# Gentherm Inc: Form 10-Q for the period ended Sep 30, 2020

- Company: [Gentherm Inc](/companies/thrm.md) (CIK 903129)
- Form: 10-Q
- Filed: 2020-10-30
- Accepted by EDGAR: Oct 30, 2020, 13:27 ET
- Period: 2020-09-30
- Accession: 0001564590-20-049238
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903129/000156459020049238/thrm-10q_20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903129/000156459020049238/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $259.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $624.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $176.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $448.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $82.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $175.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-07-01 to 2020-09-30 | $18.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2020-01-01 to 2020-09-30 | $51.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $25.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $73.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $38.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $47.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $9.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $15.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $24.1m | us-gaap:ProfitLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $25.7m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.73 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $0.78 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $0.79 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 32,958,439 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 32,924,013 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $73.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $11.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $9.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $226.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $574.9m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $921.4m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $190.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $409.7m | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $193.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $511.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,966 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, our ability to maintain current production levels, the amount of borrowing availability under the Amended 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, our ability to finance sufficient working capital and our ability to execute our strategic plan and Manufacturing Footprint Rationalization restructuring plan. 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, 2019, Part II “Item 1A. Risk Factors” in this Report 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, such forward-looking statements do not include the potential impact of any 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, 2019.

### Overview

Gentherm Incorporated is a global developer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications. Unless the context otherwise requires, the terms “Gentherm”, “Company”, “we”, “us” and “our” used herein refer to Gentherm Incorporated and its consolidated subsidiaries. Our products provide solutions for automotive passenger climate comfort and convenience, battery thermal management and cell connecting systems, as well as patient temperature management within the health care industry. Our automotive products can be found in the vehicles of nearly all major automotive manufacturers operating in North America and Europe, and several major automotive manufacturers 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 will help 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 automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. Historically, new vehicle demand has been driven by macro-economic and other factors, such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Economic volatility or weakness, as well as geopolitical factors, in North America, Europe or Asia, could result in a significant reduction in automotive sales and production by our customers, which would have an adverse effect on our business, results of operations and financial condition, as we have experienced in 2020 as a result of the COVID-19 pandemic, as described below. While our diversified automotive 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 current impact of the COVID-19 pandemic, and benefit from industry upturns in the ordinary course, shifts in the mix of global automotive production to higher cost regions or to vehicles with less content could adversely impact our profitability. In addition, we may be adversely impacted by volatility, weakness or slow growth in markets for hybrid electric vehicles specifically.

### Recent Trends

#### General Economic Conditions

The COVID-19 pandemic has significantly disrupted global economic activity, including the automotive market. The COVID-19 pandemic began in China around December 2019. The impact of the outbreak quickly expanded beyond China and its surrounding region and has significantly and adversely impacted the entire global economy and automotive market in 2020. During the first quarter of 2020, customer plants in North America and Europe were closed beginning in the second half of March due to the pandemic. This resulted in temporary, partial closures of several of our manufacturing facilities in North America and Europe by the end of March 2020. Customer plants and our manufacturing facilities in Asia were closed for several weeks in February and operated at reduced volumes in March, resuming production to near full capacity by the end of the first quarter, which continued throughout the second quarter. However, during the second quarter of 2020, our manufacturing facilities in North America and Europe remained closed until the last week in May due to the pandemic, gradually resuming production to near full capacity in North America, and to about 70% capacity in Europe by the end of June. During the third quarter of 2020, our customers’ plants were open, and our production volumes were stronger than pre-COVID levels at our manufacturing facilities. The COVID-19 pandemic continues to have a significant impact on global markets in 2020, in the form of supply chain and production disruptions, workforce restrictions, travel restrictions and reduced consumer spending, among other factors, which continues to have significant negative impacts on Gentherm’s financial performance. This may cause the Company to experience continued disruptions that could adversely impact its operations. The Company has implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines to help ensure the safety and health of all its employees, and it continues to assess and update business continuity plans in the context of this pandemic. The COVID-19 pandemic significantly adversely affected our operations, results of operations, financial condition, cash flows, liquidity and stock price in the first half of 2020. The second half of 2020 is recovering with increased production from the first half of the year. We anticipate that this level of production will continue for the remainder of the year. However, there remains substantial uncertainty regarding the global economic impact of, and the speed and shape of the recovery from, the ongoing COVID-19 pandemic, including for the global automotive industry and the resulting impact on our future operations and financial results.

#### Light Vehicle Production Levels

According to the forecasting firm IHS Markit (October 2020 release), global light vehicle production was 20.3 million units in the third quarter of 2020, down 3.3% from 21.0 million units in the third quarter of 2019. According to IHS Markit, actual light vehicle production was 17.6 million in both the third quarter of 2020 and 2019 in the Company’s key markets of North America, Europe, China, Japan and Korea.

The IHS Markit (October 2020 release) forecasted light vehicle production volume for full year 2020 has increased to 73.0 million units, a 5.0% increase from the July 2020 forecast, and down 17.9% from full year 2019 light vehicle production volumes of 88.9 million. Forecasted light vehicle production volumes are a component of the data we use in forecasting future business. However, due to differences in regional product mix at our manufacturing facilities, as well as releases from customers on specific vehicle programs, our future forecasted results do not always directly correlate with the global and/or regional light vehicle production forecasts of IHS Markit or other third-party sources.

### Liquidity

In light of the substantial economic and financial impact of the COVID-19 pandemic to date and resulting uncertainties for the remainder of 2020, the Company has taken significant actions to address its liquidity position. In March 2020, the Company borrowed an additional $169.0 million under its revolving credit facility to increase its cash position and provide additional financial flexibility. During the second and third quarters of 2020, the Company repaid a net amount of $38.7 million of the amounts outstanding under the Amended Credit Agreement. In addition, the Company has been prudently addressing its day-to-day operations, including reducing expenses, inventory levels and capital spending, and had deferred a portion of 2020 base salaries generally for all salaried employees. The Company terminated the salary deferral earlier than planned on September 30, 2020. Based upon consolidated EBITDA for the trailing twelve months calculated for purposes of the Consolidated Leverage Ratio, $221.5 million remained available as of September 30, 2020 for additional borrowings under the Amended Credit Agreement subject to specified conditions that Gentherm currently satisfies. See “—Liquidity and Capital Resources” below for additional information.

### 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 third quarter of 2020, we secured approximately $80 million of automotive new business awards. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by 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 September 30, 2020, 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 third quarter 2020 also do not reflect, in particular, the impact of the COVID-19 pandemic on future business. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties as described under “Forward-Looking Statements” above.

### Divestitures

#### Divestiture of Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”)

On February 1, 2019, the Company completed the divestiture of CSZ-IC and the former Cincinnati Sub-Zero headquarters facility to Weiss Technik North America, Inc. for total cash proceeds of $47.5 million, including $2.5 million of cash proceeds placed into an escrow account as partial security for the Company’s obligations under the sales agreement. The Company recognized a $5.0 million pre-tax gain on the sale of CSZ-IC during the nine months ended September 30, 2019. Cash proceeds of $2.5 million remain in an escrow account pending resolution of claims.

#### Divestiture of Gentherm Global Power Technologies (“GPT”)

On October 1, 2019, the Company completed the divesture of GPT for a nominal amount.

### Acquisitions

#### Acquisition of Stihler Electronic GmbH (“Stihler”)

On April 1, 2019, Gentherm acquired Stihler, a leading developer and manufacturer of patient and blood temperature management systems, for a purchase price of $15.5 million, net of cash acquired and including $0.7 million of contingent consideration to be paid upon achievement of a milestone that was completed in September 2020. In addition, the purchase agreement includes a contingent payment of $0.7 million to be paid if the selling shareholder remains employed by Stihler through December 2020, which is being recorded as a component of Selling, general and administrative expenses ratably over the service period. The results of operations of Stihler are reported within the Company’s Industrial segment from the date of acquisition.

### Restructuring

#### Manufacturing Footprint Rationalization

On September 23, 2019, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. Under this plan, the Company will relocate and consolidate certain existing automotive manufacturing and, as a result, reduce the number of plants by two. During the second quarter of 2020, due to circumstances arising from the COVID-19 pandemic, management adjusted the plan to proactively manage its cash position. Adjustments to the plan have resulted in changes to the estimated number of employee separations and total costs to execute the plan. During the three and nine months ended September 30, 2020, the Company recognized expense of $0.1 million and $(1.3) million, respectively, for employee separation costs. Additionally, the Company recognized $0.1 million and $0.6 million, respectively, of accelerated depreciation and other costs during such periods. The net activity is related to a reduction in the estimates of previously recognized employee separation costs. During the three months ended September 30, 2019, the Company recognized restructuring expense of $5.2 million for employee separation costs, and $1.6 million of accelerated depreciation and fixed asset impairment. The Company has recorded approximately $6.2 million of restructuring expenses since the inception of this program.

Under the revised restructuring plan, the Company expects to incur total costs of between $16 million and $19 million, of which $13 million and $16 million are expected to be cash expenditures. The total expected costs include employee separation costs of between $6.5 million and $7.5 million, capital expenditures of between $3.5 million and $4.5 million and non-cash expenses for accelerated depreciation and impairment of fixed assets of approximately $3 million. The Company also expects to incur other transition costs including recruiting, relocation, and machinery and equipment move and set up costs of between $3 million and $4 million. The actions under this plan are expected to be substantially completed by the end of 2021. The actual timing, costs and savings of the plan may differ materially from the Company’s current expectations and estimates.

#### GPT and CSZ-IC Restructuring

During 2019, the Company completed its plan to eliminate non-core areas of investment through the divestitures of CSZ-IC and GPT. Costs directly associated with the divestiture process were classified as Restructuring expense. During the three and nine months ended September 30, 2019, the Company recognized $0 and $0.3 million of employee separation costs, respectively, and less than $0.1 million and $0.8 million of other related costs, respectively.

#### Other Restructuring Activities

As part of the Company’s continued efforts to optimize its cost structure, the Company has undertaken several discrete restructuring actions. During the three and nine months ended September 30, 2020, the Company recognized $0 million and $4.0 million of employee separation costs, respectively, and $0 million and $0.2 million of other related costs, respectively. During the three and nine months ended September 30, 2019, the Company recognized $1.5 million and $2.7 million of employee separation costs, respectively, and $0.4 million and $0.7 million of other related costs, respectively. In addition, during the three and nine months ended September 30, 2019, the Company recognized $0 and $0.4 million of asset impairment loss. These restructuring expenses were primarily associated with restructuring actions focused on the rotation of our manufacturing footprint to lower cost locations and the reduction of global overhead costs. The Company will continue to explore opportunities to improve its future profitability and competitiveness. These actions may result in the recognition of additional restructuring charges that could be material

See Note 4, “Restructuring”, to our consolidated condensed financial statements included in this Report for information about our restructuring activities.

### Stock Repurchase Program

In December 2016, the Board of Directors authorized a three-year, $100.0 million stock repurchase program. In June 2018, our Board of Directors authorized an increase in the stock repurchase program to $300.0 million and extended the stock repurchase program until December 2020. In March 2020, the Company suspended its share repurchase program in order to preserve liquidity. However, repurchases under the stock repurchase program may resume at management’s discretion and 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 nine months ended September 30, 2020, we repurchased approximately $9.1 million of shares and have a remaining repurchase authorization of approximately $74.2 million as of September 30, 2020. We suspended our stock repurchase program to preserve liquidity and did not make any repurchases under the stock repurchase program during the second and third quarters of 2020.

### Reportable Segments

The Company has two reportable segments for financial reporting purposes: Automotive and Industrial. See Note 6, “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 nine months ended September 30, 2020 and 2019, in thousands, were as follows:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $259,540 | $240,056 | $19,484 | $624,214 | $741,303 | $(117,089) |
| Cost of sales | 176,935 | 165,364 | (11,571) | 448,807 | 518,590 | 69,783 |
| Gross margin | 82,605 | 74,692 | 7,913 | 175,407 | 222,713 | (47,306) |
| Operating expenses: |  |  |  |  |  |  |
| Net research and development expenses | 18,070 | 18,838 | 768 | 51,171 | 56,990 | 5,819 |
| Selling, general and administrative expenses | 25,745 | 26,861 | 1,116 | 73,474 | 91,683 | 18,209 |
| Restructuring expenses | 284 | 8,664 | 8,380 | 3,452 | 11,809 | 8,357 |
| Total operating expenses | 44,099 | 54,363 | 10,264 | 128,097 | 160,482 | 32,385 |
| Operating income | 38,506 | 20,329 | 18,177 | 47,310 | 62,231 | (14,921) |
| Interest expense, net | (1,259) | (1,148) | (111) | (3,368) | (3,756) | 388 |
| Foreign currency (loss) gain | (2,883) | 4,083 | (6,966) | (5,562) | 3,482 | (9,044) |
| Gain on sale of business | — | — | — | — | 4,970 | (4,970) |
| Impairment loss | — | (837) | 837 | — | (21,206) | 21,206 |
| Other (expense) income | (615) | 231 | (846) | 2,531 | 545 | 1,986 |
| Earnings before income tax | 33,749 | 22,658 | 11,091 | 40,911 | 46,266 | (5,355) |
| Income tax expense | 9,603 | 6,771 | (2,832) | 15,214 | 19,214 | 4,000 |
| Net income | $24,146 | $15,887 | $8,259 | $25,697 | $27,052 | $(1,355) |

Product revenues by product category, in thousands, for the three and nine months ended September 30, 2020 and 2019, were as follows:

|  | Three Months Ended September 30, 2020 | 2019 | % Change | Nine Months Ended September 30, 2020 | 2019 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Climate Control Seats (CCS) | $97,058 | $88,133 | 10.1% | $229,465 | $270,924 | (15.3)% |
| Seat Heaters | 73,471 | 71,030 | 3.4% | 171,345 | 218,578 | (21.6)% |
| Steering Wheel Heaters | 22,506 | 16,621 | 35.4% | 49,721 | 49,620 | 0.2% |
| Automotive Cables | 18,917 | 20,361 | (7.1)% | 50,890 | 66,316 | (23.3)% |
| Battery Thermal Management (BTM) | 15,956 | 11,890 | 34.2% | 33,818 | 31,531 | 7.3% |
| Electronics | 14,463 | 11,729 | 23.3% | 38,327 | 36,035 | 6.4% |
| Other Automotive | 7,393 | 8,479 | (12.8)% | 17,056 | 27,296 | (37.5)% |
| Subtotal Automotive | 249,764 | 228,243 | 9.4% | 590,622 | 700,300 | (15.7)% |
| Medical | 9,776 | 8,336 | 17.3% | 33,592 | 26,404 | 27.2% |
| GPT | — | 3,477 | (100.0)% | — | 11,181 | (100.0)% |
| CSZ-IC | — | — | — | — | 3,418 | (100.0)% |
| Subtotal Industrial | 9,776 | 11,813 | (17.2)% | 33,592 | 41,003 | (18.1)% |
| Total Company | 259,540 | 240,056 | 8.1% | 624,214 | 741,303 | (15.8)% |

#### Product Revenues

Below is a summary of our product revenues, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) | Variance Due To: Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $259,540 | $240,056 | $19,484 | $22,983 | $3,691 | $(7,190) | $19,484 |

Product revenues for the three months ended September 30, 2020 increased 8.1% as compared to the three months ended September 30, 2019. The increase in product revenues is primarily related to increased volumes in our Automotive segment and favorable foreign currency impacts, primarily related to the Euro. We were strong in virtually all Automotive segment product lines, including a $8.9 million, $5.9 million and $4.1 million increase in Climate Control Seats, Steering Wheel Heaters and Battery Thermal Management, respectively, primarily due to new program launches and higher take rates, partially offset by a $1.4 million decline in Automotive Cables. The decrease in product revenues included in Variance Due To Pricing/Other above is primarily attributable to the divestitures of GPT on October 1, 2019 and decreases in customer pricing, offset by increased demand for Stihler blood warmer products, Hemotherm® cardiovascular heater / cooler system and the Blanketrol® solutions.

Below is a summary of our product revenues, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) | Variance Due To: Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $624,214 | $741,303 | $(117,089) | $(94,054) | $(1,689) | $(21,346) | $(117,089) |

Product revenues for the nine months ended September 30, 2020 decreased 15.8% as compared to the nine months ended September 30, 2019. The decrease in product revenues is primarily related to reduced volumes in our Automotive segment that resulted substantially from the impact of the COVID-19 pandemic, resulting in a decrease of $47.2 million, $41.5 million and $15.4 million, respectively, in Seat Heaters, Climate Control Seats and Automotive Cables, partially offset by an increase of $2.3 million in both Battery Thermal Management and Electronics. Product revenues were also negatively impacted by foreign currency, primarily related to the Korean Won and Chinese Renminbi. The decrease in product revenues included in Variance Due To Pricing/Other above is primarily attributable to the divestitures of CSZ-IC and GPT and decreases in customer pricing, partially offset by the acquisition of Stihler on April 1, 2019 and growth in Medical primarily due to increased demand for our Blanketrol® solutions, UV Treo and the Hemotherm® cardiovascular heater / cooler system.

#### Cost of Sales

Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) | Variance Due To: Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $176,935 | $165,364 | $(11,571) | $(15,570) | $4,848 | $(527) | $(322) | $(11,571) |
| Gross margin | 82,605 | 74,692 | 7,913 | $7,413 | $4,848 | $3,164 | $(7,512) | $7,913 |
| Gross margin - Percentage of product revenues | 31.8% | 31.1% |  |  |  |  |  |  |

Cost of sales for the three months ended September 30, 2020 increased 7.0% as compared to the three months ended September 30, 2019. The increase in cost of sales is primarily related to increased volumes our Automotive segment and unfavorable foreign currency impacts primarily attributable to the Euro. The Operational Performance impact is primarily attributable to an increase in manufacturing productivity, fixed cost leverage from higher volumes and a decrease in material costs, partially offset by increased freight. The increase in cost of sales included in Variance Due to Other above is due to the following items:

- $2.5 million of decrease attributable to the divested business of GPT;
- $1.6 million of increase due to wage inflation; and
- $0.7 million of increase attributable to Medical.

Below is a summary of our cost of sales and gross margin, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) | Variance Due To: Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $448,807 | $518,590 | $69,783 | $46,309 | $8,122 | $3,867 | $11,485 | $69,783 |
| Gross margin | 175,407 | 222,713 | (47,306) | $(47,745) | $8,122 | $2,178 | $(9,861) | $(47,306) |
| Gross margin - Percentage of product revenues | 28.1% | 30.0% |  |  |  |  |  |  |

32

Cost of sales for the nine months ended September 30, 2020 decreased 13.5% as compared to the nine months ended September 30, 2019. The decrease in cost of sales is primarily related to the adverse impact of the COVID-19 pandemic for our Automotive segment volumes. Favorable foreign currency impacts are primarily attributable to the Mexican peso and Ukraine hryvnia. The Operational Performance improvements are primarily attributable to decreased material costs and increased manufacturing productivity in our Automotive segment. The decrease in cost of sales included in Variance Due to Other above is primarily due to the following items:

- $10.2 million of decrease attributable to divested businesses (CSZ-IC and GPT);
- $2.6 million of decrease attributable to lower factory costs in North America and Europe during the second quarter of 2020 related to the temporary closure of our manufacturing facilities due to the COVID-19 pandemic; and
- $3.5 million of increase attributable to Medical, including the impact of the acquisition of Stihler on April 1, 2019.

#### Net Research and Development Expenses

Below is a summary of our net research and development expenses, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $20,451 | $22,021 | $1,570 |
| Reimbursed research and development expenses | (2,381) | (3,183) | (802) |
| Net research and development expenses | $18,070 | $18,838 | $768 |
| Percentage of product revenues | 7.0% | 7.8% |  |

Net research and development expenses for the three months ended September 30, 2020 decreased 4.1% as compared to the three months ended September 30, 2019. The decrease in net research and development expenses is primarily related to reduced project-related spending and cost reduction initiatives, partially offset by incentive compensation adjustments and lower reimbursements for costs to design, develop and purchase tooling pursuant to customer contracts and government-funded programs.

Below is a summary of our net research and development expenses, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $60,365 | $68,969 | $8,604 |
| Reimbursed research and development expenses | (9,194) | (11,979) | (2,785) |
| Net research and development expenses | $51,171 | $56,990 | $5,819 |
| Percentage of product revenues | 8.2% | 7.7% |  |

Net research and development expenses for the nine months ended September 30, 2020 decreased 10.2% as compared to the nine months ended September 30, 2019. The decrease in net research and development expenses is primarily related to reduced project-related spending due to cost reduction initiatives, partially offset by incentive compensation adjustments 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 September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $25,745 | $26,861 | $1,116 |
| Percentage of product revenues | 9.9% | 11.2% |  |

33

Selling, general and administrative expenses for the three months ended September 30, 2020 decreased 4.2% as compared to the three months ended September 30, 2019. The decrease in selling, general and administrative expenses is primarily related to the impacts of the divestiture of GPT, as well as the impact of cost reduction initiatives and a reduction in travel expenses, partially offset by incentive compensation adjustments.

Below is a summary of our selling, general and administrative expenses, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $73,474 | $91,683 | $18,209 |
| Percentage of product revenues | 11.8% | 12.4% |  |

Selling, general and administrative expenses for the nine months ended September 30, 2020 decreased 19.9% as compared to the nine months ended September 30, 2019. The decrease in selling, general and administrative expenses is primarily related to the impacts of divested businesses (CSZ-IC and GPT), the absence of CFO transition costs in 2020, as well as the impact of cost reduction initiatives and a reduction in travel expenses, partially offset by incentive compensation adjustments.

#### Restructuring Expenses

Below is a summary of our restructuring expenses, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $284 | $8,664 | $8,380 |

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.

During the three months ended September 30, 2020, the Company recognized expenses of $0.2 million for employee separation costs and $0.1 million of accelerated depreciation and other costs. During the three months ended September 30, 2019, the Company recognized expenses of $6.7 million for employee separation costs, $1.6 million of accelerated depreciation and asset impairment charges and $0.3 million of other related costs.

Below is a summary of our restructuring expenses, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $3,452 | $11,809 | $8,357 |

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. During the second quarter of 2020, due to circumstances arising from the COVID-19 pandemic, management adjusted the Manufacturing Footprint Rationalization restructuring plan to proactively manage its cash position.

During the nine months ended September 30, 2020, the Company recognized expenses of $2.7 million for employee separation costs, $0.6 million of accelerated depreciation and $0.2 million of other related costs. During the nine months ended September 30, 2020, employee separation costs were offset by a reduction in the second quarter of 2020 in the estimates of previously recognized employee separation costs for the Manufacturing Footprint Rationalization restructuring program. During the nine months ended September 30, 2019, the Company recognized expenses of $8.2 million for employee separation costs, $2.0 million of accelerated depreciation and asset impairment charges and $1.6 million of other related costs.

See Note 4, “Restructuring” of the consolidated condensed financial statements included in this Report for additional information.

#### Interest Expense

Below is a summary of our interest expense, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(1,259) | $(1,148) | $(111) |

Below is a summary of our interest expense, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(3,368) | $(3,756) | $388 |

See Note 11, “Debt” of 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 September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency (loss) gain | $(2,883) | $4,083 | $(6,966) |

Foreign currency loss for the three months ended September 30, 2020 included net realized foreign currency gain of $1.2 million and net unrealized foreign currency loss of $4.1 million.

Foreign currency gain for the three months ended September 30, 2019 included net realized foreign currency gain of $0.5 million and net unrealized foreign currency gain of $3.6 million.

Below is a summary of our foreign currency (loss) gain, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency (loss) gain | $(5,562) | $3,482 | $(9,044) |

Foreign currency loss for the nine months ended September 30, 2020 included net realized foreign currency gain of $0.9 million and net unrealized foreign currency loss of $6.5 million.

Foreign currency gain for the nine months ended September 30, 2019 included net realized foreign currency loss of $1.0 million and net unrealized foreign currency gain of $4.5 million.

#### Gain on Sale of Business

Below is a summary of our gain on sale of business, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Gain on sale of business | $— | $4,970 | $(4,970) |

On February 1, 2019, as part of the Company’s initiative to eliminate investments in non-core businesses, we completed the sale of CSZ-IC to Weiss Technik North America, Inc. The Company recognized a pre-tax gain of $5.0 million on the sale of CSZ-IC during the nine months ended September 30, 2019. The Company did not recognize a gain on sale of business in the nine months ended September 30, 2020.

#### Impairment Loss

Below is a summary of our impairment loss, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Impairment loss | $— | $(837) | $837 |

During the three months ended September 30, 2019, the Company recorded an impairment loss of $0.9 million associated with the divestiture of GPT. See Note 3, “Acquisitions and Divestitures” of the consolidated condensed financial statements included in this Report for additional information.

Below is a summary of our impairment loss, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Impairment loss | $— | $(21,206) | $21,206 |

During the nine months ended September 30, 2019, the Company recorded an impairment loss of $21.2 million associated with the divestiture of GPT. See Note 3, “Acquisitions and Divestitures” of the consolidated condensed financial statements included in this Report for additional information.

#### Other (Loss) Income

Below is a summary of our other (loss) income, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other (loss) income | $(615) | $231 | $(846) |

For the three months ended September 30, 2020, Other loss was $0.6 million of miscellaneous expenses, including estimated amounts recognized for indemnification claims related to a divested business. For the three months ended September 30, 2019, Other income was $0.2 million of miscellaneous income.

Below is a summary of our other income, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income | $2,531 | $545 | $1,986 |

The increase in other income is primarily due to the gain on sale of certain patents from a non-core business in June 2020. See Note 10, “Goodwill and Other Intangibles” of the consolidated condensed financial statements included in this Report for additional information.

#### Income Tax Expense

Below is a summary of our income tax expense, in thousands, for the three months ended September 30, 2020 and 2019:

|  | Three Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $9,603 | $6,771 | $(2,832) |

36

Income tax expense was $9.6 million for the three months ended September 30, 2020, on earnings before income tax of $33.7 million, representing an effective tax rate of 28.5%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the international provisions of the U.S. tax law, such as global intangible low-tax income (“GILTI”), partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.

Income tax expense was $6.8 million for the three months ended September 30, 2019, on earnings before income tax of $22.7 million, representing an effective tax rate of 29.9%. The pre-tax earnings amount included the non-deductible impairment loss of $0.8 million. Adjusted for the impairment loss, the effective tax rate was 28.8% for the three months ended September 30, 2019. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the international provisions of the U.S. tax law, such as GILTI, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.

Below is a summary of our income tax expense, in thousands, for the nine months ended September 30, 2020 and 2019:

|  | Nine Months Ended September 30, 2020 | 2019 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $15,214 | $19,214 | $4,000 |

Income tax expense was $15.2 million for the nine months ended September 30, 2020, on earnings before income tax of $40.9 million, representing an effective tax rate of 37.2%. The tax amount included the effect of the settlement and closure of multi-year international tax audits of $3.4 million. Adjusted for the audit impacts, the effective tax rate was 29.0%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the international provisions of the U.S. tax law, such as GILTI, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.

Income tax expense was $19.2 million for the nine months ended September 30, 2019, on earnings before income tax of $46.3 million, representing an effective tax rate of 41.5%. The pre-tax earnings amount included the non-deductible impairment loss of $21.2 million. Adjusted for the impairment loss, the effective tax rate was 28.5% for the nine months ended September 30, 2019. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the international provisions of the U.S. tax law, such as GILTI, partly offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.

Changes in U.S. federal or foreign tax laws and regulations, or their interpretation and application, including those with retroactive effect, could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and shareholders’ equity. The CARES Act enacted in March 2020, together with earlier issued U.S. Internal Revenue Service guidance, provides for deferral of certain taxes. As permitted by the CARES Act, the Company deferred the payment of payroll taxes each quarter for the remainder of 2020 to be paid in the fourth quarters of 2021 and 2022.

### Liquidity and Capital Resources

### Cash and Cash Flows

The Company historically has funded its liquidity needs primarily through cash flows from operating activities and borrowings under its Amended Credit Agreement, as well as equity and other debt financings. Prior to the COVID-19 pandemic, we were focused on a capital allocation strategy within our strategic plan that included a targeted debt-to-earnings leverage ratio and using a portion of our cash flow for Common Stock repurchases. As of September 30, 2020, $74.2 million of availability remained under the stock repurchase program.

In light of the significant economic uncertainty and financial impact of the COVID-19 pandemic, the Company has taken significant actions to address its liquidity. First, the Company has been prudently addressing its day-to-day operations, including reducing expenses, inventory levels and capital spending. In addition, effective May 1, 2020, the Company implemented base salary deferrals until December 31, 2020, including a 30-40% deferral at the Executive level and a 20% deferral for other salaried employees, to control expenses and conserve cash, which deferral the Company terminated earlier than planned on September 30, 2020. For U.S. employees, the accumulated deferred base salary will generally be paid on or before March 15, 2021 notwithstanding any termination of employment for any reason prior to payment. The Company also revised its non-employee director compensation program for directors elected at the 2020 annual meeting of shareholders, with all compensation being paid in restricted stock for one year. Further, the Company suspended its stock repurchase program in the first quarter of 2020 to preserve liquidity and did not make any repurchases under the stock repurchase program during the second and third quarters of 2020.

Also, in March 2020, the Company increased its borrowings under the Amended Credit Agreement by $169.5 million as a safeguard to increase its cash position and provide additional financial flexibility. The proceeds have been and will continue to be used for working capital and for other general corporate purposes permitted by the Amended Credit Agreement. During the second and third quarters of 2020, the Company repaid a net amount of $38.7 million of the amounts outstanding under the Amended Credit Agreement. As of September 30, 2020, inclusive of the net new borrowings, $188.1 million was outstanding under the Amended Credit Agreement. Borrowing availability is subject to, among other things, the Company’s compliance with the minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio as of the end of any fiscal quarter. Based upon consolidated EBITDA for the trailing twelve months calculated for purposes of the Consolidated Leverage Ratio, $221.5 million remained available as of September 30, 2020 for additional borrowings under the Amended Credit Agreement subject to specified conditions that Gentherm currently satisfies. Subject to any amendment or waiver of the Consolidated Leverage Ratio from the lenders, the Company’s borrowing availability for the next twelve months could continue to be less than the full amount of capacity available under the U.S. Revolving Note due to the impact of the COVID-19 pandemic and related economic and industry conditions.

The Company may incur additional significant borrowing in the near term. The determination of additional borrowing amounts will be evaluated based upon the Company’s ongoing performance, the current economic and industry outlook and the desire to provide additional financial flexibility. The Company expects that its lenders will agree to an amendment or waiver to increase the borrowing availability if necessary.

Based on the Company’s current operating plan and the foregoing actions, management believes cash and cash equivalents at September 30, 2020, together with cash flows from operating activities, and borrowing available under our Amended Credit Agreement, are sufficient to meet operating and capital expenditure needs, and to service debt, for at least the next 12 months. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we may need to obtain alternative sources of capital, and we may finance additional liquidity needs in the future through one or more equity or debt offerings.

A continued worldwide disruption, including from additional waves of pandemic outbreaks, from the COVID-19 pandemic, and actions that lending institutions, our customers, consumers and governmental authorities may take in response, could materially affect our future access to sources of liquidity, and there can be no assurance that such capital will be available at all or on reasonable terms. Further, the extent to which the COVID-19 pandemic adversely affects our future financial performance and thus our cash flows will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience significant adverse impacts on our business, financial performance, financial condition, cash flows, liquidity and stock price for a lengthy period of time as a result of its global economic impact.

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

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Cash, cash equivalents and restricted cash at beginning of period | $52,948 | $39,620 |
| Cash provided by operating activities | 73,301 | 83,992 |
| Cash (used in) provided by investing activities | (13,686) | 14,474 |
| Cash provided by (used in) financing activities | 109,812 | (86,231) |
| Foreign currency effect on cash and cash equivalents | 6,664 | (4,151) |
| Cash, cash equivalents and restricted cash at end of period | $229,039 | $47,704 |

#### Cash Flows From Operating Activities

We manage our cash, cash equivalents and restricted cash in order to fund operating requirements and preserve liquidity to take advantage of future business opportunities and for financial flexibility. The following table compares the cash flows from operating activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, in thousands:

| Operating Activities: | Nine Months Ended September 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: |
| Net income | $25,697 | $27,052 | $(1,355) |
| Non-cash adjustments to reconcile net income to cash provided by operating activities: |  |  |  |
| Depreciation and amortization | 30,777 | 33,281 | (2,504) |
| Deferred income taxes | 3,583 | 5,072 | (1,489) |
| Non-cash stock based compensation | 6,569 | 5,268 | 1,301 |
| Defined benefit pension plan income | (433) | (754) | 321 |
| Loss on sale of property and equipment | 562 | 319 | 243 |
| Operating lease expense | 5,156 | 4,477 | 679 |
| Gain on sale of patents | (1,978) | — | (1,978) |
| Impairment loss | — | 21,206 | (21,206) |
| Gain on sale of business | — | (4,970) | 4,970 |
| Other | — | 189 | (189) |
| Net income before non-cash adjustments | 69,933 | 91,140 | (21,207) |
| Changes in operating assets and liabilities: |  |  |  |
| Accounts receivable, net | (33,250) | (5,961) | (27,289) |
| Inventory | 4,645 | (5,512) | 10,157 |
| Other assets | (4,655) | 9,594 | (14,249) |
| Accounts payable | 24,272 | (3,097) | 27,369 |
| Other liabilities | 12,356 | (2,172) | 14,528 |
| Net cash provided by operating activities | $73,301 | $83,992 | $(10,691) |

The following table highlights significant differences between the operating cash flows for the nine months ended September 30, 2020 and 2019, in thousands:

|  |  |
| --- | ---: |
| Net cash provided by operating activities for the nine months ended September 30, 2019 | $83,992 |
| Lower net income before changes in operating assets and liabilities | (21,207) |
| Changes in working capital, net | 11,189 |
| Changes in other assets and liabilities | (673) |
| Net cash provided by operating activities for the nine months ended September 30, 2020 | $73,301 |

39

The following table illustrates changes in working capital during the nine months ended September 30, 2020, in thousands:

|  |  |
| --- | ---: |
| Working capital at December 31, 2019 | $217,159 |
| Increase in cash, cash equivalents and restricted cash | 173,337 |
| Increase in accounts receivable | 31,690 |
| Decrease in inventory | (4,514) |
| Decrease in tax receivables, net | (11,968) |
| Increase in other assets | 5,661 |
| Increase in accounts payable | (25,225) |
| Increase in accrued expenses and other liabilities | (5,720) |
| Foreign currency effect on working capital | 3,891 |
| Working capital at September 30, 2020 | $384,311 |

The following table highlights significant transactions that contributed to the increase in cash, cash equivalents and restricted cash during the nine months ended September 30, 2020, in thousands:

|  |  |
| --- | ---: |
| Net cash provided by operating activities | $73,301 |
| Borrowing of debt | 201,193 |
| Repayments of debt | (87,688) |
| Cash paid for the repurchase of Common Stock | (9,092) |
| Purchases of property and equipment | (11,613) |
| Proceeds from the exercise of Common Stock options | 6,828 |
| Other items | 3,162 |
| Increase in cash, cash equivalents and restricted cash | $176,091 |

#### Cash Flows From Investing Activities

Cash used in investing activities was $13.7 million during the nine months ended September 30, 2020, primarily reflecting purchases of property and equipment of $11.6 million and the acquisition of intangible assets of $3.1 million.

#### Cash Flows From Financing Activities

Cash provided by financing activities was $109.8 million during the nine months ended September 30, 2020, reflecting additional borrowings on the U.S. Revolving Note totaling $201.2 million partially offset by payments of principal on the U.S. Revolving Note totaling $87.7 million in aggregate. Borrowings under the Amended Credit Agreement mature on June 27, 2024. See Note 11, “Debt” of the consolidated condensed financial statements included in this Report for additional information. Cash was also paid during the nine months ended September 30, 2020 for the repurchase of Common Stock totaling $9.1 million and for cancellations of restricted stock awards totaling $0.8 million, partially offset by proceeds from the exercise of Common Stock options totaling $6.8 million.

### 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, 2019. There have been no significant changes in our critical accounting policies or critical accounting estimates during 2020. We are not presently aware of any events or circumstances arising from the COVID-19 pandemic 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.

### Off-Balance Sheet Arrangements

At September 30, 2020, we do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

### Effects of Inflation

The automotive component supply industry is subject to inflationary pressures with respect to raw materials and labor, which have historically placed operational and financial burdens on the entire supply chain. Accordingly, the Company continues to take actions with its customers and suppliers to mitigate the impact of these inflationary pressures in the future. Actions to mitigate inflationary pressures with customers include collaboration on alternative product designs and material specifications, contractual price escalation clauses and negotiated customer recoveries. Actions to mitigate inflationary pressures with suppliers include aggregation of purchase requirements to achieve optimal volume benefits, negotiation of cost-reductions and identification of more cost competitive suppliers. While these actions are designed to offset the impact of inflationary pressures, the Company cannot provide assurance that it will be successful in fully offsetting increased costs resulting from inflationary pressure.

## Market risk

As filed, 5,369 characters.

Our exposure to market risk for changes in interest rates relates primarily to our debt obligations and foreign currency contracts. We have in the past, and may in the future, place our investments in bank certificates of deposits, debt instruments of the U.S. government, and in high-quality corporate issuers.

We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities. Market risks for changes in interest rates relate primarily to our debt obligations under our Amended 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, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, 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 maximum length of time over which we hedge our exposure to foreign currency exchange risks is fifteen months. We had foreign currency derivative contracts with a notional value of $20.8 million and $14.4 million outstanding at September 30, 2020 and December 31, 2019, respectively.

We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts which 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. We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency (loss) gain in the consolidated condensed statements of income. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.

The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounts such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term.

Information related to the fair values of all derivative instruments in our consolidated condensed balance sheet as of September 30, 2020 is set forth in Note 13, “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 U.S. dollars ($USD) or Euros (€EUR), as indicated in parentheses.

| Liabilities Long-Term Debt: | Expected Maturity Date 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Variable rate (€EUR) | $— | $— | $— | $— | $14,061 | $— | $14,061 | $14,061 |
| Variable interest rate as of September 30, 2020 |  |  |  |  | 1.75% |  | 1.75% |  |
| Variable rate ($USD) | $— | $— | $— | $— | $174,000 | $— | $174,000 | $174,000 |
| Variable interest rate as of September 30, 2020 |  |  |  |  | 1.90% |  | 1.90% |  |
| Fixed rate ($USD) | $1,250 | $2,500 | $2,500 | $1,250 | $— | $— | $7,500 | $7,767 |
| Fixed interest rate | 5.21% | 5.21% | 5.21% | 5.21% |  |  | 5.21% |  |

42

#### 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 2020 | 2021 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Total contract amount | $7,453 | $13,299 | $20,752 | $(821) |
| Average contract rate | 20.13 | 22.56 | 21.68 |  |

## Controls and procedures

As filed, 1,362 characters.

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

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance of achieving their objectives.

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the desired control objectives were achieved as of September 30, 2020.

### (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 ending September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 14,994 characters.

You should carefully consider the risk factors below and previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

***The COVID-19 pandemic and measures taken to contain it have significantly adversely affected, and are likely to continue to significantly adversely affect, our business, results of operations, financial condition, cash flows, liquidity and stock price.***

The COVID-19 pandemic has significantly and adversely impacted the global economy and financial markets, with global legislative and regulatory responses including unprecedented monetary and fiscal policy actions across all sectors. Our business, results of operations, financial condition, cash flows, liquidity and stock price were significantly adversely affected by the COVID-19 pandemic in 2020, especially beginning in March. The COVID-19 pandemic continues to have a significant impact on global markets, in the form of supply chain and production disruptions, workforce restrictions, travel restrictions and reduced consumer spending, among other factors, which continues to have significant adverse impacts on Gentherm’s financial performance and operations. The full extent to which the COVID-19 pandemic will impact our business, results of operations, financial condition, cash flows, liquidity and stock price remains uncertain and cannot be predicted with confidence. In particular, if COVID-19 continues to spread or re-emerges, resulting in an extended period of travel, commercial, social and other similar restrictions or shut-downs, we could experience prolonged and significant adverse impacts to our business, results of operations, financial condition, cash flows, liquidity and stock price.

The COVID-19 pandemic and measures taken to contain it have subjected, and continue to subject, our business, results of operations, financial condition, cash flows, liquidity and stock price to a number of material risks and uncertainties, including, but not limited to:

- *Risks Related to our Liquidity*. In March 2020, we borrowed $169.5 million as a safeguard to provide additional financial flexibility. During the second and third quarters of 2020, we repaid a net amount of $38.7 million of the amounts outstanding under the Amended Credit Agreement. As of September 30, 2020, our consolidated indebtedness was $195.6 million. Our increased indebtedness has and will continue to result in, among other things, increased interest expense and increased vulnerability to future adverse economic and industry conditions. Future borrowing availability under our Amended Credit Agreement is subject to our compliance with financial covenants thereunder (including the Consolidated Leverage Ratio based on consolidated EBITDA for the applicable trailing 12-month period). Based upon consolidated EBITDA for the twelve months ended September 30, 2020, $221.5 million remains available for additional borrowings under the Amended Credit Agreement subject to specified conditions that Gentherm currently satisfies. Subject to any amendment or waiver of the Consolidated Leverage Ratio from the lenders, the Company’s borrowing availability for the next twelve months could continue to be less than the full amount of capacity available under the U.S. Revolving Note due to the impact of the COVID-19 pandemic and related economic and industry conditions. Failure to satisfy certain covenants in the Amended Credit Agreement would result in an event of default, following which our lenders could declare all amounts outstanding to be immediately due and payable and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt on acceptable terms or at all. Further, under the Amended Credit Agreement, the lenders would have the right to foreclose on certain of our assets, which could have a significant adverse effect on our business, results of operations, financial condition, cash flows, liquidity and stock price. We may finance additional liquidity needs in the future through one or more equity or debt offerings. The current disruption of the global financial markets could reduce our ability to access additional capital on acceptable terms or at all, which would negatively affect our liquidity and may adversely impact our operations and results of operations.
- *Risks Related to the Automotive Industry.* The automotive industry is our primary market. The COVID-19 pandemic has significantly disrupted, and is expected to continue to significantly disrupt, the global automotive industry and customer sales, production volumes and purchases of light vehicles by end consumers. Further, the spread of COVID-19 has created a

significant disruption in the manufacturing, delivery and overall supply chain of automobile manufacturers and suppliers. The COVID-19 pandemic resulted in a temporary shutdown of substantially all of the major OEMs in our markets at various times in the first half of 2020. This has significantly reduced our year-to-date sales volumes and revenue as compared to our budget, and future sales volumes and revenue remain highly uncertain. In July 2020, IHS Markit forecasted light vehicle production volume for full-year 2020 of 69.5 million units, a decline of 21.8% from full-year 2019. The October 2020 IHS forecasted light vehicle production volume for full year 2020 has increased to 73.0 million units, a 5.0% increase from the July 2020 forecast. The third quarter of 2020 partially recovered with increased production compared to the first half of the year. We are optimistic that this level of production will continue for the remainder of the year. However, there remains substantial uncertainty regarding the global economic impact of, and the speed and shape of the recovery from, the ongoing COVID-19 pandemic, including for the global automotive industry and the resulting impact on our future operations and financial results. Any prolonged reduction in actual revenues and anticipated reduction in projected revenues may require us to evaluate our intangible assets or goodwill for impairment and incur impairment charges.

- *Risks Related to our Supply Chain and our Manufacturing Operations*. The COVID-19 pandemic adversely impacted in the first half of 2020 and to a lesser extent in the third quarter 2020, and may continue to adversely impact, our ability to manufacture products and obtain materials from our supply chain. We and our suppliers experienced facility closures, work stoppages, travel restrictions, implementation of precautionary health and safety measures and other restrictions. We also experienced extended work stoppages in Asia, and subsequent suspension of vehicle production by our OEM customers in North America and Europe, as the pandemic spread to those regions and governmental authorities initiated “lock-down” orders for all non-essential activities. Due to the COVID-19 pandemic, a significant portion of our employees are now working from home, which may harm our ability to manage our business and increase operational risk, including increased cyber security attacks and reduced ability to implement security measures. Our manufacturing operations resumed production under enhanced public health procedures, including temperature screening of employees before entry into facilities, deep cleaning of facilities after each shift, and the provision of personal protective equipment. Further, companies in our global supply chain are subject to distinct legislative and regulatory requirements and limitations. Certain companies in our supply chain have had significant employee layoffs or furloughs and have significant financial distress, and some may determine to cease operations or restructure their business. Our suppliers may not be able to manufacture the materials and products we require according to our schedule and specifications, and we may need to seek alternate suppliers, which may be more expensive or may result in delays. We may experience increased employee turnover due to our employees not wanting to or being able to return to work due to health, safety, family or otherwise. As a result, we and our supply chain may operate significantly below capacity for an uncertain period of time, each of which could significantly adversely affect our business, results of operations, financial condition, cash flows, liquidity and stock price.
- *Risks Related to our Customers*. COVID-19 has had, and we expect will continue to have, a significant adverse impact on the growth, viability and financial stability of our customers, including the OEMs and Tier 1 automotive suppliers to which our products are supplied. In addition to many of the risks noted above that apply to our customers regarding the automotive industry generally and our supply chain, we have experienced, and we expect to continue to experience, a delay in our collection of accounts receivable balances from our customers, which may be significant and would be at risk in the event of their bankruptcy or other restructuring.
- *Risks Related to our Growth Prospects*. Our ability to execute our business strategy through the pursuit of business ventures, acquisitions, and strategic alliances or dispositions has been, and will likely continue to be, significantly adversely impacted by COVID-19 and global economic conditions. While we continue to believe in our long-term growth strategy and prospects, we have limited, and may continue to limit, certain growth opportunities in the near term to conserve cash and working capital. We also believe that new business awards will be subject to increased risk of future change as we look to convert awards into revenue. Further, a sustained decline in automotive production may delay or reduce our returns on research and development investments, which could significantly adversely affect our business, results of operations, financial condition, cash flows, liquidity and stock price.
- *Risks Related to Tax Matters*. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payroll taxes, the allowance of a five-year net operating loss carryback period and the temporary suspension of the 80% net operating loss limitation, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We currently expect to defer the payment of payroll taxes each quarter for the remainder of 2020, with such taxes to be paid in the fourth quarters of 2021 and 2022 as permitted by the CARES Act. We continue to examine

the impacts the CARES Act may have on our business, but the extent to which we will benefit from the tax provisions in the CARES Act is currently unclear.

In addition to the risks specifically described above, the COVID-19 pandemic has exacerbated and precipitated the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, and may continue to do so, in ways that we are not currently able to predict, any of which could significantly adversely affect our business, results of operations, financial condition, cash flows, liquidity or stock price.

***Changes to trade policy, including tariffs and customs regulations, could have a material and adverse effect on our business.***

Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing trade, manufacturing, development and investment in the countries where we currently sell our products or conduct our business, as well as any negative sentiment toward the United States as a result of such changes, could adversely affect our business. Changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on U.S. imports, economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the United States and other countries where we conduct our business could negatively impact our financial performance. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes. A replacement trade deal for NAFTA was negotiated with Mexico and Canada, known as the United States-Mexico-Canada Agreement ("USMCA"), which entered into force on July 1, 2020.

As a result of recent policy changes, there may be greater restrictions and economic disincentives on international trade. New tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries. Like many other multinational corporations, we do a significant amount of business that could be impacted by changes to U.S. and international trade policies (including governmental action related to tariffs, sanctions and trade agreements). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof, our industry and the global demand for our products and, as a result, could have a material adverse effect on our business, financial condition and results of operations.

Additionally, during 2018, the U.S. and China applied significant tariffs to certain of each other’s exports. The institution of trade tariffs, both globally and between the U.S. and China specifically, carries the risk of negatively impacting overall economic conditions, which could have negative repercussions on the Company. More directly, imposition of tariffs has caused and could cause further increases in the costs of our raw materials which we may not be able to pass on to our customers in part or in full, which would directly and negatively impact our business. We purchase a significant amount of raw material components, including products manufactured in our China facilities, which are subject to such tariffs. The imposition of tariffs has caused and could cause further increases in the costs of our raw materials, and we may not be able to mitigate the impact from these tariffs or additional future tariffs.

Most recently, a “phase one” trade deal signed between the U.S. and China on January 15, 2020 accompanied a U.S. decision to cancel a plan to increase tariffs on an additional list of Chinese products. While the signing of the agreement signals a cooling of tensions between the U.S. and China over trade, concerns over the stability of bilateral trade relations remain, particularly given the limited scope of the phase one agreement. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these tariffs, the executive order and its implementation and other regulatory actions could materially affect our business, including in the form of increase cost of goods sold, decreased margins, increased pricing for customers, and reduced sales.

Filed Oct 30, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-049238. Last ingested by Listed: Oct 26, 2026, 17:44 ET. No prices; not investment advice.