# Gentherm Inc: Form 10-Q for the period ended Sep 30, 2021

- Company: [Gentherm Inc](/companies/thrm.md) (CIK 903129)
- Form: 10-Q
- Filed: 2021-10-29
- Accepted by EDGAR: Oct 29, 2021, 15:15 ET
- Period: 2021-09-30
- Accession: 0001564590-21-052926
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903129/000156459021052926/thrm-10q_20210930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903129/000156459021052926/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-07-01 to 2021-09-30 | $243.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2021-01-01 to 2021-09-30 | $797.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-07-01 to 2021-09-30 | $174.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2021-01-01 to 2021-09-30 | $561.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-07-01 to 2021-09-30 | $69.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2021-01-01 to 2021-09-30 | $236.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-07-01 to 2021-09-30 | $20.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2021-01-01 to 2021-09-30 | $56.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2021-07-01 to 2021-09-30 | $27.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2021-01-01 to 2021-09-30 | $83.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-07-01 to 2021-09-30 | $20.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-01-01 to 2021-09-30 | $93.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-07-01 to 2021-09-30 | $4.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-01-01 to 2021-09-30 | $18.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | $15.7m | us-gaap:ProfitLoss |
| Net income | 9 months, 2021-01-01 to 2021-09-30 | $73.4m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.47 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.47 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-07-01 to 2021-09-30 | 33,609,084 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-01-01 to 2021-09-30 | 33,488,900 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-01-01 to 2021-09-30 | $117.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-01-01 to 2021-09-30 | $29.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-09-30 | $195.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-09-30 | $573.7m | us-gaap:AssetsCurrent |
| Total assets | at 2021-09-30 | $944.0m | us-gaap:Assets |
| Current liabilities | at 2021-09-30 | $215.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-09-30 | $288.5m | us-gaap:Liabilities |
| Long-term debt | at 2021-09-30 | $37.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2021-09-30 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2021-09-30 | $655.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,301 characters.

### Forward-Looking Statements

*This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as the impact of the COVID-19 pandemic on our financial statements, liquidity, and business as well as the global economy, global supply chain and automotive and medical industries, the significant supply disruptions and shifts in the labor market currently faced by the automotive and medical industries, our ability and our customers’ ability to maintain production levels, the amount of borrowing availability under the 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, 2020, 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, 2020.

### 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. We are also developing a number of new technologies and products that are expected to 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, and therefore have an adverse effect on our business, results of operations and financial condition, such as we experienced in the first half of 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 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 have been and may continue to 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 that began around December 2019 introduced significant volatility to the global economy and had a widespread adverse effect on the global automotive industry in the first half of 2020. In order to respond to the then current industry production environment, the Company closed production at its North American and European manufacturing facilities in late March 2020. In Asia, its manufacturing operations ceased production in February 2020. The Company reopened all its manufacturing facilities by June 1, 2020, in line with industry demand and finished goods levels, and in accordance with local government requirements. Although global automotive industry production has improved relative to the first half of 2020, production remains below recent historic levels.

The lingering impacts of COVID-19 into 2021 has impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. These broad-based inflationary impacts have negatively impacted the Company’s financial condition, results of operations and cash flows for the nine months ended September 30, 2021. We expect these inflationary impacts to continue for the foreseeable future.

Supply shortages of semiconductor chips and other components have resulted in decreases in global automotive vehicle production and significant volatility in customer vehicle production schedules. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, 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 been able to mitigate the impacts of supply chain disruptions in order to satisfy customer orders during the nine months ended September 30, 2021, however, our ability to mitigate the impacts of ongoing shortages of semiconductors and meet customer orders without significant delay and/or expense for the remainder or 2021 and 2022 remains subject to significant uncertainty.

In response to the global supply chain instability and inflationary cost increases the Company has taken several actions to minimize any potential and actual adverse impacts by working closely with its suppliers and customers and to continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise. We expect global supply chain instability will continue to have an adverse impact on our business and financial performance for the foreseeable future, and such adverse impact may be material. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy continue to evolve. Accordingly, the significance of the future adverse impact on our business and financial statements remains subject to significant uncertainty as of the date of this filing.

#### Light Vehicle Production Volumes

Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. According to the forecasting firm IHS Markit (October 2021 release), global light vehicle production in the three and nine months ended September 30, 2021, in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to the three and nine months ended September 30, 2020, are shown below (in millions of units):

|  | Three Months Ended September 30, 2021 | 2020 | % Change | Nine Months Ended September 30, 2021 | 2020 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| North America | 3.0 | 4.0 | (25.0)% | 9.8 | 9.2 | 6.5% |
| Europe | 3.1 | 4.4 | (29.5)% | 12.0 | 11.3 | 6.2% |
| Greater China | 5.3 | 6.4 | (17.2)% | 17.0 | 15.8 | 7.6% |
| Japan / South Korea | 2.3 | 2.9 | (20.7)% | 8.0 | 8.0 | 0.0% |
| Total light vehicle production volume in key markets | 13.7 | 17.7 | (22.6)% | 46.8 | 44.3 | 5.6% |

The IHS Markit (October 2021 release) forecasted light vehicle production volume in the Company’s key markets for full year 2021 to increase to 63.1 million units, a 2.1% decrease from full year 2020 light vehicle production volumes. Forecasted light vehicle production volumes are a component of the data we use in forecasting future business. However, these forecasts generally are updated monthly, and future forecasts may be significantly different from period to period due to changes in macroeconomic conditions or matters specific to the automotive industry, such as the fluctuations that occurred in 2020 due to the COVID-19 pandemic and in 2021 due to supply chain shortages. The latest release in October 2021 may not reflect recent deterioration in the supply chain, which has caused our customers to experience interruptions to planned production schedules and suspension of production at certain manufacturing sites. Further, 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 directly correlate with the global and/or regional light vehicle production forecasts of IHS Markit or other third-party sources.

### New Business Awards

We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During the third quarter of 2021, we secured $260.0 million of automotive new business awards, which represented a win rate of 70% of the lifetime revenue opportunities available to us. Our win rate was negatively impacted by a foil-based cell connecting board opportunity that was awarded by a battery manufacturer to the incumbent supplier due to a compressed launch timeline. Adjusted for this opportunity, our win rate would have been greater than 80%, in line with previous quarters. 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, 2021, 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 of 2021 also do not reflect, in particular, the impact of the COVID-19 pandemic and supply chain 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.

### Acquisitions

During the second quarter of 2021, the Company’s Automotive segment invested $5.2 million for an ownership interest in Carrar Ltd. (“Carrar”), an Israel-based technology developer of advanced thermal management systems for the electric mobility market. The Company does not have a controlling financial interest or have the power to direct the activities that most significantly affect the economic performance of the investment. Gentherm’s investment in Carrar is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, and is recorded in Other non-current assets.

On July 1, 2021, the Company acquired the medical business unit of Beckmann & Egle Industrieelektronik GmbH (“B&E”), a developer and manufacturer of electronic control units for $2.8 million. The results of operations of the acquiree are reported within the Company’s Medical segment from the date of acquisition. The acquisition was accounted for as a business combination with the purchase price assigned to inventory, property and equipment and other intangible assets based on their estimated fair values as of the acquisition date. The pro forma effect of the B&E acquisition does not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements are presented.

On July 22, 2021, the Company’s Automotive segment invested $2.4 million for an ownership interest in Forciot Oy (“Forciot”), a technology developer of sensors for touch, motion and force measurement. Gentherm’s investment in Forciot is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, and is recorded in Other non-current assets.

### 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 is relocating and consolidating certain automotive electronics manufacturing plants in North America and China. On March 20, 2020, the Company announced the initial phase of this restructuring plan, which includes the consolidation of all North American electronics manufacturing from the Burlington, Canada facility and

Acuña, Mexico facility to Celaya, Mexico. As of September 30, 2021, our Burlington, Canada facility has closed, and the electronics manufacturing in Acuña, Mexico continues to transition to Celaya, Mexico. On December 10, 2020, the Company announced the consolidation of its electronics manufacturing in Asia to Bantian, Shenzhen, China, which will result in the closure of our Longgang, Shenzhen, China facility. The remaining actions under this plan are expected to be substantially completed by the first quarter of 2022.

During the three and nine months ended September 30, 2021, the Company recognized restructuring expense of $0.3 million and $1.3 million, respectively, for employee separation costs, de minimis and $0.2 million, respectively, for accelerated depreciation and $0.6 million and $1.3 million, respectively, for other costs. During the three and nine months ended September 30, 2020, the Company recognized restructuring expense of $0.1 million and $(1.3) million, respectively, for employee separation costs and $0.1 million and $0.6 million, respectively, of accelerated depreciation and other costs. The Company has recorded $9.9 million of restructuring expenses since the inception of this program.

Under this restructuring plan, the Company expects to incur total costs of between $15.0 million and $18.0 million, of which between $13.0 million and $16.0 million are expected to be cash expenditures. The total expected costs include employee separation costs of between $5.5 million and $6.5 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 $3.0 million. The Company also expects to incur other transition costs including recruiting, relocation, and machinery and equipment move and set up costs of between $3.0 million and $4.0 million.

#### Other Restructuring Activities

As part of the Company’s continued efforts to optimize its cost structure, the Company has undertaken several discrete restructuring actions. During the three and nine months ended September 30, 2021, the Company recognized $(0.2) million and $0.9 million, respectively, of employee separation costs. During the three and nine months ended September 30, 2020, the Company recognized $0 million and $4.0 million, respectively, of employee separation costs and $0 million and $0.2 million, respectively, of other related costs. 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.

### Stock Repurchase Program

On December 11, 2020, the Board of Directors authorized a new stock repurchase program (the “2020 Stock Repurchase Program”) to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150 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 nine months ended September 30, 2021, we did not make any repurchases under the 2020 Stock Repurchase Program and have a remaining repurchase authorization of $150.0 million as of September 30, 2021.

### Reportable Segments

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

In 2020, the Industrial reporting segment was renamed the Medical reporting segment to reflect the patient temperature management business as the focus and strategic direction of this segment. Also, during 2020, the advanced research and development costs not associated with the Medical segment were presented within the Automotive segment, as this organization primarily supports the Automotive related research and development activities following the divestitures of Cincinnati Sub-Zero industrial chamber business (“CSZ-IC”) and Gentherm Global Power Technologies (“GPT”) in 2019.

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

### Consolidated Results of Operations

The results of operations for the three and nine months ended September 30, 2021 and 2020, in thousands, were as follows:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $243,384 | $259,540 | $(16,156) | $797,924 | $624,214 | $173,710 |
| Cost of sales | 173,997 | 176,935 | 2,938 | 561,655 | 448,807 | (112,848) |
| Gross margin | 69,387 | 82,605 | (13,218) | 236,269 | 175,407 | 60,862 |
| Operating expenses: |  |  |  |  |  |  |
| Net research and development expenses | 20,590 | 18,070 | (2,520) | 56,420 | 51,171 | (5,249) |
| Selling, general and administrative expenses | 27,344 | 25,745 | (1,599) | 83,093 | 73,474 | (9,619) |
| Restructuring expenses | 749 | 284 | (465) | 3,631 | 3,452 | (179) |
| Total operating expenses | 48,683 | 44,099 | (4,584) | 143,144 | 128,097 | (15,047) |
| Operating income | 20,704 | 38,506 | (17,802) | 93,125 | 47,310 | 45,815 |
| Interest expense, net | (515) | (1,259) | 744 | (2,184) | (3,368) | 1,184 |
| Foreign currency gain (loss) | 133 | (2,883) | 3,016 | 391 | (5,562) | 5,953 |
| Other income (loss) | 10 | (615) | 625 | 13 | 2,531 | (2,518) |
| Earnings before income tax | 20,332 | 33,749 | (13,417) | 91,345 | 40,911 | 50,434 |
| Income tax expense | 4,646 | 9,603 | 4,957 | 17,959 | 15,214 | (2,745) |
| Net income | $15,686 | $24,146 | $(8,460) | $73,386 | $25,697 | $47,689 |

Product revenues by product category, in thousands, for the three and nine months ended September 30, 2021 and 2020, were as follows:

|  | Three Months Ended September 30, 2021 | 2020 | % Change | Nine Months Ended September 30, 2021 | 2020 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Climate Control Seat (CCS) | $89,991 | $97,058 | (7.3)% | $297,393 | $229,465 | 29.6% |
| Seat Heaters | 61,516 | 73,471 | (16.3)% | 208,101 | 171,345 | 21.5% |
| Steering Wheel Heaters | 24,578 | 22,506 | 9.2% | 80,139 | 49,721 | 61.2% |
| Automotive Cables | 19,465 | 18,917 | 2.9% | 66,686 | 50,890 | 31.0% |
| Battery Performance Solutions (BPS) | 16,928 | 15,956 | 6.1% | 52,265 | 33,818 | 54.5% |
| Electronics | 11,567 | 14,463 | (20.0)% | 41,324 | 38,327 | 7.8% |
| Other Automotive | 8,983 | 7,393 | 21.5% | 21,595 | 17,056 | 26.6% |
| Subtotal Automotive segment | 233,028 | 249,764 | (6.7)% | 767,503 | 590,622 | 29.9% |
| Medical segment | 10,356 | 9,776 | 5.9% | 30,421 | 33,592 | (9.4)% |
| Total Company | $243,384 | $259,540 | (6.2)% | $797,924 | $624,214 | 27.8% |

#### Product Revenues

Below is a summary of our product revenues, in thousands, for the three months ended September 30, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $243,384 | $259,540 | $(16,156) | $(19,251) | $2,832 | $263 | $(16,156) |

Product revenues for the three months ended September 30, 2021 decreased 6.2% as compared to the three months ended September 30, 2020. The decrease in product revenues is primarily related to decreased volumes in our Automotive segment which were impacted by industry-wide supply chain disruption, partially offset by favorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won. The increase in product revenues included in Variance Due To Pricing/Other above is primarily attributable to increased volumes in our Medical segment offset by decreases in customer pricing in our Automotive segment.

Below is a summary of our product revenues, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $797,924 | $624,214 | $173,710 | $165,633 | $24,824 | $(16,747) | $173,710 |

Product revenues for the nine months ended September 30, 2021 increased 27.8% as compared to the nine months ended September 30, 2020. The increase in product revenues is primarily related to increased volumes and the impact from the recovery of the COVID-19 pandemic in our Automotive segment in the first half of 2021 and favorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won. Product revenues increased across all Automotive segment product lines primarily due to production resuming at our customer locations following the pandemic shutdown in the second quarter of 2020 and new program launches and higher take rates. The decrease in product revenues included in Variance Due To Pricing/Other above is primarily attributable to decreases in customer pricing in our Automotive segment and decreased volumes in our Medical segment.

#### Cost of Sales

Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended September 30, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $173,997 | $176,935 | $2,938 | $11,500 | $(3,361) | $(2,833) | $(2,368) | $2,938 |
| Gross margin | $69,387 | $82,605 | $(13,218) | $(7,751) | $(3,361) | $(1) | $(2,105) | $(13,218) |
| Gross margin - Percentage of product revenues | 28.5% | 31.8% |  |  |  |  |  |  |

Cost of sales for the three months ended September 30, 2021 decreased 1.7% as compared to the three months ended September 30, 2020. The decrease in cost of sales is primarily related to decreased volumes in our Automotive segment. The offsetting Variance Due To Operational Performance is primarily attributable to a decrease in manufacturing productivity and higher material and freight costs primarily due to the negative impact from industry-wide supply chain disruptions. Unfavorable foreign currency impacts are primarily attributable to the Euro and Chinese Renminbi. The increase in cost of sales included in Variance Due To Other above is primarily due to the following items:

- $0.9 million increase due to wage inflation;
- $1.3 million increase due to higher factory costs in North America and Europe; and
- $0.2 million increase attributable to higher volumes in the Medical segment.

Below is a summary of our cost of sales and gross margin, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $561,655 | $448,807 | $(112,848) | $(93,500) | $11,120 | $(15,404) | $(15,064) | $(112,848) |
| Gross margin | $236,269 | $175,407 | $60,862 | $72,133 | $11,120 | $9,420 | $(31,811) | $60,862 |
| Gross margin - Percentage of product revenues | 29.6% | 28.1% |  |  |  |  |  |  |

Cost of sales for the nine months ended September 30, 2021 increased 25.1% as compared to the nine months ended September 30, 2020. The increase in cost of sales is primarily related to increased volumes in our Automotive segment and unfavorable foreign currency impacts primarily attributable to the Euro and Chinese Renminbi. The offsetting Variance Due To Operational Performance is primarily attributable to an increase in manufacturing productivity, partially offset by higher material and freight costs. The increase in cost of sales included in Variance Due To Other above is primarily due to the following items:

- $9.5 million increase due to wage inflation;
- $4.6 million increase due to higher factory costs in North America and Europe; and
- $1.8 million of decrease attributable to lower volumes in the Medical segment.

#### 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, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $23,883 | $20,451 | $(3,432) |
| Reimbursed research and development expenses | (3,293) | (2,381) | 912 |
| Net research and development expenses | $20,590 | $18,070 | $(2,520) |
| Percentage of product revenues | 8.5% | 7.0% |  |

Net research and development expenses for the three months ended September 30, 2021 increased 13.9% as compared to the three months ended September 30, 2020. The increase in net research and development expenses is primarily related to increased project-related spending, including increased investments in ClimateSense and battery performance solutions, partially offset by higher reimbursements for costs to design, develop and purchase tooling pursuant to customer contracts.

Below is a summary of our net research and development expenses, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $69,322 | $60,365 | $(8,957) |
| Reimbursed research and development expenses | (12,902) | (9,194) | 3,708 |
| Net research and development expenses | $56,420 | $51,171 | $(5,249) |
| Percentage of product revenues | 7.1% | 8.2% |  |

Net research and development expenses for the nine months ended September 30, 2021 increased 10.3% as compared to the nine months ended September 30, 2020. The increase in net research and development expenses is primarily related to increased project-related spending, including increased investments in ClimateSense and battery performance solutions, partially offset by higher 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, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $27,344 | $25,745 | $(1,599) |
| Percentage of product revenues | 11.2% | 9.9% |  |

Selling, general and administrative expenses for the three months ended September 30, 2021 increased 6.2% as compared to the three months ended September 30, 2020. The increase in selling, general and administrative expenses is primarily related to the absence of COVID-19 cost-reduction initiatives that were taken by the Company in the third quarter of 2020 to manage its liquidity position in light of the significant economic uncertainty and financial impact of the COVID-19 pandemic.

Below is a summary of our selling, general and administrative expenses, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $83,093 | $73,474 | $(9,619) |
| Percentage of product revenues | 10.4% | 11.8% |  |

Selling, general and administrative expenses for the nine months ended September 30, 2021 increased 13.1% as compared to the nine months ended September 30, 2020. The increase in selling, general and administrative expenses is primarily related to higher incentive compensation expense and exercises of cash settled stock appreciation rights, as well as the absence of COVID-19 cost reduction initiatives that were taken by the Company in the second quarter of 2020 to manage its liquidity position in light of the significant economic uncertainty and financial impact of the COVID-19 pandemic.

#### Restructuring Expenses

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

Below is a summary of our restructuring expenses, in thousands, for the three months ended September 30, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $749 | $284 | $(465) |

During the three months ended September 30, 2021, the Company recognized expenses of $0.1 million for employee separation costs and $0.6 million of other costs.

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.

Below is a summary of our restructuring expenses, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $3,631 | $3,452 | $(179) |

During the nine months ended September 30, 2021, the Company recognized expenses of $2.1 million for employee separation costs and $1.5 million of accelerated depreciation and other costs.

During the nine months ended September 30, 2020, the Company recognized expenses of $2.7 million for employee separation costs and $0.8 million of accelerated depreciation and 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.

See Note 3, “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, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(515) | $(1,259) | $744 |

31

Interest expense, net for the three months ended September 30, 2021 decreased 59.1% as compared to the three months ended September 30, 2020. The decrease is due to a lower balance on our revolving credit agreement during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020.

Below is a summary of our interest expense, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(2,184) | $(3,368) | $1,184 |

Interest expense, net for the nine months ended September 30, 2021 decreased 35.2% as compared to the nine months ended September 30, 2020. The decrease is due to a lower balance on our revolving credit agreement during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020.

See Note 6, “Debt” of the consolidated condensed financial statements included in this Report for additional information.

#### Foreign Currency Gain (Loss)

Below is a summary of our foreign currency gain (loss), in thousands, for the three months ended September 30, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency gain (loss) | $133 | $(2,883) | $3,016 |

Foreign currency gain for the three months ended September 30, 2021 primarily included net realized foreign currency loss of $0.9 million and net unrealized foreign currency gain of $1.0 million

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.

Below is a summary of our foreign currency gain (loss), in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency gain (loss) | $391 | $(5,562) | $5,953 |

Foreign currency gain for the nine months ended September 30, 2021 primarily included net realized foreign currency loss of $0.9 million and net unrealized foreign currency gain of $1.3 million

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.

#### Other Income (Loss)

Below is a summary of our other income (loss), in thousands, for the three months ended September 30, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income (loss) | $10 | $(615) | $625 |

For the three months ended September 30, 2021, Other income was miscellaneous income. 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.

Below is a summary of our other income, in thousands, for the nine months ended September 30, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income | $13 | $2,531 | $(2,518) |

The decrease in Other income is due to a one-time gain on sale of patents recorded for the nine months ended September 30, 2020.

#### Income Tax Expense

Below is a summary of our income tax expense, in thousands, for the three months ended September 30, 2021 and 2020:

|  | Three Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $4,646 | $9,603 | $4,957 |

Income tax expense was $4.6 million for the three months ended September 30, 2021 on earnings before income tax of $20.3 million representing an effective tax rate of 22.9%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due the unfavorable impact of quarterly accrual for uncertain tax positions, global intangible low-tax income (“GILTI”), withholding taxes and other non-deductible expenses, partially offset by the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate in the third quarter of 2021.

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 unfavorable impact of international provisions of the U.S. tax reform, such as GILTI, partially 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, 2021 and 2020:

|  | Nine Months Ended September 30, 2021 | 2020 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $17,959 | $15,214 | $(2,745) |

Income tax expense was $18.0 million for the nine months ended September 30, 2021 on earnings before income tax of $91.3 million representing an effective tax rate of 19.7%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to certain favorable tax effect on equity vesting, intercompany transactions in 2021 and the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate; partially offset by the unfavorable impact of uncertain tax positions, GILTI, withholding taxes and other non-deductible expenses.

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 29.0%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the unfavorable impact of international provisions of the U.S. tax law, such as GILTI, partially offset by certain intercompany transactions which disproportionately benefited lower tax rate jurisdictions.

### 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 Credit Agreement, as well as equity and other debt financings. In March 2020, the Company increased its borrowings under the Credit Agreement by $169.5 million as a safeguard to increase its cash position and provide additional financial flexibility due to the COVID-19 pandemic. The proceeds were used for working capital and for other general corporate purposes permitted by the

Credit Agreement. During the first quarter of 2021, the Company repaid the full drawdown of $169.5 million from March 2020 under the Credit Agreement. As of September 30, 2021, $35.0 million was outstanding under the 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, $440.0 million remained available as of September 30, 2021 for additional borrowings under the Credit Agreement subject to specified conditions that Gentherm currently satisfies.

In addition, on June 9, 2021, we entered into a receivable factoring agreement with HSBC Bank USA, National Association. Under the receivable factoring agreement, we can sell receivables for certain of our account debtors up to $41.3 million, on a revolving basis. As of September 30, 2021, there were no outstanding receivables transferred under the receivable factoring agreement.

On December 11, 2020, the Board of Directors authorized the 2020 Stock Repurchase Program to commence upon expiration of the prior stock repurchase program, which expired on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150.0 million of its issued and outstanding Common Stock over a three-year period, expiring December 15, 2023. As of September 30, 2021, $150.0 million of availability remained under the stock repurchase program.

Based on the Company’s current operating plan and the foregoing actions, management believes cash and cash equivalents at September 30, 2021, together with cash flows from operating activities, borrowing available under our Credit Agreement and available limit under the receivable factoring 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, our operations and the global automotive supply chain and production 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 such capital may not 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, operating, supply chain and production conditions will 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 and cash equivalents, in thousands:

|  | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: |
| Cash, cash equivalents and restricted cash at beginning of period | $268,345 | $52,948 |
| Cash provided by operating activities | 117,106 | 73,301 |
| Cash used in investing activities | (39,958) | (13,686) |
| Cash (used in) provided by financing activities | (148,586) | 109,812 |
| Foreign currency effect on cash and cash equivalents | (1,821) | 6,664 |
| Cash, cash equivalents and restricted cash at end of period | $195,086 | $229,039 |

34

#### Cash Flows From Operating Activities

We manage our cash and cash equivalents 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, 2021 as compared to the nine months ended September 30, 2020, in thousands:

| Operating Activities: | Nine Months Ended September 30, 2021 | 2020 | Change |
| --- | ---: | ---: | ---: |
| Net income | $73,386 | $25,697 | $47,689 |
| Non-cash adjustments to reconcile net income to cash provided by operating activities: |  |  |  |
| Depreciation and amortization | 29,430 | 30,777 | (1,347) |
| Deferred income taxes | 3,867 | 3,583 | 284 |
| Non-cash stock based compensation | 9,422 | 6,569 | 2,853 |
| Change in defined benefit pension plans | (650) | (433) | (217) |
| Loss on sale of property and equipment | 638 | 562 | 76 |
| Gain on sale of patents | — | (1,978) | 1,978 |
| Net income after non-cash adjustments | 116,093 | 64,777 | 51,316 |
| Changes in operating assets and liabilities: |  |  |  |
| Accounts receivable, net | 26,162 | (33,250) | 59,412 |
| Inventory | (34,019) | 4,645 | (38,664) |
| Other assets | 10 | (57) | 67 |
| Accounts payable | 9,231 | 24,272 | (15,041) |
| Other liabilities | (371) | 12,914 | (13,285) |
| Net cash provided by operating activities | $117,106 | $73,301 | $43,805 |

The following table illustrates changes in working capital during the nine months ended September 30, 2021, in thousands:

|  |  |
| --- | ---: |
| Working capital at December 31, 2020 | $437,622 |
| Change in cash and cash equivalents | (67,006) |
| Decrease in accounts receivable | (26,162) |
| Increase in inventory | 34,019 |
| Increase in tax receivables, net | 856 |
| Decrease in other current assets | (423) |
| Increase in accounts payable | (9,231) |
| Increase in other current liabilities | (1,481) |
| Increase in working capital from acquisition | 662 |
| Foreign currency effect on working capital | (10,506) |
| Working capital at September 30, 2021 | $358,350 |

The following table highlights significant transactions that contributed to the decrease in cash and cash equivalents during the nine months ended September 30, 2021, in thousands:

|  |  |
| --- | ---: |
| Net cash provided by operating activities | $117,106 |
| Repayments of debt | (151,993) |
| Purchases of property and equipment | (29,585) |
| Proceeds from the exercise of Common Stock options | 7,467 |
| Cash paid for the cancellation of restricted stock | (3,991) |
| Cost of technology investment | (7,557) |
| Acquisition of B&E | (2,827) |
| Other items | (1,879) |
| Decrease in cash and cash equivalents | $(73,259) |

35

#### Cash Flows From Investing Activities

Cash used in investing activities was $40.0 million during the nine months ended September 30, 2021, primarily reflecting purchases of property and equipment of $29.6 million, technology investments of $7.6 million and a business acquisition of B&E for $2.8 million.

#### Cash Flows From Financing Activities

Cash used in financing activities was $148.6 million during the nine months ended September 30, 2021, reflecting payments on the principal of the U.S. Revolving Note and DEG Vietnam Loan totaling $152.0 million in aggregate. Borrowings under the Credit Agreement mature on June 27, 2024. See Note 6, “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, 2021 for cancellations of restricted stock awards totaling $4.0 million, more than offset by proceeds from the exercise of Common Stock options totaling $7.5 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, 2020. There have been no significant changes in our critical accounting policies or critical accounting estimates during the three months ended September 30, 2021. We are not presently aware of any events or circumstances that would require us to update our estimates, assumptions or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained. As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements. For information on the impact of recently issued accounting pronouncements, see Note 2, “New Accounting Pronouncements” in the consolidated condensed financial statements included in this Report.

### Off-Balance Sheet Arrangements

At September 30, 2021, 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, 7,495 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.

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 our debt obligations under our 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 and price fluctuations in material commodities is fifteen months. We had foreign currency derivative contracts with a notional value of $9.0 million and $13.3 million and copper commodity swap contracts with a notional value of $1.2 million and $0 outstanding at September 30, 2021 and December 31, 2020, respectively.

The potential loss in fair value for foreign currency derivative contracts from a hypothetical 10% adverse change in quoted currency exchange rates would be $0.8 million and $1.3 million as of September 30, 2021 and December 31, 2020, respectively. The potential gain in fair value from a hypothetical 10% positive change in quoted currency exchange rates would be $1.0 million and $1.6 million as of September 30, 2021 and December 31, 2020, respectively. The impact of a 10% change in rates on fair value differs from a 10% change in the net fair value asset due to the existence of hedges. 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.

The potential loss in fair value for copper commodity swap contracts from a hypothetical 10% adverse change in quoted copper commodity prices would be $0.1 million and $0 million as of September 30, 2021 and December 31, 2020, respectively. The potential gain in fair value from a hypothetical 10% positive change in quoted copper commodity prices would be $0.1 million and $0 million as of September 30, 2021 and December 31, 2020, 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 and copper commodity hedging instruments, if any, to cost of sales 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, 2021 is set forth in Note 9, “Financial Instruments” in the consolidated condensed financial statements included in this Report.

#### Interest Rate Sensitivity

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

| Liabilities Long-Term Debt: | Expected Maturity Date 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Variable rate (€EUR) | $— | $— | $— |  | $— | $— | $— | $— |
| Variable interest rate as of September 30, 2021 |  |  |  |  |  |  |  |  |
| Variable rate ($USD) | $— | $— | $— | $35,000 | $— | $— | $35,000 | $35,000 |
| Variable interest rate as of September 30, 2021 |  |  |  | 1.33% |  |  | 1.33% |  |
| Fixed rate ($USD) | $1,250 | $2,500 | $1,250 | $— | $— | $— | $5,000 | $5,116 |
| Fixed interest rate | 5.21% | 5.21% | 5.21% |  |  |  | 5.21% |  |

The fair value of our fixed-rate debt at September 30, 2021 and December 31, 2020 was $5.1 million and $6.4 million, respectively. The fair value of our variable rate debt at September 30, 2021 and December 31, 2020 was $35.0 million and $186.2 million, respectively. A hypothetical 100 basis point change (increase or decrease) in interest rates would create an estimated change in fair value of our fixed-rate debt of a de minimis amount as of September 30, 2021. A hypothetical 100 basis point change in interest rates on our variable-rate debt would change interest expense on an annual basis by $0.4 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 2021 | Total | Fair Value |
| --- | ---: | ---: | ---: |
| Total contract amount | $8,985 | $8,985 | $176 |
| Average contract rate | 21.15 | 21.15 |  |

## Controls and procedures

As filed, 1,467 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 September 30, 2021. 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 September 30, 2021.

### (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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 3,870 characters.

Except as set forth below, 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, 2020.

*We operate in a highly competitive industry and efforts by our competitors, as well as new non-traditional entrants to the industry could adversely affect our business, results of operations and financial condition.*

The automotive component supply industry is subject to intense competition. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, timely delivery, technological innovation and service. There can be no assurance that we will be able to compete successfully with the products of our competitors. Further, our competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. Many of our competitors are substantially larger in size and have substantially greater financial, marketing and other resources than we do, and therefore may be more effective in adapting to customer requirements while being more profitable. Refer to risk factor below concerning our principal customers. In addition, our customers may increase levels of production insourcing for a variety of reasons, such as shifts in customers’ business strategies or the emergence of low-cost production opportunities in other countries, which may adversely affect our sales as well as the profit margins on our products.

In addition, the global automotive industry is experiencing a period of significant technological change. Future automotive vehicle production may be affected by additional industry or consumer behaviors, including the development and use of autonomous and electric vehicles and increasing use of car- and ride-sharing and on-demand transportation as a service, as well as related regulations. The rapidly evolving nature of the markets in which we compete has attracted, and may continue to attract, new entrants, including new entrants from outside the traditional automotive supply industry. Further, in comparison to us, our competitors may foresee the course of market developments more accurately, develop superior products, produce similar products at a lower cost, or adapt quicker to new technologies. If we do not accurately predict, prepare for and respond to new kinds of technological innovations, market developments and changing customer needs, our sales, profitability and long-term competitiveness may be harmed.

*The loss or insolvency of any of our principal customers would adversely affect our future results.*

For the nine months ended September 30, 2021, our top two customers were Lear Corporation and Adient plc, which comprised 15% and 14%, respectively, of our product revenues. Combined, approximately 75% of product revenues to these customers was sourced directly by the Company’s OEM customers. The continued growth, viability and financial stability of our principal customers, as well as the OEMS to which our products are supplied, are critical to our success. The loss of any significant portion of our sales to any of our customers would have a material adverse effect on our results of operations and financial condition. We have sometimes experience, 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.

On October 28, 2021, Lear Corporation (NYSE: LEA) announced that it has entered into an agreement to acquire substantially all of the Interior Comfort Systems business unit of Kongsberg Automotive ASA. Kongsberg Automotive ASA is a key competitor of our climate comfort solutions products, including Climate Control Seats and seat heaters.

Filed Oct 29, 2021.
Source: SEC EDGAR, the filing index for accession 0001564590-21-052926. Last ingested by Listed: Oct 26, 2026, 17:44 ET. No prices; not investment advice.