Gentherm(THRM) - 2020 Q4 - Annual Report

Part I Business Gentherm develops thermal management solutions for automotive and medical sectors, experiencing COVID-19 impacts in 2020 while pursuing strategic growth - The COVID-19 pandemic significantly disrupted the global automotive industry, with light vehicle production in Gentherm's key markets declining by 14.4% in 2020 compared to 2019. This led to temporary manufacturing closures and supply chain disruptions for the company[19] - The company's business strategy is centered on four pillars: Focus Growth, Extend Technology Leadership, Expand Gross Margin and Return on Invested Capital, and Optimize Capital Allocation[31] Product Revenue Contribution (2018-2020) | Product Category | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Climate Control Seat (CCS) | 38% | 37% | 36% | | Heated Seat | 27% | 29% | 29% | Revenue by Automotive OEM (2018-2020) | OEM | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | General Motors | 14% | 14% | 14% | | Hyundai | 12% | 9% | 7% | | Ford Motor Company | 9% | 11% | 10% | | Volkswagen | 9% | 8% | 9% | | Stellantis | 9% | 10% | 10% | | Other (including Medical) | 47% | 43% | 50% | - As of December 31, 2020, Gentherm held 518 issued patents, with the majority directed towards climate control products, thermoelectric technologies, and heating elements[78] Worldwide Employment Levels (2019-2020) | Region/Country | 2020 | 2019 | | :--- | :--- | :--- | | Mexico | 3,938 | 4,130 | | Macedonia | 2,131 | 1,871 | | China | 1,605 | 1,812 | | Ukraine | 1,722 | 1,725 | | Vietnam | 916 | 909 | | United States and Canada | 618 | 694 | | Total | 11,519 | 11,726 | Risk Factors The company faces significant risks including the COVID-19 pandemic, automotive market cyclicality, supply chain disruptions, intense competition, and global operational challenges - The COVID-19 pandemic is a primary risk, with potential adverse effects on the company's liquidity, the automotive industry, supply chain, customers, and growth prospects[92][93][94] - The automotive industry, which accounted for 95% of product revenues in 2020, is cyclical and dependent on general economic conditions, making the company's performance sensitive to declines in vehicle production[96] - A significant shortage of semiconductors, which began in late 2020, poses a material risk to the company's production schedule and profitability, as it can disrupt both its own manufacturing and that of its OEM and Tier 1 customers[97][98] - The company faces intense competition from larger suppliers and is subject to constant downward pricing pressure from automotive manufacturers, which could adversely affect financial performance[99][104] - The loss of principal customers Lear (15% of 2020 revenue) or Adient (14% of 2020 revenue) would have a material adverse effect on the company's results[103] - Global operations expose the company to risks including political and labor instability, complex local regulations, tariffs, and currency exchange rate fluctuations, particularly in its primary manufacturing locations in Mexico, China, Vietnam, Macedonia, and Ukraine[124][125] - The company's existing indebtedness of $192.4 million as of year-end 2020 could restrict business activities, and covenants in its debt agreements limit its ability to incur more debt, pay dividends, or make certain investments[149] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[156] Properties As of December 31, 2020, Gentherm operates over 23 locations in 13 countries, with primary manufacturing in China, Hungary, North Macedonia, Mexico, Ukraine, and Vietnam - The company operates over 23 locations in 13 countries for manufacturing, assembly, distribution, and engineering[157] - Primary manufacturing facilities are located in China, Hungary, North Macedonia, Mexico, Ukraine, and Vietnam[157] Legal Proceedings The company states that it is not a party to any material pending litigation as of the end of the fourth quarter of fiscal year 2020 - There is no current material pending litigation to which the company is a party[158] Mine Safety Disclosures This item is not applicable to the company - Not applicable[159] Part II Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Gentherm's common stock trades on Nasdaq under 'THRM'; the company does not pay dividends but authorized a $150 million stock repurchase program in December 2020 - The company's common stock trades on the Nasdaq Global Select Market under the symbol "THRM"[161] - No cash dividends have been paid, and none are expected in the foreseeable future. Bank credit facilities currently limit dividend payments[162] - On December 11, 2020, the Board of Directors authorized a new stock repurchase program for up to $150 million of common stock over a three-year period, expiring December 15, 2023[164] - No shares were repurchased during the fourth quarter of 2020[167] Selected Financial Data This item is not applicable to the company - Not applicable[171] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, COVID-19 led to a 6.0% revenue decrease to $913.1 million, yet net income increased to $59.7 million due to cost reductions and absence of prior year impairment charges Results of Operations In 2020, product revenues decreased 6.0% to $913.1 million due to COVID-19, while operating income rose to $89.2 million and net income to $59.7 million from reduced expenses and no impairment Consolidated Results of Operations (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Product revenues | $913,098 | $971,684 | $(58,586) | | Gross margin | $268,104 | $288,335 | $(20,231) | | Operating income | $89,217 | $84,260 | $4,957 | | Net income | $59,690 | $48,866 | $10,824 | Product Revenues by Category (2019 vs. 2020) | Product Category | 2020 (in thousands) | 2019 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Climate Control Seat (CCS) | $342,550 | $359,355 | (4.7)% | | Seat Heaters | $249,665 | $284,174 | (12.1)% | | Steering Wheel Heaters | $76,272 | $65,426 | 16.6% | | Battery Performance Solutions (BPS) | $50,901 | $41,498 | 22.7% | | Medical | $43,100 | $36,860 | 16.9% | | Total Company | $913,098 | $971,684 | (6.0)% | - The 6.0% decrease in product revenues was primarily due to unfavorable automotive volumes ($(38.2) million), partially offset by favorable foreign currency impacts ($7.1 million). Divestitures of CSZ-IC and GPT also contributed to the decline[202] - Selling, general and administrative (SG&A) expenses decreased by 11.5% due to the impact of divested businesses, cost reduction initiatives, and the absence of 2019's CFO transition costs[205] - The effective tax rate for 2020 was 26.8%, up from 17.4% in 2019. The 2020 rate included a $3.4 million impact from the settlement of multi-year international tax audits[216][217] Liquidity and Capital Resources In 2020, cash and equivalents increased to $268.3 million from $52.9 million due to a $169.5 million credit facility draw, with total debt rising to $192.4 million - In response to COVID-19 uncertainty, the company borrowed an additional $169.5 million under its Amended Credit Agreement in March 2020 to increase its cash position and provide financial flexibility[221] Summary of Cash Flows (in thousands) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $110,695 | $118,803 | | Net cash (used in) provided by investing activities | $(18,220) | $5,840 | | Net cash provided by (used in) financing activities | $115,480 | $(108,593) | | Cash, cash equivalents and restricted cash at end of period | $268,345 | $52,948 | - As of December 31, 2020, $186.2 million was outstanding under the Amended Credit Agreement, with an additional $288.8 million available for borrowing[221] Total Debt Summary (in thousands) | Debt Instrument | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | U.S. Revolving Note (USD) | $171,500 | $50,000 | | U.S. Revolving Note (EUR) | $14,684 | $21,874 | | DEG Vietnam Loan | $6,250 | $8,750 | | Total debt | $192,434 | $80,624 | Critical Accounting Policies The company's critical accounting policies involve significant estimates for revenue recognition, goodwill impairment, warranty costs, income taxes, and stock-based compensation - Revenue Recognition: For long-term automotive agreements, revenue is recognized when control transfers. If an agreement provides a material right (e.g., a future discount), a portion of the transaction price is allocated to this separate performance obligation and recognized over time[246][247] - Goodwill Impairment: Goodwill is tested for impairment annually or when triggering events occur. The company uses a qualitative assessment first, followed by a quantitative test comparing the reporting unit's fair value (estimated using a discounted cash flow model) to its carrying value if necessary[250][251] - Accrued Warranty Costs: Warranty obligations are accrued based on management estimates of future failure rates and historical claim cost experience[253] - Income Taxes: The company uses the liability method, recording deferred tax assets and liabilities. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized[254] Quantitative and Qualitative Disclosures About Market Risk Gentherm faces market risks from foreign currency fluctuations and interest rate changes, using derivatives to hedge currency exposure and estimating a $0.9 million impact for a 100 basis point interest rate shift - The company is exposed to market risk from changes in foreign currency exchange rates (primarily Euro, Mexican Peso, Chinese Renminbi) and interest rates on its debt[266] - To manage foreign currency risk, the company uses derivative contracts. As of December 31, 2020, it had foreign currency derivative contracts with a notional value of $13.3 million[267] - A hypothetical 100 basis point (1%) change in interest rates on the company's variable-rate debt would change its annual interest expense by an estimated $0.9 million[272] Financial Statements and Supplementary Data This section incorporates by reference the audited consolidated financial statements and related financial information, which are indexed on page F-1 of the report - The audited consolidated financial statements and related financial information are indexed on page F-1 of this Report[275] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[276] Controls and Procedures As of December 31, 2020, management concluded that the company's disclosure controls and internal control over financial reporting were effective - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2020[277] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020[278] - No changes in internal control over financial reporting occurred during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, the company's internal controls[280] Other Information The company reports no other information for this item - None[282] Part III Directors, Executive Officers and Corporate Governance The information required for this item, concerning directors, executive officers, and corporate governance, is incorporated by reference from the company's proxy statement for the 2021 annual meeting of shareholders - Information is incorporated by reference from the proxy statement for the 2021 annual meeting of shareholders[284] Executive Compensation The information required for this item, concerning executive and director compensation, is incorporated by reference from the company's proxy statement for the 2021 annual meeting of shareholders - Information is incorporated by reference from the proxy statement for the 2021 annual meeting of shareholders[285] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item, concerning security ownership and equity compensation plans, is incorporated by reference from the company's proxy statement for the 2021 annual meeting of shareholders - Information is incorporated by reference from the proxy statement for the 2021 annual meeting of shareholders[285] Certain Relationships and Related Transactions, and Director Independence The information required for this item, concerning related person transactions and director independence, is incorporated by reference from the company's proxy statement for the 2021 annual meeting of shareholders - Information is incorporated by reference from the proxy statement for the 2021 annual meeting of shareholders[286] Principal Accounting Fees and Services The information required for this item, concerning principal accounting fees and services, is incorporated by reference from the company's proxy statement for the 2021 annual meeting of shareholders - Information is incorporated by reference from the proxy statement for the 2021 annual meeting of shareholders[286] Part IV Exhibits and Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides an index of all financial statements, schedules, and exhibits filed with the report[288] Form 10-K Summary The company reports no Form 10-K summary - None[294]