical
|
|
|
Corporate
|
|
|
Total
|
|
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
255,105
|
|
|
$
|
10,900
|
|
|
$
|
—
|
|
|
$
|
266,005
|
|
Depreciation and amortization
|
|
|
8,892
|
|
|
|
580
|
|
|
|
245
|
|
|
$
|
9,717
|
|
Operating income (loss)
|
|
|
43,544
|
|
|
|
113
|
|
|
|
(11,985
|
)
|
|
$
|
31,672
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
124,386
|
|
|
$
|
11,675
|
|
|
$
|
—
|
|
|
$
|
136,061
|
|
Depreciation and amortization
|
|
|
9,295
|
|
|
|
573
|
|
|
|
214
|
|
|
$
|
10,082
|
|
Operating income (loss)
|
|
|
(2,617
|
)
|
|
|
903
|
|
|
|
(8,183
|
)
|
|
$
|
(9,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Automotive
|
|
|
Medical
|
|
|
Corporate
|
|
|
Total
|
|
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
534,475
|
|
|
$
|
20,065
|
|
|
$
|
—
|
|
|
$
|
554,540
|
|
Depreciation and amortization
|
|
|
17,945
|
|
|
|
1,164
|
|
|
|
462
|
|
|
$
|
19,571
|
|
Operating income (loss)
|
|
|
96,660
|
|
|
|
(418
|
)
|
|
|
(23,821
|
)
|
|
$
|
72,421
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
340,858
|
|
|
$
|
23,816
|
|
|
$
|
—
|
|
|
$
|
364,674
|
|
Depreciation and amortization
|
|
|
18,787
|
|
|
|
1,178
|
|
|
|
523
|
|
|
$
|
20,488
|
|
Operating income (loss)
|
|
|
25,837
|
|
|
|
1,867
|
|
|
|
(18,900
|
)
|
|
$
|
8,804
|
|
Automotive and Medical segment product revenues by product category for the three and six months ended June 30, 2021 and 2020 were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Climate Control Seat (CCS)
|
|
$
|
98,229
|
|
|
$
|
49,879
|
|
|
$
|
207,402
|
|
|
$
|
132,407
|
|
Seat Heaters
|
|
|
69,864
|
|
|
|
33,342
|
|
|
|
146,585
|
|
|
|
97,874
|
|
Steering Wheel Heaters
|
|
|
26,697
|
|
|
|
7,980
|
|
|
|
55,561
|
|
|
|
27,215
|
|
Automotive Cables
|
|
|
22,940
|
|
|
|
9,833
|
|
|
|
47,221
|
|
|
|
31,973
|
|
Battery Performance Solutions (BPS)
|
|
|
17,577
|
|
|
|
6,653
|
|
|
|
35,337
|
|
|
|
17,862
|
|
Electronics
|
|
|
14,652
|
|
|
|
13,488
|
|
|
|
29,757
|
|
|
|
23,864
|
|
Other Automotive
|
|
|
5,146
|
|
|
|
3,211
|
|
|
|
12,612
|
|
|
|
9,663
|
|
Subtotal Automotive segment
|
|
|
255,105
|
|
|
|
124,386
|
|
|
|
534,475
|
|
|
|
340,858
|
|
Medical segment
|
|
|
10,900
|
|
|
|
11,675
|
|
|
|
20,065
|
|
|
|
23,816
|
|
Total Company
|
|
$
|
266,005
|
|
|
$
|
136,061
|
|
|
$
|
554,540
|
|
|
$
|
364,674
|
|
22
GENTHERM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)
Total product revenues information by geographic area for the three and six months ended June 30, 2021 and 2020 is as follows (based on shipment destination):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$
|
102,174
|
|
|
$
|
47,097
|
|
|
$
|
217,461
|
|
|
$
|
153,015
|
|
China
|
|
|
33,857
|
|
|
|
23,517
|
|
|
|
67,372
|
|
|
|
36,520
|
|
South Korea
|
|
|
25,516
|
|
|
|
20,385
|
|
|
|
50,156
|
|
|
|
36,802
|
|
Germany
|
|
|
16,350
|
|
|
|
9,761
|
|
|
|
35,530
|
|
|
|
26,591
|
|
Japan
|
|
|
17,633
|
|
|
|
9,349
|
|
|
|
35,553
|
|
|
|
25,486
|
|
Other
|
|
|
70,475
|
|
|
|
25,952
|
|
|
|
148,468
|
|
|
|
86,260
|
|
Total Non-U.S.
|
|
|
163,831
|
|
|
|
88,964
|
|
|
|
337,079
|
|
|
|
211,659
|
|
Total Company
|
|
$
|
266,005
|
|
|
$
|
136,061
|
|
|
$
|
554,540
|
|
|
$
|
364,674
|
|
23