UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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For the quarterly period ended
OR
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For the transition period from to .
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☒ |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
At April 25, 2024, there were
GENTHERM INCORPORATED
TABLE OF CONTENTS
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3 |
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Item 1. |
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3 |
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3 |
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4 |
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Consolidated Condensed Statements of Comprehensive (Loss) Income |
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5 |
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6 |
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Consolidated Condensed Statements of Changes in Shareholders’ Equity |
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7 |
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Notes to Unaudited Consolidated Condensed Financial Statements |
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8 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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23 |
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Item 3. |
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33 |
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Item 4. |
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35 |
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36 |
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Item 1. |
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36 |
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Item 1A. |
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36 |
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Item 2. |
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36 |
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Item 5. |
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36 |
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Item 6. |
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37 |
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38 |
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2
PART I. FINANCIA L INFORMATION
ITEM 1. FINANC IAL STATEMENTS
GENTHERM INCORPORATED
CONSOLIDATED CONDEN SED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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March 31, 2024 |
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December 31, 2023 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventory: |
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Raw materials |
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Work in process |
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Finished goods |
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Inventory, net |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Operating lease right-of-use assets |
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Deferred income tax assets |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
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$ |
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Current lease liabilities |
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Current maturities of long-term debt |
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Other current liabilities |
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Total current liabilities |
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Long-term debt, less current maturities |
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Non-current lease liabilities |
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Pension benefit obligation |
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Other non-current liabilities |
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Total liabilities |
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$ |
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$ |
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Shareholders’ equity: |
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Common Stock: |
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par value;
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Paid-in capital |
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— |
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— |
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Accumulated other comprehensive loss |
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(
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(
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Accumulated earnings |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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See accompanying notes to the consolidated condensed financial statements.
3
GENTHERM INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Product revenues |
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$ |
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$ |
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of sales |
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Gross margin |
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Operating expenses: |
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Net research and development expenses |
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Selling, general and administrative expenses |
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Restructuring expenses |
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Total operating expenses |
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Operating income |
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Interest expense, net |
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(
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Foreign currency gain (loss) |
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(
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Other income |
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Earnings before income tax |
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Income tax expense |
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Net income |
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$ |
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$ |
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Basic earnings per share |
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$ |
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$ |
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Diluted earnings per share |
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$ |
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$ |
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Weighted average number of shares – basic |
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Weighted average number of shares – diluted |
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See accompanying notes to the consolidated condensed financial statements.
4
GENTHERM INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Net income |
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$ |
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$ |
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Other comprehensive (loss) income: |
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Pension benefit obligations |
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Foreign currency translation adjustments |
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(
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Unrealized (loss) gain on foreign currency derivative securities, net of tax |
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(
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Other comprehensive (loss) income, net of tax |
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(
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Comprehensive (loss) income |
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$ |
(
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$ |
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See accompanying notes to the consolidated condensed financial statements.
5
GENTHERM INCORPORATED
CONSOLIDATED CONDENSED S TATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Operating Activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Deferred income taxes |
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(
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Stock based compensation |
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Loss on disposition of property and equipment |
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Provisions for inventory |
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Other |
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(
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(
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Changes in assets and liabilities: |
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Accounts receivable, net |
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(
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Inventory |
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(
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(
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Other assets |
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(
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Accounts payable |
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Other liabilities |
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(
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Net cash (used in) provided by operating activities |
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(
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Investing Activities: |
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Purchases of property and equipment |
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(
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Proceeds from the sale of property and equipment |
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Proceeds from deferred purchase price of factored receivables |
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Cost of technology investments |
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(
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— |
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Net cash used in investing activities |
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(
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(
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Financing Activities: |
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Borrowings on debt |
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— |
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Repayments of debt |
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(
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(
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Proceeds from the exercise of Common Stock options |
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Taxes withheld and paid on employees' share-based payment awards |
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(
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Cash paid for the repurchase of Common Stock |
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— |
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(
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Net cash used in financing activities |
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(
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(
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Foreign currency effect |
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(
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Net (decrease) increase in cash and cash equivalents |
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(
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for taxes |
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$ |
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$ |
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Cash paid for interest |
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Non-Cash Investing Activities: |
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Period-end balance of accounts payable for property and equipment |
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$ |
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$ |
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Deferred purchase price of receivables factored in the period |
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See accompanying notes to the consolidated condensed financial statements.
6
GENTHERM INCORPORATED
CONSOLIDA TED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Accumulated |
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Other |
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Common Stock |
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Paid-in |
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Comprehensive |
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Accumulated |
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Shares |
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Amount |
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Capital |
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Loss |
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Earnings |
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Total |
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Balance at December 31, 2023 |
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$ |
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$ |
— |
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$ |
(
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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(
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— |
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(
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Stock compensation, net |
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— |
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— |
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(
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Stock repurchase |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2024 |
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$ |
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$ |
— |
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$ |
(
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$ |
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$ |
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Accumulated |
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Other |
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Common Stock |
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Paid-in |
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Comprehensive |
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Accumulated |
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Shares |
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Amount |
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Capital |
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Loss |
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Earnings |
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Total |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Stock compensation, net |
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(
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(
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— |
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— |
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(
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Stock repurchase |
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(
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) |
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(
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— |
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— |
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— |
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(
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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See accompanying notes to the consolidated condensed financial statements.
7
Note 1 – Overview
Gentherm Incorporated, a Michigan corporation, and its consolidated subsidiaries (“Gentherm”, “we”, “us”, “our” or the “Company”) is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry and a leader in medical patient temperature management. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, fuel management valves and other valves for brake and engine systems, and other electronic devices. Our automotive products can be found on vehicles manufactured by nearly all the major original equipment manufacturers (“OEMs”) operating in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. Medical products include patient temperature management systems. Our medical products can be found in hospitals throughout the world, primarily in the U.S., China, Germany and Brazil. The Company is also developing a number of new technologies and products that will help enable improvements to existing products, improve health, wellness and patient outcomes and will lead to new product applications for existing and new and adjacent markets.
During the first half of 2023, the Company launched Fit-for-Growth 2.0 to execute as part of our long-term growth strategy. Fit-for-Growth 2.0 is expected to deliver significant cost reductions through sourcing excellence, value engineering, manufacturing productivity, manufacturing footprint optimization, product profitability and cost synergies from the 2022 acquisition of Alfmeier Präzision SE. Additionally, the program is intended to drive operating expense efficiency to leverage scale.
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, 2023. The operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods 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 third-party 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.
All amounts in these notes to the consolidated condensed financial statements are presented in thousands, except share and per share data.
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
8
Variable Interest Entities
The Company maintains an ownership interest in a VIE, Carrar Ltd. (“Carrar”). Carrar is a 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. In the first quarter of 2024, we recognized an increase in the fair value of our investment in Carrar of $
Revenue Recognition
The Company has no material contract assets or contract liabilities as of March 31, 2024.
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
Note 2 – New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board. New ASUs effective in 2023 were assessed and determined to be either not applicable or not expected to have a significant impact on the Company's consolidated condensed financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Segment Reporting
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures". ASU 2023-07 requires a public entity to disclose, on an annual and interim basis, significant segment expenses that are included within each reported measure of segment profit or loss and regularly reviewed by the chief operating decision maker ("CODM"), the title and position of the CODM, clarification regarding the CODM's use of multiple measures of a segment's profit or loss in assessing segment performance (this must include a measure that is consistent with the measurement principles under U.S. GAAP, but may also include additional measures of a segment's profit or loss), and a description of the composition of amounts within an "Other" segment line item. Further, ASU 2023-07 requires that all annual disclosures about a reportable segment's profit or loss and assets currently required by Topic 280 to be provided in interim periods. This update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. ASU 2023-07 should be adopted retrospectively to all periods presented in the financial statements and early adoption is permitted. We are currently in the process of determining the impact the implementation of ASU 2023-07 will have on the Company’s financial statement disclosures.
Income Taxes
In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures". ASU 2023-09 enhances income tax disclosures to further disaggregate the effective tax rate reconciliation and income taxes paid. This update is effective for fiscal years beginning after December 15, 2024. ASU 2023-09 should be adopted prospectively, but retrospective application is permitted. Further, early adoption is permitted. We are currently in the process of determining the impact the implementation of ASU 2023-09 will have on the Company’s financial statement disclosures.
9
Note 3 – Restructur ing
The Company continuously monitors market developments, industry trends and changing customer needs and in response, has taken and may continue to undertake restructuring actions, as necessary, to execute management’s strategy, streamline operations and optimize the Company’s cost structure. Restructuring actions may include the realignment of existing manufacturing footprint, facility closures, or similar actions, either in the normal course of business or pursuant to significant restructuring programs.
These actions may result in employees receiving voluntary or involuntary employee termination benefits, which are mainly statutory requirements or other contractual agreements. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination.
2023 Manufacturing Footprint Rationalization
On September 19, 2023, the Company committed to a restructuring plan (“2023 Plan”) to improve the Company’s manufacturing productivity and rationalize its footprint. Under this 2023 Plan, the Company is in the process of relocating certain existing manufacturing and related activities in its Greenville, South Carolina facility to a new facility in Monterrey, Mexico.
The Company expects to incur total costs of between $
During the three months ended March 31, 2024
, the Company recognized restructuring expense of $
The Company has recorded $
Other Restructuring Actions
The Company has undertaken several discrete restructuring actions in an effort to optimize its cost structure.
During the three months ended March 31, 2024
, the Company’s Automotive segment recognized $
During the three months ended March 31, 2024
, the Company’s Automotive segment recognized $
During the three months ended March 31, 2024
, the Company recognized $
The Company expects to incur less than $
During the three months ended March 31, 2023
, the Company recognized $
10
Restructuring Expenses By Reporting Segment
The following table summarizes restructuring expense for the three months ended March 31, 2024 and 2023 by reporting segment:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Automotive |
|
$ |
|
|
|
$ |
|
|
|
Medical |
|
|
|
|
|
|
— |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
Restructuring Liability
Restructuring liabilities are classified as Other current liabilities in the consolidated condensed balance sheets.
|
|
|
Employee Separation Costs |
|
|
Other Related Costs |
|
|
Total |
|
|||
|
Balance at December 31, 2023 |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Additions, charged to restructuring expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Non-cash utilization |
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Currency translation |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Balance at March 31, 2024 |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
Note 4 – Details of Certain Balance Sheet Components
|
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
|
Other current assets: |
|
|
|
|
|
|
||
|
Billable tooling |
|
$ |
|
|
|
$ |
|
|
|
Income tax and other tax receivable |
|
|
|
|
|
|
|
|
|
Notes receivable |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
|
Short-term derivative financial instruments |
|
|
|
|
|
|
|
|
|
Receivables due from factor |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
|
|
|
$ |
|
|
|
Other current liabilities: |
|
|
|
|
|
|
||
|
Accrued employee liabilities |
|
$ |
|
|
|
$ |
|
|
|
Liabilities from discounts and rebates |
|
|
|
|
|
|
|
|
|
Income tax and other taxes payable |
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
Accrued warranty |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
|
|
|
$ |
|
|
Note 5 – Goodwill and Other Intangibles
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, for the three months ended March 31, 2024 was as follows:
|
|
|
Automotive |
|
|
Medical |
|
|
Total |
|
|||
|
Balance as of December 31, 2023 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Currency translation and other |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Balance as of March 31, 2024 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
11
The Company’s cumulative goodwill impairment expense since inception was $
Other Intangible Assets
Other intangible assets and accumulated amortization balances as of March 31, 2024 and December 31, 2023 were as follows:
|
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||||||||||||||
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|||||||
|
Definite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Customer relationships |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Technology |
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Product development costs |
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Software development |
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Tradenames |
|
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
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 would 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. During the three months ended March 31, 2024
, we recorded a non-cash impairment charge of $
Note 6 – Debt
The following table summarizes the Company’s debt as of March 31, 2024 and December 31, 2023:
|
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
|
Interest
|
|
|
Principal
|
|
|
Interest
|
|
|
Principal
|
|
||||
|
Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revolving Credit Facility (U.S. Dollar denominations) |
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
Other loans |
|
|
— |
|
|
|
— |
|
|
|
|
% |
|
|
|
|
|
Finance leases |
|
|
|
% |
|
|
|
|
|
|
|
% |
|
|
|
|
|
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Current maturities |
|
|
|
|
|
(
|
) |
|
|
|
|
|
(
|
) |
||
|
Long-term debt, less current maturities |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||
Credit Agreement
On June 10, 2022, the Company entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a consortium of lenders and Bank of America, N.A., as administrative agent (the “Agent”).
The Second Amended and Restated Credit Agreement provides for a $
Subject to specified conditions, Gentherm can increase the Revolving Credit Facility or incur secured term loans in an aggregate amount of up to $
12
The U.S. borrowers and guarantors participating in the Second Amended and Restated Credit Agreement also entered into a Second Amended and Restated Pledge and Security Agreement (the “Second Amended and Restated Security Agreement”). The Second Amended and Restated Security Agreement grants a security interest to the Agent 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 Second Amended and Restated Security Agreement, including the stock and membership interests of specified subsidiaries (limited to
The Second Amended and Restated 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 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 a maximum Consolidated Net Leverage Ratio (based on consolidated EBITDA for the applicable trailing four fiscal quarters) as of the end of any fiscal quarter. The Second Amended and Restated Credit Agreement also contains customary events of default. As of March 31, 2024, the Company was in compliance, in all material respects, with the terms of the Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement additionally contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the Revolving Credit Facility may be accelerated and may become immediately due and payable.
Under the Second Amended and Restated Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate Loans”) or Term SOFR rate (“Term SOFR Rate Loans”), plus a margin (“Applicable Rate”). The rate for Base Rate Loans is equal to the highest of the Federal Funds Rate plus
The Applicable Rate varies based on the Consolidated Net Leverage Ratio reported by the Company. As long as the Company is not in default of the terms and conditions of the Second Amended and Restated Credit Agreement, the lowest and highest possible Applicable Rate is
Borrowing availability is subject to, among other things, the Company’s compliance with the minimum Consolidated Interest Coverage Ratio and the maximum Consolidated Net Leverage Ratio as of the end of any fiscal quarter. Based upon consolidated EBITDA for the trailing four fiscal quarters calculated for purposes of the Consolidated Net Leverage Ratio,
$
In connection with the Second Amended and Restated Credit Agreement, the Company incurred debt issuance costs of $
13
The scheduled principal maturities of our debt as of March 31, 2024 were as follows:
|
|
|
U.S.
|
|
|
Other Debt |
|
|
Total |
|
|||
|
2024 |
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
2025 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
2026 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
2027 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
2028 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
2029 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 7 – Commitments and Contingencies
Legal and other contingencies
The Company is subject to various legal actions and claims in the ordinary course of its business, which may include those arising out of breach of contracts, 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 outstanding as of March 31, 2024 will not have a material adverse effect on its results of operations or financial position. Product liability and warranty reserves are recorded separately from legal reserves.
Product Liability and Warranty Matters
Our products subject us to warranty claims and, from time to time product liability claims, based on the Company’s products alleged failure to perform as expected or resulting in alleged bodily injury or property damage. If any of our products are or are alleged to be defective, we may be required to participate in a recall or other corrective action involving such products. The Company maintains liability insurance coverage at levels based on commercial norms and historical claims experience. The Company can provide no assurances that it will not experience material claims or liabilities in the future or that it will not incur significant costs to defend such claims.
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 any claims filed by customers, the warranty accrual is adjusted quarterly to reflect management’s estimate of future claims.
On February 14, 2024, the National Highway Traffic Safety Administration announced that Volkswagen Group of America, Inc. (“VW”) is recalling
14
The following is a reconciliation of the changes in accrued warranty costs:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Balance at the beginning of the period |
|
$ |
|
|
|
$ |
|
|
|
Warranty claims paid |
|
|
(
|
) |
|
|
(
|
) |
|
Warranty expense for products shipped during the current period |
|
|
|
|
|
|
|
|
|
Adjustments to warranty estimates from prior periods (a) |
|
|
|
|
|
|
(
|
) |
|
Adjustments due to currency translation |
|
|
(
|
) |
|
|
|
|
|
Balance at the end of the period |
|
$ |
|
|
|
$ |
|
|
Note 8 – Supplier Finance Program
The Company is party to a supplier finance program with a third-party service provider (“Service Provider”), pursuant to which the Company has offered the opportunity to participate to certain of the Company's suppliers. Although the program generally provides suppliers with a lower cost of capital than they could obtain individually due to the Company’s negotiated terms, the Company has no economic interest in a supplier’s participation and the Company has not pledged any assets to the Service Provider under this program.
Under this program, the Company and supplier initially agree on the contractual payment terms for the goods to be procured for the Company in the ordinary course. A supplier’s participation in this program is voluntary and does not impact its contractual payment terms with the Company, including the payment amount and timing of when payments are due. A participating supplier has the sole discretion to determine whether to sell one or more invoices, if any, to the Service Provider in exchange for payment by the Service Provider on an earlier date than provided for in the contract with the Company. Amounts due to participating suppliers are included in Accounts payable in the consolidated condensed balance sheets until the Company makes payment to the Service Provider, even though the payment of such amount will be made to the supplier at an earlier date by the Service Provider. As of March 31, 2024
, the Company had outstanding payment obligations to participating suppliers of $
Note 9 – Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares of the Company’s Common Stock, no par value (“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.
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 March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Basic weighted average shares of Common Stock outstanding |
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, restricted stock awards and restricted stock units |
|
|
|
|
|
|
|
|
|
Diluted weighted average shares of Common Stock outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
$ |
|
|
|
$ |
|
|
|
Diluted earnings per share |
|
$ |
|
|
|
$ |
|
|
15
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 price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to its debt obligations under the Second Amended and Restated 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, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Czech Koruna 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 decision of whether and when to execute derivative financial instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not enter into derivative financial instruments for speculative or trading purposes. Some derivative contracts do not qualify for hedge accounting; for other derivative contracts, we elect to not apply hedge accounting.
The Company’s designated 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 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 designated foreign currency instruments, if any, to Cost of sales in the consolidated condensed statements of income. Cash flows associated with derivatives are reported in Net cash (used in) provided by operating activities in the consolidated condensed statements of cash flows.
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.
The Company is party to a floating-to-fixed interest rate swap agreement that is an undesignated hedge of the Company’s exposure to interest payment fluctuations on a portion of the Revolving Credit Facility borrowings. The periodic changes in fair value is recognized in Interest expense, net.
Information related to the recurring fair value measurement of derivative instruments in the consolidated condensed balance sheet as of March 31, 2024 is as follows:
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
||||||||
|
|
|
Fair Value
|
|
Notional Amount |
|
|
Balance Sheet
|
|
Fair
|
|
|
Balance Sheet
|
|
Fair
|
|
|
Net Assets/ (Liabilities) |
|
||||
|
Derivatives Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Foreign currency derivatives |
|
Level 2 |
|
$ |
|
|
|
Other current assets |
|
$ |
|
|
|
Other current liabilities |
|
$ |
— |
|
|
$ |
|
|
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest rate contracts |
|
Level 2 |
|
$ |
|
|
|
Other current assets |
|
$ |
|
|
|
Other current liabilities |
|
$ |
— |
|
|
$ |
|
|
16
Information related to the recurring fair value measurement of derivative instruments in the consolidated condensed balance sheet as of December 31, 2023 is as follows:
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
||||||||
|
|
|
Fair Value
|
|
Notional Amount |
|
|
Balance Sheet
|
|
Fair
|
|
|
Balance Sheet
|
|
Fair
|
|
|
Net Assets/ (Liabilities) |
|
||||
|
Derivatives Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Foreign currency derivatives |
|
Level 2 |
|
$ |
|
|
|
Other current assets |
|
$ |
|
|
|
Other current liabilities |
|
$ |
— |
|
|
$ |
|
|
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest rate contracts |
|
Level 2 |
|
$ |
|
|
|
Other current assets |
|
$ |
|
|
|
Other current liabilities |
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
Location (Income/(Loss)) |
|
2024 |
|
|
2023 |
|
||
|
Derivatives Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
||
|
Foreign currency derivatives |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
||
|
Interest rate contracts |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
The Company did
Accounts Receivable Factoring
The Company sells certain customer trade receivables on a non-recourse basis under factoring arrangements with designated financial institutions. The sale of receivables under these agreements is considered an off-balance sheet arrangement to the Company and is accounted for as a true sale and excluded from Accounts receivable in the consolidated condensed balance sheets. These factoring arrangements include a deferred purchase price component in which a portion of the purchase price for the receivable is paid by the financial institution in cash upon sale and the remaining portion is recorded as a deferred purchase price receivable and paid at a later date. Deferred purchase price receivables are recorded in Other current assets within the consolidated condensed balance sheets. Cash proceeds received upon the sale of the receivables are included in Net cash (used in) provided by operating activities and the cash proceeds received on the deferred purchase price receivables are included in Net cash used in investing activities. All factoring arrangements incorporate customary representations, including representations as to validity of amounts due, completeness of performance obligations and absence of commercial disputes.
Receivables factored and availability under receivables factoring agreements balances as of March 31, 2024 and December 31, 2023 were as follows:
|
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
|
Receivables factored and outstanding |
|
$ |
|
|
|
$ |
|
|
|
Amount available under the credit limit |
|
|
|
|
|
|
|
|
|
Collective factoring limit |
|
$ |
|
|
|
$ |
|
|
Trade receivables sold and factoring fees incurred during the three months ended March 31, 2024 and 2023 were as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Trade receivables sold |
|
$ |
|
|
|
$ |
|
|
|
Factoring fees incurred |
|
|
|
|
|
|
|
|
17
Note 11 – 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.
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 10) and pension plan assets, the Company had
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. During the year ended December 31, 2023, the Company utilized a third-party to assist in the Level 3 fair value estimates of other intangible assets for acquisitions and goodwill of the Medical reporting unit. The estimated fair values of these assets were based on third-party valuations and management’s estimates, generally utilizing income and market approaches. As of March 31, 2024, and December 31, 2023
, there were
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 March 31, 2024, and December 31, 2023 , the carrying values of the indebtedness under the Company’s Second Amended and Restated 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).
Note 12 – Equity
In December 2020, the Board of Directors of Gentherm Incorporated (“Board of Directors”) authorized a stock repurchase program (the “2020 Stock Repurchase Program”). Under the 2020 Stock Repurchase Program, the Company was authorized to repurchase up to $
18
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. During the three months ended March 31, 2024, the Company did not make any repurchases under the 2020 Stock Repurchase Program
. The 2020 Stock Repurchase Program had $
On November 1, 2023, following the above-noted extension, the Company entered into a Confirmation of Issuer Forward Repurchase Transaction agreement (the “ASR Agreement”) with Bank of America, N.A. (“Bank of America”) that provides for the Company to purchase shares of Common Stock in an aggregate amount of $
Under the terms of the ASR Agreement, on November 2, 2023, the Company paid $
The ASR Agreement contains provisions customary for agreements of this type, including the mechanisms to determine the number of shares of Common Stock that will be delivered at settlement, the required timing of delivery of the shares of Common Stock, the circumstances under which Bank of America is permitted to make adjustments to the transaction terms, the circumstances under which the ASR Agreement may be accelerated, extended or terminated early by Bank of America and specified representations and warranties of each party to the other party.
Note 13 – Reclassifications Out of Accumulated Other Comprehensive Loss
Reclassification adjustments and other activities impacting Accumulated other comprehensive loss during the three months ended March 31, 2024 and 2023 were as follows:
|
|
|
Defined
|
|
|
Foreign
|
|
|
Foreign
|
|
|
Total |
|
||||
|
Balance at December 31, 2023 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
Other comprehensive (loss) income before reclassifications |
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
Income tax effect of other comprehensive (loss) income before reclassifications |
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Amounts reclassified from accumulated other comprehensive loss into net income |
|
|
|
|
|
|
— |
|
|
|
(
|
) |
a |
|
(
|
) |
|
Income taxes reclassified into net income |
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss) |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Balance at March 31, 2024 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
19
|
|
|
Defined
|
|
|
Foreign
|
|
|
Foreign
|
|
|
Total |
|
||||
|
Balance at December 31, 2022 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
Other comprehensive income before reclassifications |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive income before reclassifications |
|
|
— |
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
Amounts reclassified from accumulated other comprehensive loss into net income |
|
|
|
|
|
|
— |
|
|
|
(
|
) |
a |
|
(
|
) |
|
Income taxes reclassified into net income |
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2023 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
The Company expects that substantially all of the existing gains and losses related to foreign currency derivatives reported in Accumulated other comprehensive loss as of March 31, 2024 to be reclassified into earnings during the next twelve months. See Note 10 for additional information about derivative financial instruments and the effects from reclassification to Net income.
Note 14 – Income Taxes
At the end of each interim period, the Company makes an 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 months ended March 31, 2024 and 2023, is shown below:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Income tax expense |
|
$ |
|
|
|
$ |
|
|
|
Earnings before income tax |
|
$ |
|
|
|
$ |
|
|
|
Effective tax rate |
|
|
|
% |
|
|
|
% |
Income tax expense was
$
20
Income tax expense was
$
Note 15 – Segment Reporting
Segment information is used by management for making operating decisions for the Company. Management evaluates the performance of the Company’s segments based primarily on operating income or loss.
The Company’s reportable segments are as follows:
The Corporate category includes unallocated costs related to our corporate headquarter activities, including selling, general and administrative costs and acquisition transaction costs, which do not meet the requirements for being classified as an operating segment.
The tables below present segment information about the reported Product revenues, Depreciation and amortization and Operating income (loss) of the Company for the three months ended March 31, 2024 and 2023.
|
Three Months Ended March 31, |
|
Automotive |
|
|
Medical |
|
|
Corporate |
|
|
Total |
|
||||
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
$ |
|
|
Automotive and Medical segment Product revenues by product category for the three months ended March 31, 2024 and 2023 were as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Climate Control Seat |
|
$ |
|
|
|
$ |
|
|
|
Seat Heaters |
|
|
|
|
|
|
|
|
|
Steering Wheel Heaters |
|
|
|
|
|
|
|
|
|
Lumbar and Massage Comfort Solutions |
|
|
|
|
|
|
|
|
|
Valve Systems |
|
|
|
|
|
|
|
|
|
Automotive Cables |
|
|
|
|
|
|
|
|
|
Battery Performance Solutions |
|
|
|
|
|
|
|
|
|
Electronics |
|
|
|
|
|
|
|
|
|
Other Automotive |
|
|
|
|
|
|
|
|
|
Subtotal Automotive segment |
|
|
|
|
|
|
|
|
|
Medical segment |
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
|
|
|
$ |
|
|
21
Total information by geographic area for the three months ended March 31, 2024 and 2023 is as follows (based on shipment destination):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
United States |
|
$ |
|
|
|
$ |
|
|
|
China |
|
|
|
|
|
|
|
|
|
South Korea |
|
|
|
|
|
|
|
|
|
Germany |
|
|
|
|
|
|
|
|
|
Czech Republic |
|
|
|
|
|
|
|
|
|
Romania |
|
|
|
|
|
|
|
|
|
Slovakia |
|
|
|
|
|
|
|
|
|
Japan |
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total Non-U.S. |
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
|
|
|
$ |
|
|
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as: the expected light vehicle production in the Company’s key markets; the integration of acquisitions; the impact of macroeconomic and geopolitical conditions; the components of and our ability to execute our updated strategic plan and 2023 manufacturing footprint rationalization restructuring plan; long-term consumer and technological trends in the automotive industry and our related market opportunity for our existing and new products and technologies; the competitive landscape; the impact of global tax reform legislation; the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs; and our ability to finance sufficient working capital. Reference is made in particular to forward-looking statements included in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Such statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar terms, variations of such terms or the negative of such terms. The forward-looking statements included in this Report are made as of the date hereof or as of the date specified herein and are based on management’s reasonable expectations and beliefs. In making these statements we rely on assumptions and analysis based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we consider appropriate under the circumstances. Such statements are subject to a number of assumptions, risks, uncertainties and other factors, which are set forth in “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2023 and subsequent reports filed with or furnished to the Securities and Exchange Commission, and which could cause actual results to differ materially from that described in the forward-looking statements. In addition, with reasonable frequency, we have entered into business combinations, acquisitions, divestitures, strategic investments and other significant transactions. Such forward-looking statements do not include the potential impact of any such transactions that may be completed after the date hereof, each of which may present material risks to the Company’s future business and financial results. Except as required by law, we expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the consolidated condensed financial statements and related notes thereto included elsewhere in this Report and our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Overview
Gentherm Incorporated is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry and a leader in medical patient temperature management. Automotive products include variable temperature Climate Control Seats® (“CCS”), heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, fuel management valves and other valves for brake and engine systems, and other electronic devices. Our automotive products can be found on vehicles manufactured by nearly all the major original equipment manufacturers ("OEMs") operating in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. Medical products include patient temperature management systems. Our medical products can be found in hospitals throughout the world, primarily in the U.S., China, Germany and Brazil. The Company is also developing a number of new technologies and products that will help enable improvements to existing products, improve health, wellness and patient outcomes and will lead to new product applications for existing and new and adjacent markets.
Our Automotive sales are driven by the number of vehicles produced by the OEMs, which is ultimately dependent on consumer demand for automotive vehicles, our product content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. Historically, new vehicle demand and product content (i.e. vehicle features) have been driven by macroeconomic and other factors, such as interest rates, automotive manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Vehicle content has also been driven by trends in consumer preferences, such as preferences for smart devices and features, personalized user experience, and comfort, health and wellness. Economic volatility or weakness in North America, Europe or Asia, as well as global geopolitical factors, have had and could result in a significant reduction in automotive sales and production by our customers, which have had and would have an adverse effect on our business, results of operations and financial condition. We believe our diversified OEM customer base and
23
geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns and benefit from industry upturns in the ordinary course. However, shifts in the mix of global automotive production to higher cost regions or to vehicles that contain less of our product content as well as continuing production challenges and inflationary pressures have adversely impacted our profitability and may continue to do so. In addition, we have been and may in the future be adversely impacted by volatility or weakness in markets for hybrid or electric vehicles specifically. We believe our products offer certain advantages for hybrid and electric vehicles, including improved energy efficiency, and position us well to withstand changes in the volume mix between vehicles driven by internal combustion engines and hybrid and other electric vehicles. We believe our industry is increasingly progressing towards a focus on human comfort and health and wellness, which is evidenced by increasing adoption rates for comfort products. We believe that products we are developing, such as ClimateSense®, WellSense™, and our acquisition of Alfmeier’s pneumatic comfort solutions, position us well to address trends in consumer preferences such as personalized user experience, comfort, health and wellness. Gentherm is an independent partner that can cooperate with any combination of the vehicle OEMs and seat manufacturers globally, including those that are vertically integrated, to create innovative and unique configurations that adapt to industry trends.
Recent Trends
Global Conditions
Since 2020, the global economy has experienced significant volatility and supply chain disruption, which has had a widespread adverse effect on the global automotive industry. These macroeconomic conditions have resulted in fluctuating demand and production disruptions, facility closures, labor shortages and work stoppages. In addition, global inflation has increased significantly beginning in 2021. Although supply chain conditions have steadily improved and certain inflationary pressures have moderated, rising costs of materials, labor, equipment and other inputs used to manufacture and sell our products, including freight and logistics costs, have impacted, and may in the future impact, operating costs and operating results. We continue to employ measures to mitigate the impact of cost increases through identification of sourcing and manufacturing efficiencies where possible. However, we have been unable to fully mitigate or pass through the increases in our operating costs, which may continue in the future.
We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain international operations. Therefore, fluctuations in foreign currency exchange rates can create volatility in the results of operations and may adversely affect our financial condition.
We have a global manufacturing footprint that enables us to serve our customers in the regions they operate and shift production between regions to remain competitive. In recent years there have been various ongoing geopolitical conflicts, such as the current conflicts between Russia and Ukraine, and in the Middle East, heightened tensions in the Red Sea, and potential tensions in the South China Sea. These conflicts have interrupted ocean freight shipping and if prolonged or intensified, could have a substantial adverse effect on our financial results. We, like other manufacturers, have a high proportion of fixed structural costs, and therefore relatively small changes in industry vehicle production can have a substantial effect on our financial results. If industry vehicle sales were to decline to levels significantly below our planning assumption, the decline could have a substantial adverse effect on our financial condition, results of operations, and cash flow.
On December 15, 2022, the European Union (“EU”) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development Pillar Two Framework. The effective dates for different aspects of the directive are January 1, 2024, and January 1, 2025. The aspects of the directive that were effective as of January 1, 2024 did not have a material impact on the Company’s financial statements. Further, the Company does not expect the remaining aspects to have a material impact to the Company’s financial statements. The Company will continue to evaluate the potential impact on future periods of these tax regulations.
Fit-for-Growth 2.0
During the first half of 2023, the Company launched Fit-for-Growth 2.0 to execute as part of our long-term growth strategy. Fit-for-Growth 2.0 is expected to deliver significant cost reductions through sourcing excellence, value engineering, manufacturing productivity, manufacturing footprint optimization, product profitability and cost synergies from the Alfmeier acquisition. Additionally, the program is intended to drive operating expense efficiency to leverage scale.
24
2023 Manufacturing Footprint Rationalization
On September 19, 2023, the Company committed to a restructuring plan (“2023 Plan”) to improve the Company’s manufacturing productivity and rationalize its footprint. Under this 2023 Plan, the Company will relocate certain existing manufacturing and related activities in its Greenville, South Carolina facility to a new facility in Monterrey, Mexico.
The Company expects to incur total costs of between $12 million and $16 million, of which between $11 million and $15 million are expected to be cash expenditures. The actions under the 2023 Plan are expected to be substantially completed by the end of 2025 and generate annual benefits of between $5 million and $6 million. The actual timing, costs and savings of the 2023 Plan may differ materially from the Company’s current expectations and estimates. During the three months ended March 31, 2024, the Company recognized restructuring expense of $0.7 million for employee separation costs and $0.3 million for other costs.
See Note 3, “Restructuring,” to the notes to the consolidated condensed financial statements included in this Report for additional information related to this plan.
Light Vehicle Production Volumes
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm S&P Global Mobility (April 2024 release), global light vehicle production in the three months ended March 31, 2024 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to the three months ended March 31, 2023, are shown below (in millions of units):
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
|
North America |
|
|
3.9 |
|
|
|
3.9 |
|
|
|
1.4 |
% |
|
Europe |
|
|
4.5 |
|
|
|
4.6 |
|
|
|
(2.5 |
)% |
|
Greater China |
|
|
6.2 |
|
|
|
5.9 |
|
|
|
4.4 |
% |
|
Japan / South Korea |
|
|
2.9 |
|
|
|
3.2 |
|
|
|
(9.7 |
)% |
|
Total light vehicle production volume in key markets |
|
|
17.5 |
|
|
|
17.6 |
|
|
|
(0.6 |
)% |
The S&P Global Mobility (April 2024 release) forecasted light vehicle production volume in the Company’s key markets for full year 2024 to remain flat at 75.4 million units from full year 2023 light vehicle production volumes. Forecasted light vehicle production volumes are a component of the data we use in forecasting future business. However, these forecasts generally are updated monthly, and future forecasts have been and may continue to be significantly different from period to period due to changes in macroeconomic and geopolitical conditions or matters specific to the automotive industry. Further, due to differences in regional product mix at our manufacturing facilities, as well as material production schedules from our customers for our products on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of S&P Global Mobility or other third-party sources.
Automotive New Business Awards
We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During the first quarter of 2024, we secured new automotive business awards totaling $530 million. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by our customers to Gentherm in the applicable period, with the value based on the price and volume projections received from each customer as of the award date. Although automotive new business awards are not firm customer orders, we believe that automotive new business awards are an indicator of future revenue. Automotive new business awards are not projections of revenue or future business as of March 31, 2024, the date of this Report or any other date. Customer projections regularly change over time, and we do not update our calculation of any automotive new business award after the date initially communicated. Automotive new business awards in the first quarter 2024 also do not reflect, in particular, the impact of macroeconomic and geopolitical challenges on future business. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties that are included in this Report or incorporated by reference in “Forward-Looking Statements” above.
25
Stock Repurchase Program
In December 2020, the Board of Directors authorized a stock repurchase program (the “2020 Stock Repurchase Program”). Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150.0 million of its issued and outstanding Common Stock, no par value (“Common Stock”) over a three-year period, expiring December 15, 2023. On November 1, 2023, the Board of Directors extended the maturity date of the program from December 15, 2023 to June 30, 2024. Repurchases under the 2020 Stock Repurchase Program 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. During the three months ended March 31, 2024, the Company did not make any repurchases under the 2020 Stock Repurchase Program. The 2020 Stock Repurchase Program had $37.5 million repurchase authorization remaining as of March 31, 2024.
On November 1, 2023, following the above-noted extension, the Company entered into a Confirmation of Issuer Forward Repurchase Transaction agreement (the “ASR Agreement”) with Bank of America, N.A. (“Bank of America”) that provides for the Company to purchase shares of Common Stock in an aggregate amount of $60 million (“ASR Repurchase Amount”) under the 2020 Stock Repurchase Program. Under the terms of the ASR Agreement, on November 2, 2023, the Company paid $60 million to Bank of America for an initial purchase of approximately 1.22 million shares of Common Stock, representing 80% of ASR Repurchase Amount. The final settlement date is scheduled to occur in the second quarter of 2024. As of the final settlement date, Bank of America may be required to deliver additional shares of Common Stock to the Company or the Company may be required to deliver shares of Common Stock to Bank America, such that the Company’s repurchase of Common Stock under the ASR Agreement in aggregate will equal the ASR Repurchase Amount (based on the average of the daily volume-weighted average prices of the Common Stock during the term of the ASR Agreement, less a specified discount). There is no cash requirement as of the final settlement date. For further information regarding the ASR Agreement, see Note 12, "Equity," to the notes to the consolidated condensed financial statements included in this Report.
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
See Note 15, “Segment Reporting,” to the consolidated condensed financial statements included in this Report for a description of our reportable segments as well as their proportional contribution to the Company’s reported product revenues and operating income. The financial information used by our chief operating decision maker to assess operating performance and allocate resources is based on these reportable segments.
Consolidated Results of Operations
The results of operations for the three months ended March 31, 2024 and 2023, in thousands, were as follows:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Product revenues |
|
$ |
356,015 |
|
|
$ |
363,625 |
|
|
$ |
(7,610 |
) |
|
Cost of sales |
|
|
267,262 |
|
|
|
282,495 |
|
|
|
15,233 |
|
|
Gross margin |
|
|
88,753 |
|
|
|
81,130 |
|
|
|
7,623 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|||
|
Net research and development expenses |
|
|
22,745 |
|
|
|
25,145 |
|
|
|
2,400 |
|
|
Selling, general and administrative expenses |
|
|
40,721 |
|
|
|
37,042 |
|
|
|
(3,679 |
) |
|
Restructuring expenses |
|
|
7,238 |
|
|
|
1,269 |
|
|
|
(5,969 |
) |
|
Total operating expenses |
|
|
70,704 |
|
|
|
63,456 |
|
|
|
(7,248 |
) |
|
Operating income |
|
|
18,049 |
|
|
|
17,674 |
|
|
|
375 |
|
|
Interest expense, net |
|
|
(3,244 |
) |
|
|
(4,144 |
) |
|
|
900 |
|
|
Foreign currency gain (loss) |
|
|
2,549 |
|
|
|
(2,069 |
) |
|
|
4,618 |
|
|
Other income |
|
|
973 |
|
|
|
230 |
|
|
|
743 |
|
|
Earnings before income tax |
|
|
18,327 |
|
|
|
11,691 |
|
|
|
6,636 |
|
|
Income tax expense |
|
|
3,542 |
|
|
|
3,728 |
|
|
|
186 |
|
|
Net income |
|
$ |
14,785 |
|
|
$ |
7,963 |
|
|
$ |
6,822 |
|
26
Product revenues by product category, in thousands, for the three months ended March 31, 2024 and 2023, were as follows:
|
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
|
Climate Control Seat |
|
$ |
115,590 |
|
|
$ |
114,753 |
|
|
$ |
837 |
|
|
|
0.7 |
% |
|
Seat Heaters |
|
|
77,076 |
|
|
|
75,636 |
|
|
|
1,440 |
|
|
|
1.9 |
% |
|
Steering Wheel Heaters |
|
|
39,814 |
|
|
|
36,347 |
|
|
|
3,467 |
|
|
|
9.5 |
% |
|
Lumbar and Massage Comfort Solutions |
|
|
38,251 |
|
|
|
38,738 |
|
|
|
(487 |
) |
|
|
(1.3 |
)% |
|
Valve Systems |
|
|
26,625 |
|
|
|
26,994 |
|
|
|
(369 |
) |
|
|
(1.4 |
)% |
|
Automotive Cables |
|
|
21,519 |
|
|
|
20,220 |
|
|
|
1,299 |
|
|
|
6.4 |
% |
|
Battery Performance Solutions |
|
|
13,608 |
|
|
|
20,309 |
|
|
|
(6,701 |
) |
|
|
(33.0 |
)% |
|
Electronics |
|
|
8,185 |
|
|
|
10,970 |
|
|
|
(2,785 |
) |
|
|
(25.4 |
)% |
|
Other Automotive |
|
|
3,970 |
|
|
|
8,725 |
|
|
|
(4,755 |
) |
|
|
(54.5 |
)% |
|
Subtotal Automotive segment |
|
|
344,638 |
|
|
|
352,692 |
|
|
|
(8,054 |
) |
|
|
(2.3 |
)% |
|
Medical segment |
|
|
11,377 |
|
|
|
10,933 |
|
|
|
444 |
|
|
|
4.1 |
% |
|
Total Company |
|
$ |
356,015 |
|
|
$ |
363,625 |
|
|
$ |
(7,610 |
) |
|
|
(2.1 |
)% |
Product Revenues
Below is a summary of our product revenues, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|
|
Variance Due To: |
|
||||||||||||||||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|
|
Automotive Volume |
|
|
FX |
|
|
Pricing / Other |
|
|
Total |
|
|||||||
|
Product revenues |
|
$ |
356,015 |
|
|
$ |
363,625 |
|
|
$ |
(7,610 |
) |
|
|
$ |
(1,671 |
) |
|
$ |
(2,797 |
) |
|
$ |
(3,142 |
) |
|
$ |
(7,610 |
) |
Product revenues for the three months ended March 31, 2024 decreased 2.1% as compared to the three months ended March 31, 2023. The decrease in product revenues is due to unfavorable pricing, lower cost recoveries from customers, unfavorable foreign currency impacts primarily attributable to the Chinese Renminbi and Korean Won, and unfavorable automotive volumes, partially offset by favorable foreign currency impacts primarily attributable to the Euro.
Cost of Sales
Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|
|
Variance Due To: |
|
||||||||||||||||||||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|
|
Automotive Volume |
|
|
Operational
|
|
|
FX |
|
|
Other |
|
|
Total |
|
||||||||
|
Cost of sales |
|
$ |
267,262 |
|
|
$ |
282,495 |
|
|
$ |
15,233 |
|
|
|
$ |
553 |
|
|
$ |
18,200 |
|
|
$ |
(892 |
) |
|
$ |
(2,628 |
) |
|
$ |
15,233 |
|
|
Gross margin |
|
$ |
88,753 |
|
|
$ |
81,130 |
|
|
$ |
7,623 |
|
|
|
$ |
(1,118 |
) |
|
$ |
16,900 |
|
|
$ |
(3,689 |
) |
|
$ |
(4,470 |
) |
|
$ |
7,623 |
|
|
Gross margin - Percentage of product revenues |
|
|
24.9 |
% |
|
|
22.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cost of sales for the three months ended March 31, 2024 decreased 5.4% as compared to the three months ended March 31, 2023. The decrease in cost of sales is primarily due to lower material costs, the impact of non-automotive inventory charges in the prior year period, lower automotive volumes and favorable foreign currency impacts primarily attributable to the Chinese Renminbi. These decreases were partially offset by unfavorable foreign currency impacts primarily attributable to the Euro and the Mexican Peso.
Net Research and Development Expenses
Below is a summary of our net research and development expenses, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Research and development expenses |
|
$ |
27,742 |
|
|
$ |
31,749 |
|
|
$ |
4,007 |
|
|
Reimbursed research and development expenses |
|
|
(4,997 |
) |
|
|
(6,604 |
) |
|
|
(1,607 |
) |
|
Net research and development expenses |
|
$ |
22,745 |
|
|
$ |
25,145 |
|
|
$ |
2,400 |
|
|
Percentage of product revenues |
|
|
6.4 |
% |
|
|
6.9 |
% |
|
|
|
|
27
Net research and development expenses for the three months ended March 31, 2024 decreased 9.5% as compared to the three months ended March 31, 2023. The decrease in net research and development expenses is primarily related to a reduction in resources allocated to the battery performance solutions product category.
Selling, General and Administrative Expenses
Below is a summary of our selling, general and administrative expenses, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Selling, general and administrative expenses |
|
$ |
40,721 |
|
|
$ |
37,042 |
|
|
$ |
(3,679 |
) |
|
Percentage of product revenues |
|
|
11.4 |
% |
|
|
10.2 |
% |
|
|
|
|
Selling, general and administrative expenses for the three months ended March 31, 2024 increased 9.9% as compared to the three months ended March 31, 2023. The increase in selling, general and administrative expenses is primarily related to higher compensation expenses and increased investment in information technology.
Restructuring Expenses
Below is a summary of our restructuring expenses, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Restructuring expenses |
|
$ |
7,238 |
|
|
$ |
1,269 |
|
|
$ |
(5,969 |
) |
During the three months ended March 31, 2024, the Company recognized expenses of $6.7 million for employee separation costs and $0.5 million for other costs. These restructuring expenses primarily relate to discrete restructuring actions focused on the reduction of global overhead expenses and achieving our Fit-for-Growth 2.0 objectives. See Note 3, “Restructuring,” to the consolidated condensed financial statements included in this Report for additional information.
During the three months ended March 31, 2023, the Company recognized $1.3 million for employee separation costs and less than $0.1 million for other costs.
Interest Expense, net
Below is a summary of our interest expense, net, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Interest expense, net |
|
$ |
(3,244 |
) |
|
$ |
(4,144 |
) |
|
$ |
900 |
|
Interest expense, net for the three months ended March 31, 2024 decreased 21.7% as compared to the three months ended March 31, 2023. The decrease is primarily related to a benefit from the change in fair value of the interest rate swap derivative, partially offset by higher interest rates on outstanding borrowings under the Revolving Credit Facility.
Foreign Currency Gain (Loss)
Below is a summary of our foreign currency gain (loss), in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Foreign currency gain (loss) |
|
$ |
2,549 |
|
|
$ |
(2,069 |
) |
|
$ |
4,618 |
|
Foreign currency gain for the three months ended March 31, 2024 included net realized foreign currency gain of $0.7 million and net unrealized foreign currency gain of $1.9 million.
28
Foreign currency loss for the three months ended March 31, 2023 primarily included net realized foreign currency gain of $3.8 million and net unrealized foreign currency loss of $5.9 million.
Other Income
Below is a summary of our other income, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Other income |
|
$ |
973 |
|
|
$ |
230 |
|
|
$ |
743 |
|
Other income for the three months ended March 31, 2024 increased as compared to the three months ended March 31, 2023. The increase in other income is due to an increase in the fair value of our investment in Carrar due to observable transactions.
Income Tax Expense
Below is a summary of our income tax expense, in thousands, for the three months ended March 31, 2024 and 2023:
|
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
Favorable /
|
|
|||
|
Income tax expense |
|
$ |
3,542 |
|
|
$ |
3,728 |
|
|
$ |
186 |
|
Income tax expense was $3.5 million for the three months ended March 31, 2024, on earnings before income tax of $18.3 million, representing an effective tax rate of 19.3%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the impact of a one-time benefit related to the Alfmeier acquisition, partially offset by income taxes on foreign earnings taxed at rates varying from the U.S. Federal statutory rate and the unfavorable impact of the global intangible low-tax income (“GILTI”).
Income tax expense was $3.7 million for the three months ended March 31, 2023 on earnings before income tax of $11.7 million, representing an effective tax rate of 31.9%. The tax amount included the effect of the settlement and closure of a multi-year state audit of $0.5 million. Adjusted for the audit impacts, the effective rate was 28.0%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. Federal statutory rate, the unfavorable impact of the GILTI, and the quarterly accrual for uncertain tax positions, partially offset by the impact of research and development credits in various jurisdictions and certain favorable tax effects on stock compensation vesting.
29
Liquidity and Capital Resources
Overview
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our Second Amended and Restated Credit Agreement. Our cash requirements consist principally of working capital, capital expenditures, research and development, operating lease payments, income tax payments and general corporate purposes. We generally reinvest available cash flows from operations into our business, while opportunistically utilizing our authorized stock repurchase program. Further, we continuously evaluate acquisition, disposition, exits, and investment opportunities that will enhance our business strategies.
As of March 31, 2024, the Company had $125.1 million of cash and cash equivalents and $278.0 million of availability under our Second Amended and Restated Credit Agreement. We may issue debt or equity securities, which may provide an additional source of liquidity. However, there can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current shareholders.
We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Second Amended and Restated Credit Agreement. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of March 31, 2024, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled $88.1 million. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S.; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts.
We currently believe that our cash and cash equivalents, borrowings available under our Second Amended and Restated Credit Agreement and receivables factoring arrangements, and cash flows from operations will be adequate to meet anticipated cash requirements for at least the next twelve months and the foreseeable future.
Cash and Cash Flows
The following table represents our cash and cash equivalents, in thousands:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
Cash and cash equivalents at beginning of period |
|
$ |
149,673 |
|
|
$ |
153,891 |
|
|
Net cash (used in) provided by operating activities |
|
|
(10,322 |
) |
|
|
25,109 |
|
|
Net cash used in investing activities |
|
|
(8,831 |
) |
|
|
(2,549 |
) |
|
Net cash used in financing activities |
|
|
(1,534 |
) |
|
|
(12,965 |
) |
|
Foreign currency effect on cash and cash equivalents |
|
|
(3,879 |
) |
|
|
3,144 |
|
|
Cash and cash equivalents at end of period |
|
$ |
125,107 |
|
|
$ |
166,630 |
|
Cash Flows From Operating Activities
Net cash used in operating activities totaled $10.3 million during the three months ended March 31, 2024 primarily reflecting $42.0 million related to changes in assets and liabilities, non-cash charges of $0.2 million for deferred income taxes and $0.8 million of other, partially offset by net income of $14.8 million, $17.7 million for non-cash charges for depreciation, amortization, stock based compensation and loss on disposition of property and non-cash charges of $0.3 million for inventory provisions.
Cash Flows From Investing Activities
Net cash used in investing activities was $8.8 million during the three months ended March 31, 2024, reflecting purchases of property and equipment of $11.3 million and investments in technology companies of $0.2 million, partially offset by proceeds from deferred purchase price of factored receivables of $2.7 million.
30
Cash Flows From Financing Activities
Net cash used in financing activities was $1.5 million during the three months ended March 31, 2024, reflecting $10.3 million of debt repayments and $2.0 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year, partially offset by the borrowing on debt of $10.0 million and the proceeds from the exercise of Common Stock options totaling $0.8 million.
Debt
The following table summarizes the Company’s debt, in thousands, as of March 31, 2024 and December 31, 2023:
|
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
|
Interest
|
|
|
Principal
|
|
|
Interest
|
|
|
Principal
|
|
||||
|
Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revolving Credit Facility (U.S. Dollar denominations) |
|
|
6.80 |
% |
|
$ |
222,000 |
|
|
|
6.58 |
% |
|
$ |
222,000 |
|
|
Other loans |
|
|
— |
|
|
|
— |
|
|
|
3.90 |
% |
|
|
233 |
|
|
Finance leases |
|
|
3.51 |
% |
|
|
497 |
|
|
|
3.53 |
% |
|
|
605 |
|
|
Total debt |
|
|
|
|
|
222,497 |
|
|
|
|
|
|
222,838 |
|
||
|
Current maturities |
|
|
|
|
|
(324 |
) |
|
|
|
|
|
(621 |
) |
||
|
Long-term debt, less current maturities |
|
|
|
|
$ |
222,173 |
|
|
|
|
|
$ |
222,217 |
|
||
Credit Agreement
Gentherm, together with certain of its subsidiaries, maintain a revolving credit note (the “Revolving Credit Facility”) under its Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Second Amended and Restated Credit Agreement was entered into on June 10, 2022 and amended and restated in its entirety the Amended and Restated Credit Agreement dated June 27, 2019, by and among Gentherm, certain of its direct and indirect subsidiaries, the lenders party thereto and the Agent. The Second Amended and Restated Credit Agreement has a maximum borrowing capacity of $500 million and matures on June 10, 2027. The Second Amended and Restated 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 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 a maximum Consolidated Net Leverage Ratio (based on consolidated EBITDA for the applicable trailing four fiscal quarters) as of the end of any fiscal quarter. As of March 31, 2024, the Company was in compliance, in all material respects, with the terms of the Second Amended and Restated Credit Agreement.
Finance Leases
As of March 31, 2024 and December 31, 2023, there was $0.5 million and $0.6 million, respectively, of outstanding finance leases.
Other Sources of Liquidity
The Company is party to receivable factoring agreements with unrelated third parties under which we can sell receivables for certain account debtors, on a revolving basis, subject to outstanding balances and concentration limits. The receivable factoring agreements are transferred in their entirety to the acquiring entities and are accounted for as a sale. Some of the agreements, including those assumed through the acquisition of Alfmeier, have deferred purchase price arrangements. As of March 31, 2024, there were $7.4 million available under the receivable factoring agreements.
31
Material Cash Requirements
In September 2023, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. As of March 31, 2024, the Company expects to incur total costs of between $12 million and $16 million, of which between $11 million and $15 million are expected to be cash expenditures. The Company has recorded $1.7 million of restructuring expenses since the inception of this program as of March 31, 2024. See Note 3, “Restructuring,” to the consolidated condensed financial statements included in this Report for additional information.
Except as described above, there have been no material changes in our cash requirements since December 31, 2023, the end of fiscal year 2023. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding our material cash requirements.
Effects of Inflation
The automotive component supply industry has historically been subject to inflationary pressures with respect to materials and labor. Since 2021, the automotive industry has experienced a period of significant volatility in the costs of certain materials and components, labor and transportation. Although supply chain conditions have steadily improved and certain inflationary pressures have moderated, rising costs of materials, labor, equipment and other inputs used to manufacture and sell our products, including freight and logistics costs, have impacted, and may in the future impact, operating costs and operating results. These higher costs and cost increases due to inflation are expected to continue for the foreseeable future as demand remains elevated and supply remains constrained. Although the Company has developed and implemented strategies to mitigate the impact of higher material component costs and transportation costs through sourcing and manufacturing efficiencies where possible, these strategies together with commercial negotiations with Gentherm's customers and suppliers have not fully offset to date and may not fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. For discussion of our significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes in our critical accounting policies or critical accounting estimates during the three months ended March 31, 2024. We are not presently aware of any events or circumstances that would require us to update our estimates, 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.
32
ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to the Company's debt obligations under the Second Amended and Restated 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, acquisitions denominated in foreign currencies, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Czech Koruna 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 decision of whether and when to execute derivative financial instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not enter into derivative financial instruments for speculative or trading purposes. Some derivative contracts do not qualify for hedge accounting; for other derivative contracts, we elect to not apply hedge accounting.
The Company’s designated 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 that 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 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 and copper commodity hedging instruments, if any, to cost of sales, and the ineffective portion of interest rate swaps, if any, to interest expense, net in the consolidated condensed statements of income. Cash flows associated with derivatives are reported in net cash (used in) provided by operating activities in the consolidated condensed statements of cash flows.
Information related to the fair values of all derivative instruments in the consolidated condensed balance sheet as of March 31, 2024 is set forth in Note 10, “Financial Instruments” in the consolidated condensed financial statements included in this Report.
Interest Rate Sensitivity
The table below presents principal cash flows and related weighted average interest rates by expected maturity dates for each of the Company’s debt obligations, excluding finance leases. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency.
|
|
|
Expected Maturity Date |
|
|||||||||||||||||||||||||||||
|
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
2027 |
|
|
2028 |
|
|
2029 |
|
|
Total |
|
|
Fair Value |
|
||||||||
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Variable rate |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
222,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
222,000 |
|
|
$ |
222,000 |
|
|
Variable interest rate as of March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
6.80 |
% |
|
|
|
|
|
|
|
|
6.80 |
% |
|
|
|
||||||
Based on the amounts outstanding as of March 31, 2024, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense by $2.2 million. To hedge the Company's exposure to interest payment fluctuations on a portion of these borrowings, we entered into a floating-to-fixed interest rate swap agreement with a notional amount of $100.0 million.
33
Exchange Rate Sensitivity
The table below provides information about the Company’s foreign currency exchange rate agreements that are sensitive to changes in foreign currency exchange rates. The table presents the notional amounts and weighted average exchange rates by expected maturity dates for each type of foreign currency exchange agreement. These notional amounts generally are used to calculate the payments to be exchanged under the contract.
|
|
|
Expected Maturity or Transaction Date |
|
|
|
|
||||||||||
|
Anticipated Transactions and Related Derivatives |
|
2024 |
|
|
2025 |
|
|
Total |
|
|
Fair Value |
|
||||
|
USD Functional Currency |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Exchange Agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
(Receive MXN / Pay USD) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total contract amount |
|
$ |
44,473 |
|
|
$ |
29,649 |
|
|
$ |
74,122 |
|
|
$ |
9,113 |
|
|
Average contract rate |
|
|
19.23 |
|
|
|
19.23 |
|
|
|
|
|
|
|
||
The table below presents the potential gain and loss in fair value for the foreign currency derivative contracts from a hypothetical 10% change in quoted currency exchange rates.
|
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
Exchange Rate Sensitivity |
|
Potential loss in fair value |
|
|
Potential gain in fair value |
|
|
Potential loss in fair value |
|
|
Potential gain in fair value |
|
||||
|
Exchange Agreement:(Receive MXN / Pay USD) |
|
$ |
6,531 |
|
|
$ |
8,682 |
|
|
$ |
7,179 |
|
|
$ |
9,798 |
|
34
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2024. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024.
(b) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
35
PART I I OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of business, however there was no material pending litigation to which we are a party and no material legal proceeding was terminated, settled or otherwise resolved during the three months ended March 31, 2024.
ITEM 1A. RISK FACTORS
The Company’s risk factors have not materially changed from those previously disclosed in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. You should carefully consider the risks and uncertainties described therein.
ITEM 2. UNREGISTERED SALES OF EQUI TY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities During First Quarter 2024
|
Period |
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
||||
|
January 1, 2024 to January 31, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
37,490,518 |
|
|
February 1, 2024 to February 29, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
37,490,518 |
|
|
March 1, 2024 to March 31, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
37,490,518 |
|
For further information regarding the ASR Agreement and the final settlement date that is scheduled to occur in the second quarter of 2024, see Note 12, "Equity," to the notes to the consolidated condensed financial statements included in this Report.
ITEM 5. OTHER INFORMATION
Trading Plans – Directors and Section 16 Officers
During the three months ended March 31, 2024
, none of the Company's
36
ITEM 6. EXHIBI TS
Exhibits to this Report are as follows:
|
|
|
|
|
|
|
Incorporated by Reference |
||||||
|
Exhibit Number |
|
Exhibit Description |
|
Filed /Furnished Herewith |
|
Form |
|
Period Ending |
|
Exhibit /
|
|
Filing Date |
|
3.1 |
|
Second Amended and Restated Articles of Incorporation of Gentherm Incorporated |
|
|
|
8-K |
|
|
|
3.2 |
|
3/5/18 |
|
3.2 |
|
|
|
|
8-K |
|
|
|
3.1 |
|
5/26/16 |
|
|
10.1* |
|
Offer Letter between Gentherm Incorporated and Vishnu Sundaram, dated as of August 31, 2023 |
|
X |
|
|
|
|
|
|
|
|
|
10.2* |
|
|
X |
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
X |
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
X |
|
|
|
|
|
|
|
|
|
|
32.1** |
|
|
X |
|
|
|
|
|
|
|
|
|
|
32.2** |
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
X |
|
|
|
|
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
|
X |
|
|
|
|
|
|
|
|
|
104 |
|
Cover Page Interactive Date File – the cover page XBRL tags are embedded within the Inline XBRL document |
|
X |
|
|
|
|
|
|
|
|
* Indicates management contract or compensatory plan.
** Documents are furnished not filed.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Gentherm Incorporated |
|
|
|
|
|
/s/ P HILLIP E YLER |
|
|
Phillip Eyler |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: April 30, 2024 |
|
|
/s/ M ATTEO A NVERSA |
|
|
Matteo Anversa |
|
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
|
(Principal Financial Officer) |
|
|
|
|
|
Date: April 30, 2024 |
38