GENTHERM Inc - Quarter Report: 2013 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2013

OR

For the transition period from                    to                    .

Commission File Number: 0 - 21810

GENTHERM INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (248) 504-0500

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At May 7, 2013, the registrant had 33,425,765 shares of Common Stock, no par value, issued and outstanding.

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GENTHERM INCORPORATED

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PART I. FINANCIAL INFORMATION

GENTHERM INCORPORATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except share data)

See accompanying notes to the consolidated condensed financial statements.

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GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to the consolidated condensed financial statements.

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GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

See accompanying notes to the consolidated condensed financial statements.

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GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the consolidated condensed financial statements.

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GENTHERM INCORPORATED

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

See accompanying notes to the consolidated condensed financial statements.

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 1 – The Company

Gentherm Incorporated is a leading supplier of thermal seat comfort and cable systems to the global automotive industry. Unless the context otherwise requires, the terms “Company”, “we”, “us” and “our” used herein refer to Gentherm Incorporated. The term “historical Gentherm” used herein excludes W.E.T. Automotive Systems AG (“W.E.T.”), a subsidiary of Gentherm, Inc. The Company performs design, development and manufacturing functions in locations aligned with our major customers’ product strategies in order to continue to grow and expand our business around the globe. We are working to expand application of our existing technologies into new markets and products and to develop and refine new technologies to make our existing products more efficient.

On February 22, 2013, historical Gentherm acquired 442,253 shares in W.E.T., representing approximately 14% of the total outstanding shares in W.E.T., through a transaction agreement with W.E.T.’s largest minority shareholder. The Company paid 3,300,000 shares of Gentherm common stock and cash of €5,408, or $7,247, for these shares. As of May 7, 2013, we have acquired an additional 308,400 shares in W.E.T., pushing our total ownership interest in W.E.T. above 99%. These additional shares were purchased at a price €85 per share for a total of €26,214, or $35,127. Gentherm borrowed an additional $40,441 from the US Bank of America credit facility in connection with the purchase of these shares. See Note 6 below for additional information about the US Bank of America credit facility.

On February 22, 2013, the Company registered a Domination and Profit and Loss Transfer Agreement (“DPLTA”) in Germany with respect to W.E.T. The DPLTA essentially allows historical Gentherm and W.E.T. to be managed as one operational entity.

The Company has evaluated subsequent events through the date that the consolidated condensed financial statements were issued. No events have taken place that meet the definition of a subsequent event that requires adjustment to or disclosure in this filing.

Note 2 – Basis of Presentation and New Accounting Pronouncements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. The balance sheet as of December 31, 2012 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 2012 included in our Annual Report on Form 10-K.

Comprehensive Income

The Financial Accounting Standards Board (“FASB”) amended ASC 220, “Comprehensive Income,” with ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires additional disclosures regarding reclassifications out of accumulated other comprehensive income and is effective for all quarterly and annual reporting periods beginning on or after January 1, 2013. While adoption of ASU 2013-02 did not have an impact on our consolidated condensed financial statements for the three-month period ending March 31, 2013, it is likely to expand our disclosures with regard to items currently reported in accumulated other comprehensive income in future periods.

Note 3 –Earnings per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of shares of stock outstanding. The Company’s diluted earnings per common share give effect to all potential shares of Common Stock outstanding during a period that are not anti-dilutive. In computing the diluted earnings per share, the treasury stock and if converted methods are used in determining the number of shares assumed to be purchased from the conversion of Common Stock equivalents. The following summarizes the amounts included in the dilutive shares as disclosed on the face of the consolidated condensed statements of operations:

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 3 – Earnings per Share – Continued

The accompanying table represents Common Stock issuable upon the exercise of certain stock options, the Series C Convertible Preferred Stock and potential dividends paid in common stock that have been excluded from the diluted shares calculation because the effect of their inclusion would be anti-dilutive.

Note 4 – Segment Reporting

Segment information is used by management for making operating decisions and assessing the performance of the Company. Management evaluates the performance of its segments based primarily on operating income.

The Company’s reportable segments are as follows:

The tables below present segment information about the reported product revenues and operating income of the Company for the three month period ended March 31, 2013 and 2012. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level at this time. Goodwill as of March 31, 2013 and 2012 pertained entirely to our W.E.T. segment.

The Advanced Technology operating loss for the three months ended March 30, 2013 and 2012 is net of $610 and $442, respectively, of reimbursed research and development costs. Reconciling items include historical Gentherm’s corporate selling, general and administrative costs and, for March 31, 2013 only, acquisition transaction costs.

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 4 – Segment Reporting – Continued

Total revenues information by geographic area:

Note 5– Series C Convertible Preferred Stock

In March 2011, the Company issued 7,000 shares of our Series C Convertible Preferred Stock (each a “Preferred Share” and, collectively, the “Preferred Shares”) having an initial stated value of $10,000 per Preferred Share, subject to adjustment. We received approximately $64,013 in net proceeds from the sale, after deducting placement agent fees and other offering expenses which totaled $5,987. We used the net proceeds from this offering to fund, in part, the W.E.T. acquisition.

Holders of the Series C Convertible Preferred Stock are entitled to receive, out of funds legally available therefore, dividends payable in cash (if permitted under the US Bank of America credit facility), our Common Stock (if certain equity conditions are satisfied or waived as of the applicable date), or any combination thereof, at the election of the Company, at the rate of 8% per annum of the stated value, payable quarterly in arrears on September 1, December 1, March 1 and June 1 of each year, commencing September 1, 2011. Dividends on our Series C Convertible Preferred Stock are cumulative from the date of initial issuance.

The Series C Convertible Preferred Stock is to be redeemed in nine equal quarterly installments that began on September 1, 2011 and will end on September 1, 2013 (each, an “Amortization Date”) by paying cash, issuing shares of our Common Stock or any combination thereof for $10,000 per Preferred Share plus accumulated and unpaid dividends.

Holders of the Series C Convertible Preferred Stock may convert their shares at any time into shares of common stock at a conversion price of $15.83, including the conversion of accrued but unpaid dividends per Preferred Share then remaining into shares of common stock, and in addition will be entitled to a make-whole amount that would apply in a conversion (reflecting dividends that would have been payable through maturity if the Series C Convertible Preferred Stock had remained outstanding); provided, however, that under certain conditions where our US Bank of America credit facility prohibits payment of the make-whole amount, we will only be obligated to pay such make-whole amount at the time such amount, or portion thereof, would have been due to be paid as a dividend as if the Series C Convertible Preferred Stock at issue had not been converted.

In March 2013, holders of the Series C Convertible Preferred Stock elected to convert 165 shares into shares of common stock at the conversion price of $15.83 per share. The Company issued approximately 105,000 shares of common stock related to the conversion of Series C Convertible Preferred Stock.

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 5 – Series C Convertible Preferred Stock – Continued

Total Series C Convertible Preferred Stock installments made in cash during the three months period ended March 31, 2013 is as follows:

Note 6 – Debt

Gentherm, Inc. and our subsidiary, Gentherm Europe, have entered into a credit agreement with a syndicate of banks led by Bank of America (the “US Bank of America credit facility”). W.E.T., a subsidiary of Gentherm Europe, has also entered into a credit facility with the same syndicate of banks (the “W.E.T. Bank of America credit facility”).

The US Bank of America credit facility provided two term notes (referred to as the “US Term Note and Europe Term Note”) and a revolving line of credit note (“US Revolving Note”). The W.E.T. Bank of America credit facility provided W.E.T. with a term note (“W.E.T. Term Note”) and a revolving line of credit note (“W.E.T. Revolving Note”).

The US Term Note and Europe Term Note are subject to quarterly principal payments, with total principal amortization of 10% of the original principal amount in the first year and amortization of 12.5%, 15%, 17.5% and 10% of the original principal amount during years two, three, four and five, respectively with all remaining amounts owing under each term facility due and payable in full at the term loan maturity date. The W.E.T. Term Note is subject to quarterly principal payments totaling 20% annually. Principal outstanding under the two credit facilities will be due and payable in full on March 30, 2016. Interest is payable at least quarterly. The Company has the option to elect interest rates based on either a Eurocurrency (LIBOR or EUIBOR) rate (“Eurocurrency Rate Loans”) (0.20% – 0.40% at March 31, 2013) or a base rate (“Base Rate Loans”) plus a margin (“Applicable Rate”), which varies based on the Consolidated Leverage Ratio of the Company, as defined by the US and W.E.T. Bank of America credit agreements. The base rate is equal to the highest of the Federal Funds Rate (0.09% at March 31, 2013) plus 0.5%, Bank of America’s prime rate (3.25% at March 31, 2013), or a one month Eurocurrency rate plus 1.0%. The Applicable Rate for the current period was 1.75% for Eurocurrency Rate Loans and 0.75% for Base Rate Loans.

We have also borrowed ¥20,000, or $3,159, from Bank of China to fund a plant expansion project in China. The Bank of China loan is due in lump sum on September 10, 2013 with interest calculated at a fixed rate of 6.9%.

In February 2013, the Company made a $40,441 draw on the existing Europe Term Note portion of the US Bank of America credit facility to finance the purchase of shares of WET held by non-controlling interests. The Europe Term Note is now closed and additional draws are not available to Gentherm.

No amounts were outstanding under either the US Revolving Note or the W.E.T. Revolving Note as of March 31, 2013 and $29,550 and €20,000 were available under each note, respectively. Gentherm has an outstanding Letter of Credit of $450 as of March 31, 2013.

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 6 – Debt– Continued

The following table summarizes the Company’s debt at March 31, 2013 and at December 31, 2012.

The Company must maintain certain financial ratios including a minimum Consolidated Fixed Charge Coverage Ratio and a maximum Leverage Ratio as defined by the Bank of America credit agreement.

As of March 31, 2013, we were in compliance with all terms as outlined in the credit agreement for each of the US Bank of America credit facility, the W.E.T. Bank of America credit facility and the Bank of China loan.

Note 7 – Derivative Financial Instruments

We are exposed to market risk from changes in foreign currency exchange rates, short term interest rates and price fluctuations of certain material commodities such as copper. Foreign currency exchange risks are attributable to sales to foreign customers not denominated in the seller’s functional currency, foreign plant operations, intercompany indebtedness and purchases from foreign suppliers and include exposures to the European Euro, Canadian Dollar, Japanese Yen, Hungarian Forint, Korean Won and Mexican Peso. The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from this risk by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. We record the ineffective portion of hedging instruments, if any, to other income (expense) in the consolidated condensed statements of operations.

In March 2008, W.E.T. entered into a 10 year currency related interest rate swap (“CRS”) having a notional value of €10,000, or $12,816 as of March 31, 2013, in order to offset the interest rate risk associated with a debt financing which was repaid prior to our acquisition of W.E.T. Under this agreement W.E.T. receives interest equal to the then six month Euro Interbank Offered Rate (“EURIBOR”), 0.34% at March 31, 2013, plus 1.40% and pays interest equal to the six month EURIBOR when the exchange rate between the European Euro (“EUR”) and the Swiss Franc (“CHF”), which was 1.22 at March 31, 2013, equals or exceeds 1.46 EUR to the CHF or pays interest equal to the six month EURIBOR plus a premium when this exchange rate is less than 1.46. The premium is calculated as [(1.46 – current EUR/CHF rate)/current EUR/CHF rate] x 100. In 2012, W.E.T. entered into offsetting derivative contracts designed to cancel out the payment due under the CRS through the end of the CRS agreement, in 2018.

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 7 – Derivative Financial Instruments – Continued

In September 2011, W.E.T. brought a lawsuit against UniCredit Bank AG (“UniCredit”), a past financial advisor, stemming from the recommendation to invest in the aforementioned CRS. On March 25, 2013, the Munich District Court in Munich, Germany ruled in favor of W.E.T., asserting that UniCredit violated its duty to properly advise W.E.T. with respect to the initial negative market value for the CRS and UniCredit’s inherent conflict of interest in recommending that W.E.T. invest in CRS. The Munich District Court ruled that UniCredit must (1) pay €144 to W.E.T. and (2) bear the costs of all future obligations under the CRS, which were €10,179, or $13,045 as of March 31, 2013, plus additional accrued liabilities for past due payments under the CRS of approximately €4,000, or $5,126 as of March 31, 2013. The Company expects that UniCredit will appeal the decision. If the decision is appealed, it may take up to several years until a final, non-appealable decision is rendered. As a result, the Company cannot be certain that any portion of the award by the Munich District Court will be realized by W.E.T. See the derivatives table below for information about our future obligations under the CRS as of March 31, 2013.

In July 2011, the Company entered into a series of interest rate swap contracts designated as cash flow hedges and an interest rate cap agreement in order to hedge the exposure to variable market interest rates on the Company’s senior debt. Gains and losses reported in accumulative other comprehensive income will be reclassified to earnings once the Company’s senior debt is repaid.

The Company uses a market approach to value derivative instruments, analyzing observable benchmark rates at commonly quoted intervals for the instrument’s full term. Information related to the recurring fair value measurement of derivative instruments in our consolidated balance sheet as of March 31, 2013 is as follows:

Information relating to the effect of derivative instruments on our consolidated income statements is as follows:

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GENTHERM INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share, per share data and unit of product data)

Note 7 – Derivative Financial Instruments – Continued

We did not incur any hedge ineffectiveness during the three months ended March 31, 2013 and 2012.

Note 8 – Fair Value Measurement

The Company bases fair value on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have adopted a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and also considers counterparty credit risk in its assessment of fair value.

The Company’s derivative instruments and hedging activities and pension assets qualify as financial assets and liabilities whose fair value is measured on a recurring basis each reporting period. Fair value measurement disclosures for our derivative instruments and hedging activities are located within Note 7. The carrying amounts of financial instruments comprising cash and cash equivalents, short-term investments and accounts receivable approximate their fair values due to their short-term nature. The carrying value of the Company’s long-term debt approximates its fair value because interest charged on the loan balance is variable. There were no significant changes to interest rates during the period.

Certain Company assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. As of March 31, 2013 and 2012, the Company did not realize any changes to the fair value of these assets due to events that negatively impacted their recoverability.

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FORWARD LOOKING STATEMENTS

Certain matters discussed or referenced in this report, including expectations of future revenues, our financing requirements, our capital expenditures, our potential acquisitions and our prospects for the development of new products, new customers or new orders from existing customers, are forward-looking statements. Other forward-looking 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. All forward-looking statements speak only as of the date of this report, and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to reflect any change in our expectations with regard to such statements or any change in events, conditions or circumstances on which any such statement is based. Although such statements are based upon our current expectations, and we believe such expectations are reasonable, such expectations, and the forward-looking statements based on them, are subject to a number of factors, risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including those described below and in our other filings with the Securities and Exchange Commission.

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General

Gentherm Incorporated designs, develops, manufactures and markets proprietary thermal seat comfort systems and cable systems for sale to automobile and truck original equipment manufacturers (“OEMs”). The Company’s current reportable segments are Climate Controlled Seats (“CCS), Advanced Technology and W.E.T. CCS represents historical Gentherm’s seat climate control systems, which are designed to improve the temperature comfort of automobile passengers. The CCS segment includes sales of our heated and cooled cup holder and heated and cooled mattress, both of which utilize our proprietary thermoelectric device (“TED”) technology.

Advanced Technology represents a division of the Company engaged in research and development efforts to improve the efficiency of TEDs and to develop, market and distribute products based on this technology.

W.E.T., a German publicly traded company based in Odelzhausen, Germany, is a subsidiary of Gentherm. W.E.T.’s primary product categories include automotive seat comfort systems and specialized automotive cable systems. The automotive seat comfort systems category includes automotive seat heaters, climate comfort systems (similar to Gentherm’s climate controlled seat technology) for automotive seats, automotive steering wheel heater systems and integrated electronic components. The specialized automotive cable systems category includes ready-made wire harnesses and related wiring products.

On February 22, 2013, historical Gentherm acquired 442,253 shares in W.E.T., representing approximately 14% of the total outstanding shares in W.E.T., through a transaction agreement with W.E.T.’s largest minority shareholder. The Company paid 3,300,000 shares of Gentherm common stock and cash of €5,408,000 or $7,247,000 for these shares. As of May 7, 2013, we have acquired an additional 308,400 shares in W.E.T., pushing our total ownership interest in W.E.T. above 99%. These additional shares were purchased at a price €85 per share for a total of €26,214,000 or $35,127,000. Gentherm borrowed an additional $40,441,000 from the US Bank of America credit facility in connection with the purchase of these shares. See Note 6 for additional information about the US Bank of America credit facility.

On February 22, 2013, the Company registered a Domination and Profit and Loss Transfer Agreement (“DPLTA”) in Germany with respect to W.E.T. The DPLTA essentially allows historical Gentherm and W.E.T. to be managed as one operational entity.

Management is currently in the process of developing new segments based on future integration plans for W.E.T. and new global strategy.

First Quarter 2013 Compared with First Quarter 2012

The following table presents segment information about the reported product revenues and operating income of the Company for the three month period ended March 31, 2013 and 2012. With the exception of goodwill, asset information by segment is not reported since the Company does not manage assets at a segment level at this time. Goodwill as of March 31, 2013 and 2012 pertained entirely to our W.E.T. segment.

Product Revenues. Product revenues for the three months ended March 31, 2013 (“First Quarter 2013”) were $148,090,000 compared with product revenues of $129,526,000 for the three months ended March 31, 2012 (“First Quarter 2012”), an increase of $18,564,000, or 14%. Product revenues for CCS increased by $3,980,000 or 14% while product revenues for W.E.T. grew by $14,584,000, or 15%, compared to First Quarter 2012. Higher CCS revenue was primarily driven by new program launches since

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First Quarter 2012 including the newly redesigned Land Rover Range Rover and additional volume on programs launched during First Quarter 2012 including the Nissan Pathfinder and Infiniti JX. Production volumes on existing vehicle platforms where higher in North America but lower in Japan. The weakness in Japan primarily reflected certain mature vehicle programs that are expected to be refreshed in the coming months. W.E.T. product revenue increases resulted from strong automotive volumes in North America and Asia and due to continued market penetration in the automotive cable business. W.E.T.’s European based sales were slightly higher than the prior year despite local economic weakness partly due to this market penetration. Foreign currency translation of our Euro denominated product revenue for First Quarter 2013, which was approximately €34,900,000 verses €33,100,000 during First Quarter 2012, had only a modest impact on our product revenue results. The average US Dollar/Euro exchange rate for First Quarter 2013 was 1.3207 versus 1.3108 for First Quarter 2012.

Cost of Sales. Cost of sales increased to $109,039,000 in First Quarter 2013 from $97,022,000 in First Quarter 2012. This increase of $12,017,000, or 12%, is due to increased sales volume offset by higher gross margin percentages. A favorable change in product mix and greater coverage of fixed costs at the higher volume levels increased historical gross profit percentage during First Quarter 2013 to approximately 26% compared with 25% during First Quarter 2012.

Net Research and Development Expenses. Net research and development expenses were $11,841,000 during First Quarter 2013 compared to $10,081,000 in First Quarter 2012, an increase of $1,760,000, or 17%. This increase is primarily driven by additional resources, including personnel, focused on application engineering for new production programs of existing products, development of new products and a program to develop the next generation of seat comfort products using the best ideas and designs of the combined Gentherm and W.E.T. systems. New product development includes automotive heated and cool storage devices, automotive interior thermal management devices, medical thermal management devices, battery thermal management devices and other potential products.

We classify development and prototype costs and related reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Acquisition Transaction Expenses. We incurred $1,163,000 in fees, legal and other expenses associated with the acquisition of W.E.T. shares during First Quarter 2013. These fees included payments totaling $750,000 to the holders of our Series C Convertible Preferred Stock who waived certain equity offering participation rights allowing for the partial funding of W.E.T. shares with Gentherm common stock. We did not incur any acquisition transaction expenses during First Quarter 2012.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $16,256,000 in First Quarter 2013 from $13,973,000 in First Quarter 2012, an increase of $2,283,000, or 16%. This increase in expenses is due to higher general legal, audit and travel costs, as well as wages and benefits costs resulting from new employee hiring and merit increases. The additional employees are primarily related to establishing a new electronics production facility in Shenzhen, China, increasing sales and marketing efforts aimed at supporting our current product development strategy and beginning the integration process between historical Gentherm and W.E.T. We incurred approximately $250,000 in incremental audit and accounting expenses driven by Sarbanes-Oxley compliance implementation for W.E.T. which began during the second quarter of 2012. We believe that our selling, general and administrative costs will begin to level off as we work through the integration process and implement cost reduction initiatives enabled by this integration over the next three years.

Income Tax Expense. We recorded an income tax expense of $795,000 during First Quarter 2013 representing an effective tax rate of 7% on earnings before income tax of $10,704,000. This amount included a one-time benefit resulting from the American Taxpayer Relief Act of 2012 (“the Act”) which was signed into law on January 2, 2013. The Act restored the research and development credit and certain exemption under the foreign income tax rules, retroactively to the beginning of 2012. As a result, we recognized approximately $1,300,000 in benefits associated with our 2012 tax year during First Quarter 2013. Had the Act been adopted during 2012, the benefit would have been recorded during that year and First Quarter 2013 effective tax rate would have been 20%. This effective tax rate was lower than the US Federal rate of 34% primarily due to the impact of lower statutory rates for our subsidiaries operating in foreign jurisdictions. During First Quarter 2012, we recorded an income tax expense of $2,145,000 representing an effective tax rate of 26% on earnings before income tax of $8,242,000. Our effective tax rate was estimated based upon a forecast of our full year results.

Liquidity and Capital Resources

The following table represents our cash and cash equivalents and short-term investments which are available for our business operations:

We manage our cash and cash equivalents in order to fund operating requirements and preserve liquidity to take advantage of future business opportunities. Cash and cash equivalents decreased by $10,175,000 in First Quarter 2013. As of March 31, 2013, the Company had approximately $14,706,000 in cash and cash equivalent at foreign locations. If that cash and cash equivalents were

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needed for our operations in the U.S. in the future we would be required to accrue and pay U.S. taxes in order to repatriate these funds. Based on our current plans, we believe we have sufficient cash in the U.S. to fund our U.S. operations and our intent is to permanently reinvest these foreign amounts outside of the U.S.

Cash provided by operating activities during First Quarter 2013 was $10,039,000 and was attributable to net income of $9,909,000, net of non-cash adjustments. Non-cash adjustments included depreciation and amortization of $7,934,000, deferred tax benefits of $740,000, gains on revaluation of financial derivatives of $1,244,000 and stock compensation of $491,000.

As of March 31, 2013, working capital was $113,401,000 compared to $124,935,000 at December 31, 2012, a decrease of $11,534,000, or 9%. Decreases in cash and cash equivalents and inventory and an increase to current maturities of long-term debt of $10,175,000, $1,518,000 and $5,291,000, respectively, were partially offset by increases in accounts receivable of $5,701,000. Account receivable increased primarily as a result of timing differences between when sales in First Quarter 2013 were recognized compared with sales recognized during the three months ended December 31, 2012 (“Fourth Quarter 2012”). Gentherm incurred proportionally more sales in the last month of First Quarter 2013 compared with the last month of Fourth Quarter 2012 due to the year-end holiday season. Current maturities of long-term debt increased due to draws made on our US Bank of America Credit Facility to finance the purchase of outstanding shares of W.E.T. held by non-controlling interests. See the General section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information about the acquisition of W.E.T. shares. During First Quarter 2013, cash was used to make payments on our outstanding term notes and Series C Convertible Preferred Stock. Total payments on outstanding borrowings were $5,182,000 and total Series C Convertible Preferred Stock payments were $8,268,000. Working Capital was also impacted by changes in currency exchange rates.

Cash used in investing activities was $46,417,000 during First Quarter 2013, reflecting the purchase of W.E.T. shares from non-controlling interests totaling $40,302,000 and purchases of property and equipment totaling $6,116,000. Purchases of property and equipment for the period are primarily related to expansion of production capacity, as well as replacement of existing equipment.

Cash provided by financing activities was $28,478,000 during First Quarter 2013, reflecting additional borrowings from our US Bank of America Credit Facility of $40,441,000 and proceeds from the exercise of common stock options of $1,487,000. These amounts were partially offset by repayments on our outstanding term notes and Series C Convertible Preferred stock totaling $5,182,000 and $8,268,000, respectively.

Series C Convertible Preferred Stock installments paid during the three month period ended March 31, 2013 are as follows (in thousands, except share data):