# Gentherm Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [Gentherm Inc](/companies/thrm.md) (CIK 903129)
- Form: 10-Q
- Filed: 2023-04-27
- Accepted by EDGAR: Apr 27, 2023, 16:16 ET
- Period: 2023-03-31
- Accession: 0000950170-23-015285
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903129/000095017023015285/thrm-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903129/000095017023015285/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $363.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $282.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $81.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $25.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $37.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $17.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $3.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $8.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.24 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.24 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 33,386,134 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $25.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $6.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $10.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-03-31 | $166.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $711.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $1.27bn | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $306.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $588.4m | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $232.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-03-31 | $2.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-03-31 | $680.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,769 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 expected light vehicle production in the Company’s key markets; the integration of recent acquisitions; the impact of macroeconomic and geopolitical conditions; the components of and our ability to execute our updated strategic plan; long-term consumer and technological trends in the Automotive industry and our related market opportunity for our existing and new products and technologies; the competitive landscape; 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 reasonable expectations and beliefs. In making these statements we rely on assumptions and analysis based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we consider appropriate under the circumstances. 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, 2022 and subsequent reports filed with or furnished to the Securities and Exchange Commission, and which could cause actual results to differ materially from that described in the forward-looking statements. In addition, with reasonable frequency, we have entered into business combinations, acquisitions, divestitures, strategic investments and other significant transactions. Such forward-looking statements do not include the potential impact of any such transactions that may be completed after the date hereof, each of which may present material risks to the Company’s future 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, 2022.

### Overview

Gentherm Incorporated is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive and medical industries. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, valve systems, and other electronic devices. Our automotive products can be found on vehicles manufactured by nearly all the major original equipment manufacturers (“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. Medical products include patient temperature management systems. Our medical products can be found in hospitals throughout the world, primarily in the US, China, Germany and Brazil. The Company is also developing a number of new technologies and products that will help enable improvements to existing products, improve health, wellness and patient outcomes and will lead to new product applications for existing and new and adjacent 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 macroeconomic 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 had and would have an adverse effect on our business, results of operations and financial condition. Since 2020, 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 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 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 that contain 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 or weakness 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 believe our industry is increasingly progressing towards a focus on human comfort and health, which is evidenced by increasing adoption rates for comfort products. We believe that products we are developing, such as ClimateSense® and our acquisition of Alfmeier’s pneumatic comfort solutions, position us well to address trends in consumer preferences such as personalized user experience, comfort, health and wellness.

### Recent Trends

#### General Macroeconomic and Geopolitical Conditions

Since 2020, the global economy has experienced significant volatility and disrupted supply chains, which has had a widespread adverse effect on the global automotive industry. These macroeconomic conditions have 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. Although we are optimistic that the worst of the global macroeconomic volatility is in the past, the direct and indirect impacts on our markets, operations, and financial performance have been unpredictable. As a result of this continued uncertainty, there may still be impacts on our industry, operations, workforce, supply chains, distribution systems, and demand for our products in the future which cannot be reasonably estimated at this time.

Additionally, 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 price of certain raw materials and energy and could have a lasting impact on regional and global economies.

Our facility in Vynohradiv is on the far western corner within the Transcarpathia region of Ukraine near the Hungary border. In 2022, products manufactured at our Ukraine facility represented approximately 8% 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 continue to execute contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. We have incurred, and will likely continue to incur costs to support our employees and relocate equipment and production based on customer and company needs. Further, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we may experience a significant disruption to our operations. Our response to the ongoing conflict 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.

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 has experienced and may continue to experience direct impacts of ongoing shortages of semiconductors. Our ability to meet customer orders without significant delay and/or expense remains subject to significant uncertainty.

Global inflation has increased significantly beginning in 2021. Changing costs of freight, materials, equipment, labor and other inputs used to manufacture and sell our products and logistics costs, in particular, have impacted and may in the future impact operating costs and, accordingly, may affect the prices of our products. We are involved in continuing programs to mitigate the impact of cost increases through identification of sourcing and manufacturing efficiencies where possible. However, there have been, and there may still be, impacts we are not able to fully mitigate or pass through the increases in our operating costs.

We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain international operations into U.S. Dollars as part of the consolidation process. Therefore, fluctuations in foreign currency exchange rates can create volatility in the results of operations and may adversely affect our financial condition.

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.

#### Acquisitions

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. Dacheng, a privately held manufacturer of medical materials and medical equipment, including patient temperature management solutions, for numerous local and international customers. The acquisition provided Gentherm Medical a local presence in China’s high-growth market for patient warming devices and other medical device products, and expanded overall manufacturing capacity to include a low-cost manufacturing site. The total consideration transferred was $35.0 million. The purchase agreement also included potential cash payments contingent upon the achievement of certain performance metrics and continued employment of the former majority shareholder through a series of defined dates. The achievement of these performance metrics resulted in cash payments of $0.5 million. These cash payments were accounted for as compensation expense and recorded as a component of selling, general and administrative expense ratably over the service period.

On August 1, 2022, the Company acquired 100% of the equity interests of Alfmeier Präzision SE (“Alfmeier”) a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems, integrated electronics and software. The acquisition further expanded the Company's value proposition beyond thermal in comfort, health, wellness, and energy efficiency and aligned well with global consumer demand for expanded offerings in vehicle passenger comfort. The total consideration for this acquisition was $170.7 million.

See Note 2, “Acquisitions” to the consolidated condensed financial statements included in this Report for additional information.

#### Impairments – Non-Automotive Electronics Business

On December 31, 2022, the Company approved a plan to exit its non-automotive electronics business to strengthen the Company’s core business and focus its resources and equipment with businesses and investments that are more strategic and profitable. The Company will continue to sell certain non-automotive electronics products until the exit is complete. During the year ended December 31, 2022, the Company recorded non-cash impairment charges of $9.4 million, $5.6 million and $0.7 million for write downs of inventory, intangible assets and property and equipment, respectively, within the Automotive segment.

During the three months ended March 31, 2023, the Company recorded non-cash impairment charges of $1.4 million for the write down of inventory within the Automotive segment. This charge is recorded in Cost of sales.

The Company is no longer pursuing a sale of the business and intends to wind-down the operations of the business by the end of 2023, subject to discussions with customers and suppliers.

#### 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 S&P Global Mobility (April 2023 release), global light vehicle production in the three months ended March 31, 2023 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to the three months ended March 31, 2022, are shown below (in millions of units):

|  | Three Months Ended March 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| North America | 3.9 | 3.6 | 9.8% |
| Europe | 4.6 | 3.9 | 17.2% |
| Greater China | 5.7 | 6.2 | (7.8)% |
| Japan / South Korea | 3.1 | 2.7 | 16.9% |
| Total light vehicle production volume in key markets | 17.4 | 16.4 | 6.0% |

The S&P Global Mobility (April 2023 release) forecasted light vehicle production volume in the Company’s key markets for full year 2023 to increase to 70.4 million units, a 4.1% increase from full year 2022 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. 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 S&P Global Mobility 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 first quarter of 2023, we secured new automotive business awards totaling $480 million in the quarter. 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 March 31, 2023, 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 first quarter 2023 also do not reflect, in particular, the impact of macroeconomic and geopolitical 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

In December 2020, the Board of Directors authorized a stock repurchase program (the “2020 Stock Repurchase Program”). 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 three months ended March 31, 2023, the Company repurchased $10.0 million of shares under the 2020 Stock Repurchase Program with an average price paid per share of $59.27. The 2020 Stock Repurchase Program had $120.0 million repurchase authorization remaining as of March 31, 2023.

### 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 (loss). 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 months ended March 31, 2023 and 2022, in thousands, were as follows:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Product revenues | $363,625 | $267,657 | $95,968 |
| Cost of sales | 282,495 | 203,544 | (78,951) |
| Gross margin | 81,130 | 64,113 | 17,017 |
| Operating expenses: |  |  |  |
| Net research and development expenses | 25,145 | 20,434 | (4,711) |
| Selling, general and administrative expenses | 37,042 | 29,308 | (7,734) |
| Restructuring expenses | 1,269 | 181 | (1,088) |
| Total operating expenses | 63,456 | 49,923 | (13,533) |
| Operating income | 17,674 | 14,190 | 3,484 |
| Interest expense, net | (4,144) | (569) | (3,575) |
| Foreign currency (loss) gain | (2,069) | 2,217 | (4,286) |
| Other income | 230 | 204 | 26 |
| Earnings before income tax | 11,691 | 16,042 | (4,351) |
| Income tax expense | 3,728 | 4,295 | 567 |
| Net income | $7,963 | $11,747 | $(3,784) |

Product revenues by product category, in thousands, for the three months ended March 31, 2023 and 2022, were as follows:

|  | Three Months Ended March 31, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Climate Control Seat | $114,753 | $102,734 | $12,019 | 11.7% |
| Seat Heaters | 75,636 | 68,896 | 6,740 | 9.8% |
| Lumbar and Massage Comfort Solutions | 38,738 | — | 38,738 | 100.0% |
| Steering Wheel Heaters | 36,347 | 28,736 | 7,611 | 26.5% |
| Valve Systems | 26,994 | — | 26,994 | 100.0% |
| Battery Performance Solutions | 20,309 | 17,613 | 2,696 | 15.3% |
| Automotive Cables | 20,220 | 22,045 | (1,825) | (8.3)% |
| Electronics | 10,970 | 10,828 | 142 | 1.3% |
| Other Automotive | 8,725 | 7,012 | 1,713 | 24.4% |
| Subtotal Automotive segment | 352,692 | 257,864 | 94,828 | 36.8% |
| Medical segment | 10,933 | 9,793 | 1,140 | 11.6% |
| Total Company | $363,625 | $267,657 | $95,968 | 35.9% |

### Product Revenues

Below is a summary of our product revenues, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | FX | Acquisitions | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $363,625 | $267,657 | $95,968 | $36,804 | $(8,131) | $67,011 | $284 | $95,968 |

Product revenues for the three months ended March 31, 2023 increased 35.9% as compared to the three months ended March 31, 2022. The increase in product revenues is due to favorable volumes in our Automotive segment, the inclusion of sales from Alfmeier and Dacheng since the acquisitions, and the negotiation of lower annual price reductions and cost recoveries from customers, partially offset by unfavorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi, Korean Won, and Japanese Yen.

### Cost of Sales

Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | Operational Performance | FX | Acquisitions and Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $282,495 | $203,544 | $(78,951) | $(22,055) | $3,745 | $4,327 | $(64,968) | $(78,951) |
| Gross margin | $81,130 | $64,113 | $17,017 | $14,749 | $1,634 | $(3,803) | $4,437 | $17,017 |
| Gross margin - Percentage of product revenues | 22.3% | 24.0% |  |  |  |  |  |  |

27

Cost of sales for the three months ended March 31, 2023 increased 38.8% as compared to the three months ended March 31, 2022. The increase in cost of sales is primarily due to increased volumes in our Automotive segment, the inclusion of expenses from the acquired businesses, inflation associated with wages and material costs, and a non-automotive electronics inventory charge. These increases were partially offset by favorable foreign currency impacts primarily attributable to the Euro, Chinese Renminbi and Ukrainian Hryvnia and lower expedited freight costs.

### Net Research and Development Expenses

Below is a summary of our net research and development expenses, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $31,749 | $23,903 | $(7,846) |
| Reimbursed research and development expenses | (6,604) | (3,469) | 3,135 |
| Net research and development expenses | $25,145 | $20,434 | $(4,711) |
| Percentage of product revenues | 6.9% | 7.6% |  |

Net research and development expenses for the three months ended March 31, 2023 increased 23.1% as compared to the three months ended March 31, 2022. The increase in net research and development expenses is primarily related to the inclusion of net expenses from Alfmeier and increased investments to support new program wins.

### Selling, General and Administrative Expenses

Below is a summary of our selling, general and administrative expenses, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $37,042 | $29,308 | $(7,734) |
| Percentage of product revenues | 10.2% | 10.9% |  |

Selling, general and administrative expenses for the three months ended March 31, 2023 increased 26.4% as compared to the three months ended March 31, 2022. The increase in selling, general and administrative expenses is primarily related to the inclusion of expenses from acquired businesses and higher compensation expenses.

### Restructuring Expenses

Below is a summary of our restructuring expenses, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $1,269 | $181 | $(1,088) |

During the three months ended March 31, 2023, the Company recognized expenses of $1.2 million for employee separation costs and less than $0.1 million for other costs. These restructuring expenses primarily relate to discrete restructuring actions focused on the reduction of global overhead expenses.

During the three months ended March 31, 2022, the Company recognized expenses of $0.1 million for employee separation costs and $0.1 million for other costs.

See Note 3, “Restructuring” to 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 March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(4,144) | $(569) | $(3,575) |

Interest expense, net for the three months ended March 31, 2023 increased 628.3% as compared to the three months ended March 31, 2022. The increase is primarily related to a higher balance on our revolving credit agreement during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022 and the mark to market impact of the Company’s interest rate swap during the three months ended March 31, 2023. See Note 6, "Debt," to the consolidated condensed financial statements included in this Report for additional information.

### Foreign Currency (Loss) Gain

Below is a summary of our foreign currency (loss) gain, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency (loss) gain | $(2,069) | $2,217 | $(4,286) |

Foreign currency (loss) gain for the three months ended March 31, 2023 included net realized foreign currency gain of $3.8 million and net unrealized foreign currency loss of $5.9 million.

Foreign currency (loss) gain for the three months ended March 31, 2022 primarily included net realized foreign currency loss of $0.1 million and net unrealized foreign currency gain of $2.3 million.

### Other Income

Below is a summary of our other income, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income | $230 | $204 | $26 |

Other income for the three months ended March 31, 2023 remained flat as compared to the three months ended March 31, 2022.

### Income Tax Expense

Below is a summary of our income tax expense, in thousands, for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, 2023 | 2022 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $3,728 | $4,295 | $567 |

Income tax expense was $3.7 million for the three months ended March 31, 2023, on earnings before income tax of $11.7 million, representing an effective tax rate of 31.9 %. The tax amount included the effect of the settlement and closure of a multi-year state audit of $0.5 million. Adjusted for the audit impacts, the effective rate was 28.0%. 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 quarterly accrual for uncertain tax positions, partially offset by the impact of research and development credits in various jurisdictions and certain favorable tax effects on stock compensation vesting.

Income tax expense was $4.3 million for the three months ended March 31, 2022 on earnings before income tax of $16.0 million representing an effective tax rate of 26.8%. 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

GILTI, and the quarterly accrual for uncertain tax positions partially offset by the impact of certain favorable tax effects on stock compensation vesting.

### 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 March 31, 2023, the Company had $166.6 million of cash and cash equivalents, $266.4 million of availability under our Second Amended and Restated Credit Agreement. We may issue debt or equity securities, which may provide an additional source of liquidity. However, 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 March 31, 2023, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled approximately $134.0 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, borrowings available under our Second Amended and Restated Credit Agreement and receivables factoring arrangements, and cash flows from operations 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:

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents at beginning of period | $153,891 | $190,606 |
| Net cash provided by (used in) operating activities | 25,109 | (684) |
| Net cash used in investing activities | (2,549) | (5,957) |
| Net cash used in financing activities | (12,965) | (3,750) |
| Foreign currency effect on cash and cash equivalents | 3,144 | (2,298) |
| Cash and cash equivalents at end of period | $166,630 | $177,917 |

#### Cash Flows From Operating Activities

Net cash provided by (used in) operating activities totaled $25.1 million during the three months ended March 31, 2023 primarily reflecting net income of $8.0 million, $15.6 million for non-cash charges for depreciation, amortization, stock based compensation and loss on disposition of property, $1.7 million related to changes in assets and liabilities and non-cash charges of $1.7 million for inventory provisions, partially offset by non-cash charges of $1.8 million for deferred income taxes.

#### Cash Flows From Investing Activities

Net cash used in investing activities was $2.5 million during the three months ended March 31, 2023, reflecting purchases of property and equipment of $6.3 million, partially offset by proceeds from deferred purchase price of factored receivables of $3.7 million.

#### Cash Flows From Financing Activities

Net cash used in financing activities was $13.0 million during the three months ended March 31, 2023, reflecting $10.0 million paid to repurchase common stock, $2.7 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year and $0.6 million of debt repayments, partially offset by the proceeds from the exercise of Common Stock options totaling $0.3 million.

### Debt

The following table summarizes the Company’s debt, in thousands, as of March 31, 2023 and December 31, 2022:

| Credit Agreement: | March 31, 2023 Interest Rate | Principal Balance | December 31, 2022 Interest Rate | Principal Balance |
| --- | --- | ---: | --- | ---: |
| Revolving Credit Facility (U.S. Dollar denominations) | 6.28% | $232,000 | 5.80% | $232,000 |
| Other loans | 3.90% - 5.21% | 1,555 | 3.89% - 5.21% | 2,011 |
| Finance leases | N/A | 999 | N/A | 1,085 |
| Total debt |  | 234,554 |  | 235,096 |
| Current maturities |  | (1,996) |  | (2,443) |
| Long-term debt, less current maturities |  | $232,558 |  | $232,653 |

#### Credit Agreement

Gentherm, together with certain of its subsidiaries, maintain a revolving credit note (the “Revolving Credit Facility”) 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 amended and restated 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. As of March 31, 2023, the Company was in compliance with the terms of the Second Amended and Restated Credit Agreement.

#### Finance Leases

As of March 31, 2023 and December 31, 2022, there was $1.0 million and $1.1 million, respectively, of outstanding finance leases.

### Other Sources of Liquidity

The Company is party to receivable factoring agreements with unrelated third parties under which we can sell receivables for certain account debtors, on a revolving basis, subject to outstanding balances and concentration limits. The receivable factoring agreements are transferred in their entirety to the acquiring entities and are accounted for as a sale. Some of the agreements, including those assumed through the acquisition of Alfmeier, have deferred purchase price arrangements. As of March 31, 2023, there were $3.3 million outstanding receivables transferred under the receivable factoring agreement.

### Material Cash Requirements

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 March 31, 2023, the Company’s total commitments for these semiconductor chip agreements was

$40.6 million. See Note 7, “Commitments and Contingencies” to 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, 2022, the end of fiscal year 2022. 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, 2022 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. Beginning in 2021 and continuing into the first quarter of 2023, the industry has experienced inflationary cost increases in certain materials and components, labor and transportation. These inflationary cost increases are expected to continue for 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 fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.

### Critical Accounting 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, 2022. There have been no significant changes in our critical accounting policies or critical accounting estimates during the three months ended March 31, 2023. 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.

### Recent Accounting Pronouncements

There are no new accounting pronouncements applicable to the Company as of March 31, 2023.

## Market risk

As filed, 6,203 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 the Company's 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, Czech Koruna 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 provided by (used in) 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 March 31, 2023 is set forth in Note 9, “Financial Instruments” in the consolidated condensed financial statements included in this Report.

#### Interest Rate Sensitivity

The table below presents principal cash flows and related weighted average interest rates by expected maturity dates for each of the Company’s debt obligations, excluding finance leases. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency.

| Liabilities Long-Term Debt: | Expected Maturity Date 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Variable rate | $— | $— | $— | $— | $232,000 | $— | $232,000 | $232,000 |
| Variable interest rate as of March 31, 2023 |  |  |  |  | 6.28% |  | 6.28% |  |
| Fixed rate | $1,556 | $— | $— | $— | $— | $— | $1,556 | $1,574 |
| Fixed interest rate | 3.90% - 5.21% |  |  |  |  |  | 3.90% - 5.21% |  |

Based on the amounts outstanding as of March 31, 2023, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense by $2.3 million. 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.

| Anticipated Transactions and Related Derivatives USD Functional Currency Forward Exchange Agreements: (Receive MXN / Pay USD) | Expected Maturity or Transaction Date 2023 | 2024 | 2025 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: |
| Total contract amount | $42,078 | $27,030 | $— | $69,108 | $6,474 |
| Average contract rate | 20.32 | 21.09 | — | 20.62 |  |

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 | March 31, 2023 Potential loss in fair value | Potential gain in fair value | December 31, 2022 Potential loss in fair value | Potential gain in fair value |
| --- | ---: | ---: | ---: | ---: |
| Forward Exchange Agreement:(Receive MXN / Pay USD) | $6,888 | $8,419 | $3,999 | $4,888 |

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, 1,455 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 March 31, 2023. 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 March 31, 2023.

### (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 March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 269 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, 2022. You should carefully consider the risks and uncertainties described therein.

Filed Apr 27, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-015285. Last ingested by Listed: Oct 26, 2026, 17:44 ET. No prices; not investment advice.