thrm-10k_20201231.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
for the fiscal year ended December 31, 2020
or
for the transition period from to .
Commission file number 0-21810
GENTHERM INCORPORATED
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 504-0500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, no par value THRM Nasdaq
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
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). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such Common Stock on The Nasdaq Global Select Market as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2020, was $1,264,214,873. For purposes of this computation, the registrant has excluded the market value of all shares of its Common Stock reported as being beneficially owned by executive officers and directors; such exclusion shall not, however, be deemed to constitute an admission that any such person is an “affiliate” of the registrant.
As of February 26, 2021, there were 32,944,198 issued and outstanding shares of Common Stock of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2021 annual meeting of shareholders are incorporated by reference into Part III of this Report to the extent described herein.
TABLE OF CONTENTS
Part I
Item 1: Business 3
Item 1A: Risk Factors 14
Item 1B: Unresolved Staff Comments 26
Item 2: Properties 26
Item 3: Legal Proceedings 26
Item 4: Mine Safety Disclosures 26
Item 6: Selected Financial Data 29
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 46
Item 8: Financial Statements and Supplementary Data 48
Item 9A: Controls and Procedures 48
Item 9B: Other Information 48
Part III 49
Item 10: Directors, Executive Officers and Corporate Governance 49
Item 11: Executive Compensation 49
Item 14: Principal Accounting Fees and Services 49
Item 15: Exhibits and Financial Statement Schedules 50
GENTHERM INCORPORATED
PART I
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as the impact of the COVID-19 pandemic on our financial statements, liquidity, and business as well as the global economy, our ability to maintain and grow current production levels, the amount of borrowing availability under the Amended Credit Agreement and the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs, our ability to finance sufficient working capital, and our ability to execute our strategic plan and Manufacturing Footprint Rationalization restructuring plan (defined below). Reference is made in particular to forward-looking statements included in “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. 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 and are based on management’s reasonable expectations and beliefs. Such statements are subject to a number of important assumptions, risks, uncertainties and other factors that may cause the Company’s actual results or performance to differ materially from that described in or indicated by the forward-looking statements, including:
▪ any significant declines in automobile production;
▪ the Company’s ability to convert new business awards into product revenues;
▪ the loss or insolvency of any of the Company’s key customers;
▪ security breaches and other disruptions to the Company’s IT systems;
▪ work stoppages impacting the Company, its suppliers or customers;
▪ unfavorable changes to currency exchange rates;
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In addition, such forward-looking statements do not include the potential impact of any business combinations, acquisitions, divestitures, strategic investments and other significant transactions that may be completed after the date hereof, each of which may present material risks to the Company’s 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.
ITEM 1. BUSINESS
Unless otherwise indicated, references to “Gentherm”, “the Company”, “we”, “our” and “us” in this Annual Report on Form 10-K (“this Report”) refer to Gentherm Incorporated and its consolidated subsidiaries.
Except to the extent expressly noted herein, the content of our website or the websites of other third parties noted herein are not incorporated by reference in this Report.
Overview
Gentherm Incorporated is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. Our products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well as patient temperature management within the health care industry. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America and Europe, and several major automotive manufacturers in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. The Company is also developing a number of new technologies and products that are expected to help enable improvements to existing products and to create new product applications for existing and new markets.
We are incorporated under the laws of the State of Michigan. Our internet website is www.gentherm.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge through our website, www.gentherm.com, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission. These reports are also available on the Securities and Exchange Commission’s website, www.sec.gov.
COVID-19 Impact on our Business
The COVID-19 pandemic has significantly disrupted global economic activity, including within the automotive market and our business. Our sales are driven by the number of light vehicles produced by OEMs and our content per vehicle. The COVID-19 pandemic has significantly disrupted, and is expected to continue to significantly disrupt, the global automotive industry and customer sales, production volumes and purchases of light vehicles by end consumers. Per IHS Markit (February 2021 release), global light vehicle production volume was down 14.4% in 2020 from 2019 in the Company’s key markets of North America, Europe, China, Japan and Korea. In the first half of 2020, we were adversely affected by temporary manufacturing closures and customer plant closures, supply chain and production disruptions, workforce restrictions and travel restrictions, among other factors. While the operations of the Company, our customers and our supply chain improved in the second half of the year, the pandemic continued to adversely impact various aspects of our operations during such period.
Our business is subject to continuing and uncertain risks depending on the progression of the pandemic and the recovery of the global economy. In addition to challenges faced in 2020, recent pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts and manufacturing delays. Similarly, increased demand for personal electronics has created a shortfall of semiconductors, and it is yet unknown how we may be impacted. Our suppliers have experienced plant closures and production delays, and may continue to experience delays in manufacturing the materials and products we require according to our schedule and specifications. Certain companies in our supply chain have had significant employee layoffs or furloughs and have significant financial distress, and some may determine to cease operations or restructure their business. As a result, we and our supply chain may operate significantly below capacity for an uncertain
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period of time. Further, COVID-19 has had, and we expect will continue to have, a significant adverse impact on the growth, viability and financial stability of our customers, including the OEMs and Tier 1 automotive suppliers to which our products are supplied.
The Company has implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines to help ensure the safety and health of its employees. Due to the COVID-19 pandemic, a significant portion of our non-production employees are now working from home. We continue to assess and update business continuity plans in the context of this pandemic.
The COVID-19 pandemic continues to have a significant impact on global automotive markets in 2021, in the form of supply chain and production disruptions, workforce restrictions, travel restrictions and reduced consumer spending, among other factors. There remains substantial uncertainty regarding the global economic impact of, and the speed and shape of the recovery from, the ongoing COVID-19 pandemic, including for the global automotive industry and the resulting impact on our future operations and financial results. See further discussion of the risks relating to the COVID-19 pandemic and related risks in Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
Automotive
The Automotive reporting segment is comprised of the results from our global automotive businesses. Operating results from our climate comfort systems, automotive cable systems, battery performance solutions, automotive electronic and software systems and our advanced research and development organization are all reported in the Automotive segment because of their complementary focus on automotive content, passenger thermal comfort and convenience. In 2020, we added our advanced research and development organization to this reporting segment.
Climate comfort systems include seat heaters, blowers and thermoelectric devices for variable temperature Climate Control Seats (“CCS”) and steering wheel heaters designed to provide individualized thermal comfort to automobile passengers, and integrated electronic components, such as electronic control units that utilize our proprietary electronics technology and software. Other climate comfort systems include neck conditioners and climate control system products for door panels, armrests, cupholders and storage bins.
Battery performance solutions (formerly battery thermal management) consist of cell connecting devices used for various types of automotive batteries and thermal management products for heating and cooling 12V, 48V and high voltage batteries and battery modules.
Automotive electronic and software systems include electronic control units for climate comfort systems, electronic control units for memory seat modules and other devices.
Medical
In 2018 and 2019, our Industrial reporting segment represented the combined results from our patient temperature management systems business (“Medical”), remote power generation systems business, Gentherm Global Power Technologies (“GPT”) (through its divestiture on October 1, 2019), environmental test equipment business, Cincinnati Sub Zero industrial chamber business (“CSZ-IC”) (through its divestiture on February 1, 2019) and non-automotive expenses from our advanced research and development division (through December 31, 2019). The operating results from these businesses and division previously were presented together as one reporting segment because of their historical joint concentration on identifying new markets and product applications based on thermal management technologies.
In 2020, the Industrial reporting segment was renamed the Medical reporting segment to reflect the patient temperature management business as the focus and strategic direction of this segment. Also, during 2020, the advanced research and development costs not associated with the Medical segment were moved to the Automotive segment, as this organization primarily supports the Automotive related research and development activities following the divestitures of GPT and CSZ-IC.
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Business Strategy
Globally we develop, manufacture, and deliver advanced thermal solutions for automotive and patient thermal management markets that make meaningful differences in everyday life around the world by improving health, wellness, comfort and energy efficiency.
To achieve our goals and capitalize on opportunities within the automotive and patient thermal management markets, we launched in mid-2018 and continue to implement four primary strategies:
Focus Growth
The focused growth strategy includes four key goals:
These areas of the focused growth strategy are underpinned and enabled by our electronic and software systems business.
Extend Technology Leadership
We continue to expand our technology leadership with focused investments in key core technologies and competencies, including thermophysiology, software and electronics, simulation, thermal engines and integration.
Expand Gross Margin and Return on Invested Capital
We are strengthening our operational discipline and execution to expand gross margin and return on invested capital. This strategy centers around building a culture of performance that includes a focus on high-return growth opportunities. It also included the divestiture of non-core investments, which was completed in 2019. During 2018, we initiated this strategy through the sale of our battery management systems division located in Irvine, California and the site consolidation of its advanced research and development operations, which resulted in vacating two lease facilities in Azusa, California. Further, we exited several product categories including furniture, aviation, battery management electronics, industrial battery packs, automotive thermoelectric generators and other non-core electronics. Additionally, we undertook restructuring actions to reduce global overhead costs to improve Selling, general and administrative expenses.
Optimize Capital Allocation
We are optimizing our capital allocation to drive shareholder returns, which includes stock repurchases, while allowing us to reinvest in our business to drive continued growth through capital expenditure projects, and focused research and development investments. Further, we continuously evaluate acquisition opportunities that will enhance other business strategies.
Research, Development and Partnerships
Our research, development and partnerships activities are an essential part of our efforts to develop new or improved innovative products. Through both internal and external programs, we are working to develop a comprehensive knowledge of thermal management systems that can demonstrate functionality and performance. These activities are critical to optimizing energy and production efficiencies, improving effectiveness in our products and minimizing the cost to integrate our products with those of our customers.
We perform advanced research and development on thermal management systems, including those that utilize new proprietary comfort software algorithms, to enhance the efficiency and functionality of our automotive heating and cooling products. We believe there are substantial opportunities to integrate innovative thermal management systems into current and future product applications.
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To offer our customers cutting-edge products and technologies, our strategy includes partnering with key technology leaders in our industry. Our advanced partnership with global automakers and manufactures address and work to solve industry preferences of today and tomorrow by leveraging our expertise in human thermophysiology.
Research and development is conducted around the globe, predominately at our world headquarters in Northville, Michigan, our Technology Center in Farmington Hills, Michigan and our European research facilities in Odelzhausen, Germany.
Additional product development is performed at all of our manufacturing facilities to support customers. We believe the localized development model employed at our global design and manufacturing facilities improves our ability to effectively serve our customers and increases our innovative capacity.
Core Technologies
Gentherm’s expertise in thermal management is focused on two general areas: managing the thermal conditions of people and objects.
ClimateSenseTM
ClimateSense is an integrated comfort system we are designing to create a personalized microclimate for passengers using localized convective, conductive and radiative heating and cooling products. Using automatic regulation technology in combination with our unique occupant-centric control algorithm, ClimateSense offers the ability to personalize and improve overall occupant thermal comfort, improve time to comfort with (all-electric) pre-conditioning, provide comfort with less energy consumption thereby lowering carbon dioxide emissions by conventional internal combustion and hybrid powertrains, and extend range for electrified powertrains through a reduction in central HVAC system usage.
Electronics
Gentherm manufactures and supplies electronics to our core climate comfort solution products. We also supply value-added electronic products to third parties for adjacent areas within the automotive interior. In addition, Gentherm manufacturers and supplies electronic control units for memory seat modules that include electric motor position sensing technology. This technology further applies to other automotive products requiring fine motor controls.
Air Moving Devices
Our highly durable and quiet air moving devices, including our proprietary blower and fan designs, are essential to all of our products that require air movement. We have a strong portfolio of these products, tailored to various automotive application, including seat ventilation and EV battery cooling.
Thermoelectric Technologies
Many of our thermal products manage the thermal conditions of people and objects using our internally developed advanced thermoelectric device technology (“TED”). A TED is a solid-state circuit that has the capability to produce both hot and cold thermal conditions by use of the Peltier effect. The advantages of advanced TEDs over conventional compressed gas systems are that they are environmentally friendly and less complex as they have no moving parts and are compact and light weight. Over the last 19 years, our work on this technology has yielded improvements in areas of functionality, efficiency, durability and performance.
Resistive Heaters
Resistive heater technologies are comprised of wire, carbon fiber or positive thermal coefficient (“PTC”) heating elements that quickly and effectively deliver heat to people and objects. Wire heating elements are designed from stainless steel, copper, our proprietary carbon fiber woven lattice technology called Carbotex® or printed circuit PTC heaters based on the specifications for a particular product application. Resistive heaters have multiple automotive applications, including seat heating, steering wheel heating, interior panel heating, and battery heating.
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Products
Climate Comfort Solutions – Seat Comfort
Climate Control Seat® (“CCS”)
Our CCS products utilize exclusive patented technology to regulate temperature and enhance the comfort of vehicle passengers. The most advanced CCS models use one or more TEDs to generate heating or cooling depending upon the direction of the current applied to the device.
A TED is the heart of a compact heat pump used in our active CCS products. Air is forced through the heat pump and thermally conditioned in response to electronic switch input from the seat occupant. The conditioned air circulates by one of our specially designed air moving devices through a proprietary air distribution system installed in the seat cushion and seat back, so that the seat surface can be heated or cooled. Each seat has individual electronic controls to adjust the level of heating or cooling. Active CCS products improve comfort compared with conventional air conditioners by focusing cooling directly on the passenger through the seat rather than waiting until ambient air cools the seat surface beneath the passenger. A heated and ventilated variant of the CCS utilizes ambient cabin air to provide cooling comfort instead of a TED to actively cool the seat. In the heating mode, both the vent-only system and the TED system can be supplemented with resistive heating elements.
Heated and ventilated CCS products provide a lower level of cooling capability than our active CCS solution, but at a lower price. By offering different models of the CCS product, our customers have the opportunity to purchase a wider range of climate control products at different price points. Sales of CCS products contributed 38%, 37% and 36% to our total product revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Heated Seat
Heated seats, based on our resistive heater core technology, are seamlessly integrated into automotive seat designs, and are constructed using materials that offer the best capacity, installation characteristics and durability. Our capabilities allow customers to choose among a variety of resistive heater materials based on their individual vehicle specifications. Sales of heated seat products contributed 27%, 29% and 29% to our total product revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Neck Climate Control Systems
Neck climate control systems ventilate warm or temperature-controlled air directly onto the passenger’s neck area. The system combines electronics, air moving device technologies and a heating element into a compact, integrated headrest design that can be adjusted to suit the body size of the passenger.
Climate Comfort Solutions – Surface Climate Control Systems
Heated Steering Wheel
Heated steering wheels deliver heating comfort to automobile drivers through resistive elements. This product can be applied to both leather and wood steering wheels. A solution for drivers in cold and mild weather climates, the heated steering wheel is designed for the global automotive market.
Heated Surfaces
Gentherm’s thermally conductive or radiative surfaces, such as door panel armrest and center console armrest products, are powered by our core technologies. The system is thermally managed by a heating control system which can be discretely located in the door panel or seat of the vehicle. Heated door panels and armrests complement our climate-controlled seat and steering wheel products and provide a superior level of thermal comfort to the driving experience.
Electronics Solutions
Memory Seat Modules
Gentherm has developed a unique way to control certain electrical motors in a vehicle. Our Intelligent Positioning System, IPS® product suite utilizes proprietary software to determine the position of a power seat and control the Memory Seat module.
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Hands-On Detection
All vehicles manufactured with Autonomous Driving Level 2 or higher capabilities are required to ensure that the driver stays in control of the vehicle during operation. In order to accomplish this task, Gentherm developed PilotSenseTM – a sensor integrated into the steering wheel that monitors whether the driver’s hands are maintaining contact with the steering wheel. This product is available for both heated and non-heated steering wheels.
Battery Performance Solutions (“BPS”)
Cell Connecting Systems
Cell connecting systems provide secure connections between advanced automotive batteries to transmit a continuous flow of information about battery temperature and cell voltage during the charging and discharging process to monitor battery system performance. Gentherm has developed a range of cell connecting system products, including flexible foil cell connecting boards that offer improved packaging, weight and functionality. We offer these products in a variety of materials to cover customers’ requirements.
Thermoelectric Battery Thermal Management (“BTM”)
Thermal management is critically important for the long-term operation of advanced automotive batteries. The expansion of electrified vehicle applications, such as Battery Electric Vehicles, Plug-In Hybrids and Mild Hybrids, have drastically increased the demand for BTM systems that enable wider operating temperature ranges, enhanced driving range and prolonged life of the battery. Gentherm’s BTM system can provide precision battery cooling of 48 Volt Mild Hybrid systems on pack or cell-level using patented TED technology. The BTM system maintains the temperature of the lithium-ion battery or other advanced chemistry battery within an acceptable temperature range without the use of chilled liquids or refrigerant loops, making it a light weight, highly scalable, compact solution ideal for automotive applications. Gentherm’s proprietary BTM system is compact and energy efficient, resulting in a minimal energy budget, which is important for an electrified vehicle.
Aside from battery cooling, Gentherm’s BTM portfolio includes battery heating applications. Based on our proprietary technology, we offer solutions to our customers that enable efficient heating of lithium-ion batteries for most electrified vehicles.
Climate Comfort Solutions – Thermal Convenience
TrueThermTM Cup Holder
The TrueTherm cup holder applies Gentherm’s patented TED technologies to keep beverages of automobile drivers and passengers either warm or cool. We have developed a range of cup holder models with varying degrees of functionality, designed to be packaged in multiple configurations to accommodate different console environments. Our dual independent design provides separate temperature settings in each holder allowing the driver and passenger to individually maintain a heated or cooled beverage.
TrueThermTM Storage Unit
Gentherm’s TrueTherm storage units provide for food or beverage cooling for the global automotive market. Using patented TED or refrigeration technologies, the TrueTherm cool storage unit provides temperature control independently from a vehicle’s heating and air conditioning system. It can be custom designed to accommodate tight interior spaces, such as the front floor console of a sport utility vehicle (SUV) and provide additional cooling capacity to those who have long work commutes or transport multiple passengers.
Automotive Cable Systems
Gentherm produces automotive cable systems used to connect automotive components to sources of power. The automotive cable systems are an important element in the production of many of our products and form a significant component in how we generate value to our customers by being an efficient, low-cost and high-quality manufacturer. We offer cable systems as integrated parts of our products and also as stand-alone components for other automotive applications, such as oxygen sensors. Our cable systems business includes both ready-made individual cables and ready-to-install cable networks.
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Patient Temperature Management Systems
Gentherm provides a full line of patient temperature management systems across multiple product categories addressing the needs of hyper-hypothermia therapy in intensive care, normothermia in surgical procedures and additional warming/cooling therapies utilized in acute care, ambulatory, clinics and home health. Our broad array of products for patient warming provides an improved patient experience and satisfaction. Our core brands include Blanketrol® hyper-hypothermia system, WarmAir®/FilteredFlo® convective warming system, Electri-Cool®/Micro-Temp® localized cooling/warming systems, Hemotherm® cardiovascular cooling/warming system and our recent launch of our next generation cardiovascular cooling/warming system utilized to deliver precise blood temperature control during cardiopulmonary by-pass and other related cardiovascular procedures. We aspire to have innovative patient temperature management product offerings coupled with clinical education enabling our customers to have enhanced patient outcomes and improved efficiencies of care.
In April 2019, Gentherm acquired Stihler Electronic GmbH (“Stihler”) to further strengthen our patient temperature management offering in the operating room focused on normothermia. The Stihler core brands include ASTOPAD® patient warming system, ASTOTHERM®/ASTOFLO® IV fluid and blood warming systems and ASTODIA® diaphanoscope for transillumination. The ASTOPAD® patient warming system utilizes resistive warming technology which is also used in our automotive products. Gentherm is now focused on globalizing the Stihler portfolio and integrating across key sales channels.
Customers
Our Automotive segment customers include light vehicle OEMs, commercial vehicle OEMs and first tier (“Tier 1”) suppliers to the automotive OEMs, including automotive seat manufacturers. We also directly supply CCS products to aftermarket seat distributors and installers.
The Company’s automotive marketing is directed primarily at automotive manufacturers and their Tier 1 suppliers and focuses on the enhanced value consumers attribute to vehicles with climate comfort products. In many cases, the manufacturers direct us to work with their suppliers to integrate our products into the vehicle’s seat or interior design. These customers will sell our product, as a component of an entire seat or seating system, to automotive OEMs. Once the integration work is complete, prototypes are sent to the manufacturer for evaluation and testing. If a manufacturer accepts our product, a program can then be launched for a particular model on a production basis, but it normally takes one to three years from the time a manufacturer decides to include any of our products in a vehicle model to actual production for that vehicle. During this process, we derive funding from prototype sales but obtain no significant revenue until mass production begins. Inherent to the automotive supplier market are costs and commitments that are incurred well in advance of the receipt of orders and resulting revenues from customers.
The volume of products we sell is significantly affected by global automotive production levels and the general business conditions in the automotive industry. Our product revenues are generally based upon purchase orders issued by our customers, with updated releases for volume adjustments. As such, we typically do not have a backlog of firm orders at any point in time. Once selected to supply products for a particular platform, we typically supply those products for the platform life, which is normally five to seven years, although there is no guarantee that this will occur. In addition, when we are the incumbent supplier to a given platform, we believe we have a competitive advantage in winning the redesign or replacement platform, although there is no guarantee that this will occur.
For 2020, our revenues from sales to our two largest customers, Lear and Adient were $141 million and $132 million, respectively, representing 15% and 14% of our product revenues, respectively. Revenues from Lear and Adient represent sales of our climate comfort products. The loss of these customers would likely have a material adverse impact on our business, results of operations and cash flows. However, as noted above, in many cases OEMs direct their suppliers such as Lear and Adient to work with us for our climate comfort solutions, battery performance solutions and cable technology products. It is, therefore, relevant to understand how our revenues are divided among the OEMs, as shown below.
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Our totalproduct revenues for each of the past three years were divided among automotive OEMs as follows:
Ford Motor Company 9 % 11 % 10 %
Volkswagen 9 % 8 % 9 %
Stellantis(a) 9 % 10 % 10 %
Honda 6 % 7 % 6 %
Daimler 6 % 6 % 5 %
Mazda 3 % 4 % 3 %
Toyota Motor Corporation 3 % 4 % 3 %
Renault/Nissan 2 % 3 % 4 %
Jaguar/Land Rover 3 % 3 % 3 %
Other (including Medical) 18 % 15 % 22 %
a) Reflective of the 2021 merger of PSA and Fiat Chrysler.
Market Trends
We believe increased consumer demand for personalized thermal comfort in a vehicle is driving increased adoption of our comfort products. In recent years, we are seeing a trend of equipping second, and in some cases, third row seats with thermal management solutions. This trend is accelerating in all major markets where Gentherm is present, including North America, Europe, Japan, Korea and China.
The Gentherm product portfolio aligns well with long-term technological trends:
Production and Suppliers
Our global manufacturing and distribution facilities are located close to our key customers. In Europe we operate three manufacturing sites located in Macedonia, Germany and Ukraine and one distribution center located in Hungary. In North America, we operate four manufacturing sites in Mexico, one in the United States and one in Canada. In Asia, we operate three production sites in China and one in Vietnam. In September 2019, we committed to a restructuring plan to improve our manufacturing productivity and rationalize our footprint. In March 2020, we announced the initial phase of this restructuring plan, which includes the
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consolidation of all North American electronics manufacturing to Celaya, Mexico. This will result in the closure of the Burlington, Canada facility, and the transfer of electronics manufacturing to Acuña, Mexico. In December 2020, we announced the consolidation of our electronics manufacturing in Asia to Bantian, Shenzhen, China, which will result in the closure of our Longgang, Shenzhen, China facility that is expected to be completed by the end of 2021. See Note 5, "Restructuring" of the consolidated financial statements included in this Report for additional information.
The automotive industry is highly reliant on semiconductors and, beginning in the fourth quarter 2020 and continuing in 2021, is facing a significant supply shortage of semiconductors. In the first half of 2020, global semiconductor manufacturers and their distributors allocated capacity to meet surging demand for consumer electronics and away from the automotive sector that was experiencing plant shutdowns. Given capacity constraints and long lead times for restarting production, semiconductor manufacturers became further strained when automotive vehicle production and other industries utilizing semiconductors had a strong rebound in the second half of 2020. Such activity has resulted in significant supply shortages and cost increases across the automotive industry, and has an adverse impact on our business. We continue to closely monitor the availability of semiconductor microchips and other key component parts and raw materials, as well as customer vehicle production schedules that may be impacted by supply shortages and disruptions. We are working closely with our suppliers and customers to minimize any potential adverse impacts. See further discussion of the risks relating to the supply shortage of semiconductors and related risks in Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
Proprietary Rights and Patents
The development of new or improved technologies is critical to the execution of our business strategy. Patents obtained for new or improved technologies form an important basis for the success of the Company and underpin the success of our research and development efforts. We have adopted a policy of obtaining, where practical, the exclusive rights to use technology related to our products through patents or licenses for proprietary technologies or processes. We adapt and commercialize such technologies in products for mass production. We also have developed technologies or furthered the development of acquired technologies through internal research and development efforts.
As of December 31, 2020, Gentherm held 518 issued patents, of which 253 were U.S. patents and 265 were non-U.S. patents. Gentherm held 393 patents directed to climate control products and thermoelectric technologies, 62 patents directed at heating elements and technologies, 22 patents directed to medical technologies, 17 patents directed to air moving devices and 24 patents directed to cable and cell connector battery technologies. In furtherance of its Focused Growth strategy, the Company continued to evaluate its patents during 2020 and made strategic decisions to reduce low-value patents and patents unrelated to current or planned business strategies.
Competition
See further discussion of the risks relating to competition in Item 1A, “Risk Factors”.
Gentherm faces competition from other automotive suppliers and, with respect to certain products, from the automobile OEMs and Tier 1 suppliers who produce or have the capability to produce certain products that Gentherm supplies. The automotive supply industry competes on the basis of technology, quality, reliability of supply and price. Design, engineering capability and competitive pricing are increasingly important factors.
The competitive landscape for Gentherm’s climate comfort solutions and battery sub-systems includes component specialists, thermal management system suppliers and Tier 1 suppliers or automobile OEMs with their own integrated solutions. Independent suppliers that represent the principal competitors of Gentherm include I.G. Bauerhin GmbH, Kongsberg Automotive ASA, Lisa DRÄXLMAIER GmbH and ElringKlinger AG.
The competitive landscape for patient temperature management systems includes patient thermal management medical device OEMs. The principal manufacturers of products similar to those of Gentherm’s products include 3M Company Co, Stryker Corporation and Becton, Dickinson and Company.
We believe our expertise in core thermal management technologies and occupant thermal comfort, as well as our capability in application specific component design, global footprint and broad product offerings make us well positioned to compete against the traditional thermal management systems suppliers, global Tier 1s and component specialists.
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Seasonality
Our principal operations are directly related to the automotive industry. Consequently, we have historically experienced seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants close for model year changeovers and in December when many customer plants close for the holidays. Due to the COVID-19 pandemic, our product revenues were adversely affected by customer plant closures and temporary, partial closures of several of our manufacturing facilities in North America and Europe during the first half of 2020. During the second half of 2020, our customers’ plants were open, and our production volumes were stronger than pre-COVID levels at our manufacturing facilities.
Human Capital Management
Employees
At Gentherm, we believe our global workforce and our global footprint are a competitive advantage, not only from the global diversity of customers, but the richness of the diversity of our people. Gentherm resides in over 23 locations across 13 countries. As of December 31, 2020 and 2019, Gentherm’s employment levels worldwide were as follows:
United States and Canada 618 694
United Kingdom 5 5
Notable statistics as of December 31, 2020:
▪ Over 59% of our global workforce is Female.
Key Highlights of our Human Capital Strategy
Health and Safety
At Gentherm, safety is an essential part of our operating model. Our safety focus has never been more critical over the last year, during our response to the COVID-19 pandemic around the globe. Paramount to our efforts, has been creating a safe working environment for our employees through creation of a COVID-19 safe work playbook. We implemented safe work protocols, personal protective equipment enhancements, screening protocols and work area layout modifications. By partnering with our employees, we were able to maintain a safe work environment while meeting the needs of our global customers. Frequent and transparent communications with our team members was also critical to business continuity and COVID-19 recovery planning. Our employee pulse survey on COVID-19 actions boasted a more than 80% confidence level in management’s leadership throughout the pandemic.
Diversity, Equity and Inclusion
In 2020, Gentherm launched our Diversity, Equity and Inclusion Council, building upon the momentum of our global Women’s Network that was launched in 2018. Our DEI mission is Embracing Diversity Inspires Innovation. We are building an inclusive culture where we value our differences to positively impact the lives of our employees, customers and communities.
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Total Rewards
Gentherm’s compensation and benefits programs are designed to attract and retain our employees in the locations where we compete for talent using a mix of elements that allow us to achieve our Company goals, in both the short- and long-term.
Environmental, Social, and Governance
In 2020, we began integrating the fundamental sustainable values of environmental, social, and governance ("ESG") into our everyday business operations and future strategies. Our sustainability efforts are based on three pillars: People, Planet, and Places.
In 2020, we published our inaugural sustainability report, and also formed our ESG steering committee, which includes multiple members of our senior leadership team. In addition, we clarified that our Board of Directors oversees our programs related to matters of corporate responsibility and sustainability performance through the Nominating and Corporate Governance Committee. These actions indicate the strength of our commitment to sustainability across Gentherm.
ITEM 1A. RISK FACTORS
You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this Report, as well as any amendments or updates reflected in subsequent filings or furnishings with the SEC. We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity.
Industry and Operational Risks
The COVID-19 pandemic and measures taken to contain it have significantly adversely affected, and are likely to continue to significantly adversely affect, our business, results of operations, financial condition, cash flows, liquidity and stock price.
The COVID-19 pandemic has significantly and adversely impacted the global economy and financial markets, with global legislative and regulatory responses including unprecedented monetary and fiscal policy actions across all sectors. Our business, results of operations, financial condition, cash flows, liquidity and stock price were significantly adversely affected by the COVID-19 pandemic in 2020, especially beginning in March. The COVID-19 pandemic continues to have a significant impact on global markets, in the form of supply chain and production disruptions, workforce restrictions and travel restrictions, among other factors, which continues to have significant adverse impacts on Gentherm’s financial performance and operations. The full extent to which the COVID-19 pandemic will impact our business, results of operations, financial condition, cash flows, liquidity and stock price remains uncertain and cannot be predicted with confidence. In particular, if COVID-19 continues to spread or re-emerges or the vaccine rollout is slow or delayed, resulting in an extended period of travel, commercial, social and other similar restrictions or shut-downs,
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we could experience prolonged and significant adverse impacts to our business, results of operations, financial condition, cash flows, liquidity and stock price.
The COVID-19 pandemic and measures taken to contain it have subjected, and continue to subject, our business, results of operations, financial condition, cash flows, liquidity and stock price to a number of material risks and uncertainties, including, but not limited to:
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The risks related to these factors above are discussed in greater detail below in separate risk factors.
The automotive industry, our primary market, is cyclical and a decline in the production levels of our major customers, particularly with respect to models for which we supply significant amounts of product, could adversely affect our business, results of operations and financial condition.
Our Automotive segment represents 95%, 95% and 91% of our product revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Demand for our automotive products is directly related to automotive vehicle production, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. Automotive sales and production are cyclical and have been, and we expect will continue to be, materially affected by general economic and industry conditions, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit for us, customers and consumers and other factors.
The inability of our supply chain, or the supply chain of the OEMs and Tier 1s that we supply, to deliver key components, such as semiconductors, could materially adversely affect our business, profitability and results of operations.
Our products contain a significant number of components that we source globally from suppliers who, in turn, source components from their global suppliers. If our supply chain fails to deliver products to us in sufficient quality and quantity on a timely basis, we will be challenged to meet our production schedules, fulfilling our orders, sales and profits could decline, and our commercial reputation and customer relationships could be damaged. Similarly, OEMs and Tier 1s to whom we supply our products are dependent on an ever-greater number of global suppliers to manufacture and sell their products to consumers, which drives sales of our products. These global supply chains have been and may be adversely impacted by events outside of our and their control, including macroeconomic events, trade restrictions, economic recessions, political crises, labor relations issues, liquidity constraints, or natural occurrences, such as the ongoing disruptions from the COVID-19 pandemic. Any significant disruptions to such supply chains could materially adversely affect our business, profitability and results of operations.
The automotive industry is highly reliant on semiconductors and, beginning in the fourth quarter 2020 and continuing in 2021, is facing a significant shortage of semiconductors. The semiconductor supply chain is complex, with capacity constraints occurring throughout. We, the OEMs and Tier 1s must compete among the automotive supply chain and with other industries to satisfy current and near-term requirements for semiconductors, and such allocation is not within our control even though we attempt various mitigating actions. Certain semiconductors we utilize are sourced from a very limited number of suppliers, which further exacerbates the risks to our operations. A shortage of semiconductors or other key components (historically, such as TEDs), especially if prolonged, can disrupt our production schedule and have an adverse effect on our business, profitability and results of operations. OEM and Tier 1 production could also be impacted by this shortage, which would result in reduced sales of our products and could be materially adverse to our operations, profitability and results of operations.
We operate in a highly competitive industry and efforts by our competitors, as well as new non-traditional entrants to the industry could adversely affect our business, results of operations and financial condition.
The automotive component supply industry is subject to intense competition. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, timely delivery, technological innovation and service. There can be no
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assurance that we will be able to compete successfully with the products of our competitors. Further, our competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. Many of our competitors are substantially larger in size and have substantially greater financial, marketing and other resources than we do, and therefore may be more effective in adapting to customer requirements while being more profitable. In addition, our customers may increase levels of production insourcing for a variety of reasons, such as shifts in customers’ business strategies or the emergence of low-cost production opportunities in other countries, which may adversely affect our sales as well as the profit margins on our products.
In addition, the global automotive industry is experiencing a period of significant technological change. Future automotive vehicle production may be affected by additional industry or consumer behaviors, including the development and use of autonomous and electric vehicles and increasing use of car- and ride-sharing and on-demand transportation as a service, as well as related regulations. The rapidly evolving nature of the markets in which we compete has attracted, and may continue to attract, new entrants, including new entrants from outside the traditional automotive supply industry. Further, in comparison to us, our competitors may foresee the course of market developments more accurately, develop superior products, produce similar products at a lower cost, or adapt quicker to new technologies. If we do not accurately predict, prepare for and respond to new kinds of technological innovations, market developments and changing customer needs, our sales, profitability and long-term competitiveness may be harmed.
We manage our business based on projected future sales volume, which is highly dependent on information received from customers and general market data, and any inaccuracies or changes in such information could adversely affect our business, results of operations and financial condition.
We manage our business based upon projected future sales volumes, which are based upon many factors, including awarded business and assumptions of conversion rates thereof, customers’ forecasts and general market data. Our customers generally do not guarantee sales volumes. In addition, awarded business may include business under arrangements that our customers have the right to terminate without penalty at any time. Further, our customers’ forecasts are subject to numerous assumptions, and such forecasts often are/may be changed rapidly with limited notice. Therefore, our actual sales volumes, and thus the ultimate amount of revenue that we derive from such sales, are not committed. If actual production orders from our customers are not consistent with our projected future sales volumes, we could realize substantially less revenue and incur greater expenses over the life of vehicle programs.
The loss or insolvency of any of our principal customers would adversely affect our future results.
For the year ended December 31, 2020, our top two customers were Lear and Adient which comprised 15% and 14%, respectively, of our product revenues. We are dependent on the continued growth, viability and financial stability of our customers, as well as the OEMS to which our products are supplied. The loss of any significant portion of our sales to any of our customers would have a material adverse effect on our results of operations and financial condition. We have experienced, and we expect to continue to experience, a delay in our collection of accounts receivable balances from our customers, which may be significant and would be at risk in the event of their bankruptcy or other restructuring.
Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial performance.
Downward pricing pressure is customarily applied by automotive manufacturers to the automotive supply chain. Our customer contracts generally provide for annual price reductions over the production life of the vehicle, while requiring us to assume significant responsibility for the design, development and engineering of our products. Prices may also be adjusted on an ongoing basis to reflect changes in product content/costs and other commercial factors. Our inability to achieve product cost reductions that offset customer-imposed price reductions could adversely affect our financial condition, results of operations and cash flows.
Our inability to effectively manage the development, timing, quality and costs of new product launches could adversely affect our financial performance.
Gentherm is developing and launching new products and related technologies for its battery performance solutions and electronic and software systems businesses, and intends to launch other new products in the future. The launch of products employing new technologies is a complex process, the success of which depends on a wide range of factors, including the robustness of our product and manufacturing process development, success in sourcing new components and commodities with suitable suppliers, readiness of our and our suppliers' manufacturing facilities and manufacturing processes, as well as factors related to tooling, equipment, employees, initial product quality and other factors. Given the complexity of new product launches, we may experience difficulties managing product quality, timeliness and associated costs.
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In addition, new program launches require a significant ramp up of costs up to a few years prior to sales of such products. However, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could have a materially adverse effect on our business, results of operations and financial condition.
To the extent we are not able to successfully launch new business, vehicle production at our customers could be significantly delayed or shut down. Such operating failures could result in significant financial penalties to us or a diversion of personnel and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives, and could result in our customers shifting work away from us to a competitor. Any of the foregoing matters could result in a significant loss of revenue and market shares and could have an adverse effect on our profitability and cash flows.
We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights and trade secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in many of the markets that we serve.
We cannot guarantee, however, that we will be able to secure all desired protection, nor that the steps we have taken to protect our intellectual property will be adequate, to prevent infringement of our rights or misappropriation or theft of our technology, trade secrets or know-how. For example, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some of the countries in which we operate. In addition, while we generally enter into confidentiality agreements with our employees and third parties to protect our trade secrets, know-how, business strategy and other proprietary information, such confidentiality agreements could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the design, manufacture or operation of our products. If it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail. Further, adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. Finally, for those products in our portfolio that rely on patent protection, once a patent has expired, the product is generally open to competition. Products under patent protection usually generate higher revenues and profitability than those not protected by patents. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows.
In addition, our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Foreign governments may adopt regulations, and foreign governments or courts may render decisions, requiring compulsory licensing of intellectual property rights, or foreign governments may require products to meet standards that serve to favor local companies or provide reduced protection relative to other countries.
Our ability to market our products successfully depends on acceptance of our products by existing and potential customers and consumers, as well as the success of our customers.
We have been, and will continue to be, required to educate potential customers and demonstrate that the merits of our existing products justify the costs associated with them. Similar efforts will be required with existing and potential customers for additional products we develop using technologies we develop or license. Customers will only include our products if there appears to be consumer demand. For our automotive products, we rely on OEMs and applicable dealer networks to market our products to consumers, and we do not have any control over the marketing budget or messaging nor the training of employees and agents regarding our products. Further, OEMs and dealer networks may market products offered by our competitors, including products manufactured by such OEMs. If customers or consumers conclude that temperature control seats or our other automotive products are unnecessary or too expensive or that our competitors offer more favorable sales terms or better products, OEMs and other manufacturers may reduce availability or decline to include our products in their vehicles.
Adverse developments affecting one or more of our suppliers, or the suppliers of the OEMs and Tier 1s we supply, could harm our profitability and business reputation.
Our supply chain may be adversely impacted by events outside of our control, including macro-economic events, trade restrictions, political crises, labor relations issues, liquidity constraints, natural or environmental occurrences or other factors noted
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herein that can adversely affect us, which may adversely affect our operations and profitability. We operate a global supply chain that has been, and could in the future continue to be, disrupted by the COVID-19 pandemic, resulting in delays or inefficiencies in production. While we have been successful in mitigating these supply chain challenges, future component shortages could limit our production in the future.
In addition, many of our products include TEDs, which contain certain raw materials that generally cannot be substituted. The prices for these raw materials fluctuate depending on market conditions. Tellurium, a raw material used in TEDs, and other key raw materials include copper, silver and petroleum-based engineered plastics. If the market prices for these raw materials significantly increases, as they have in the past, our gross profit may be adversely impacted to the extent our suppliers pass those price increases on to us.
If our suppliers fail to deliver products, parts, components and raw materials of sufficient quality and quantity and to our other stated written expectations on a timely basis, we could have difficulties meeting our production schedules, fulfilling our orders, sales and profits could decline, and our commercial reputation and customer relationships could be damaged. If we were to experience a significant or prolonged shortage of critical components from any of our suppliers, particularly those who are sole sources, and could not procure the components from other sources, or necessary raw materials are not available due to supply chain disruption, we would be unable to meet our production schedules for some of our key products or to ship such products to our customers in a timely fashion which would adversely affect sales, margins and customer relations which could materially adverse effect our business, results of operations and financial condition. Unfavorable economic or industry conditions increases the risk of supply disruption.
Security breaches and other disruptions to our information technology networks and systems, including a disruption related to cybersecurity, could interfere with our operations and could compromise the confidentiality of our proprietary information or personal information.
We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. We rely upon the capacity, reliability and security of our IT and data security infrastructure, as well as our ability to expand and continually update this infrastructure in response to the changing needs of our business. If we experiences a problem with the functioning of an important IT system or a security breach of our IT systems, due to failure to timely upgrade systems or during system upgrades and/or new system implementations, or resulting from failures of our third-party service providers, the resulting disruptions could have an adverse effect on our business.
As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which were material in 2020. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; delay our ability to deliver products to customers; and jeopardize the security of our facilities. A cyber incident could be caused by malicious outsiders (including state-sponsored espionage or cyberwarfare) or insiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware, “ransomware” and other cyber-attacks, are increasing in both frequency and sophistication and could create financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and other stakeholders. Many victims of ransomware are forced to pay significant ransoms to regain access to their critical business data. With some of our employees working from home during the COVID-19 pandemic, there may be increased opportunities for unauthorized access and cyber-attacks. Security breaches could also result in a violation of U.S. and international privacy and other laws and subject the Company to various litigations, investigations and proceedings. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
Despite our implementation of security measures, our IT systems, like those of other companies, are vulnerable to damages from computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions. No IT system can be fully secure and impervious to all threats or failures. Any system failure, accident or security breach could result in disruptions to our operations. A material network breach in the security of our IT systems could include the theft of our intellectual property, trade secrets, customer information, human resources information or other confidential information. To the extent that any disruptions or security breach results in a loss or damage to our data, or an inappropriate disclosure of confidential, proprietary or customer information, it could
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cause significant damage to our reputation, affect our relationships with its customers, lead to claims against us, fines and other penalties assessed upon us by governmental authorities, and ultimately harm our business. In addition, we may be required to incur significant costs to remediate and protect against damage caused by these disruptions or security breaches in the future.
Our business is subject to risks associated with manufacturing processes.
If certain of our existing production facilities become incapable of manufacturing products for any reason, such as the extended work stoppages we experienced in the first half of 2020 as the pandemic spread and governmental authorities initiated “lock-down” orders for all non-essential activities, we may be unable to meet production requirements, sales and profits could decline, and our commercial reputation could be damaged. Without operation of certain existing production facilities, we may be limited in our ability to deliver products until we restore the manufacturing capability at the particular facility, find an alternative manufacturing facility or arrange an alternative source of supply. Furthermore, in November 2020, the California Privacy Rights Act (“CPRA”) was passed as a ballot measure. While many of the CPRA’s substantive modifications will not go into effect until 2023, they will require businesses to dedicate time and resources on compliance efforts, in some cases requiring new or modified practices and operations.
We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our insurance policies may not offset the lost sales, harm to our business reputation or increased costs that may be experienced during the disruption of operations. Further, any such proceeds may be received and accounted for in a different reporting period, which could materially and adversely affect our business, financial condition, results of operations and cash flow generally or for a specific reporting period.
If we fail to manage our growth effectively or to integrate successfully any new or future business ventures, acquisitions or strategic alliance into our business, our business could be materially adversely harmed.
We regularly consider opportunities to pursue business ventures, acquisitions, and strategic alliances that could leverage our products and capabilities, as well as, enhance our customer base, geographic penetration and scale, to complement our current businesses, some of which could be material. Finding and assessing a potential growth opportunity and completing a transaction involves extensive due diligence, management time and expense; however, the amount of information we can obtain about a potential growth opportunity may be limited. Further, we can give no assurance that new business ventures, acquisitions, and strategic alliances will positively affect our financial performance or will perform as planned, including regarding anticipated synergies. We may not be able to successfully assimilate or integrate companies that we acquire, including personnel, financial systems, distribution, operations, internal controls and general operating procedures. Further, for significant transactions, we would expect to incur additional debt, issue equity and/or increase capital expenditures, which may increase leverage risks, result in dilution or reduce capital available for other investments in ongoing operations. If we fail to assimilate or integrate acquired companies successfully, our business, reputation and results of operations could be materially impacted. Likewise, our failure to integrate and manage acquired companies successfully may lead to future impairment of any associated goodwill and intangible asset balances. Given our limited history in the patient temperature management business, the foregoing risks may be heightened due to our lack of experience in integrating similar businesses.
Work stoppages, including those at our customers, and similar events could significantly disrupt our business.
Because the automotive industry relies heavily on “just-in-time” delivery of components, a work stoppage at one or more of Gentherm's production facilities could have adverse effects on the business. Similarly, if one or more of our direct customers or an OEM were to experience a work stoppage, such as what occurred during the General Motors labor strike occurring in fall 2019 or the work stoppages that occurred in the first half of 2020 as a result of the COVID-19 pandemic, our customer would likely halt or limit purchases of our products, which could result in the temporary shutdown of the related Gentherm production facilities or other restructuring initiatives.
Our global operations subject us to risks that may harm our operations and financial results.
In 2020, 59% of our product revenue was generated from sales to customers outside the United States. We have significant personnel, property, equipment and operations in a number of countries outside of the United States, including Canada, China, Germany, Hungary, Macedonia, Mexico, Ukraine and Vietnam. Our exposure to the risks described below is substantial. We also derive a significant portion of revenues from Europe and Asia and conduct certain investing and financing activities in local currencies.
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In addition to the general risks relating to our operations, our international operations are subject to unique risks inherent in doing business abroad, including:
• exposure to local economic, political and labor conditions;
• expropriation, nationalization or other protectionist activities;
Additionally, our primary manufacturing locations are in Mexico, China, Vietnam, Macedonia and Ukraine, all countries that have historically experienced a heightened degree of political, civil and labor uncertainty. Political conflict and related demonstrations and violence in Ukraine in recent years, for example, highlights the risks to our foreign manufacturing facilities. Although our manufacturing facility in Ukraineis located approximately 700 miles by road from Kiev, and approximately the same distance from the activities along the border of Ukraine and Russia where fighting has occurred, we cannot be certain that similar demonstrations, unrest and international tensions will not affect our facility in the future, including due to electrical outages and periodic battles with separatists closer to our facility. In addition, certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. Furthermore, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we would essentially experience a loss of the use of our Ukrainian facility, which would have a material adverse effect on our business.
Defects or quality issues associated with our medical products could adversely affect the results of our operations.
Our design, manufacture and marketing of automotive products may subject us to warranty claims and product liability in the event that our products fail to perform as expected and, in the case of product liability, such failure of our products results or is alleged to result in bodily injury or property damage. Any large product liability claims, if made, could exceed our insurance coverage limits and insurance may not continue to be available on commercially acceptable terms, if at all, and we may incur significant costs to defend these claims. If any of our products are or are alleged to be defective, we also may be required to participate in a recall or other corrective action involving such products. Automotive manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims, as well as requiring their suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. OEMs historically have recalled vehicles for perceived defects in seat heaters, and we have incurred liabilities in connection with the recalls and other field actions. In addition, governmental regulatory agencies throughout the world, such as NHTSA in the U.S., have safety standards that require manufacturers to remedy defects related to vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard. A recall claim brought against us that is not insured, or a product liability claim brought against us in excess of our available insurance, could have an adverse impact on our results of operations and reputation or market acceptance of our products. In certain instances, allegedly defective products may be the result of components supplied by our supply chain, and we may be limited in our ability to obtain recovery from our suppliers of materials or services
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included within our products that are associated with product liability and warranty claims, particularly if the affected items relate to global platforms or involve defects that are identified years after production.
The design, manufacture and marketing of medical products involve certain inherent risks. Manufacturing or design defects, component failures, unapproved or improper use of our products, or inadequate disclosure of risks or other information relating to the use of our products can lead to regulatory action, injury or other serious adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or as required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall, inadequate disclosure or defect could result in significant costs and lost sales and customers, enforcement actions and/or investigations by state and federal governments or other enforcement bodies, as well as negative publicity and damage to our reputation that could reduce future demand for our products. Personal injuries relating to the use of our products can also result in significant product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in regulatory approval of new products or the imposition of post-market approval requirements, such as further clinical testing. Such clinical testing is costly and time-consuming and could delay market approval or the meeting of additional post-market requirements.
Legal, Regulatory and Compliance Risks
Changes to trade policy, including tariffs and customs regulations, could have a material and adverse effect on our business.
Existing free trade laws and regulations, such as the United States-Mexico-Canada Agreement, provide certain duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as China and Mexico, could have a material adverse effect on our business and financial results. For instance, beginning in 2018, the U.S. and Chinese governments have imposed a series of significant incremental retaliatory tariffs to certain imported products. Most notably with respect to the automotive industry, the U.S. imposed tariffs on imports of certain steel, aluminum and automotive components, and China imposed retaliatory tariffs on imports of U.S. vehicles and certain automotive components. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these tariffs and other regulatory actions could materially affect our business, including in the form of increase cost of goods sold, decreased margins, increased pricing for customers, and reduced sales.
Tax matters, including changes in the corporate tax rates, disagreement with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
We are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax legislation and other initiatives. We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our result of operations and financial position.
We also need to comply with new, evolving or revised tax laws and regulations, more of which may arise as the United States government shifts to a new administration in 2021. The enactment of or increases in tariffs, or other changes in the application or interpretation of tax legislation and other initiatives, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
The value of our deferred tax assets may not be realized, which could materially and adversely affect our operating results.
As of December 31, 2020, we had approximately $72 million in net deferred tax assets. These deferred tax assets include net operating loss carryovers and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our financial statements.
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Our patient temperature management business is subject to extensive industry regulation and failure to comply with all applicable rules and regulation may adversely impact us.
Our patient temperature management products are subject to extensive, complex, costly and evolving government regulation. In the United States, this is principally administered by the Food and Drug Administration (“FDA”). Various regulatory agencies in foreign countries where our medical products are sold also regulate that business. Under both United States and foreign country regulations, we are subject to periodic inspection of our facilities (including third-party facilities that are performing services for us), procedures and operations and testing of our products. Following such FDA inspections, should any noncompliance with regulations or other quality issues be noted, we may receive observations, notices, citations and/or warning letters that could require us to get FDA approval of a corrective action plan and modify certain activities identified during the inspection, possibly at a significant cost. We are also required to report adverse events associated with our medical products to the FDA and other foreign regulatory authorities where our products have been approved or received market clearance. Unexpected or serious health or safety concerns could result in liability claims, recalls, market withdrawals or other regulatory actions. Changes in laws or regulations could require us to change the way we operate or to utilize resources to maintain compliance, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in fines or revocation of our operating permits and licenses or, in rare circumstances, market withdrawal of the product.
The process for obtaining governmental approval to manufacture and market new medical devices is time-consuming and costly. We are dependent on receiving FDA and other governmental or third-party approvals prior to manufacturing, marketing and shipping any new medical products. We cannot be certain that any new medical products we develop will receive FDA or other necessary approvals. Also receipt of approval in one country does not guarantee approval by the FDA or any other foreign regulatory agency.
Any failure to comply with anti-corruption laws and regulations could have a material and adverse effect on our reputation, business and financial results.
Our operations outside of the United States require us to comply with various anti-bribery and anti-corruption regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act and the China Anti-Unfair Competition Law. Violations of these laws, which are complex and often difficult to interpret and apply, could result in significant criminal penalties or sanctions that could adversely affect our business, financial condition, results of operations and cash flows.
A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers, or an investigation regarding vehicle safety generally, could materially and adversely affect our financial performance.
In the event that our products fail to perform as expected, whether allegedly due to our fault or that of one of our suppliers, and such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims, and we have been in the past and may again be required or requested by our customers or regulators to participate in a recall or other corrective action involving such products. We also are a party to agreements with certain of our customers, whereby these customers may pursue claims against us for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims. We carry insurance for certain product liability claims, and have utilized such insurance periodically. However, such coverage may be limited for future claims. In addition, we may not be successful in recovering amounts from third parties, including suppliers, in connection with these claims. These types of claims could materially and adversely affect our financial condition, operating results and cash flows.
We are involved from time to time in various legal and regulatory proceedings and claims, which could adversely affect our financial performance.
We are involved in various legal and regulatory proceedings and claims that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our customers, suppliers or competitors, intellectual property matters, personal injury claims, environmental matters, tax matters and employment matters. Such legal and regulatory proceedings could result in an adverse outcome for the Company that would adversely affect our financial condition, results of operations and cash flows.
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Our results of operations and financial condition may be adversely impacted from a decrease in or cessation or clawback of government incentives related to investments, workforce or production.
We have received, and may receive economic benefits from national, state and local governments in various regions of the world in the form of incentives designed to encourage manufacturers to establish, maintain or increase investment, workforce or production. These incentives may take various forms, including grants, loan subsidies and tax abatements or credits. The impact of these incentives can be significant in a particular market during a reporting period. A decrease in, expiration without renewal of, or other cessation or clawback of government incentives for any of our business units, as a result of administrative decision or otherwise, could have an adverse impact on our results of operations and financial condition, as well as our ability to fund new investments.
We are required to comply with environmental laws and regulations that could cause us to incur significant costs.
Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future. We may also assume, or be deemed to assume, significant environmental liabilities in acquisitions. Environmental liability may be imposed without regard to fault, and under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. No assurance can be given that all environmental liabilities have been identified or that no prior owner or operator of our properties or former properties has created an environmental condition not known to us. Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Violations of these requirements could result in fines or sanctions, obligations to investigate or remediate contamination, third party property damage or personal injury claims due to the migration of contaminants off-site, or modification or revocation of our operating permits, which could materially and adversely affect our financial condition, results of operations and cash flows. Additionally, proposed and existing efforts to address climate change by reducing greenhouse gas emissions could directly or indirectly affect our costs of energy, materials, manufacturing, distribution, packaging and other operating costs, which could impact our business and financial results.
We may face particular privacy, data security and data protection risks.
Legislators and/or regulators in countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws. In particular, the European Union’s General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018, imposes additional obligations and risk upon our business and which increases substantially the penalties to which we could be subject in the event of any non-compliance. The GDPR and other similar laws and regulations, including the new California Consumer Protection Act (“CCPA”) and other similar state laws recently or soon to be enacted, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. Furthermore, the CCPA went into effect on January 1, 2020 and many of its requirements have not yet been interpreted by courts, and best practices are still being developed by the industry, all of which increase the risk of compliance failure and related adverse impacts.
Any failure to maintain effective internal control over financial reporting or disclosure controls and procedures may affect our ability to accurately report our financial results, cause us to fail to meet our reporting obligations, fail to prevent fraud and adversely affect the market price of our common stock.
Under the Sarbanes-Oxley Act, we must maintain effective internal control over financial reporting and disclosure controls and procedures, which requires significant resources and management oversight. Effectiveness of such controls are necessary for us to provide reliable financial reports, effectively prevent fraud and to operate successfully as a public company.
Our management determined we had a material weakness in our internal control over financial reporting as of December 31, 2018, which we determined was remediated as of September 30, 2019. Any future failure to maintain effective internal control over financial reporting or disclosure controls and procedures, or timely effect any necessary improvement of such controls, could harm our results of operations or cause us to fail to meet our reporting obligations, which could subject us to adverse regulatory consequences. Ineffectiveness of such controls also could cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our stock.
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Financial Risks
We are subject to significant foreign currency risk and foreign exchange exposure related to our global operations.
A significant portion of our global transactions is conducted in currencies other than the U.S. Dollar. While we sometimes employ financial instruments to hedge some of our transactional foreign exchange exposure, developing an effective and economical foreign currency risk strategy is complex and expensive and no strategy can completely insulate us from those exposures. Exchange rates can be volatile and could adversely affect our financial results and comparability of results from period to period.
We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations.
We have undertaken significant restructuring activities in recent years that remain ongoing, and may take future restructuring actions to realign and resize our production capacity and cost structure, lower our cost base, improve our financial performance and cash flow generation, and create a simplified organization best positioned to deliver on our key financial and operational priorities. Charges related to these actions or any further restructuring actions may have a material adverse effect on our results of operations and financial condition. We cannot ensure that any current or future restructuring will be completed as planned, on a timely basis or at all, will be on budget, or achieve the desired results.
Our existing indebtedness and the inability to access capital markets could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance.
As of December 31, 2020, our total consolidated indebtedness was $192.4 million. We may also incur additional indebtedness in the future. This significant amount of debt could have important, adverse consequences to us and our investors, including:
• making it more difficult to satisfy other obligations;
Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: incur additional debt, make certain payments or distributions (including for the repurchase or redemption of our shares), engage in mergers or consolidations, make certain dispositions and transfers of assets, enter into transactions with affiliates and guarantee indebtedness. While not unusual for financings of the type that we have, the restrictions in our credit facilities may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute our business plans, take advantage of business opportunities, or react to changing industry conditions.
To the extent that we incur additional indebtedness, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.
If an event of default would occur under our existing debt agreements or any additional indebtedness, our lenders could declare all amounts outstanding to be immediately due and payable, which may cause cross-defaults under our other debt obligations. If our lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to all lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our existing credit facilities, the lenders would have the right to foreclose on certain of our assets, which could have a material adverse effect on our business, results of operations and financial condition.
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An adverse change in the interest rates for our borrowings could adversely affect our financial condition.
Our current outstanding variable rate indebtedness uses LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. The ICE Benchmark Administration, which administers LIBOR, has announced that certain tenors of U.S. Dollar LIBOR will cease at the end of 2021, and the remaining tenors of U.S. Dollar LIBOR will cease at the end of June of 2023 for loans originated prior to the end of 2021. The Alternative Reference Rate Committee, which was convened by the Board of Governors of the Federal Reserve and the Federal Reserve Bank of New York in 2014 to identify alternative reference rates for U.S. Dollar LIBOR, has selected variations of the Secured Overnight Financing Rate (“SOFR”) to replace LIBOR. Our Amended Credit Agreement utilizes LIBOR as a benchmark for calculating the applicable interest rate, and the obligations under our Amended Credit Agreement mature after the expected cessation of LIBOR. Under the terms of our Amended Credit Agreement, the cessation of LIBOR or the announcement by the administrator of LIBOR or a governmental authority with jurisdiction over the Administrative Agent would require us to renegotiate or amend this agreement to select a replacement benchmark, which may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to or elimination of LIBOR or the establishment and use of alternative rates or benchmarks and the corresponding effects on our cost of capital.
Common Stock Investment Risks
The price of our Common Stock may fluctuate significantly.
The price of our Common Stock on the Nasdaq Global Select Market has experienced substantial price volatility in the past, including in 2020 as a result of the impacts of the COVID-19 pandemic, and may continue to do so in the future. Additionally, the Company, the automotive industry and the stock market as a whole have experienced significant stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its stock to exceed the stock’s price at a given point in time. If the Company fails to meet expectations related to future growth, profitability, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.
On December 11, 2020, the Board of Directors authorized a new stock repurchase program, pursuant to which the Company is authorized to repurchase up to $150 million of common stock over a three-year period. 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 Company stock repurchases under the program may result in stock price and volume fluctuations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2020, we operate in over 23 locations across 13 countries, which are primarily for manufacturing, assembly, distribution, warehousing, engineering and testing. The majority of our facilities outside of the U.S., which are principally used in manufacturing, are located in China, Hungary, North Macedonia, Mexico, Ukraine and Vietnam. Our global headquarters is located in Northville, Michigan, our European headquarters is located in Odelzhausen, Germany and our Medical headquarters is located in Cincinnati, Ohio.
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of our business, however there is no current material pending litigation to which we are a party and no material legal proceedings were terminated, settled or otherwise resolved during the fourth quarter of the fiscal year ended December 31, 2020.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
Market Information
Our Common Stock trades on the Nasdaq Global Select Market under the symbol “THRM.”
Holders
As of February 24, 2021, our Common Stock was held by 42 shareholders of record. A substantially greater number of holders are beneficial owners whose shares of record are held by banks, brokers and other nominees.
Dividends
We have not paid any Common Stock cash dividends since formation and we do not expect to pay any in the foreseeable future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon business conditions, our earnings and financial condition and other factors. Currently, our bank credit facilities limit payment of dividends on our Common Stock.
Stock Repurchase Program
In December 2016, the Board of Directors authorized a three-year, $100 million stock repurchase program. In June 2018, our Board of Directors authorized an increase in the stock repurchase plan to $300 million and extended the stock repurchase plan until December 15, 2020. Such stock repurchase program had $74.2 million of repurchase authorization remaining at expiration.
On December 11, 2020, the Board of Directors authorized a new stock repurchase program (the “2020 Stock Repurchase Program”) to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150 million of its issued and outstanding common stock over a three-year period, expiring December 15, 2023.
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. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions, and may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The 2020 Stock Repurchase Program may be modified, extended or terminated at any time without prior notice.
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Issuer Purchases of Equity Securities During Fourth Quarter 2020
Performance Graph
The following graph reflects the comparative changes in the value from December 31, 2015 through December 31, 2020, assuming an initial investment of $100 and the reinvestment of dividends, if any, in (1) our Common Stock, (2) the NASDAQ Composite index, (3) the Russell 2000 Index (4) the Dow Jones U.S. Auto & Parts Index and (5) the Hemscott Auto Parts Index. Historical performance may not be indicative of future shareholder returns.
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As of December 31,
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (and notes related thereto) and other more detailed financial information appearing elsewhere in this Report. Further, you should read the following discussion and analysis of our financial condition and results of operations together with the “Risk Factors” included elsewhere in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Forward-Looking Statements” in Part I of this Report.
Overview
Gentherm Incorporated is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. Our products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well as patient temperature management within the health care industry. Our automotive products can be found on the vehicles of nearly all major automotive manufacturers operating in North America and Europe and several major auto manufacturers in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. The Company is also developing a number of new technologies and products that are expected to help enable improvements to existing products and to create new product applications for existing and new markets.
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. Historically, new vehicle demand has been driven by macro-economic and other factors, such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Economic volatility or weakness, as well as geopolitical factors, in North America, Europe or Asia, could result in a significant reduction in automotive sales and production by our customers, which would have an adverse effect on our business, results of operations and financial condition, as we experienced in 2020 as a result of the COVID-19 pandemic, as described below. While our diversified automotive OEM customer base and geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns, including the current impact of the COVID-19 pandemic, and benefit from industry upturns in the ordinary course, shifts in the mix of global automotive production to higher cost regions or to vehicles with less content could adversely impact our profitability. In addition, we may be adversely impacted by volatility, weakness or slow growth in markets for hybrid electric vehicles specifically.
Recent Trends
General Economic Condition
The COVID-19 pandemic has significantly disrupted global economic activity, including the automotive market. The COVID-19 pandemic was first identified in China around December 2019. The impact of the outbreak quickly expanded beyond China and its surrounding region and has significantly and adversely impacted the entire global economy and automotive market in 2020. During the first quarter of 2020, customer plants in North America and Europe were closed beginning in the second half of March due to the pandemic. This resulted in temporary, partial closures of several of our manufacturing facilities in North America and Europe by the end of March 2020. Customer plants and our manufacturing facilities in Asia were closed for several weeks in February and operated at reduced volumes in March, resuming production to near full capacity by the end of the first quarter, which continued throughout the remainder of the year. However, during the second quarter of 2020, our manufacturing facilities in North America and Europe remained closed until the last week in May due to the pandemic, gradually resuming production to near full capacity in North America, and to about 70% capacity in Europe by the end of June. During the second half of 2020, our customers’ plants were open, and our production volumes were stronger than pre-COVID levels at our manufacturing facilities. The Company has implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines to help ensure the safety and health of all its employees, and it continues to assess and update business continuity plans in the context of this pandemic.
The COVID-19 pandemic significantly adversely affected our operations, results of operations, financial condition, cash flows, liquidity and stock price in the first half of 2020. The second half of 2020 recovered with increased production from the first half of the year. However, the COVID-19 pandemic continues to have a significant impact on global automotive markets in 2021, in the form of supply chain and production disruptions, workforce restrictions, travel restrictions and reduced consumer spending, among other factors. There remains substantial uncertainty regarding the global economic impact of, and the speed and shape of the recovery from,
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the ongoing COVID-19 pandemic, including for the global automotive industry and the resulting impact on our future operations and financial results.
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. According to the forecasting firm IHS Markit (February 2021 release), global light vehicle production in 2020 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to 2019, are shown below (in millions of units):
Total light vehicle production volume in key markets 64.4 75.3 (14.4 )%
The IHS Markit (February 2021 release) forecasted light vehicle production volume in the Company’s key markets for full year 2021 to increase to 72.2 million units, a 12.1% increase from full year 2020 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 may be significantly different from period to period due to changes in macroeconomic conditions or matters specific to the automotive industry, such as the fluctuations that occurred in 2020 due to the COVID-19 pandemic. Further, due to differences in regional product mix at our manufacturing facilities, as well as releases from customers on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of IHS Markit or other third-party sources.
Liquidity and Capital Resources
In light of the substantial economic and financial impact of the COVID-19 pandemic to date, the Company took significant actions in 2020 to address its liquidity position. In March 2020, the Company borrowed an additional $169.5 million under its revolving credit facility to increase its cash position and provide additional financial flexibility. After the drawdown in March 2020, and through December 31, 2020, the Company repaid a net amount of $41.2 million of the amounts outstanding under the Amended Credit Agreement. As of December 31, 2020, inclusive of the net new borrowings, $186.2 million was outstanding under the Amended Credit Agreement. In January 2021, the Company repaid an additional $80.0 million of the amounts outstanding under the Amended Credit Agreement.
In addition, the Company has been prudently addressing its day-to-day operations, including reducing expenses, inventory levels and capital spending, and had deferred a portion of 2020 base salaries generally for all salaried employees. The Company terminated the salary deferral earlier than planned on September 30, 2020 due to the improved market and financial conditions. Based upon consolidated EBITDA for the trailing twelve months calculated for purposes of the Consolidated Leverage Ratio, $288.8 million remained available as of December 31, 2020 for additional borrowings under the Amended Credit Agreement subject to specified conditions that Gentherm currently satisfies. See “—Liquidity and Capital Resources” below for additional information.
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New Business Awards
We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During 2020, we secured an estimated $940 million of automotive new business awards. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by 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 new business awards are an indicator of future revenue. New business awards are not projections of revenue or future business as of December 31, 2020, the date of this Report or any other date. Customer projections regularly change over time and we do not update our calculation of any new business award after the date initially communicated. Automotive new business awards in 2020 were adversely impacted by the macroeconomic changes and related uncertainties caused by the COVID-19 pandemic, but also may not convert into future customer orders similar to historical periods due to the future impacts of the COVID-19 pandemic. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties as described under “Forward-Looking Statements” in Item 1 of this Report.
Stock Repurchase Program
In December 2016, the Board of Directors authorized a three-year, $100.0 million stock repurchase program. In June 2018, our Board of Directors authorized an increase in the stock repurchase plan to $300.0 million and extended the stock repurchase plan until December 15, 2020. In 2020, we repurchased approximately $9.1 million of shares under this plan. The repurchase authorization remaining at expiration was $74.2 million.
On December 11, 2020, the Board of Directors authorized the 2020 Stock Repurchase Program to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150 million of its issued and outstanding common stock over a three-year period, expiring December 15, 2023. In 2020, no shares were repurchased under the 2020 Stock Repurchase Program.
For further information related to our stock repurchase program, see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," and Note 15, "Equity" to the consolidated financial statements included in this Report.
Restructuring
Manufacturing Footprint Rationalization
On September 23, 2019, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. Under this plan, the Company will relocate and consolidate certain existing automotive manufacturing and, as a result, reduce the number of plants by two. On March 20, 2020, the Company announced the initial phase of this restructuring plan, which includes the consolidation of all North American electronics manufacturing to Celaya, Mexico. This will result in the closure of the Burlington, Canada facility, and the transfer of electronics manufacturing from Acuña, Mexico. The closure of the Burlington, Canada facility is expected to be completed mid-year 2021. During the second quarter of 2020, due to circumstances arising from the COVID-19 pandemic, management adjusted the plan to proactively manage its cash position. Adjustments to the plan have resulted in changes to the estimated number of employee separations and total costs to execute the plan. On December 10, 2020, the Company announced the consolidation of our electronics manufacturing in Asia to Bantian, Shenzhen, China, which will result in the closure of our Longgang, Shenzhen, China facility that is expected to be completed by the end of 2021.
During the year ended December 31, 2020, the Company recognized restructuring expense of $(0.8) million for employee separation costs, $0.7 million for accelerated depreciation and $0.3 million for other costs. During the year ended December 31, 2019, the Company recognized restructuring expense of $4.9 million for employee separation costs, and $2.1 million of accelerated depreciation and fixed asset impairment. The Company has recorded approximately $7.1 million of restructuring expenses since the inception of this program.
Under the revised restructuring plan, the Company expects to incur total costs of between $16 million and $19 million, of which between $13 million and $16 million are expected to be cash expenditures. The total expected costs include employee separation costs of between $6.5 million and $7.5 million, capital expenditures of between $3.5 million and $4.5 million and non-cash expenses for accelerated depreciation and impairment of fixed assets of approximately $3 million. The Company also expects to incur other transition costs including recruiting, relocation, and machinery and equipment move and set up costs of between $3 million and $4 million. The actions under this plan are expected to be substantially completed by the end of 2021. The actual timing, costs and savings of the plan may differ materially from the Company’s current expectations and estimates.
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GPT and CSZ-IC Restructuring
During 2019, the Company completed its plan to eliminate non-core areas of investment through the divestitures of Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”) and Gentherm Global Power Technologies (“GPT”). Costs directly associated with the divestiture process were classified as Restructuring expense. During the year ended December 31, 2019, the Company recognized $0.3 million of employee separation costs and $1.0 million of other related costs.
Other Restructuring Activities
As part of the Company’s continued efforts to optimize its cost structure, the Company has undertaken several discrete restructuring actions. During the years ended December 31, 2020 and 2019, the Company recognized $5.4 million and $2.9 million of employee separation costs, respectively, and $0.2 million and $1.4 million of other related costs, respectively. In addition, during the year ended December 31, 2019, the Company recognized $0.4 million of asset impairment loss. These restructuring expenses were primarily associated with restructuring actions focused on optimizing our manufacturing and engineering footprint and the reduction of global overhead costs. The Company will continue to explore opportunities to improve its future profitability and competitiveness. These actions may result in the recognition of additional restructuring charges that could be material.
See Note 5, “Restructuring”, to our consolidated financial statements included in this Report for information about our restructuring activities.
Divestitures
Divestiture of CSZ-IC
On February 1, 2019, the Company completed the divestiture of CSZ-IC and the former Cincinnati Sub-Zero headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million, including $2.5 million of cash proceeds placed into an escrow account for a period of up to one year as partial security for the Company’s obligations under the sale agreement. During the year ended December 31, 2020, the Company resolved its remaining obligations under the sale agreement, and the amounts in escrow were released net of settlement for obligations under the sale agreement. For the year ended December 31, 2019, the Company recognized a $4.3 million gain on sale, which is classified in Net loss on divestitures within the consolidated statements of income.
Divestiture of GPT
OnOctober 1, 2019, the Company completed the divesture of GPT for a nominal amount. For the year ended December 31, 2019, the Company recognized asset impairments and loss on sale totaling $27.1 million, consisting of $16.8 million of impairment on assets held for sale, $4.5 million related to impairment of an equity investment that met held for sale criteria during 2019 and $5.8 million of loss on sale, which includes $4.0 million related to the release of previously deferred foreign currency translation losses recorded in accumulated other comprehensive loss and $1.5 million related to a loan to the buyer that was considered uncollectible. These impairment charges and loss on sale are classified in Impairment loss within the consolidated statements of income.
Acquisitions
Acquisition of Stihler Electronic GmbH (“Stihler”)
On April 1, 2019, Gentherm acquired Stihler, a leading developer and manufacturer of patient and blood temperature management systems, for a purchase price of $15.5 million, net of cash acquired and including $0.7 million of contingent consideration to be paid upon achievement of a milestone that was completed in September 2020, and paid in the fourth quarter of 2020. In addition, the purchase agreement included a contingent payment of $0.7 million to be paid if the selling shareholder remains employed by Stihler through December 2020. This was completed and the payment was recorded as a component of Selling, general and administrative expenses ratably over the service period. The results of operations of Stihler are reported within the Company’s Medical segment from the date of acquisition.
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
In 2018 and 2019, our Industrial reporting segment represented the combined results from our patient temperature management systems business (“Medical”), GPT (through its divestiture on October 1, 2019), CSZ-IC (through its divestiture on February 1, 2019) and non-automotive expenses from our advanced research and development division (through December 31, 2019). The operating
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results from these businesses and division previously were presented together as one reporting segment because of their historical joint concentration on identifying new markets and product applications based on thermal management technologies.
In 2020, the Industrial reporting segment was renamed the Medical reporting segment to reflect the patient temperature management business as the focus and strategic direction of this segment. Also, during 2020, the advanced research and development costs not associated with the Medical segment were moved to the Automotive segment, as this organization primarily supports the Automotive related research and development activities following the divestitures of GPT and CSZ-IC.
See Note 20 to the consolidated financial statements 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.
Results of Operations Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
This section discusses our consolidated results of operations for the years ended December 31, 2020 versus 2019. A detailed discussion of our consolidated results of operations for the years ended December 31, 2019 compared to the year ended December 31, 2018 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Part II of our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 20, 2020.
The results of operations for the years ended December 31, 2020 and 2019, in thousands, were as follows:
Year Ended December 31,
Operating expenses:
Reimbursed research and development expenses (13,928 ) (18,557 ) (4,629 )
Net loss on divestitures — (1,587 ) 1,587
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Product revenues by product category, in thousands, for the years ended December 31, 2020 and 2019 were as follows:
Year Ended December 31,
Product Revenues
Below is a summary of our Product revenues, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31, Variance Due To:
2020 2019 Favorable / (Unfavorable) Automotive Volume FX Pricing/Other Total
Product revenues for the year ended December 31, 2020 decreased 6.0% as compared to the year ended December 31, 2019. The decrease in product revenues is due to unfavorable volumes in our Automotive segment, partially offset by favorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won. The decrease in product revenues included in Variance Due To Pricing/Other above is primarily attributable to the divestitures of CSZ-IC on February 1, 2019 and GPT on October 1, 2019, as well as decreases in customer pricing, partially offset by the acquisition of Stihler on April 1, 2019 and an increase in product revenue in our Medical segment.
Cost of Sales
Below is a summary of our Cost of sales and Gross margin, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31, Variance Due To:
Gross margin - Percentage of product revenues 29.4 % 29.7 %
Cost of sales for the year ended December 31, 2020 decreased 5.6% as compared to the year ended December 31, 2019. The decrease in cost of sales is due to volumes decreases in our Automotive segment, operational performance improvements, and favorable foreign currency impacts, primarily attributable to the Mexican Peso and Ukrainian Hryvnia. The operational performance improvements are primarily attributable to a decrease in material costs, an increase in manufacturing productivity, fixed cost savings and, partially offset by increases in freight costs. The decrease in cost of sales is also due to the following items included in Variance Due To Other above:
▪ $10.2 million decrease attributable to divested businesses (CSZ-IC and GPT);
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▪ $2.7 million decrease due to various government subsidy programs globally; and
Net Research and Development Expenses
Below is a summary of our Net research and development expenses, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Reimbursed research and development expenses (13,928 ) (18,557 ) (4,629 )
Percentage of product revenues 7.5 % 7.5 %
Net research and development expenses for the year ended December 31, 2020 decreased 6.1% as compared to the year ended December 31, 2019. The decrease in net research and development expenses is primarily related to reduced project-related spending due to cost reduction initiatives, partially offset by lower reimbursements for project-related spending.
Selling, General and Administrative Expenses
Below is a summary of our Selling, general and administrative expenses, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Percentage of product revenues 11.5 % 12.2 %
Selling, general and administrative expenses for the year ended December 31, 2020 decreased 11.5% as compared to the year ended December 31, 2019. The decrease in selling, general and administrative expenses is primarily related to the impacts of divested businesses (CSZ-IC and GPT), the absence of CFO transition costs in 2020, as well as the impact of cost reduction initiatives and a reduction in travel expenses, partially offset by mark to market adjustments in cash settled stock appreciation rights.
Restructuring Expenses
Below is a summary of our Restructuring expenses, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Restructuring expenses primarily relate to the Manufacturing Footprint Rationalization restructuring program and other discrete restructuring activities focused on optimizing our manufacturing and engineering footprint and the reduction of global overhead expenses. During the year ended December 31, 2020, the Company recognized expenses of $4.6 million for employee separation costs, $0.7 million of accelerated depreciation and asset impairment charges and $0.5 million of other related costs. During the year ended December 31, 2019, the Company recognized expenses of $8.1 millionfor employee separation costs, $2.5 millionof accelerated depreciation and asset impairment charges and $2.4 millionof other related costs.
See Note 5, "Restructuring" of the consolidated financial statements included in this Report for additional information.
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Interest Expense
Below is a summary of our Interest expense, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
See Note 9, "Debt" of the consolidated financial statements included in this Report for additional information.
Foreign Currency (Loss) Gain
Below is a summary of our Foreign currency (loss) gain, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Foreign currency loss for the year ended December 31, 2020, included net realized foreign currency gain of $2.2 million and unrealized net foreign currency loss of $7.6 million.
Foreign currency gain for the year ended December 31, 2019, included net realized foreign currency gain of $56 thousand and unrealized net foreign currency gain of $2.3 million.
Impairment Loss
Below is a summary of our Impairment loss, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Impairment loss for the year ended December 31, 2019 includes the following:
▪ $16.7 million of impairment loss on assets held for sale (GPT); and
Net Loss on Divestitures
Below is a summary of our Net loss on divestitures, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Net loss on divestitures $ — $ (1,587 ) $ 1,587
Net loss on divestitures for the year ended December 31, 2019 includes the following:
▪ $4.3 million of gain on sale of CSZ-IC; and
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Other Income
Below is a summary of our Other income, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
The increase in other income is primarily due to the gain on sale of certain patents from a non-core business in June 2020. See Note 7, “Goodwill and Other Intangibles” of the consolidated financial statements included in this Report for additional information.
Income Tax Expense
Below is a summary of our Income tax expense, in thousands, for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Income tax expense was $21.9 millionfor the year ended December 31, 2020, on earnings before income tax of $81.6 million, representing an effective tax rate of 26.8%. The tax amount included the effect of the settlement and closure of multi-year international tax audits of $3.4 million. Adjusted for the audit impacts, the effective tax rate was 22.6%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the international provisions of the U.S. tax reform, such as global intangible low-tax income (“GILTI”).
Income tax expense was $10.3 million for the year ended December 31, 2019, on earnings before income tax of $59.2 million, representing an effective tax rate of 17.4%. The pre-tax earnings amount included the non-deductible impairment loss of $27.1 million. Adjusted for the impairment loss, the effective tax rate was 11.9% for 2019. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to (1) the international provisions of the U.S. tax reform, such as GILTI and higher tax rate jurisdictions and (2) the revised valuation of certain deferred income tax assets.
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Liquidity and Capital Resources
Cash and Cash Flows
The Company historically has funded its liquidity needs primarily through cash flows from operating activities and borrowings under its Amended Credit Agreement, as well as equity and other debt financings on a more limited basis. Prior to the COVID-19 pandemic, we were focused on a capital allocation strategy within our strategic plan that included a targeted debt-to-earnings leverage ratio and using a portion of our cash flow for Common Stock repurchases.
In light of the significant economic uncertainty and financial impact of the COVID-19 pandemic, the Company took significant actions to address its liquidity. First, the Company has been prudently addressing its day-to-day operations, including reducing expenses, inventory levels and capital spending. In addition, effective May 1, 2020, the Company implemented base salary deferrals until September 30, 2020, including a 30-40% deferral among executives and a 20% deferral for other salaried employees, to control expenses and conserve cash, which deferral the Company terminated earlier than planned on September 30, 2020 due to the improved market and financial conditions. The Company also revised its non-employee director compensation program for directors elected at the 2020 annual meeting of shareholders, with all compensation being paid in restricted stock for one year.
Also, in March 2020, the Company increased its borrowings under the Amended Credit Agreement by $169.5 million as a safeguard to increase its cash position and provide additional financial flexibility. The proceeds were used for working capital and for other general corporate purposes permitted by the Amended Credit Agreement. After the drawdown in March 2020 and through December 31, 2020, the Company repaid a net amount of $41.2 million of the amounts outstanding under the Amended Credit Agreement. As of December 31, 2020, inclusive of the net new borrowings, $186.2 million was outstanding under the Amended Credit Agreement. In January 2021, the Company repaid an additional $80.0 million of the amounts outstanding under the Amended Credit Agreement. Borrowing availability is subject to, among other things, the Company’s compliance with the minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio as of the end of any fiscal quarter. Based upon consolidated EBITDA for the trailing twelve months calculated for purposes of the Consolidated Leverage Ratio, $288.8 million remained available as of December 31, 2020 for additional borrowings under the Amended Credit Agreement subject to specified conditions that Gentherm currently satisfies.
Further, the Company suspended its stock repurchase program in the first quarter of 2020 to preserve liquidity. The Company repurchased $9.1 million of stock earlier in the first quarter of 2020 and did not make any repurchases under the program during the remainder of 2020. Upon expiration of the prior stock repurchase program on December 15, 2020, $74.2 million of availability remained under the program. On December 11, 2020, the Board of Directors authorized the 2020 Stock Repurchase Program to commence upon expiration of the prior program. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150 million of its issued and outstanding common stock over a three-year period, expiring December 15, 2023.
Based on the Company’s current operating plan and the foregoing actions, management believes cash and cash equivalents at December 31, 2020, together with cash flows from operating activities, and borrowing available under our Amended Credit Agreement, are sufficient to meet operating and capital expenditure needs, and to service debt, for at least the next 12 months. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we may need to obtain alternative sources of capital, and we may finance additional liquidity needs in the future through one or more equity or debt offerings.
A continued worldwide disruption, including from additional waves of pandemic outbreaks, from the COVID-19 pandemic, and actions that lending institutions, our customers, consumers and governmental authorities may take in response, could materially affect our future access to sources of liquidity, and there can be no assurance that such capital will be available at all or on reasonable terms. Further, the extent to which the COVID-19 pandemic adversely affects our future financial performance and thus our cash flows will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions will resume. Even after the COVID-19 pandemic has subsided, we may continue to experience significant adverse impacts on our business, financial performance, financial condition, cash flows, liquidity and stock price for a lengthy period of time as a result of its global economic impact.
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The following table represents our cash and cash equivalents and short-term investments, in thousands:
Year Ended December 31,
Cash (used in) provided by investing activities (18,220 ) 5,840
Cash provided by (used in) financing activities 115,480 (108,593 )
Foreign currency effect on cash and cash equivalents 7,442 (2,722 )
Cash, cash equivalents and restricted cash at end of period $ 268,345 $ 52,948
Cash Flows From Operating Activities
We manage our cash, cash equivalents and short-term investments to fund operating requirements and preserve liquidity to take advantage of future business opportunities. The following table compares the cash flows from operating activities earned during 2020 and 2019, in thousands:
Year Ended December 31,
Operating Activities:
Change in defined benefit pension plans (748 ) (570 ) (178 )
Loss on sale of property and equipment 683 462 221
Gain on sale of patents (1,978 ) — (1,978 )
Net loss on divestitures — 1,587 (1,587 )
Changes in operating assets and liabilities:
Working Capital
The following table illustrates changes in working capital during 2020, in thousands:
Increase in cash, cash equivalents and restricted cash 208,693
Increase in accounts receivable 45,182
Increase in inventory 946
Decrease in tax receivables, net (16,786 )
Increase in other assets 3,486
Increase in accounts payable (30,912 )
Increase in accrued expenses and other liabilities (2,864 )
Foreign currency effect on working capital 12,718
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The following table highlights significant transactions that contributed to the increase in cash experienced during the year ended December 31, 2020, in thousands:
Net cash provided by operating activities $ 110,695
Repayments of debt (91,439 )
Purchases of property and equipment (17,219 )
Proceeds from the exercise of Common Stock options 16,552
Cash paid for the repurchase of Common Stock (9,092 )
Increase in cash, cash equivalents and restricted cash $ 215,397
Cash Flows From Investing Activities
Cash used in investing activities was $18.2 million during 2020, reflecting purchases of property and equipment of $17.2 million and the acquisition of intangible assets of $3.1 million, partially offset by $2.1 million in proceeds from the sale of patents and property and equipment.
Cash Flows From Financing Activities
Cash provided by financing activities was $115.5 million during 2020, reflecting additional borrowings on the U.S. Revolving Note totaling $201.2 million partially offset by payments of principal on the U.S. Revolving Note totaling $91.4 million. Borrowings under the Amended Credit Agreement mature on June 27, 2024. See Note 9, “Debt” of the consolidated financial statements included in this Report for additional information. Cash was also paid for the repurchase of Common Stock totaling $9.1 million and for cancellations of restricted stock awards totaling $1.1 million, partially offset by proceeds from the exercise of Common Stock options totaling $16.6 million.
Debt
Amended Credit Agreement
On June 27, 2019, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Amended Credit Agreement amended and restated in its entirety the prior Credit Agreement. The outstanding principal and interest of the U.S. Revolving Note under the prior Credit Agreement continued and constitute obligations under the Amended Credit Agreement.
The Amended Credit Agreement increased the U.S. Revolving Note from $350.0 million to $475.0 million and extended the maturity from March 17, 2021 to June 27, 2024. The Amended Credit Agreement also provides $15.0 million availability for the issuance of letters of credit and a maximum of $40.0 million for swing line borrowing. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the Amended Credit Agreement. The Company had no outstanding letters of credit issued under the Amended Credit Agreement as of December 31, 2020 and 2019.
The U.S. borrowers and guarantors participating in the Amended Credit Agreement also entered into a related amended and restated pledge and security agreement. The amended and restated pledge and security agreement grants a security interest to the lenders in substantially all of the personal property of the Company and its U.S. subsidiaries designated as borrowers to secure their respective obligations under the Amended Credit Agreement, including the stock and membership interests of specified subsidiaries (limited to 66% of the stock in the case of certain non-U.S. subsidiaries). In addition to the security obligations, all obligations under the Amended Credit Agreement are unconditionally guaranteed by certain of the Company’s subsidiaries. The Amended Credit Agreement restricts, among other things, the amount of dividend payments the Company can make to shareholders.
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The Amended Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets, merge with other companies or enter into certain other transactions outside the ordinary course of business, and (ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio (based on consolidated EBITDA for the applicable trailing 12-month period as defined in the Amended Credit Agreement) as of the end of any fiscal quarter. The Amended Credit Agreement also contains customary events of default. As of December 31, 2020, the Company was in compliance with the terms of the Amended Credit Agreement.
Under the Amended Credit Agreement, U.S. Dollar denominated loans bear interest at either a base rate (“Base Rate Loans”) or Eurocurrency rate (“Eurocurrency Rate Loans”), plus a margin (“Applicable Rate”). The rate for Base Rate Loans is equal to the highest of the Federal Funds Rate (0.09% at December 31, 2020) plus 0.50%, Bank of America’s prime rate (3.25% at December 31, 2020), or the Eurocurrency rate plus 1.00%. The rate for Eurocurrency Rate Loans denominated in U.S. Dollars is equal to the London Interbank Offered Rate (0.14% at December 31, 2020). All loans denominated in a currency other than the U.S. Dollar must be Eurocurrency Rate Loans. Interest is payable at least quarterly.
The Applicable Rate varies based on the Consolidated Leverage Ratio reported by the Company. As long as the Company is not in default of the terms and conditions of the Amended Credit Agreement, the lowest and highest possible Applicable Rate is 1.25% and 2.25%, respectively, for Eurocurrency Rate Loans and 0.25% and 1.25%, respectively, for Base Rate Loans.
In March 2020, the Company increased its borrowings under the Amended Credit Agreement by $169.5 million as a safeguard to increase its cash position and provide additional financial flexibility due to the COVID-19 pandemic. The proceeds have been and will continue to be used for working capital and for other general corporate purposes permitted by the Amended Credit Agreement. After the drawdown in March 2020 and through December 31, 2020, the Company repaid a net amount of $41.2 million of the amounts outstanding under the Amended Credit Agreement. In January 2021, the Company repaid an additional $80.0 million of the amounts outstanding under the Amended Credit Agreement. As of December 31, 2020, inclusive of the net new borrowings in 2020, $186.2 million was outstanding under the Amended Credit Agreement. Borrowing availability is subject to, among other things, the Company’s compliance with the minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio as of the end of any fiscal quarter. Based upon consolidated EBITDA for the trailing twelve months calculated for purposes of the Consolidated Leverage Ratio, $288.8 million remained available as of December 31, 2020 for additional borrowings under the Amended Credit Agreement subject to specified conditions that Gentherm currently satisfies.
DEG Vietnam Loan
The Company also has a fixed interest rate loan with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank. The fixed interest rate senior loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”). The DEG Vietnam Loan is subject to semi-annual principal payments that began November 2017 and will end May 2023. Under the terms of the DEG Vietnam Loan, the Company must maintain a minimum Enhanced Equity Ratio, as defined by the DEG Vietnam Loan agreement, based on the financial statements of Gentherm’s wholly owned subsidiary, Gentherm Vietnam Co. Ltd. As of December 31, 2020, the Company was in compliance with all terms as outlined in the DEG Vietnam Loan.
The following table summarizes the Company’s debt at December 31, 2020 (dollars in thousands).
December 31,
Interest Rate Principal Balance Interest Rate Principal Balance
Amended Credit Agreement:
Long-term debt, less current maturities $ 189,934 $ 78,124
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. These estimates and assumptions include, but are not limited to:
• Product revenues;
• Impairments of goodwill and other intangible assets;
• Accrued warranty costs;
• Income taxes;
• Stock compensation; and
Revenue Recognition
Revenue is recognized from agreements containing enforceable rights and obligations, when promised goods are delivered or services are completed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling fees billed to customers are included in net sales, while costs of shipping and handling are included in cost of sales.
Automotive Revenues