# Gentherm Inc: Form 10-Q for the period ended Mar 31, 2022

- Company: [Gentherm Inc](/companies/thrm.md) (CIK 903129)
- Form: 10-Q
- Filed: 2022-05-04
- Accepted by EDGAR: May 4, 2022, 15:27 ET
- Period: 2022-03-31
- Accession: 0001564590-22-017813
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903129/000156459022017813/thrm-10q_20220331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903129/000156459022017813/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $267.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $203.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $64.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-01-01 to 2022-03-31 | $20.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-01-01 to 2022-03-31 | $29.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $14.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $11.7m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 33,376,764 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | −$684.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $5.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-03-31 | $177.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $602.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $967.1m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $243.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $311.3m | us-gaap:Liabilities |
| Long-term debt | at 2022-03-31 | $36.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-03-31 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-03-31 | $655.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,913 characters.

### Forward-Looking Statements

*This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as the impact of the COVID-19 pandemic on our financial statements, liquidity, and business as well as the global economy, global supply chain and automotive and medical industries, the impact of the conflict in Ukraine on our operations, the timing of closing of the acquisition of the Alfmeier transaction described herein (the “Acquisition”), the expected sources of funds to be used for as consideration to be paid in the Acquisition, the nature of the closing conditions for the Acquisition, the expected synergies and growth prospects following the closing of the Acquisition, 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 and our ability to finance sufficient working capital. Reference is made in particular to forward-looking statements included in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Such statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar terms, variations of such terms or the negative of such terms. The forward-looking statements included in this Report are made as of the date hereof or as of the date specified herein and are based on management’s current expectations and beliefs. Such statements are subject to a number of assumptions, risks, uncertainties and other factors, which are set forth in “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021, 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, except for the Acquisition, such forward-looking statements do not include the potential impact of any other business combinations, acquisitions, divestitures, strategic investments and other significant transactions that may be completed after the date hereof, each of which may present material risks to the Company’s business and financial results. Except as required by law, we expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.*

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

### Overview

Gentherm Incorporated is a global developer, manufacturer and marketer of innovative thermal management technologies for a broad range of heating and cooling and temperature control applications in the automotive and medical industries. Within the automotive industry, our products provide solutions for passenger climate comfort and convenience, battery thermal management and cell connecting systems. Within the medical industry our products provide patient temperature management solutions. Our automotive products can be found on vehicles manufactured by nearly all the major OEMs operating in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. The Company is also developing a number of new technologies and products that are expected to enable improvements to existing products and to create new product applications for existing and new markets.

Our sales are driven by the number of vehicles produced by the OEMs, which is ultimately dependent on consumer demand for automotive vehicles, our product content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. Historically, new vehicle demand and product content (i.e. vehicle features) have been driven by macro-economic and other factors, such as interest rates, automotive manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Vehicle content has also been driven by trends in consumer preferences, such as preferences for smart devices and features, personalized user experience, and comfort, health and wellness. Economic volatility or weakness, as well as geopolitical factors, in North America, Europe or Asia, have had and could result in a significant reduction in automotive sales and production by our customers, which have and would have an adverse effect on our business, results of operations and financial condition. In 2020 and 2021, and continuing into 2022, the automotive industry has experienced fluctuating demand and production disruptions related to supply chain challenges, facility closures, labor shortages, work stoppages and inflationary pressures, as a result of the COVID-19 pandemic and associated macroeconomic conditions, as described below. We believe our diversified OEM customer base and geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns, including the ongoing impact of the COVID-19 pandemic and associated economic conditions, and benefit from industry upturns in the ordinary course. However, shifts in the mix of global automotive production to higher cost regions or to vehicles with less of our product content as well as continuing production challenges and inflationary pressures could adversely impact our profitability. In addition, we may be adversely impacted by volatility, weakness or accelerated growth in markets for hybrid or electric vehicles specifically. We believe our products offer certain advantages for hybrid and electric vehicles, including improved energy efficiency, and position us well to withstand changes in the volume mix between vehicles driven by internal combustion engines and hybrid and other electric vehicles. We also believe that products we are developing, such as ClimateSense®, position us well to address trends in consumer preferences such as personalized user experience, comfort, health and wellness.

### Recent Trends

#### General Economic Conditions

The COVID-19 pandemic that began around December 2019 introduced significant volatility to the global economy, disrupted supply chains and had a widespread adverse effect on the global automotive industry in the first half of 2020, with various direct and indirect adverse impacts continuing throughout 2021 and into 2022.

Beginning in February 2020 and continuing into June 2020, substantially all of the Company’s major OEM and Tier 1 customers temporarily ceased or significantly reduced production as a result of restrictions that were requested or mandated by governmental authorities. As a result, substantially all of our manufacturing facilities either temporarily suspended production or experienced significant reductions in volumes during this period. By the end of the second quarter of 2020, the Company had reopened all of its manufacturing facilities, in line with industry demand, and in accordance with local government requirements. Although global automotive industry production has improved relative to the first half of 2020, production remains below recent historic levels.

The lingering impacts of COVID-19 throughout 2021 and into 2022 have impeded global supply chains, resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. These broad-based inflationary impacts have negatively impacted the Company’s financial condition, results of operations and cash flows throughout 2021 and into 2022. We expect these inflationary impacts to continue for the foreseeable future.

Supply shortages of semiconductor chips and other components have resulted in decreases in global automotive vehicle production and significant volatility in customer vehicle production schedules. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, including Gentherm, have been unable to fully meet the vehicle production demands of the OEMs due to events which are outside the Company's control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, fires at suppliers’ facilities, significant weather events impacting semiconductor supplier facilities in the southern United States, and other extraordinary events. The Company was able to mitigate the impacts of supply chain disruptions in order to satisfy customer orders during the first three quarters of 2021; however, during the fourth quarter of 2021 and continuing into 2022 we have experienced and may continue to experience direct adverse impacts of ongoing shortages of semiconductors. Our ability to meet customer orders without significant delay and/or expense for 2022 and beyond remains subject to significant uncertainty.

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

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

Our facility in Vynohradiv is on the far western corner of Ukraine near the Hungary border. In 2021, products manufactured at our Ukraine facility represented approximately 11% of the Company’s total revenue, including automotive cables, seat heaters and steering wheel heaters. At this time, our Ukraine facility is operating at normal levels and we have begun executing contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Our response to the escalating situation is based on a severity level contingency response plan that has been developed with certain customers. As the situation in Ukraine is very fluid, we continue to monitor its effects on our business and we continue to work closely with our customers to adjust our contingency response as necessary. See Part II, Item. 1A., “Risk Factors” in this Report for additional information on risks and uncertainties related to the Ukraine conflict.

#### Alfmeier Acquisition

On May 4, 2022, the Company entered into a definitive purchase agreement to acquire the automotive business of Alfmeier Präzision SE (“Alfmeier”), the global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software.

Under the terms of the agreement, the Company will acquire all shares in Alfmeier for €177.5 million, net of cash and debt, subject to customary adjustments related to Alfmeier’s net working capital as of the closing and may be increased by up to €4.0 million at or post-closing upon resolution of certain Alfmeier tax matters. The transaction will be funded through a combination of the Company’s existing cash balances and revolving credit facility. The transaction is expected to close during the third quarter of 2022 subject to the receipt of regulatory approvals and the satisfaction or waiver of other customary closing conditions.

Also on May 4, 2022, the Company entered into a put and call option agreement for the real property in Germany on which Alfmeier’s headquarters is located. Pursuant to this agreement, the seller will have a put to sell the headquarters and the Company will have an option to purchase the headquarters post-closing of the acquisition of Alfmeier. See Part II, Item 5, “Other Information” in this Report for more information about the acquisition of Alfmeier.

#### Light Vehicle Production Volumes

Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm IHS Markit (April 2022 release), global light vehicle production in the first quarter of 2022 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to the first quarter of 2021, are shown below (in millions of units):

|  | Three Months Ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| North America | 3.6 | 3.6 | 0.0% |
| Europe | 3.9 | 4.7 | (17.0)% |
| Greater China | 6.2 | 5.9 | 5.1% |
| Japan / South Korea | 2.7 | 3.1 | (12.9)% |
| Total light vehicle production volume in key markets | 16.4 | 17.3 | (5.3)% |

The IHS Markit (April 2022 release) forecasted light vehicle production volume in the Company’s key markets for full year 2022 to increase to 67.2 million units, a 4.0% increase from full year 2021 light vehicle production volumes. Forecasted light vehicle production volumes are a component of the data we use in forecasting future business. However, these forecasts generally are updated monthly, and future forecasts may be significantly different from period to period due to changes in macroeconomic conditions or matters specific to the automotive industry, such as the fluctuations that occurred in 2020 and remain ongoing due to the COVID-19 pandemic. Further, due to differences in regional product mix at our manufacturing facilities, as well as material production schedules from our customers for our products on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of IHS Markit or other third-party sources.

### New Business Awards

We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During the first quarter of 2022, we secured an estimated $170 million of automotive new business awards. Automotive new business awards represent the aggregate projected lifetime revenue of new awards provided by our customers to Gentherm in the applicable period, with the value based on the price and volume projections received from each customer as of the award date. Although automotive new business awards are not firm customer orders, we believe that new business awards are an indicator of future revenue. New business awards are not projections of revenue or future business as of March 31, 2022, the date of this Report or any other date. Customer projections regularly change over time and we do not update our calculation of any new business award after the date initially communicated. Automotive new business awards in the first quarter 2022 also do not reflect, in particular, the impact of the COVID-19 pandemic and related macroeconomic challenges on future business. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties that are included in this Report or incorporated by reference in “Forward-Looking Statements” above.

### Stock Repurchase Program

On December 11, 2020, the Board of Directors authorized a new stock repurchase program (the “2020 Stock Repurchase Program”) to commence upon expiration of the prior stock repurchase program on December 15, 2020. Under the 2020 Stock Repurchase Program, the Company is authorized to repurchase up to $150 million of its issued and outstanding Common Stock over a three-year period, expiring December 15, 2023. Repurchases under the 2020 Stock Repurchase Program may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. During the three months ended March 31, 2022, we did not make any repurchases under the 2020 Stock Repurchase Program and have a remaining repurchase authorization of $130.0 million as of March 31, 2022.

### Reportable Segments

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

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

### Consolidated Results of Operations

The results of operations for the three months ended March 31, 2022 and 2021, in thousands, were as follows:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Product revenues | $267,657 | $288,535 | $(20,878) |
| Cost of sales | 203,544 | 200,866 | (2,678) |
| Gross margin | 64,113 | 87,669 | (23,556) |
| Operating expenses: |  |  |  |
| Net research and development expenses | 20,434 | 17,603 | (2,831) |
| Selling, general and administrative expenses | 29,308 | 28,526 | (782) |
| Restructuring expenses | 181 | 791 | 610 |
| Total operating expenses | 49,923 | 46,920 | (3,003) |
| Operating income | 14,190 | 40,749 | (26,559) |
| Interest expense, net | (569) | (1,039) | 470 |
| Foreign currency gain | 2,217 | 773 | 1,444 |
| Other income (loss) | 204 | (9) | 213 |
| Earnings before income tax | 16,042 | 40,474 | (24,432) |
| Income tax expense | 4,295 | 7,565 | 3,270 |
| Net income | $11,747 | $32,909 | $(21,162) |

23

Product revenues by product category, in thousands, for the three months ended March 31, 2022 and 2021, were as follows:

|  | Three Months Ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Climate Control Seat | $102,734 | $109,173 | (5.9)% |
| Seat Heaters | 68,896 | 76,721 | (10.2)% |
| Steering Wheel Heaters | 28,736 | 28,864 | (0.4)% |
| Automotive Cables | 22,045 | 24,281 | (9.2)% |
| Battery Performance Solutions | 17,613 | 17,760 | (0.8)% |
| Electronics | 10,828 | 15,105 | (28.3)% |
| Other Automotive | 7,012 | 7,466 | (6.1)% |
| Subtotal Automotive segment | 257,864 | 279,370 | (7.7)% |
| Medical segment | 9,793 | 9,165 | 6.9% |
| Total Company | $267,657 | $288,535 | (7.2)% |

### Product Revenues

Below is a summary of our product revenues, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | FX | Pricing/Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $267,657 | $288,535 | $(20,878) | $(12,970) | $(6,601) | $(1,307) | $(20,878) |

Product revenues for the three months ended March 31, 2022 decreased 7.2% as compared to the three months ended March 31, 2021. The decrease in product revenues is primarily related to decreased volumes in our Automotive segment and unfavorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won. Product revenues decreased across all Automotive segment product lines, including decreases of $7.8 million, $6.4 million, $4.3 million, and $2.2 million in Seat Heaters, Climate Control Seat, Electronics and Automotive Cables, respectively, primarily due to a decrease in light vehicle production across relevant markets. 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 offset by an increase in product revenue in our Medical segment.

### Cost of Sales

Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) | Variance Due To: Automotive Volume | Operational Performance | FX | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $203,544 | $200,866 | $(2,678) | $8,348 | $(12,008) | $3,917 | $(2,935) | $(2,678) |
| Gross margin | $64,113 | $87,669 | $(23,556) | $(4,622) | $(12,008) | $(2,684) | $(4,242) | $(23,556) |
| Gross margin - Percentage of product revenues | 24.0% | 30.4% |  |  |  |  |  |  |

Cost of sales for the three months ended March 31, 2022 increased 1.3% as compared to the three months ended March 31, 2021. The increase in cost of sales within the Variance Due To Operational Performance is primarily related to inflation associated with higher freight costs and material costs. This increase was offset by decreased volumes in our Automotive segment and favorable foreign currency impacts primarily attributable to the Euro and Chinese Renminbi. The increase in cost of sales included in Variance Due To Other above is due to the following items:

- $2.6 million of increase due to wage inflation;
- $0.7 million of increase attributable to higher volumes in the Medical segment; and
- $0.6 million of decrease due to lower stock compensation expense.

### Net Research and Development Expenses

Below is a summary of our net research and development expenses, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Research and development expenses | $23,903 | $22,426 | $(1,477) |
| Reimbursed research and development expenses | (3,469) | (4,823) | (1,354) |
| Net research and development expenses | $20,434 | $17,603 | $(2,831) |
| Percentage of product revenues | 7.6% | 6.1% |  |

Net research and development expenses for the three months ended March 31, 2022 increased 16.1% as compared to the three months ended March 31, 2021. The increase in net research and development expenses is primarily related to increased project-related spending and lower reimbursements for costs to design, develop and purchase tooling pursuant to customer contracts.

### Selling, General and Administrative Expenses

Below is a summary of our selling, general and administrative expenses, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Selling, general and administrative expenses | $29,308 | $28,526 | $(782) |
| Percentage of product revenues | 10.9% | 9.9% |  |

Selling, general and administrative expenses for the three months ended March 31, 2022 increased 2.7% as compared to the three months ended March 31, 2021. The increase in selling, general and administrative expenses is primarily related to acquisition related costs partially offset by lower stock compensation expense.

### Restructuring Expenses

Below is a summary of our restructuring expenses, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Restructuring expenses | $181 | $791 | $610 |

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

During the three months ended March 31, 2021, the Company recognized expenses of $0.5 million for employee separation costs and $0.3 million for other costs.

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 March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(569) | $(1,039) | $470 |

Interest expense, net for the three months ended March 31, 2022 decreased 45.2% as compared to the three months ended March 31, 2021. The decrease is due to a lower balance on our revolving credit agreement during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

### Foreign Currency Gain

Below is a summary of our foreign currency gain, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Foreign currency gain | $2,217 | $773 | $1,444 |

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

Foreign currency gain for the three months ended March 31, 2021 included net realized foreign currency gain of $0.5 million and net unrealized foreign currency gain of $0.3 million.

### Other Income (Loss)

Below is a summary of our other income (loss), in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Other income (loss) | $204 | $(9) | $213 |

The increase in Other income (loss) is due to an increase in miscellaneous income.

### Income Tax Expense

Below is a summary of our income tax expense, in thousands, for the three months ended March 31, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | 2021 | Favorable / (Unfavorable) |
| --- | ---: | ---: | ---: |
| Income tax expense | $4,295 | $7,565 | $3,270 |

Income tax expense was $4.3 million for the three months ended March 31, 2022, on earnings before income tax of $16.0 million, representing an effective tax rate of 26.8%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, the unfavorable impact of the global intangible low-tax income (“GILTI”), and the quarterly accrual for uncertain tax positions partially offset by the impact of certain favorable tax effects on equity vesting.

Income tax expense was $7.6 million for the three months ended March 31, 2021, on earnings before income tax of $40.5 million, representing an effective tax rate of 18.7%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to certain intercompany transactions, partially offset by unfavorable impact of the global intangible low-tax income (“GILTI”).

### Liquidity and Capital Resources

### Overview

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

As of March 31, 2022, the Company had $177.9 million of cash and cash equivalents, $424.5 million of availability under our Credit Agreement and $19.4 million of availability under our North America receivables factoring arrangement. We also continue to maintain access to the capital markets and may issue debt or equity securities, which may provide an additional source of liquidity. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current shareholders.

We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Credit Agreement. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of March 31, 2022, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled approximately $157.2 million. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S.; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts.

We currently believe that our cash and cash equivalents and borrowings available under our Credit Agreement and the North America receivables factoring arrangement will be adequate to meet anticipated cash requirements for at least the next twelve months and the foreseeable future.

### Cash and Cash Flows

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

|  | Three Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: |
| Cash and cash equivalents at beginning of period | $190,606 | $268,345 |
| Net Cash (used in) provided by operating activities | (684) | 39,667 |
| Net Cash used in investing activities | (5,957) | (10,103) |
| Net Cash used in financing activities | (3,750) | (125,616) |
| Foreign currency effect on cash and cash equivalents | (2,298) | (1,338) |
| Cash and cash equivalents at end of period | $177,917 | $170,955 |

#### Cash Flows From Operating Activities

Cash used in operating activities totaled $0.7 million during the three months ended March 31, 2022 primarily reflecting net income of $11.7 million, decreased by non-cash adjustments of $0.8 million for deferred income taxes and $23.9 million related to changes in assets and liabilities, partially offset by $12.3 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, pension plan adjustments and loss on disposition of property and equipment.

#### Cash Flows From Investing Activities

Cash used in investing activities was $6.0 million during the three months ended March 31, 2022, reflecting purchases of property and equipment of $5.6 million and payments related to an equity method investment for $0.4 million.

#### Cash Flows From Financing Activities

Cash used in financing activities was $3.8 million during the three months ended March 31, 2022, reflecting taxes withheld and paid on employees' share based payment awards totaling $4.3 million, partially offset by proceeds from the exercise of Common Stock options totaling $0.5 million.

### Debt

The following table summarizes the Company’s debt, in thousands, as of March 31, 2022 and 2021:

| Amended Credit Agreement: | March 31, 2022 Interest Rate | Principal Balance | March 31, 2021 Interest Rate | Principal Balance |
| --- | ---: | ---: | ---: | ---: |
| U.S. Revolving Note (U.S. Dollar denominations) | 1.71% | $35,000 | 1.61% | $41,500 |
| U.S. Revolving Note (Euro denominations) | — | — | 1.50% | 14,069 |
| DEG Vietnam Loan | 5.21% | 3,750 | 5.21% | 6,250 |
| Total debt |  | 38,750 |  | 61,819 |
| Current maturities |  | (2,500) |  | (2,500) |
| Long-term debt, less current maturities |  | $36,250 |  | $59,319 |

#### Credit Agreement

Gentherm, together with certain of its subsidiaries, maintain a revolving credit note (“U.S. Revolving Note”) under its Amended and Restated Credit Agreement (the “Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Credit Agreement has a maximum borrowing capacity of $475 million and matures on June 27, 2024. The Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets, merge with other companies or enter into certain other transactions outside the ordinary course of business, and (ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio (based on consolidated EBITDA for the applicable trailing 12-month period as defined in the Credit Agreement) as of the end of any fiscal quarter.

#### DEG Vietnam Loan

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

### Other Sources of Liquidity

The Company is party to a receivable factoring agreement with HSBC Bank USA, National Association. Under the receivable factoring agreement, we can sell receivables for certain of our North America account debtors up to $41.3 million, on a revolving basis, subject to outstanding balances and concentration limits. As of March 31, 2022, there were no outstanding receivables transferred under the receivable factoring agreement and our availability under the receivables factoring agreement was $19.4 million.

### Material Cash Requirements

Significant liquidity will be required during the second half of 2022 to close the Alfmeier Acquisition. Under terms of the definitive purchase agreement, the purchase price is €177.5 million, net of cash and debt, subject to customary adjustments related to Alfmeier’s net working capital as of the closing and may be increased by up to €4.0 million at or post-closing upon resolution of certain Alfmeier tax matters. We believe cash on hand, cash generated from operations, and the borrowing capacity available under our revolving credit facility will be sufficient to support this transaction.

The Company continues to enter into agreements with suppliers to reserve the right to purchase certain semiconductor chips over periods of 12-24 months. As of March 31, 2022, the Company’s total commitments for these semiconductor chip agreements was $38.9 million. See Note 7, “Commitments and Contingencies” of the consolidated condensed financial statements included in this Report for additional information.

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

### Effects of Inflation

The automotive component supply industry has historically been subject to inflationary pressures with respect to materials and labor. In 2021 and continuing in 2022, macroeconomic effects of the COVID-19 pandemic have resulted in inflationary cost increases in certain materials, labor and transportation. These inflationary cost increases are expected to continue into the foreseeable future as demand remains elevated and supply remains constrained. Although the Company has developed and implemented strategies to mitigate the impact of higher material component costs and transportation costs, these strategies, together with commercial negotiations with Gentherm's customers and suppliers may not fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.

### Critical Accounting Policies

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

### Recent Accounting Pronouncements

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

## Market risk

As filed, 6,277 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 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, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.

The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The 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 $21.2 million and $14.0 million outstanding at March 31, 2022 and December 31, 2021 and copper commodity swap contracts with a notional value of $0 million and $0.3 million outstanding as of March 31, 2022 and December 31, 2021, respectively. The potential loss in fair value for such financial instruments from a hypothetical 10% adverse change in quoted currency exchange rates would be $2.0 million and $1.3 million as of March 31, 2022 and December 31, 2021, respectively. The potential gain in fair value from a hypothetical 10% change in quoted currency exchange rates would be $2.5 million and $1.6 million as of March 31, 2022 and December 31, 2021, 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.

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 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 March 31, 2022 is set forth in Note 9, “Financial Instruments” in the consolidated condensed financial statements included in this Report.

#### Interest Rate Sensitivity

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

| Liabilities Long-Term Debt: | Expected Maturity Date 2022 | 2023 | 2024 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: |
| Variable rate ($USD) | $— | $— | $35,000 | $35,000 | $35,000 |
| Variable interest rate as of March 31, 2022 |  |  | 1.71% | 1.71% |  |
| Fixed rate ($USD) | $2,500 | $1,250 | $— | $3,750 | $3,796 |
| Fixed interest rate | 5.21% | 5.21% |  | 5.21% |  |

Based on the amounts outstanding as of March 31, 2022, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense 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 2022 | Total | Fair Value |
| --- | ---: | ---: | ---: |
| Total contract amount | $21,180 | $21,180 | $904 |
| Average contract rate | 21.25 | 21.25 |  |

## Controls and procedures

As filed, 1,455 characters.

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

Management of the Company, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2022. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022.

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

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 8,995 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, 2021.

*Our operations within Ukraine subject us to risks that may harm our operations and financial results.*

The United States and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. In February 2022, Russia launched a full-scale military invasion of Ukraine. As a result of the conflict, the United States, United Kingdom, European Union and other countries have levied economic sanctions and bans on Russia and Russia has responded with its own retaliatory measures. These measures have impacted the availability and price of certain raw materials and could have a lasting impact on regional and global economies. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to and could lead to further market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

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

We cannot be certain that the current conflict will not affect our facility and local employees in the future, including due to electrical outages, a loss of control over the assets due to destruction or theft, or periodic battles with foreign forces closer to our facility. We have incurred, and will likely continue to incur costs to support our employees and relocate equipment and production. Our management team has and will likely continue to spend significant time and attention on supporting our team members in Ukraine and mitigating the impacts of the Ukraine conflict and related events. Most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we may experience a significant disruption to our operations. The current conflict may lead to further disruption of our supply chains and operations, increased costs of labor, materials and components, result in impairment of tangible assets and implementation of restructuring activities, and may impair our ability to complete financial or banking transactions.

Any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price. The extent and duration of the military action, sanctions, and resulting market and/or supply disruptions are impossible to predict, but could be substantial. Any such disruptions may also magnify the impact of other risks described in Part 1, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

*Our proposed Acquisition of Alfmeier is subject to conditions, as well as other uncertainties, and there can be no assurances as to whether or when it may be completed. Failure to complete the proposed Acquisition could adversely affect our business.*

Our proposed Acquisition of Alfmeier is expected to close during the third quarter of 2022; however, closing is subject to certain conditions that may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant required antitrust approval. Events may occur that could give rise to termination of the Acquisition agreement, including due to factors outside of Gentherm’s control. There may also be delays in closing the proposed Acquisition which could result in additional consultation and advisory fees necessary to finalize the Acquisition. Any of the foregoing, or other risks arising in connection with the failure of or delay in completing the Acquisition, including the diversion of management’s attention from pursuing other opportunities, could have a material adverse effect on our business, financial condition and results of operations.

*The announcement and pendency of the proposed Acquisition of Alfmeier could adversely affect our business, financial condition and results of operations and could adversely affect Alfmeier’s ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties for the post-transaction benefit of Gentherm.*

The announcement and pendency of the potential Acquisition of Alfmeier could cause disruptions and create uncertainty surrounding our business and affect our relationships with our customers, suppliers and employees. As a result of the Acquisition, some customers, suppliers or strategic partners may terminate their business relationship with us or Alfmeier. Potential customers, suppliers or strategic partners may delay entering into, or decide not to enter into, a business relationship with us or Alfmeier because of the Acquisition. If customer or supplier relationships or strategic alliances of us or Alfmeier are adversely affected by the Acquisition, the post-transaction benefit to Gentherm of the Acquisition of Alfmeier and our business, financial condition and results of operations following the Acquisition could be adversely affected.

In addition, we have diverted, and will continue to divert, significant management resources to complete the Acquisition and may incur unexpected costs during the pendency of the proposed Acquisition, which could adversely impact our ability to manage existing operations or pursue alternative strategic transactions, which could adversely affect our business, financial condition and results of operations.

*Our efforts to integrate Alfmeier’s business may not be successful and could adversely affect our production, financial condition and results of operations.*

The success of the Company’s acquisitions is dependent, in part, on its ability to realize the expected benefits from the integration of the acquired businesses and there are risks inherent in the achievement of expected financial results, growth prospects and cost synergies for the Acquisition and the timing thereof. To realize these anticipated benefits, acquired companies must be successfully integrated, which is subject to the Company’s ability to consolidate operations, corporate cultures and systems and to eliminate redundancies and costs. If the Company is unsuccessful in combining companies, including Alfmeier, the anticipated benefits of our acquisitions, including the Acquisition of Alfmeier, may not be realized fully or at all or may take longer to realize than expected. Further, there is potential for unknown or inestimable liabilities relating to the acquired business. In addition, the actual integration may result in additional and unforeseen expenses, which could reduce the anticipated benefits of the acquisition.

The integration of acquired businesses is a complex, costly and time-consuming process that requires significant management attention and resources. It is possible that the integration process could result in the loss of key employees, the disruption of the Company’s operations, the inability to maintain or increase its competitive presence, inconsistencies in standards, controls, procedures and policies, difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition, the diversion of management’s attention to integration matters and/or difficulties in the assimilation of employees and corporate cultures. Any or all of these factors and the Company’s increased debt leverage following the closing of the Acquisition or other acquisitions could have an adverse effect on the Company. In addition, many of these factors are outside of the Company’s control, and any one of these factors could result in increased costs, decreases in the amount of expected revenues and additional diversion of management’s time and energy, which could materially adversely impact its business, financial condition and results of operations.

Filed May 4, 2022.
Source: SEC EDGAR, the filing index for accession 0001564590-22-017813. Last ingested by Listed: Oct 26, 2026, 17:44 ET. No prices; not investment advice.