GENTHERM INC MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
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 Annual 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 Annual 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 Annual Report.
Overview
Gentherm Incorporated is a global developer, manufacturer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications in the automotive and medical industries. Within the automotive industry, our products provide solutions for passenger climate comfort and convenience, battery thermal management and cell connecting systems. Within the medical industry our products provide patient temperature management solutions. Our automotive products can be found on vehicles manufactured by nearly all the major OEMs operating inNorth America andEurope , and several major OEMs inAsia . 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 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 OEMs, which is ultimately dependent on consumer demand for automotive vehicles, our product content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. Historically, new vehicle demand and product content (i.e. vehicle features) have been driven by macro-economic and other factors, such as interest rates, automotive manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Vehicle content has also been driven by trends in consumer preferences, such as preferences for smart devices and features, personalized user experience, and comfort, health and wellness. Economic volatility or weakness, as well as geopolitical factors, inNorth America ,Europe orAsia , have had and 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. In 2020 and 2021, and continuing into 2022, the automotive industry has experienced fluctuating demand and production disruptions related to supply chain challenges, facility closures, labor shortages, work stoppages and inflationary pressures, as a result of the COVID-19 pandemic and associated macroeconomic conditions, as described below. We believe our diversified 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 ongoing impact of the COVID-19 pandemic and associated economic conditions, and benefit from industry upturns in the ordinary course. However, shifts in the mix of global automotive production to higher cost regions or to vehicles with less of our product content as well as continuing production challenges and inflationary pressures could adversely impact our profitability. In addition, we may be adversely impacted by volatility, weakness or accelerated growth in markets for hybrid or electric vehicles specifically. We believe our products offer certain advantages for hybrid and electric vehicles, including improved energy efficiency, and position us well to withstand changes in the volume mix between vehicles driven by internal combustion engines and hybrid and other electric vehicles. We also believe that products we are developing, such as ClimateSense®, position us well to address trends in consumer preferences such as personalized user experience, comfort, health and wellness.
Recent trends
General economic situation
The COVID-19 pandemic that began aroundDecember 2019 introduced significant volatility to the global economy, disrupted supply chains and had a widespread adverse effect on the global automotive industry in the first half of 2020, with various direct and indirect adverse impacts continuing throughout 2021 and into 2022. Beginning inFebruary 2020 and continuing intoJune 2020 , substantially all of the Company's major OEM and Tier 1 customers temporarily ceased or significantly reduced production as a result of restrictions that were requested or mandated by governmental authorities. As a result, substantially all of our manufacturing facilities either temporarily suspended production or experienced significant reductions in volumes during this period. By the end of the second quarter of 2020, the Company had reopened all of its manufacturing facilities, in line with industry demand, and in accordance with local government requirements. 31
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Although global automotive industry output has improved compared to the first half of 2020, output remains below recent historical levels.
The lingering impacts of COVID-19 into 2021 have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. These broad-based inflationary impacts have negatively impacted the Company's financial condition, results of operations and cash flows throughout 2021. We expect these inflationary impacts to continue for the foreseeable future. Supply shortages of semiconductor chips and other components have resulted in decreases in global automotive vehicle production and significant volatility in customer vehicle production schedules. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, includingGentherm , have been unable to fully meet the vehicle production demands of the OEMs due to events which are outside the Company's control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, fires at suppliers' facilities, significant weather events impacting semiconductor supplier facilities in the southernUnited States , and other extraordinary events. The Company was able to mitigate the impacts of supply chain disruptions in order to satisfy customer orders during the first three quarters of 2021, however, during the fourth quarter of 2021 and continuing into 2022 we have experienced and may continue to experience direct impacts of ongoing shortages of semiconductors. Our ability to meet customer orders without significant delay and/or expense for 2022 and beyond remains subject to significant uncertainty. In response to the global supply chain instability and inflationary cost increases the Company has taken several actions to minimize any potential and actual adverse impacts by working closely with its suppliers and customers to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise. We expect global supply chain instability will continue to have an adverse impact on our business and financial performance for the foreseeable future, and such adverse impact may be material. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy continue to evolve. Accordingly, the significance of the future adverse impact on our business and financial statements remains subject to significant uncertainty as of the date of this filing.
Light vehicle production volumes
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm IHS Markit (February 2022 release), global light vehicle production in 2021 in the Company's key markets ofNorth America ,Europe ,China ,Japan andKorea , as compared to 2020, are shown below (in millions of units): 2021 2020 % Change North America 13.0 13.0 0.0 % Europe 15.9 16.6 (4.2 )% Greater China 24.8 23.6 5.1 % Japan / South Korea 10.9 11.2 (2.7 )% Total light vehicle production volume in key markets 64.6 64.4 0.3 % The IHS Markit (February 2022 release) forecasted light vehicle production volume in the Company's key markets for full year 2022 to increase to 70.8 million units, an 9.6% increase from full year 2021 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 since 2020 and remain ongoing due to the COVID-19 pandemic. Further, due to differences in regional product mix at our manufacturing facilities, as well as material production schedules from our customers for our products on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of IHS Markit or other third-party sources. New Business Awards We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During 2021, we secured an estimated$1,613 million of automotive new business awards, which is at the high end of the 32 -------------------------------------------------------------------------------- range of new business awards in recent years. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by our customers toGentherm 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 ofDecember 31, 2021 , the date of this Annual 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 2021 also do not reflect, in particular, the impact of the COVID-19 pandemic and related macroeconomic challenges on future business. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties as described in Item 1 under "Forward-Looking Statements" of this Annual Report. Restructuring
Rationalization of the manufacturing footprint
InSeptember 2019 , the Company committed to a restructuring plan ("Plan") to improve the Company's manufacturing productivity and rationalize its footprint. Under this Plan, the Company is relocating and consolidating certain automotive electronics manufacturing plants inNorth America andChina . During 2021, the Company completed the closures and relocation of its automotive electronics manufacturing operations fromBurlington, Canada toCelaya, Mexico and from Longgang,Shenzhen, China to Bantian,Shenzhen, China . As ofDecember 31, 2021 , the electronics manufacturing in Acuña,Mexico continues to transition toCelaya, Mexico . During the year endedDecember 31, 2021 , the Company recognized restructuring expense of$1.3 million for employee separation costs and$1.7 million for other costs, primarily related to equipment move and set up costs. During the year endedDecember 31, 2020 , the Company recognized restructuring expense of$(0.8) million primarily related to a reduction in the estimates of previously recognized employee separation costs and$1.0 million for other costs, primarily related to accelerated depreciation and equipment move and set up costs. During the year endedDecember 31, 2019 , the Company recognized restructuring expense of$4.9 million for employee separation costs, and$2.1 million of other costs, primarily related to accelerated depreciation and fixed asset impairment. The Company has recorded approximately$10.1 million of restructuring expenses since the inception of this program and as ofDecember 31, 2021 ,$0.9 remains accrued. Actions under the Plan are expected to be substantially completed by the first half of 2022 and future expenses are expected to be less than$1 million .
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 endedDecember 31, 2021 , 2020 and 2019, the Company recognized$0.9 million ,$5.4 million and$3.2 million of employee separation costs, respectively, and$0.0 million ,$0.2 million and$2.8 million of other related costs, respectively. These restructuring expenses were primarily associated with restructuring actions focused on the rotation of our manufacturing footprint to best cost locations and the reduction of global overhead costs.
See Note 5, “Restructuring”, to the consolidated financial statements included in this annual report for information on our restructuring activities.
Disposals
Disposal of GPT
OnOctober 1, 2019 , the Company completed the sale of its remote power generation systems business,Gentherm Global Power Technologies ("GPT") for a nominal amount and recognized a$5.9 million loss on sale for the year endedDecember 31, 2019 , which is classified as Net loss on divestitures within the consolidated statements of income. During 2019, the Company also recognized impairment losses of$21.2 million for its GPT assets held for sale. These impairment charges are classified as Impairment loss within the consolidated statements of income. 33
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Sale of CSZ-IC
OnFebruary 1, 2019 , the Company completed the sale of its environmental test equipment business, Cincinnati Sub Zero industrial chamber business ("CSZ-IC") and former Cincinnati Sub-Zero headquarters facility for total cash proceeds of$47.5 million . The Company recognized a$4.3 million pre-tax gain on the sale of CSZ-IC for the year endedDecember 31, 2019 which is classified as Net loss on divestitures within the consolidated statements of income.
Acquisitions
The acquisition of
OnJuly 1, 2021 , the Company acquired the medical business unit ofBeckmann & Egle Industrieelektronik GmbH ("B&E"), a developer and manufacturer of electronic control units, for a purchase price of$2.8 million . The acquisition was accounted for as a business combination with the purchase price assigned to inventory, property and equipment and other intangible assets based on their estimated fair values as of the acquisition date. The pro-forma effect of the B&E acquisition does not materially impact the Company's reported results for any period presented, and as a result no pro forma financial statements are presented. The results of operations of B&E are reported within the Company's Medical segment from the date of acquisition.
The acquisition of
OnApril 1, 2019 , the Company acquiredStihler Electronic GmbH ("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 that was paid upon achievement of a milestone during the year endedDecember 31, 2020 . The results of operations of Stihler are reported within the Company's Medical segment from the date of acquisition.
Investments in non-consolidated associates
During 2021, the Company's Automotive segment invested$5.2 million for an ownership interest inCarrar Ltd. ("Carrar"), anIsrael -based technology developer of advanced thermal management systems for the electric mobility market. The Company determined that Carrar is a VIE; however, the Company does not have a controlling financial interest or have the power to direct the activities that most significantly affect the economic performance of the investment. Therefore, the Company has concluded that it is not the primary beneficiary.Gentherm's investment in Carrar is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, and is recorded in Other non-current assets.
In 2021, the Company’s Automotive segment invested
the investment in Forciot is valued at cost, less depreciation, adjusted for price variations observable during regular transactions for identical or similar investments from the same issuer, and is recorded in other non-current assets.
InDecember 2021 , the Company committed to make a$5 million investment inAutotech Fund III, L.P. , pursuant to a limited partnership agreement. As a limited partner, the Company will periodically make capital contributions toward this total commitment amount over the expected ten-year life of the fund. The Company has not made any contributions to theAutotech Fund III, LP as ofDecember 31, 2021 . This fund focuses broadly on the automotive industry and compliments the Company's innovation strategy.
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical. The financial information used by our chief operating decision maker to assess operating performance and allocate resources is based on these reportable segments. The Automotive reporting segment is comprised of the results from our global automotive businesses, including the design, development, manufacturing and sales of automotive climate comfort systems, automotive cable systems, battery performance solutions, and automotive electronic and software systems.
The medical information segment includes the results of the patient temperature management business in the medical industry.
See Note 19, “Segmented Information,” to the consolidated financial statements included in this Annual Report for a description of our reportable segments and their proportionate contribution to the Company’s reported product revenues and operating income.
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Results of operations Year ended
This section discusses our consolidated results of operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For a detailed discussion of our consolidated results of operations for the years endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation" under "Results of Operations Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 " in our annual report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onMarch 1, 2021 . The results of operations for the years endedDecember 31, 2021 and 2020, in thousands, were as follows: Year Ended December 31, Favorable / 2021 2020 (Unfavorable) Product revenues$ 1,046,150 $ 913,098 $ 133,052 Cost of sales 742,519 644,994 (97,525 ) Gross margin 303,631 268,104 35,527 Operating expenses: Research and development expenses 91,807 81,968 (9,839 )
Reimbursed research and development costs (16,593 ) (13,928 )
2,665 Net research and development expenses 75,214 68,040 (7,174 )
Selling, general and administrative expenses 109,554 105,044
(4,510 ) Restructuring expenses 3,857 5,803 1,946 Total operating expenses 188,625 178,887 (9,738 ) Operating income 115,006 89,217 25,789 Interest expense, net (2,758 ) (4,559 ) 1,801 Foreign currency gain (loss) 1,487 (5,439 ) 6,926 Other income 117 2,337 (2,220 ) Earnings before income tax 113,852 81,556 32,296 Income tax expense 20,418 21,866 1,448 Net income$ 93,434 $ 59,690 $ 33,744
Product revenue by product category, in thousands, for the fiscal years ended
Year Ended December 31
2021 2020 % Change
Climate Control Seat $ 393,816 $ 342,550 15.0 %
Seat Heaters 270,054 249,665 8.2 %
Steering Wheel Heaters 102,496 76,272 34.4 %
Automotive Cables 84,114 73,997 13.7 %
Battery Performance Solutions 69,594 50,901 36.7 %
Electronics 51,648 53,238 (3.0 )%
Other Automotive 32,911 23,375 40.8 %
Subtotal Automotive segment 1,004,633 869,998 15.5 %
Medical Segment 41,517 43,100 (3.7 )%
Total Company $ 1,046,150 $ 913,098 14.6 %
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Product Revenues
Below is a summary of our Product revenues, in thousands, for the years ended
December 31, 2021 and 2020:
Year Ended December 31, Variance Due To:
Favorable / Automotive
2021 2020 (Unfavorable) Volume FX Pricing/Other Total
Product revenues $ 1,046,150 $ 913,098 $ 133,052 $ 127,044 $ 21,846 $ (15,838 ) $ 133,052
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-------------------------------------------------------------------------------- Product revenues for the year endedDecember 31, 2021 increased 14.6% as compared to the year endedDecember 31, 2020 . Revenue increased in all product categories except Electronics. The increase in product revenues is due to favorable volumes in our Automotive segment and 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 decreases in automotive customer pricing and 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
Year Ended December 31, Variance Due To:
Favorable / Automotive Operational
2021 2020 (Unfavorable) Volume Performance FX Other Total
Cost of sales $ 742,519 $ 644,994 $ (97,525 ) $ (76,750 ) $ 3,877 $ (14,294 ) $ (10,358 ) $ (97,525 )
Gross margin 303,631 268,104 35,527 $ 50,294 $ 3,877 $ 7,552 $ (26,196 ) $ 35,527
Gross margin - Percentage of
product revenues 29.0 % 29.4 %
Cost of sales for the year ended December 31, 2021 increased by 15.1% as
compared to the year ended December 31, 2020 . The increase in cost of sales is
primarily related to increased volumes in our Automotive segment and unfavorable
foreign currency impacts primarily attributable to the Euro and Chinese
Renminbi. The offsetting Variance Due To Operational Performance is primarily
attributable to an increase in manufacturing productivity, partially offset by
higher material and freight costs. The increase in cost of sales is also due to
the following items included in Variance Due To Other above:
? $3.7 million increase due to higher factory costs
? $3.5 million increase due to wage inflation
?
programs ?$1.1 million increase due to pre-production costs
?
cash settled stock appreciation rights ?$0.8 million increase due to higher incentive compensation expense ?$0.9 million decrease due to lower volumes in Medical segment
Below is a summary of our net research and development expenditure, in thousands, for the years ended
Year Ended December 31,
Favorable /
2021 2020 (Unfavorable)
Research and development expenses $ 91,807 $ 81,968 $ (9,839 )
Reimbursed research and development expenses (16,593 ) (13,928 ) 2,665
Net research and development expenses $ 75,214 $ 68,040 $ (7,174 )
Percentage of product revenues 7.2 % 7.5 %
Net research and development expenses for the year ended December 31, 2021
increased 10.5% as compared to the year ended December 31, 2020 . The increase in
net research and development expenses is primarily related to increased
project-related spending, including increased investments in ClimateSense and
battery performance solutions and higher incentive compensation expense,
partially offset by higher reimbursements for costs to design, develop and
purchase tooling pursuant to customer contracts.
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Selling, general and administrative expenses
Below is a summary of our selling, general and administrative expenses, in thousands, for the years ended
Year Ended December 31,
Favorable /
2021 2020 (Unfavorable)
Selling, general and administrative expenses
$ (4,510 ) Percentage of product revenues 10.5 % 11.5 % Selling, general and administrative expenses for the year endedDecember 31, 2021 increased 4.3% as compared to the year endedDecember 31, 2020 . The increase in selling, general and administrative expenses is primarily related to higher incentive compensation expense, as well as the absence of COVID-19 cost reduction initiatives that were taken by the Company in the second quarter of 2020 to manage its liquidity position in light of the significant economic uncertainty and the financial impact of the COVID-19 pandemic, partially offset by higher stock compensation expense in 2020 due to the exercises and mark-to-market adjustments of cash settled stock appreciation rights.
Restructuring costs
Below is a summary of our restructuring expenses, in thousands, for the years ended
Year Ended December 31,
Favorable /
2021 2020 (Unfavorable)
Restructuring costs
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 endedDecember 31, 2021 , the Company recognized expenses of$2.2 million for employee separation costs charges and$1.7 million of other costs, primarily related to equipment move and set up costs. During the year endedDecember 31, 2020 , the Company recognized expenses of$4.6 million for employee separation costs and$1.2 million of other related costs.
See Note 5, “Restructuring”, in the Notes to the Consolidated Financial Statements included in this Annual Report for additional information.
Interest charges
Below is a summary of our Interest expense, in thousands, for the years endedDecember 31, 2021 and 2020: Year Ended December 31, Favorable / 2021 2020 (Unfavorable) Interest expense, net$ (2,758 ) $ (4,559 ) $ 1,801 The decrease in interest expense during the year endedDecember 31, 2021 compared to 2020 reflects the$169.5 million increased borrowings under the Credit Facility in the first quarter of 2020, primarily to provide additional liquidity and financial flexibility in response to the initial impacts from the onset of the COVID-19 pandemic. A portion of these increased borrowings were repaid by the end ofDecember 31, 2020 , and the remainder was repaid in the first quarter of 2021. No amounts were drawn on the 37 -------------------------------------------------------------------------------- Credit Facility during the year endedDecember 31, 2021 . Amounts outstanding on the Revolving Credit Facility as of the year endedDecember 31, 2021 and 2020 were$35.0 million and$186.2 million , respectively.
See Note 9, “Debt”, to the consolidated financial statements included in this annual report for more information.
Foreign exchange gain (loss)
Below is a summary of our foreign exchange gains (losses), in thousands, for the years ended
Year Ended December 31,
Favorable /
2021 2020 (Unfavorable)
Foreign exchange gain (loss)
Foreign exchange gain for the year ended
Foreign exchange loss for the year ended
Other income
Below is a summary of our other income, in thousands, for the years ended
Year Ended December 31,
Favorable /
2021 2020 (Unfavorable)
Other income $ 117 $ 2,337 $ (2,220 )
The decrease in other income is primarily due to the 2020 non-recurring gain on
sale of certain patents from a non-core business. See Note 7, "Goodwill and
Other Intangibles," to the consolidated financial statements included in this
Annual Report for additional information.
income tax expense
Below is a summary of our Income tax expense, in thousands, for the years endedDecember 31, 2021 and 2020: Year Ended December 31, Favorable / 2021 2020 (Unfavorable) Income tax expense$ 20,418 $ 21,866 $ 1,448 Income tax expense was$20.4 million for the year endedDecember 31, 2021 , on earnings before income tax of$113.9 million , representing an effective tax rate of 17.9%. The effective tax rate differed from theU.S. Federal statutory rate of 21% primarily due to certain favorable tax effects on equity vesting, intercompany transactions during the year and the impact of income taxes on foreign earnings taxed at rates varying from theU.S. statutory rate, offset by the unfavorable impact of the global intangible low-tax income ("GILTI"), withholding taxes, other non-deductible expenses and uncertain tax positions. Income tax expense was$21.9 million for the year endedDecember 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 theU.S. Federal statutory rate of 21% primarily due to the international provisions of theU.S. tax reform, such as GILTI. 38
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Cash and capital resources
Overview
Our primary sources of liquidity and capital resources are cash flow from operations and borrowings available under our credit agreement. Our cash requirements consist primarily of working capital, capital expenditures, research and development, operating lease payments, income tax payments and general corporate purposes. We generally reinvest free cash flow from operations in our business, while opportunistically using our authorized share buyback program. Additionally, we continually evaluate acquisition and investment opportunities that will enhance our business strategies.
As ofDecember 31, 2021 , the Company had$190.6 million of cash and cash equivalents,$440 million of availability under our Credit Agreement and$26.5 million of availability under ourNorth America receivables factoring arrangement. We also continue to maintain access to the capital markets and may issue debt or equity securities, which may provide an additional source of liquidity. We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Credit Agreement. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions toGentherm Incorporated . As ofDecember 31, 2021 , the Company's cash and cash equivalents held by our non-U.S. subsidiaries totaled approximately$161.5 million . If additional non-U.S. cash was needed for ourU.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to theU.S. ; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts. We currently believe that our cash and cash equivalents and borrowings available under our Credit Agreement and theNorth America receivables factoring arrangement will be adequate to meet anticipated cash requirements for at least the next twelve months and the foreseeable future.
Cash and cash flow
The table below summarizes our cash activity for each of the last two fiscal
years (in thousands):
Year Ended December 31,
2021 2020
Cash, cash equivalents and restricted cash at
beginning of period $ 268,345 $ 52,948
Net cash provided by operating activities 143,076
110,695
Net cash used in investing activities (48,830 ) (18,220 ) Net cash (used in) provided by financing activities (169,141 )
115,480
Foreign currency effect on cash and cash equivalents (2,844 )
7,442
Cash, cash equivalents and restricted cash, end of period
$ 190,606
Cash flow from operating activities
Net cash provided by operating activities totaled$143.1 million and$110.7 million for the years endedDecember 31, 2021 and 2020, respectively. Cash flow provided by operating activities for the year endedDecember 31, 2021 consisted primarily of net income of$93.4 million , increased by$54.3 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, and loss on disposition of property and equipment, partially offset by non-cash charges of$0.5 million for deferred income taxes and other, and$4.2 million related to changes in assets and liabilities. Cash flows provided by operating activities for the year endedDecember 31, 2020 consisted primarily of net income of$59.7 million , increased by$51.5 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, deferred income taxes and loss on disposition of property and equipment, and$2.3 million related to changes in operating assets and liabilities, partially offset by$2.7 million net gain on sale of property and equipment and other. 39
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Cash flow from investing activities
Net cash used in investing activities totaled$48.8 million and$18.2 million for the years endedDecember 31, 2021 and 2020, respectively. The increase in usage is primarily attributable to increased capital expenditures of$21.2 million during the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . Additionally, during the year endedDecember 31, 2021 , usage included$10.4 million paid for business acquisitions and technology investments. During the year endedDecember 31, 2020 , usage included$3.1 million paid for acquisition of intangible assets, partially offset by$2.1 million proceeds for the sale of patents, property and equipment.
Cash flow from financing activities
Net cash used in financing activities totaled$169.1 million for the year endedDecember 31, 2021 and net cash provided by financing activities totaled$115.5 million for the year endedDecember 31, 2020 . Cash flows used in financing activities for the year endedDecember 31, 2021 primarily included$153.2 million of debt repayments,$20.0 million paid to repurchase common stock and$4.1 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year, partially offset by$8.3 million of proceeds from the exercise of common stock options. Cash flows provided by financing activities for the year endedDecember 31, 2020 primarily included proceeds of$201.1 million received from the increased borrowings under our Credit Agreement,$16.6 million of proceeds from the exercise of common stock options, partially offset by$91.4 million of debt repayments,$9.1 million paid to repurchase common stock and$1.1 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year.
Debt
The following table summarizes the Company's debt atDecember 31, 2021 and 2020 (dollars in thousands). December 31, 2021 2020 Interest Principal Interest Principal Rate Balance Rate Balance Amended Credit Agreement:U.S. Revolving Note (U.S. Dollar denominations) 1.35 %$ 35,000 1.65 %$ 171,500 U.S. Revolving Note (Euro denominations) - - 1.50 % 14,684 DEG Vietnam Loan 5.21 % 3,750 5.21 % 6,250 Total debt 38,750 192,434 Current maturities (2,500 ) (2,500 ) Long-term debt, less current maturities$ 36,250 $ 189,934 Credit AgreementGentherm , together with certain of its subsidiaries, maintain a revolving credit note ("U.S. Revolving Note") under its Amended and Restated Credit Agreement (the "Credit Agreement") with a consortium of lenders andBank of America, N.A . as administrative agent. The Credit Agreement has a maximum borrowing capacity of$475 million and matures onJune 27, 2024 . The Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets, merge with other companies or enter into certain other transactions outside the ordinary course of business, and (ii) require thatGentherm maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio (based on consolidated EBITDA for the applicable trailing 12-month period as defined in the Credit Agreement) as of the end of any fiscal quarter. DEG Vietnam Loan The Company also has a fixed interest rate loan with theGerman Investment Corporation ("DEG"), a subsidiary ofKfW Banking Group , aGermany government-owned development bank. The fixed interest rate senior loan agreement with DEG was used to finance the construction and set up of theVietnam 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. 40
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See Note 9, “Debt”, to the consolidated financial statements included in this annual report for more information.
Other sources of liquidity
In June, 2021, we entered into a receivable factoring agreement withHSBC Bank USA, National Association . Under the receivable factoring agreement, we can sell receivables for certain of ourNorth America account debtors up to$41.3 million , on a revolving basis, subject to outstanding balances and concentration limits. As ofDecember 31, 2021 , there were no outstanding receivables transferred under the receivable factoring agreement and our availability under the receivables factoring agreement was$26.5 million .
Material cash needs
The following table summarizes current and long-term material cash requirements as ofDecember 31, 2021 , which we expect to fund primarily with operating cash flows. Payments Due by Period Material Cash Requirements (in Less than More than thousands) Total 1 year 1 to 3
years 3 to 5 years 5 years Long-term debt (1)
- $ - Operating lease obligations (2) 29,671 6,541 8,864 6,728 7,538 Purchase obligations (3) 24,457 19,832 4,625 - - Capital commitments (4) 5,388 5,388 - - - Other 250 50 100 100 - Total$ 98,516 $ 34,311 $ 49,839 $ 6,828 $ 7,538
(1) Long-term debt obligations do not include an amount payable for interest.
See Note 9 “Debt” to the consolidated financial statements included in
this annual report for more information.
(2) See Note 8 “Leases” to the consolidated financial statements included in
this annual report for more information.
(3) Purchase obligations consist of commitments to secure supply
some semiconductor chips. We have entered into agreements with various
suppliers to reserve the rights to certain semiconductor chips over the
next 12 to 24 months, with volume commitments determined based on our
anticipated production needs. Such agreements allow the Company
with priority access to semiconductor chips as they become available,
however, these agreements do not guarantee that our suppliers will comply
the schedule and quantities requested by
amounts for other material and component purchase obligations related to
standard recurring purchases of materials for use in our manufacturing
operations since these amounts are generally constant from one year to the next,
closely reflect our production levels and are not long term in nature.
(4) Capital commitments include capital expenditure commitments.
These commitments are generally less than one year.
Other commitments
InDecember 2021 , the Company committed to make a$5 million investment inAutotech Fund III, L.P. , pursuant to a limited partnership agreement. As a limited partner, the Company will periodically make capital contributions toward this total commitment amount over the expected ten year life of the fund. The Company has not made any contributions to theAutotech Fund III, LP as ofDecember 31, 2021 . Timing of the capital contributions is unknown and therefore amounts have been excluded from the Material Cash Requirements table above.
Capital expenditure
We anticipate capital expenditures in fiscal year 2022 of approximately$50 million to$60 million . We will continue support organic growth through capacity expansion in our facilities and make capital improvements as necessary. We believe cash on hand, cash generated from operations, and the borrowing capacity available under our Credit Agreement will be sufficient to support our capital expenditures. 41
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Share buyback program
OnDecember 11, 2020 , the Board of Directors authorized the 2020 Stock Repurchase Program, pursuant to which the Company is authorized to repurchase up to$150 million of its issued and outstanding common stock over a three-year period, expiringDecember 15, 2023 . During the year endedDecember 31, 2021 , the Company repurchased approximately$20 million of shares under the 2020 Stock Repurchase Program with an average price paid per share of$83.44 . The 2020 Stock Repurchase Program has$130 million of repurchase authorization remaining as ofDecember 31, 2021 . Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. Repurchases may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources.
For more information on our share buyback program, see note 15, “Equity”, in the notes to the consolidated financial statements included in this annual report.
Effects of inflation
The automotive component supply industry has historically been subject to inflationary pressures with respect to materials and labor. In 2021 and continuing in 2022, macroeconomic effects of the COVID-19 pandemic have resulted in inflationary cost increases in certain materials, labor and transportation. These inflationary cost increases are expected to continue into the foreseeable future as demand remains elevated and supply remains constrained. Although the Company has developed and implemented strategies to mitigate the impact of higher material component costs and transportation costs, these strategies, together with commercial negotiations withGentherm's customers and suppliers may not fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.
Critical accounting estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). In preparing these consolidated financial statements, management was required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. These estimates and assumptions are subject to an inherent degree of uncertainty. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material to our financial statements. We have identified the following estimates as our most critical accounting estimates, which are those that are most important to aid in fully understanding and evaluating the Company's financial condition and results of operations, and that require management's most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 2, Summary of Significant Accounting Policies, of the notes to the consolidated financial statements.
The deficiencies of
Critical estimates:Goodwill is tested for impairment at least annually as ofDecember 31 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit's fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. 42 -------------------------------------------------------------------------------- The Company utilizes an income approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow that is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit's expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in our industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt ("cost of capital") derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates and terminal value margin rates. To further support the fair value estimate determined by the income approach, the Company utilizes a market valuation approach to estimate the fair value of a reporting unit. The market approach considers historical and/or anticipated financial metrics of a reporting unit and applies valuation multiples based on recent observed transactions involving companies similar enough to the reporting units from which to draw meaningful conclusions. Judgments and uncertainties: These fair value calculations contain uncertainties as they require management to make assumptions about future cash flows and appropriate discount rates to reflect the risk inherent in the future cash flows and to derive a reasonable enterprise value and related premium. Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape, including estimates of revenue based on production volumes over the foreseeable future and long-term growth rates, and operating margins based on historical trends and future cost containment activities.
Moreover, the stock market valuation approach is very subjective because it requires the selection of companies and comparable valuation multiples.
Impact if actual results differ from assumptions: As ofDecember 31, 2021 , our goodwill balance included$37.3 million related to our Automotive segment and$28.7 million related to our Medical segment. These balances could be fully or partially impaired if management does not achieve the expected cash flows assumed in the fair value estimates or if assumptions and cash flow estimates change in future periods. Income Taxes Critical estimates: The Company is subject to income taxes inthe United States and numerous international jurisdictions. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. When determining whether we will be able to realize deferred tax assets, judgment is used to evaluate the positive and negative evidence, including forecasting taxable income using historical and future operating results. The provision for income taxes includes current income taxes as well as deferred income taxes. Deferred tax assets and liabilities are measured based on the difference between the financial statement and tax base of assets and liabilities at the applicable enacted tax rates. Judgments and uncertainties: We have various tax filing positions with regard to the timing and amount of deductions and credits and the allocation of income among various tax jurisdictions, based on our interpretation of local tax laws, supported by external advisor review for material positions. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized when management considers it more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is based on the evaluation of positive and negative evidence, which includes historical profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis. 43 -------------------------------------------------------------------------------- The Company is subject to ongoing tax examinations and assessments in various jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities and a number of years may elapse before a particular matter, for which a liability has been established, is audited and fully resolved or clarified. In evaluating the exposures associated with various tax filing positions, the Company may record liabilities for such exposures. The Company generally adjusts its liabilities for unrecognized tax benefits and related indemnification obligations through earnings in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and may materially increase or decrease the effective tax rate, as well as impact the Company's operating results. Impact if actual results differ from assumptions: Some or all of management's judgments are subject to review by the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows. Further, if the Company is unable to generate sufficient future taxable income, there is a material change in the actual effective tax rates, a change to the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then the Company could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate.
For the year ended
Recent accounting pronouncements
For a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations, as well as significant accounting standards that have been adopted during the year endedDecember 31, 2021 , see Note 3, "New Accounting Pronouncements," to the consolidated financial statements included in this Annual Report.
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