# Gentherm Inc: Form 10-Q for the period ended Jun 30, 2022

- Company: [Gentherm Inc](/companies/thrm.md) (CIK 903129)
- Form: 10-Q
- Filed: 2022-08-02
- Accepted by EDGAR: Aug 2, 2022, 17:06 ET
- Period: 2022-06-30
- Accession: 0000950170-22-013912
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903129/000095017022013912/thrm-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903129/000095017022013912/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $260.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $528.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $201.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $404.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $59.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | $123.5m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-04-01 to 2022-06-30 | $19.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-01-01 to 2022-06-30 | $39.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-04-01 to 2022-06-30 | $31.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-01-01 to 2022-06-30 | $61.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $7.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | $21.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $3.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $8.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $7.1m | us-gaap:ProfitLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $18.8m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 33,426,123 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 33,421,987 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | −$3.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $15.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-06-30 | $157.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $592.7m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $947.0m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $239.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $303.9m | us-gaap:Liabilities |
| Long-term debt | at 2022-06-30 | $35.0m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-06-30 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-06-30 | $643.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,889 characters.

### Forward-Looking Statements

*This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as the impact of the COVID-19 pandemic on our financial statements, liquidity, and business as well as the global economy, global supply chain and automotive and medical industries, the impact of the conflict in Ukraine on our operations, the expected synergies and growth prospects following the closing of recent acquisitions, the significant supply disruptions and shifts in the labor market currently faced by the automotive and medical industries, our ability and our customers’ ability to maintain production levels, the amount of borrowing availability under the Second Amended and Restated Credit Agreement and the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs and our ability to finance sufficient working capital. Reference is made in particular to forward-looking statements included in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Such statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar terms, variations of such terms or the negative of such terms. The forward-looking statements included in this Report are made as of the date hereof or as of the date specified herein and are based on management’s current expectations and beliefs. Such statements are subject to a number of assumptions, risks, uncertainties and other factors, which are set forth in “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Part II “Item 1A. Risk Factors” in our Current Report on Form 10-Q for the three months ended March 31, 2022 and subsequent reports filed with the Securities and Exchange Commission, and which could cause actual results to differ materially from that described in the forward-looking statements. In addition, except for the recently consummated acquisitions, such forward-looking statements do not include the potential impact of any other business combinations, acquisitions, divestitures, strategic investments and other significant transactions that may be completed after the date hereof, each of which may present material risks to the Company’s business and financial results. Except as required by law, we expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.*

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our consolidated condensed financial statements and related notes thereto included elsewhere in this Report and our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

### Overview

Gentherm Incorporated is a global developer, manufacturer and marketer of innovative thermal management technologies for a broad range of heating, cooling and temperature control applications, primarily for the automotive and medical industries and pneumatic comfort technologies for the automotive industry. Within the automotive industry, our products provide solutions for passenger climate comfort and convenience, lumbar and massage comfort solutions, valve system technologies, 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 in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. 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, in North America, Europe or Asia, have had and could result in a significant reduction in automotive sales and production by our customers, which have and 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 Conditions

The COVID-19 pandemic that began around December 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 in February 2020 and continuing into June 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. Although global automotive industry production has improved relative to the first half of 2020, production remains below recent historic levels.

The lingering impacts of COVID-19 throughout 2021 and into 2022 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 and into 2022. 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, including Gentherm, 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 southern United 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 adverse impacts of ongoing shortages of semiconductors. Our ability to meet customer orders without significant delay and/or expense for the remainder of 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.

In addition to the direct and indirect impacts of COVID-19, the United States and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflict between Russia and Ukraine. In February 2022, Russia launched a full-scale military invasion of Ukraine. As a result of the conflict, the United States, United Kingdom, European Union and other countries have levied economic sanctions and bans on Russia and Russia has responded with its own retaliatory measures. These measures have impacted the availability and price of certain raw materials and could have a lasting impact on regional and global economies.

Our facility in Vynohradiv is on the far western corner of Ukraine near the Hungary border. In 2021, products manufactured at our Ukraine facility represented approximately 11% of the Company’s total revenue, including automotive cables, seat heaters and steering wheel heaters. At this time, our Ukraine facility is operating at normal levels and we have begun executing contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Our response to the escalating situation is based on a severity level contingency response plan that has been developed with certain customers. As the situation in Ukraine is very fluid, we continue to monitor its effects on our business and we continue to work closely with our customers to adjust our contingency response as necessary.

#### Acquisitions

On May 4, 2022, the Company entered into a definitive purchase agreement to acquire the automotive business of Alfmeier Präzision SE (“Alfmeier”), a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. Also on May 4, 2022, the Company entered into a put and call option agreement with one of the owners of Alfmeier for the real property in Germany on which Alfmeier’s headquarters is located. Pursuant to this agreement, the seller had a put to sell the headquarters to the Company and the Company had an option to purchase the headquarters post-closing of the acquisition of Alfmeier. Prior to the closing of the acquisition, Alfmeier and certain of its subsidiaries completed a series of carve-out transactions such that Alfmeier’s industrial and non-automotive business would not be acquired by the Company. On July 29, 2022, the Company completed the acquisition of Alfmeier through the acquisition of all shares in Alfmeier for a total purchase price of €181.5 million (approximately $184.9 million at foreign exchange rates as of such date), net of cash and cash-like items on one hand, and debt and debt-like items on the other hand, and subject to customary adjustments related to Alfmeier’s net working capital as of the closing. The Alfmeier purchase price was increased by €4.0 million (approximately $4.1 million at foreign exchange rates as of such date) at closing as a result of the resolution of certain Alfmeier tax matters prior to closing. Also, on July 29, 2022, the Company completed the acquisition of Alfmeier’s headquarters for a purchase price of €10.5 million (approximately $10.7 million at foreign exchange rates as of such date). The transactions were funded through a combination of the Company’s existing cash balances and borrowings under the Revolving Credit Facility.

On July 13, 2022, the Company completed the acquisition of Jiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”) and its wholly owned subsidiary, IOB Medical, Inc. (“IOB”). Dacheng, a privately held company headquartered in Jiangmen, Guangdong Province, China, is a manufacturer of medical materials and medical equipment, including patient temperature management solutions, for numerous local and international customers. The acquisition provides Gentherm Medical a local presence in China’s high-growth market for patient warming devices and other medical device products, while also expanding overall manufacturing capacity to include a low-cost manufacturing site. The Company acquired all shares in Dacheng for $34.3 million, net of cash and debt, and subject to customary adjustments related to Dacheng’s net working capital as of the closing. The purchase price may be increased by up to $3.0 million post-closing upon the achievement of certain milestones. Also, as part of the transaction but not the purchase price or net working capital, IOB retained the obligation to satisfy an existing $2.7 million consulting fee for work performed on IOB’s behalf. The transaction was funded through a combination of the Company’s existing cash balances and borrowings under the Revolving Credit Facility.

#### 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 (July 2022 release), actual light vehicle production in the three and six months ended June 30, 2022 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to the three and six months ended June 30, 2021, are shown below (in millions of units):

|  | Three Months Ended June 30, 2022 | 2021 | % Change | Six Months Ended June 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| North America | 3.6 | 3.2 | 12.5% | 7.1 | 6.8 | 4.4% |
| Europe | 3.9 | 4.1 | (4.9)% | 7.9 | 8.9 | (11.2)% |
| Greater China | 5.5 | 5.8 | (5.2)% | 11.7 | 11.6 | 0.9% |
| Japan / South Korea | 2.5 | 2.8 | (10.7)% | 5.2 | 5.8 | (10.3)% |
| Total light vehicle production volume in key markets | 15.5 | 15.9 | (2.6)% | 31.9 | 33.1 | (3.7)% |

The IHS Markit (July 2022 release) forecasted light vehicle production volume in the Company’s key markets for full year 2022 to increase to 67.2 million units, a 3.9% 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 in 2020 and remain ongoing due to the direct and indirect impacts of 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 the second quarter of 2022, we secured new automotive business awards totaling $600.0 million in the quarter including $190.0 million secured by Alfmeier Präzision SE prior to acquisition closing. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by our customers to Gentherm in the applicable period, with the value based on the price and volume projections received from each customer as of the award date. Although automotive new business awards are not firm customer orders, we believe that new business awards are an indicator of future revenue. New business awards are not projections of revenue or future business as of June 30, 2022, the date of this Report or any other date. Customer projections regularly change over time and we do not update our calculation of any new business award after the date initially communicated. Automotive new business awards in the second quarter 2022 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 that are included in this Report or incorporated by reference in “Forward-Looking Statements” above.

### Stock Repurchase Program

On December 11, 2020, the Board of Directors authorized a new stock repurchase program (the “2020 Stock Repurchase Program”) to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150.0 million of its issued and outstanding Common Stock over a three-year period, expiring December 15, 2023. Repurchases under the 2020 Stock Repurchase Program may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. During the six months ended June 30, 2022, we did not make any repurchases under the 2020 Stock Repurchase Program and have a remaining repurchase authorization of $130.0 million as of June 30, 2022.

### Reportable Segments

The Company has two reportable segments for financial reporting purposes: Automotive and Medical.

See Note 14, “Segment Reporting”, to the consolidated condensed financial statements included in this Report for a description of our reportable segments as well as their proportional contribution to the Company’s reported product revenues and operating income. The financial information used by our chief operating decision maker to assess operating performance and allocate resources is based on these reportable segments.

### Consolidated Results of Operations

The results of operations for the three and six months ended June 30, 2022 and 2021, in thousands, were as follows:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $260,715 | $266,005 | $(5,290) | $528,372 | $554,540 | $(26,168) |
| Cost of sales | 201,338 | 186,792 | (14,546) | 404,882 | 387,658 | (17,224) |
| Gross margin | 59,377 | 79,213 | (19,836) | 123,490 | 166,882 | (43,392) |
| Operating expenses: |  |  |  |  |  |  |
| Net research and development expenses | 19,325 | 18,227 | (1,098) | 39,759 | 35,830 | (3,929) |
| Selling, general and administrative expenses | 31,943 | 27,223 | (4,720) | 61,251 | 55,749 | (5,502) |
| Restructuring expenses | 374 | 2,091 | 1,717 | 555 | 2,882 | 2,327 |
| Total operating expenses | 51,642 | 47,541 | (4,101) | 101,565 | 94,461 | (7,104) |
| Operating income | 7,735 | 31,672 | (23,937) | 21,925 | 72,421 | (50,496) |
| Interest expense, net | (1,430) | (630) | (800) | (1,999) | (1,669) | (330) |
| Foreign currency gain (loss) | 4,552 | (515) | 5,067 | 6,769 | 258 | 6,511 |
| Other income | 134 | 12 | 122 | 338 | 3 | 335 |
| Earnings before income tax | 10,991 | 30,539 | (19,548) | 27,033 | 71,013 | (43,980) |
| Income tax expense | 3,919 | 5,748 | 1,829 | 8,214 | 13,313 | 5,099 |
| Net income | $7,072 | $24,791 | $(17,719) | $18,819 | $57,700 | $(38,881) |

Product revenues by product category, in thousands, for the three and six months ended June 30, 2022 and 2021, were as follows:

|  | Three Months Ended June 30, 2022 | 2021 | % Change | $ Change | Six Months Ended June 30, 2022 | 2021 | % Change | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Climate Control Seat | $96,488 | $98,229 | (1.8)% | $(1,741) | $199,222 | $207,402 | (3.9)% | $(8,180) |
| Seat Heaters | 65,903 | 69,864 | (5.7)% | $(3,961) | 134,799 | 146,585 | (8.0)% | $(11,786) |
| Steering Wheel Heaters | 28,951 | 26,697 | 8.4% | $2,254 | 57,687 | 55,561 | 3.8% | $2,126 |
| Automotive Cables | 19,280 | 22,940 | (16.0)% | $(3,660) | 41,325 | 47,221 | (12.5)% | $(5,896) |
| Battery Performance Solutions | 17,451 | 17,577 | (0.7)% | $(126) | 35,064 | 35,337 | (0.8)% | $(273) |
| Electronics | 10,278 | 14,652 | (29.9)% | $(4,374) | 21,106 | 29,757 | (29.1)% | $(8,651) |
| Other Automotive | 10,801 | 5,146 | 109.9% | $5,655 | 17,813 | 12,612 | 41.2% | $5,201 |
| Subtotal Automotive segment | 249,152 | 255,105 | (2.3)% | $(5,953) | 507,016 | 534,475 | (5.1)% | $(27,459) |
| Medical segment | 11,563 | 10,900 | 6.1% | $663 | 21,356 | 20,065 | 6.4% | $1,291 |
| Total Company | $260,715 | $266,005 | (2.0)% | $(5,290) | $528,372 | $554,540 | (4.7)% | $(26,168) |

27

### Product Revenues

Below is a summary of our product revenues, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $260,715 | $266,005 | $(5,290) | $4,388 | $(13,569) | $3,891 | $(5,290) |

Product revenues for the three months ended June 30, 2022 decreased 2.0% as compared to the three months ended June 30, 2021. The decrease in product revenues is related to unfavorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won, partially offset by increased volumes in our Automotive segment. The increase in product revenues included in Variance Due To Pricing/Other is primarily attributable to price increases as a result of initial cost recoveries from customers in our Automotive segment and negotiated lower annual price reductions from customers. Additional increase in product revenues included in Variance Due To Pricing/Other is a result of an increase in product revenue in our Medical segment.

Below is a summary of our product revenues, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $528,372 | $554,540 | $(26,168) | $(8,582) | $(20,170) | $2,584 | $(26,168) |

Product revenues for the six months ended June 30, 2022 decreased 4.7% as compared to the six months ended June 30, 2021. The decrease in product revenues is primarily related to decreased volumes in our Automotive segment and unfavorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won. The increase in product revenues included in Variance Due To Pricing/Other is primarily attributable to price increases as a result of initial cost recoveries from customers in our Automotive segment and negotiated lower annual price reductions from customers. Additional increase in product revenues included in Variance Due To Pricing/Other is a result of an increase in product revenue in our Medical segment.

### Cost of Sales

Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $201,338 | $186,792 | $(14,546) | $(2,727) | $(13,472) | $7,280 | $(5,627) | $(14,546) |
| Gross margin | $59,377 | $79,213 | $(19,836) | $1,661 | $(13,472) | $(6,289) | $(1,736) | $(19,836) |
| Gross margin - Percentage of product revenues | 22.8% | 29.8% |  |  |  |  |  |  |

Cost of sales for the three months ended June 30, 2022 increased 7.8% as compared to the three months ended June 30, 2021. The increase in cost of sales is due to increased volumes in our Automotive segment and inflation associated with higher freight costs and material costs included in the Variance Due To Operational Performance. This increase was partially offset by favorable foreign currency impacts primarily attributable to the Euro and Chinese Renminbi. The increase in cost of sales included in Variance Due To Other above is due to the following items:

- $3.2 million of increase due to wage inflation; and
- $1.3 million of increase attributable to higher volumes in the Medical segment

Below is a summary of our cost of sales and gross margin, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $404,882 | $387,658 | $(17,224) | $5,621 | $(25,480) | $11,197 | $(8,562) | $(17,224) |
| Gross margin | $123,490 | $166,882 | $(43,392) | $(2,961) | $(25,480) | $(8,973) | $(5,978) | $(43,392) |
| Gross margin - Percentage of product revenues | 23.4% | 30.1% |  |  |  |  |  |  |

Cost of sales for the six months ended June 30, 2022 increased 4.4% as compared to the six months ended June 30, 2021. The increase in cost of sales within the Variance Due To Operational Performance is primarily related to inflation associated with higher freight costs and material costs. This increase was partially offset by decreased volumes in our Automotive segment and favorable foreign currency impacts primarily attributable to the Euro and Chinese Renminbi. The increase in cost of sales included in Variance Due To Other above is due to the following items:

- $6.5 million of increase due to wage inflation;
- $2.0 million of increase attributable to higher volumes in the Medical segment; and
- $0.7 million of decrease due to lower stock compensation expense.

### Net Research and Development Expenses

Below is a summary of our net research and development expenses, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $24,334 | $23,013 | $(1,321) |
| Reimbursed research and development expenses | (5,009) | (4,786) | 223 |
| Net research and development expenses | $19,325 | $18,227 | $(1,098) |
| Percentage of product revenues | 7.4% | 6.9% |  |

Net research and development expenses for the three months ended June 30, 2022 increased 6.0% as compared to the three months ended June 30, 2021. The increase in net research and development expenses is primarily related to increased project-related spending.

Below is a summary of our net research and development expenses, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $48,237 | $45,439 | $(2,798) |
| Reimbursed research and development expenses | (8,478) | (9,609) | (1,131) |
| Net research and development expenses | $39,759 | $35,830 | $(3,929) |
| Percentage of product revenues | 7.5% | 6.5% |  |

Net research and development expenses for the six months ended June 30, 2022 increased 11.0% as compared to the six months ended June 30, 2021. The increase in net research and development expenses is primarily related to increased project-related spending and lower reimbursements for costs to design, develop and purchase tooling pursuant to customer contracts.

### Selling, General and Administrative Expenses

Below is a summary of our selling, general and administrative expenses, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $31,943 | $27,223 | $(4,720) |
| Percentage of product revenues | 12.3% | 10.2% |  |

Selling, general and administrative expenses for the three months ended June 30, 2022 increased 17.3% as compared to the three months ended June 30, 2021. The increase in selling, general and administrative expenses is primarily related to acquisition related costs.

Below is a summary of our selling, general and administrative expenses, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $61,251 | $55,749 | $(5,502) |
| Percentage of product revenues | 11.6% | 10.1% |  |

Selling, general and administrative expenses for the six months ended June 30, 2022 increased 9.9% as compared to the six months ended June 30, 2021. The increase in selling, general and administrative expenses is primarily related to acquisition related costs.

### Restructuring Expenses

Restructuring expenses primarily relate to the Manufacturing Footprint Rationalization restructuring program and other discrete restructuring actions focused on the rotation of our manufacturing footprint to lower cost locations and the reduction of global overhead expenses.

Below is a summary of our restructuring expenses, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $374 | $2,091 | $1,717 |

During the three months ended June 30, 2022, the Company recognized expenses of $0 million for employee separation costs and $0.4 million for other costs.

During the three months ended June 30, 2021, the Company recognized expenses of $1.5 million for employee separation costs and $0.6 million of accelerated depreciation and other costs.

Below is a summary of our restructuring expenses, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $555 | $2,882 | $2,327 |

During the six months ended June 30, 2022, the Company recognized expenses of $0.1 million for employee separation costs and $0.5 million for other costs.

During the six months ended June 30, 2021, the Company recognized expenses of $2.0 million for employee separation costs and $0.9 million of accelerated depreciation and other costs.

See Note 3, “Restructuring” of the consolidated condensed financial statements included in this Report for additional information.

### Interest Expense, net

Below is a summary of our interest expense, net, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(1,430) | $(630) | $(800) |

Interest expense, net for the three months ended June 30, 2022 increased 127.0% as compared to the three months ended June 30, 2021. The increase is primarily due to the change in fair value of the interest rate swap derivative during the three months ended June 30, 2022.

Below is a summary of our interest expense, net, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(1,999) | $(1,669) | $(330) |

Interest expense, net for the six months ended June 30, 2022 increased 19.8% as compared to the six months ended June 30, 2021. The increase is primarily due to the change in fair value of the interest rate swap derivative during the six months ended June 30, 2022 offset by a lower balance on our revolving credit agreement during the six months ended June 30, 2022, as compared to the six months ended June 30, 2021.

### Foreign Currency Gain (Loss)

Below is a summary of our foreign currency gain (loss), in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency gain (loss) | $4,552 | $(515) | $5,067 |

Foreign currency gain for the three months ended June 30, 2022 included net realized foreign currency gain of $0.5 million and net unrealized foreign currency gain of $4.0 million.

Foreign currency loss for the three months ended June 30, 2021 primarily included net realized foreign currency loss of $0.5 million.

Below is a summary of our foreign currency gain, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency gain | $6,769 | $258 | $6,511 |

Foreign currency gain for the six months ended June 30, 2022 included net realized foreign currency gain of $0.4 million and net unrealized foreign currency gain of $6.4 million.

Foreign currency gain for the six months ended June 30, 2021 primarily included net unrealized foreign currency gain of $0.3 million.

### Other Income

Below is a summary of our other income, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income | $134 | $12 | $122 |

The increase in Other income is due to an increase in miscellaneous income.

Below is a summary of our other income, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income | $338 | $3 | $335 |

The increase in Other income is due to an increase in miscellaneous income.

### Income Tax Expense

Below is a summary of our income tax expense, in thousands, for the three months ended June 30, 2022 and 2021:

|  | Three Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $3,919 | $5,748 | $1,829 |

Income tax expense was $3.9 million for the three months ended June 30, 2022, on earnings before income tax of $11.0 million, representing an effective tax rate of 35.7%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, the unfavorable impact of the global intangible low-tax income (“GILTI”), and the increase of accruals for uncertain tax positions partially offset by the impact of certain favorable tax effects on equity vesting.

Income tax expense was $5.7 million for the three months ended June 30, 2021 on earnings before income tax of $30.5 million representing an effective tax rate of 18.8%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to certain favorable tax effect on equity vesting and intercompany transactions in the second quarter of 2021, partially offset by unfavorable impact of GILTI.

Below is a summary of our income tax expense, in thousands, for the six months ended June 30, 2022 and 2021:

|  | Six Months Ended June 30, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $8,214 | $13,313 | $5,099 |

Income tax expense was $8.2 million for the six months ended June 30, 2022, on earnings before income tax of $27.0 million, representing an effective tax rate of 30.4%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, the unfavorable impact of GILTI, and the increase of accruals for uncertain tax positions partially offset by the impact of certain favorable tax effects of equity vesting.

Income tax expense was $13.3 million for the six months ended June 30, 2021 on earnings before income tax of $71.0 million representing an effective tax rate of 18.7%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to certain favorable tax effect on equity vesting and intercompany transactions in 2021, partially offset by the unfavorable impact of GILTI.

### Liquidity and Capital Resources

### Overview

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our Second Amended and Restated Credit Agreement. Our cash requirements consist principally of working capital, capital expenditures, research and development, operating lease payments, income tax payments and general corporate purposes. We generally reinvest available cash flows from operations into our business, while opportunistically utilizing our authorized stock repurchase program. Further, we continuously evaluate acquisition and investment opportunities that will enhance our business strategies.

As of June 30, 2022, the Company had $157.3 million of cash and cash equivalents, $357.0 million of availability under our Second Amended and Restated Credit Agreement and $32.4 million of availability under our North America receivables factoring arrangement. Significant changes in liquidity occurred during July 2022 in connection with the close of the Alfmeier and Dacheng acquisitions. See "Material Cash Requirements" below for further information. We continue to maintain access to the capital markets and may issue debt or equity securities, which may provide an additional source of liquidity. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current shareholders.

We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Second Amended and Restated Credit Agreement. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of June 30, 2022, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled approximately $141.1 million. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S.; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts.

We currently believe that our cash and cash equivalents and borrowings available under our Second Amended and Restated Credit Agreement and the North 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 Flows

The following table represents our cash and cash equivalents, in thousands:

|  | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: |
| Cash and cash equivalents at beginning of period | $190,606 | $268,345 |
| Net Cash (used in) provided by operating activities | (3,686) | 84,362 |
| Net Cash used in investing activities | (15,717) | (25,859) |
| Net Cash used in financing activities | (5,145) | (139,625) |
| Foreign currency effect on cash and cash equivalents | (8,800) | (360) |
| Cash and cash equivalents at end of period | $157,258 | $186,863 |

#### Cash Flows From Operating Activities

Cash used in operating activities totaled $3.7 million during the six months ended June 30, 2022 primarily reflecting net income of $18.8 million, decreased by non-cash adjustments of $1.0 million for deferred income taxes and $46.6 million related to changes in assets and liabilities, partially offset by $25.1 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, loss on disposition of property and equipment and pension plan adjustments.

#### Cash Flows From Investing Activities

Cash used in investing activities was $15.7 million during the six months ended June 30, 2022, reflecting purchases of property and equipment of $15.4 million and payments related to an equity method investment for $0.4 million, partially offset by proceeds from the sale of property and equipment of $0.1 million.

#### Cash Flows From Financing Activities

Cash used in financing activities was $5.1 million during the six months ended June 30, 2022, reflecting taxes withheld and paid on employees' share based payment awards totaling $4.5 million and repayments of debt of $1.2 million, partially offset by proceeds from the exercise of Common Stock options totaling $0.6 million.

### Debt

The following table summarizes the Company’s debt, in thousands, as of June 30, 2022 and 2021:

| Credit Agreement: | June 30, 2022 Interest Rate | Principal Balance | June 30, 2021 Interest Rate | Principal Balance |
| --- | ---: | ---: | ---: | ---: |
| U.S. Revolving Note (U.S. Dollar denominations) | 2.42% | $35,000 | 1.35% | $35,000 |
| U.S. Revolving Note (Euro denominations) | — | — | 1.25% | 8,294 |
| DEG Vietnam Loan | 5.21% | 2,500 | 5.21% | 5,000 |
| Total debt |  | 37,500 |  | 48,294 |
| Current maturities |  | (2,500) |  | (2,500) |
| Long-term debt, less current maturities |  | $35,000 |  | $45,794 |

34

#### Credit Agreement

Gentherm, together with certain of its subsidiaries, maintain a revolving credit note (“U.S. Revolving Note”) under its Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Second Amended and Restated Credit Agreement was entered into on June 10, 2022 and amends and restates in its entirety the Amended and Restated Credit Agreement dated June 27, 2019, by and among Gentherm, certain of its direct and indirect subsidiaries, the lenders party thereto and the Agent. The Second Amended and Restated Credit Agreement has a maximum borrowing capacity of $500 million and matures on June 10, 2027. The Second Amended and Restated Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets or enter into certain other transactions outside the ordinary course of business, and (ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Net Leverage Ratio (based on consolidated EBITDA for the applicable trailing four fiscal quarters) as of the end of any fiscal quarter.

#### DEG Vietnam Loan

The Company also has a fixed interest rate loan with the German Investment Corporation (“DEG”), a subsidiary of KfW Banking Group, a Germany government-owned development bank. The fixed interest rate senior loan agreement with DEG was used to finance the construction and set up of the Vietnam production facility (“DEG Vietnam Loan”). The DEG Vietnam Loan is subject to semi-annual principal payments that began November, 2017 and will end May, 2023.

### Other Sources of Liquidity

The Company is party to a receivable factoring agreement with HSBC Bank USA, National Association. Under the receivable factoring agreement, we can sell receivables for certain of our North America account debtors up to $41.3 million, on a revolving basis, subject to outstanding balances and concentration limits. As of June 30, 2022, there were no outstanding receivables transferred under the receivable factoring agreement and our availability under the receivables factoring agreement was $32.4 million.

### Material Cash Requirements

Significant liquidity was required during July 2022 to close the Alfmeier and Dacheng acquisitions. In connection with these acquisitions, we drew $202.0 million from the U.S. Revolving Note and made cash payments totaling approximately $232.6 million, including amounts placed in escrow. Additional cash payments may be required for customary adjustments related to Alfmeier’s net working capital as of the closing and for the contingent payments of up to $3.0 million related to the Dacheng acquisition. See "Acquisitions" above for additional information about the purchase prices associated with these transactions.

The Company continues to enter into agreements with suppliers to reserve the right to purchase certain semiconductor chips over periods of 12-24 months. As of June 30, 2022, the Company’s total commitments for these semiconductor chip agreements was $40.4 million. See Note 7, “Commitments and Contingencies” of the consolidated condensed financial statements included in this Report for additional information.

Except as described above, there have been no material changes in our cash requirements since December 31, 2021, the end of fiscal year 2021. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding our material cash requirements.

### Effects of Inflation

The automotive component supply industry has historically been subject to inflationary pressures with respect to materials and labor. 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 with Gentherm's customers and suppliers have not fully offset to date and may not offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.

### Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. For discussion of our significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our critical accounting policies or critical accounting estimates during the three months ended June 30, 2022. We are not presently aware of any events or circumstances that would require us to update our estimates, assumptions or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained. As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements. For information on the impact of recently issued accounting pronouncements, see Note 2, “New Accounting Pronouncements” in the consolidated condensed financial statements included in this Report.

### Recent Accounting Pronouncements

For information on the impact of recently issued accounting pronouncements, see Note 2, “New Accounting Pronouncements” in the consolidated condensed financial statements included in this Report.

## Market risk

As filed, 6,753 characters.

The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to its debt obligations under the Second Amended and Restated Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in a location’s functional currency, foreign plant operations, intercompany indebtedness, acquisitions denominated in foreign currencies, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.

The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The decision of whether and when to execute derivative financial instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not enter into derivative financial instruments for speculative or trading purposes. Some derivative contracts do not qualify for hedge accounting; for other derivative contracts, we elect to not apply hedge accounting.

The Company’s designated hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts that can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to Accumulated other comprehensive loss in the consolidated condensed balance sheets. When the underlying hedge transaction is realized, the gain or loss included in Accumulated other comprehensive loss is recorded in earnings in the consolidated condensed statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency and copper commodity hedging instruments, if any, to cost of sales, and the ineffective portion of interest rate swaps, if any, to interest expense in the consolidated condensed statements of income. Cash flows associated with derivatives are reported in net cash (used in) provided by operating activities in the Company’s consolidated condensed statements of cash flows.

Information related to the fair values of all derivative instruments in our consolidated condensed balance sheet as of June 30, 2022 is set forth in Note 9, “Financial Instruments” in the consolidated condensed financial statements included in this Report.

#### Interest Rate Sensitivity

The table presents principal cash flows and related weighted average interest rates by expected maturity dates for each of the Company’s debt obligations. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency. The instruments actual cash flows are denominated in the currency indicated in parentheses.

| Liabilities Long-Term Debt: | Expected Maturity Date 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Variable rate ($USD) | $— | $— | $— | $— | $— | $35,000 | $35,000 | $35,000 |
| Variable interest rate as of June 30, 2022 |  |  |  |  |  | 2.42% | 2.42% |  |
| Fixed rate ($USD) | $1,250 | $1,250 | $— | $— | $— | $— | $2,500 | $2,490 |
| Fixed interest rate | 5.21% | 5.21% |  |  |  |  | 5.21% |  |

Based on the amounts outstanding as of June 30, 2022, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense by $0.4 million.

In connection with the acquisitions of Alfmeier and Dacheng, we drew $202.0 million from the U.S. Revolving Note in July 2022. To hedge the Company's exposure to interest payment fluctuations on a portion of these borrowings, we entered into a floating-to-fixed interest rate swap agreement with a notional amount of $100.0 million.

#### Exchange Rate Sensitivity

The table below provides information about the Company’s foreign currency forward exchange rate agreements that are sensitive to changes in foreign currency exchange rates. The table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates for each type of foreign currency forward exchange agreement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.

During the three months ended June 30, 2022, the Company entered into forward contracts with a notional amount of $128.3 million to hedge the foreign currency risk associated with the expected closing of Alfmeier.

| Anticipated Transactions and Related Derivatives USD Functional Currency Forward Exchange Agreements: (Receive $MXN / Pay $USD) | Expected Maturity or Transaction Date 2022 | Total | Fair Value |
| --- | ---: | ---: | ---: |
| Total contract amount | $14,075 | $14,075 | $588 |
| Average contract rate | 21.31 | 21.31 |  |
| (Receive $EUR / Pay $USD) |  |  |  |
| Total contract amount | $128,319 | $128,319 | $482 |
| Average contract rate | 0.96 | 0.96 |  |

The table below presents the potential gain and loss in fair value for the foreign currency derivative contracts from a hypothetical 10% change in quoted currency exchange rates.

| Exchange Rate Sensitivity | June 30, 2022 Potential loss in fair value | Potential gain in fair value | December 31, 2021 Potential loss in fair value | Potential gain in fair value |
| --- | ---: | ---: | ---: | ---: |
| Forward Exchange Agreement:(Receive $MXN / Pay $USD) | $1,332 | $1,628 | $1,296 | $1,584 |
| Forward Exchange Agreement:(Receive $EUR / Pay $USD) | $33,300 | $40,700 | $— | $— |

The model assumes a parallel shift in currency exchange rates; however, currency exchange rates rarely move in the same direction. The assumption that currency exchange rates change in a parallel fashion may overstate the impact of changing currency exchange rates on assets and liabilities denominated in currencies other than the U.S. dollar.

## Controls and procedures

As filed, 1,452 characters.

### (a) Evaluation of Disclosure Controls and Procedures

Management of the Company, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2022. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.

### (b) Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 316 characters.

The Company’s risk factors have not materially changed from those previously disclosed in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Part II “Item 1A. Risk Factors” in our Current Report on Form 10-Q for the three months ended March 31, 2022.

Filed Aug 2, 2022.
Source: SEC EDGAR, the filing index for accession 0000950170-22-013912. Last ingested by Listed: Oct 26, 2026, 17:44 ET. No prices; not investment advice.