Gentherm Inc 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as: the expected light vehicle production in the Company’s key markets; the impact of macroeconomic and geopolitical conditions; the components and our execution of our updated strategic plan and 2023 manufacturing footprint rationalization restructuring plan; long-term consumer and technological trends in the automotive industry and our related market opportunity for our existing and new products and technologies; the competitive landscape; the impact of global tax reform legislation; the sufficiency of our cash balances and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs; and our ability to finance sufficient working capital. Reference is made in particular to forward-looking statements included in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Such statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar terms, variations of such terms or the negative of such terms. The forward-looking statements included in this Report are made as of the date hereof or as of the date specified herein and are based on management’s reasonable expectations and beliefs. In making these statements we rely on assumptions and analysis based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we consider appropriate under the circumstances. Such statements are subject to a number of assumptions, risks, uncertainties and other factors, which are set forth in “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2023 and subsequent reports filed with or furnished to the Securities and Exchange Commission, and which could cause actual results to differ materially from that described in the forward-looking statements. In addition, with reasonable frequency, we have entered into business combinations, acquisitions, divestitures, strategic investments and other significant transactions. Such forward-looking statements do not include the potential impact of any such transactions that may be completed after the date hereof, each of which may present material risks to the Company’s future business and financial results. Except as required by law, we expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the 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, 2023. Overview Gentherm Incorporated is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry and a leader in medical patient temperature management. Automotive products include variable temperature Climate Control Seats®, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, fuel management valves and other valves for brake and engine systems, and other electronic devices. Our automotive products can be found on vehicles manufactured by nearly all the major original equipment manufacturers ("OEMs") operating in North America and Europe, and several major OEMs in Asia. We operate in locations aligned with our major customers’ product strategies to provide locally enhanced design, integration and production capabilities. Medical products include patient temperature management systems. Our medical products can be found in hospitals throughout the world, primarily in the U.S., China, Germany and Brazil. The Company is also developing a number of new technologies and products that will help enable improvements to existing products, improve health, wellness and patient outcomes and will lead to new product applications for existing and new and adjacent markets. Our Automotive sales are driven by the number of vehicles produced by the OEMs, which is ultimately dependent on consumer demand for automotive vehicles, our product content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. Historically, new vehicle demand and product content (i.e. vehicle features) have been driven by macroeconomic and other factors, such as interest rates, automotive manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Vehicle content has also been driven by trends in consumer preferences, such as preferences for smart devices and features, personalized user experience, and comfort, health and wellness. Economic volatility or weakness in North America, Europe or Asia, as well as global geopolitical factors, have had and could result in a significant reduction in automotive sales and production by our customers, which have had and would have an adverse effect on our business, results of operations and financial condition. We believe our diversified OEM customer base and 24 geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns and benefit from industry upturns in the ordinary course. However, shifts in the mix of global automotive production to higher cost regions or to vehicles that contain less of our product content as well as continuing production challenges and inflationary pressures have adversely impacted our profitability and may continue to do so. In addition, we have been and may in the future be adversely impacted by volatility or weakness in markets for hybrid or electric vehicles specifically. We believe our products offer certain advantages for hybrid and electric vehicles, including improved energy efficiency, and position us well to withstand changes in the volume mix between vehicles driven by internal combustion engines and hybrid and other electric vehicles. We believe our industry is increasingly progressing towards a focus on human comfort and health and wellness, which is evidenced by increasing adoption rates for comfort products. We believe that products we are developing, such as ClimateSense®, WellSense™, and our acquisition of Alfmeier Präzision SE (“Alfmeier”) pneumatic comfort solutions, position us well to address trends in consumer preferences such as personalized user experience, comfort, health and wellness. Gentherm is an independent partner that can cooperate with any combination of the vehicle OEMs and seat manufacturers globally, including those that are vertically integrated, to create innovative and unique configurations that adapt to industry trends. Recent Trends Global Conditions Since 2020, the global economy has experienced significant volatility and supply chain disruption, which has had a widespread adverse effect on the global automotive industry. These macroeconomic conditions have resulted in fluctuating demand and production disruptions, facility closures, labor shortages and work stoppages. In addition, global inflation has increased significantly beginning in 2021. Although supply chain conditions have steadily improved and certain inflationary pressures have moderated, rising costs of materials, labor, equipment and other inputs used to manufacture and sell our products, including freight and logistics costs, have impacted, and may in the future impact, operating costs and operating results. We continue to employ measures to mitigate the impact of cost increases through identification of sourcing and manufacturing efficiencies where possible. However, we have been unable to fully mitigate or pass through the increases in our operating costs, which may continue in the future. We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain international operations. Therefore, fluctuations in foreign currency exchange rates can create volatility in the results of operations and may adversely affect our financial condition. We have a global manufacturing footprint that enables us to serve our customers in the regions they operate and shift production between regions to remain competitive. In recent years there have been various ongoing geopolitical conflicts, such as the current conflicts between Russia and Ukraine, and in the Middle East, heightened tensions in the Red Sea, and potential tensions in the South China Sea. These conflicts have interrupted ocean freight shipping and if prolonged or intensified, could have a substantial adverse effect on our financial results. We, like other manufacturers, have a high proportion of fixed structural costs, and therefore relatively small changes in industry vehicle production have and may continue to have a substantial effect on our financial results. If industry vehicle sales were to decline to levels significantly below our planning assumption, the decline could have a substantial adverse effect on our financial condition, results of operations, and cash flow. On December 15, 2022, the European Union (“EU”) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development Pillar Two Framework. The effective dates for different aspects of the directive are January 1, 2024 and January 1, 2025. The aspects of the directive that were effective as of January 1, 2024 did not have a material impact on the Company’s financial statements. Further, the Company does not expect the remaining aspects to have a material impact to the Company’s financial statements. The Company will continue to evaluate the potential impact on future periods of these tax regulations. Fit-for-Growth 2.0 During the first half of 2023, the Company launched Fit-for-Growth 2.0 to execute as part of our long-term growth strategy. Fit-for-Growth 2.0 has begun, and is expected to continue, to deliver significant cost reductions through sourcing excellence, value engineering, manufacturing productivity, manufacturing footprint optimization, product profitability and cost synergies from the Alfmeier acquisition. Additionally, the program is intended to drive operating expense efficiency to leverage scale. 25 2023 Manufacturing Footprint Rationalization On September 19, 2023, the Company committed to a restructuring plan (“2023 Plan”) to improve the Company’s manufacturing productivity and rationalize its footprint. Under this 2023 Plan, the Company will relocate certain existing manufacturing and related activities in its Greenville, South Carolina facility to a new facility in Monterrey, Mexico. During the three months ended September 30, 2024, the Company completed the sale of our Greenville, South Carolina manufacturing facility, resulting in a gain on sale of $1.7 million. The gain on sale was recorded as a reduction of restructuring expenses, net in the consolidated condensed statements of income. During the three and nine months ended September 30, 2024, the Company recognized restructuring expense of $0.3 million and $1.8 million, respectively, for employee separation costs and $0.2 million and $0.6 million, respectively, for other costs, including the gain on sale of the Greenville facility. See Note 3, “Restructuring,” to the notes to the consolidated condensed financial statements included in this Report for additional information related to this plan. 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, our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm S&P Global Mobility (October 2024 release), global light vehicle production in the three and nine months ended September 30, 2024 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, 2023, are shown below (in millions of units): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 % Change 2024 2023 % Change North America 3.8 3.9 (4.7 )% 11.8 11.9 (0.8 )% Europe 3.7 3.9 (6.1 )% 12.8 13.3 (3.5 )% Greater China 7.4 7.6 (2.7 )% 20.6 20.2 2.0 % Japan / South Korea 2.9 3.1 (6.2 )% 8.8 9.4 (6.7 )% Total light vehicle production volume in key markets 17.7 18.6 (4.5 )% 54.1 54.9 (1.4 )% The S&P Global Mobility (October 2024 release) forecasted light vehicle production volume in the Company’s key markets for full year 2024 to decrease to 73.9 million units, a 2.1% decrease from full year 2023 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 have been and may continue to be significantly different from period to period due to changes in macroeconomic and geopolitical conditions or matters specific to the automotive industry. Further, due to differences in regional product mix at our manufacturing facilities, as well as material production schedules from our customers for our products on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of S&P Global Mobility or other third-party sources. Automotive 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 2024, we secured automotive new business awards totaling $600 million. 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 automotive new business awards are an indicator of future revenue. Automotive new business awards are not projections of revenue or future business as of September 30, 2024, the date of this Report or any other date. Customer projections regularly change over time, and we do not update our calculation of any automotive new business award after the date initially communicated. Automotive new business awards in the third quarter 2024 also do not reflect, in particular, the impact of macroeconomic and geopolitical challenges on future business. Revenues resulting from automotive new business awards also are subject to additional risks and uncertainties that are included in this Report or incorporated by reference in “Forward-Looking Statements” above. 26 Stock Repurchase Program In December 2020, the Board of Directors of Gentherm Incorporated (the “Board of Directors”) authorized a stock repurchase program (the “2020 Stock Repurchase Program”). Under the 2020 Stock Repurchase Program, the Company was authorized to repurchase up to $150.0 million of its issued and outstanding Common Stock, no par value (“Common Stock”) over a three-year period, expiring December 15, 2023. On November 1, 2023, the Board of Directors extended the maturity date of the program from December 15, 2023 to June 30, 2024. During the nine months ended September 30, 2024, the Company repurchased $20.0 million under the 2020 Stock Repurchase Program with an average price paid per share of $52.65. The 2020 Stock Repurchase Program had $17.5 million of repurchase authorization remaining at the time of expiration. On November 1, 2023, following the above-noted extension, the Company entered into a Confirmation of Issuer Forward Repurchase Transaction agreement (the “ASR Agreement”) with Bank of America, N.A. (“Bank of America”) that provided for the Company to purchase shares of Common Stock in an aggregate amount of $60.0 million (the “ASR Repurchase Amount”) under the 2020 Stock Repurchase Program. Under the terms of the ASR Agreement, on November 2, 2023, the Company paid $60.0 million to Bank of America for an initial purchase of approximately 1.22 million shares of Common Stock, representing 80% of ASR Repurchase Amount. The final settlement date occurred in the second quarter of 2024. During the nine months ended September 30, 2024, the Company paid $0.3 million in cash as the final settlement of the ASR Agreement. In June 2024, the Board of Directors authorized a new stock repurchase program (the “2024 Stock Repurchase Program”) to commence upon expiration of the 2020 Stock Repurchase Program on June 30, 2024. Under the 2024 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 June 30, 2027. Repurchases under the 2024 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. Any such repurchases may be executed using open market purchases, accelerated share repurchase programs, privately negotiated agreements or other transactions. Repurchases may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. During the nine months ended September 30, 2024, the Company repurchased $19.9 million under the 2024 Stock Repurchase Program with an average price paid per share of $48.97. The 2024 Stock Repurchase Program had $130.1 million of repurchase authorization remaining as of September 30, 2024. Stock repurchases are subject to excise tax, subject to specified exclusions and adjustments. Excise tax of $0.4 million was charged to common stock for the three and nine months ended September 30, 2024. Reportable Segments The Company has two reportable segments for financial reporting purposes: Automotive and Medical. See Note 15, “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. 27 Consolidated Results of Operations The results of operations for the three and nine months ended September 30, 2024 and 2023, in thousands, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) 2024 2023 Favorable / (Unfavorable) Product revenues $ 371,512 $ 366,195 $ 5,317 $ 1,103,210 $ 1,102,143 $ 1,067 Cost of sales 276,639 279,985 3,346 822,883 846,815 23,932 Gross margin 94,873 86,210 8,663 280,327 255,328 24,999 Operating expenses: Net research and development expenses 23,013 23,150 137 67,619 72,991 5,372 Selling, general and administrative expenses 36,861 38,220 1,359 116,992 113,680 (3,312 ) Restructuring expenses, net 2,662 1,099 (1,563 ) 12,342 3,412 (8,930 ) Impairment of goodwill — — — — 19,509 19,509 Total operating expenses 62,536 62,469 (67 ) 196,953 209,592 12,639 Operating income 32,337 23,741 8,596 83,374 45,736 37,638 Interest expense, net (4,710 ) (3,368 ) (1,342 ) (11,956 ) (9,444 ) (2,512 ) Foreign currency (loss) gain (8,480 ) 2,107 (10,587 ) (6,213 ) 384 (6,597 ) Other income 263 272 (9 ) 952 1,058 (106 ) Earnings before income tax 19,410 22,752 (3,342 ) 66,157 37,734 28,423 Income tax expense 3,445 6,908 3,463 16,531 15,478 (1,053 ) Net income $ 15,965 $ 15,844 $ 121 $ 49,626 $ 22,256 $ 27,370 Product revenues by product category, in thousands, for the three and nine months ended September 30, 2024 and 2023, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Climate Control Seat $ 115,498 $ 124,905 $ (9,407) (7.5)% $ 352,789 $ 360,868 $ (8,079) (2.2)% Seat Heaters 72,982 77,238 (4,256) (5.5)% 227,114 231,132 (4,018) (1.7)% Lumbar and Massage Comfort Solutions 48,970 33,260 15,710 47.2 % 133,090 109,602 23,488 21.4 % Steering Wheel Heaters 44,711 39,861 4,850 12.2 % 126,939 115,166 11,773 10.2 % Valve Systems 26,082 27,830 (1,748) (6.3)% 81,974 82,516 (542) (0.7)% Automotive Cables 16,834 19,668 (2,834) (14.4)% 57,185 60,131 (2,946) (4.9)% Battery Performance Solutions 16,869 17,242 (373) (2.2)% 46,540 57,138 (10,598) (18.5)% Electronics 10,862 10,163 699 6.9 % 26,218 30,456 (4,238) (13.9)% Other Automotive 5,996 4,615 1,381 29.9 % 15,595 21,998 (6,403) (29.1)% Subtotal Automotive segment 358,804 354,782 4,022 1.1 % 1,067,444 1,069,007 (1,563) (0.1)% Medical segment 12,708 11,413 1,295 11.3 % 35,766 33,136 2,630 7.9 % Total Company $ 371,512 $ 366,195 $ 5,317 1.5 % $ 1,103,210 $ 1,102,143 $ 1,067 0.1 % Product Revenues Below is a summary of our product revenues, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, Variance Due To: 2024 2023 Favorable / (Unfavorable) Automotive Volume FX Pricing / Other Total Product revenues $ 371,512 $ 366,195 $ 5,317 $ 1,720 $ 1,599 $ 1,998 $ 5,317 Product revenues for the three months ended September 30, 2024 increased 1.5% as compared to the three months ended September 30, 2023. The increase in product revenues is due to favorable pricing, favorable automotive volumes, and favorable foreign currency impacts primarily attributable to the Euro and the Chinese Renminbi, partially offset by unfavorable foreign currency impacts primarily attributable to the Korean Won. 28 Below is a summary of our product revenues, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, Variance Due To: 2024 2023 Favorable / (Unfavorable) Automotive Volume FX Pricing / Other Total Product revenues $ 1,103,210 $ 1,102,143 $ 1,067 $ 9,169 $ (5,134 ) $ (2,968 ) $ 1,067 Product revenues for the nine months ended September 30, 2024 increased 0.1% as compared to the nine months ended September 30, 2023. The increase in product revenues is due to favorable automotive volumes, partially offset by unfavorable pricing, lower cost recoveries from customers and unfavorable foreign currency impacts primarily attributable to the Chinese Renminbi, the Korean Won and the Japanese Yen. Cost of Sales Below is a summary of our cost of sales and gross margin, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, Variance Due To: 2024 2023 Favorable / (Unfavorable) Automotive Volume Operational Performance FX Other Total Cost of sales $ 276,639 $ 279,985 $ 3,346 $ (1,909 ) $ 10,170 $ 1,719 $ (6,634 ) $ 3,346 Gross margin $ 94,873 $ 86,210 $ 8,663 $ (189 ) $ 12,852 $ 3,318 $ (7,318 ) $ 8,663 Gross margin - Percentage of product revenues 25.5 % 23.5 % Cost of sales for the three months ended September 30, 2024 decreased 1.2% as compared to the three months ended September 30, 2023. The decrease in cost of sales is primarily due to Fit-for-Growth 2.0 initiatives including supplier cost reductions and value engineering activities, as well as the impact of non-automotive inventory charges in the prior-year period and favorable foreign currency impacts primarily attributable to the Mexican Peso and the Ukranian Hryvnia. These decreases were partially offset by higher automotive volumes, start-up costs from our new plants in Tangier, Morocco and Monterrey, Mexico and unfavorable foreign currency impacts primarily attributable to the Euro and the Chinese Renminbi. Below is a summary of our cost of sales and gross margin, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, Variance Due To: 2024 2023 Favorable / (Unfavorable) Automotive Volume Operational Performance FX Other Total Cost of sales $ 822,883 $ 846,815 $ 23,932 $ (7,889 ) $ 42,595 $ 2,441 $ (13,215 ) $ 23,932 Gross margin $ 280,327 $ 255,328 $ 24,999 $ 1,280 $ 44,359 $ (2,693 ) $ (17,947 ) $ 24,999 Gross margin - Percentage of product revenues 25.4 % 23.2 % Cost of sales for the nine months ended September 30, 2024 decreased 2.8% as compared to the nine months ended September 30, 2023. The decrease in cost of sales is primarily due to Fit-for-Growth 2.0 initiatives including supplier cost reductions and value engineering activities, as well as the impact of non-automotive inventory charges in the prior-year period and favorable foreign currency impacts primarily attributable to the Chinese Renminbi. These decreases were partially offset by higher automotive volumes, start-up costs from our new plants in Tangier, Morocco and Monterrey, Mexico and unfavorable foreign currency impacts primarily attributable to the Euro and the Mexican Peso. 29 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, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Research and development expenses $ 32,248 $ 32,298 $ 50 Reimbursed research and development expenses (9,235 ) (9,148 ) 87 Net research and development expenses $ 23,013 $ 23,150 $ 137 Percentage of product revenues 6.2 % 6.3 % Net research and development expenses for the three months ended September 30, 2024 were relatively unchanged as compared to the three months ended September 30, 2023. Below is a summary of our net research and development expenses, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Research and development expenses $ 89,093 $ 94,784 $ 5,691 Reimbursed research and development expenses (21,474 ) (21,793 ) (319 ) Net research and development expenses $ 67,619 $ 72,991 $ 5,372 Percentage of product revenues 6.1 % 6.6 % Net research and development expenses for the nine months ended September 30, 2024 decreased 7.4% as compared to the nine months ended September 30, 2023. The decrease in net research and development expenses is primarily related to a reduction in resources allocated to the battery performance solutions product category. 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, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Selling, general and administrative expenses $ 36,861 $ 38,220 $ 1,359 Percentage of product revenues 9.9 % 10.4 % Selling, general and administrative expenses for the three months ended September 30, 2024 decreased 3.6% as compared to the three months ended September 30, 2023. The decrease in selling, general and administrative expenses is primarily related to acquisition and integration expenses in the prior year. Below is a summary of our selling, general and administrative expenses, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Selling, general and administrative expenses $ 116,992 $ 113,680 $ (3,312 ) Percentage of product revenues 10.6 % 10.3 % Selling, general and administrative expenses for the nine months ended September 30, 2024 increased 2.9% as compared to the nine months ended September 30, 2023. The increase in selling, general and administrative expenses is primarily related to higher compensation expenses and increased investment in information technology, partially offset by acquisition and integration expenses in the prior year. 30 Restructuring Expenses, net Below is a summary of our restructuring expenses, net, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Restructuring expenses, net $ 2,662 $ 1,099 $ (1,563 ) During the three months ended September 30, 2024, the Company recognized expenses of $1.8 million for employee separation costs and $2.6 million for other costs, partially offset by $1.7 million of gain on sale of our Greenville, North Carolina facility. These restructuring expenses primarily related to discrete restructuring actions focused on the reduction of global overhead expenses and achieving our Fit-for-Growth 2.0 objectives. See Note 3, “Restructuring,” to the consolidated condensed financial statements included in this Report for additional information. During the three months ended September 30, 2023, the Company recognized expenses of $1.1 million for employee separation costs and $0 million for other costs. These restructuring expenses primarily relate to discrete restructuring actions focused on the reduction of global overhead expenses. Below is a summary of our restructuring expenses, net, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Restructuring expenses, net $ 12,342 $ 3,412 $ (8,930 ) During the nine months ended September 30, 2024, the Company recognized expenses of $10.7 million for employee separation costs and $3.4 million for other costs, partially offset by $1.7 million of gain on sale of our Greenville, North Carolina facility. These restructuring expenses primarily related to discrete restructuring actions focused on the reduction of global overhead expenses and achieving our Fit-for-Growth 2.0 objectives. See Note 3, “Restructuring,” to the consolidated condensed financial statements included in this Report for additional information. During the nine months ended September 30, 2023, the Company recognized expenses of $2.6 million for employee separation costs and $0.8 million for other costs. These restructuring expenses primarily related to discrete restructuring actions focused on the reduction of global overhead expenses. Impairment of Goodwill Below is a summary of our impairment of goodwill, in thousands, for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Impairment of goodwill $ — $ — $ — Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Impairment of goodwill $ — $ 19,509 $ 19,509 Impairment of goodwill for the nine months ended September 30, 2023 related to the Medical reporting unit. 31 Interest Expense, net Below is a summary of our interest expense, net, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Interest expense, net $ (4,710 ) $ (3,368 ) $ (1,342 ) Interest expense, net for the three months ended September 30, 2024 increased 39.8% as compared to the three months ended September 30, 2023. The increase is primarily related to carrying a higher balance of outstanding borrowings under the Revolving Credit Facility and the impact from the change in fair value of the interest rate swap derivative, partially offset by lower interest rates. Below is a summary of our interest expense, net, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Interest expense, net $ (11,956 ) $ (9,444 ) $ (2,512 ) Interest expense, net for the nine months ended September 30, 2024 increased 26.6% as compared to the nine months ended September 30, 2023. The increase is primarily related to carrying a higher balance of outstanding borrowings under the Revolving Credit Facility and the impact from the change in fair value of the interest rate swap derivative. Foreign Currency (Loss) Gain Below is a summary of our foreign currency (loss) gain, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Foreign currency (loss) gain $ (8,480 ) $ 2,107 $ (10,587 ) Foreign currency loss for the three months ended September 30, 2024 included net realized foreign currency gain of $0.1 million and net unrealized foreign currency loss of $8.6 million. Foreign currency gain for the three months ended September 30, 2023 included net realized foreign currency gain of $1.2 million and net unrealized foreign currency gain of $0.9 million. Below is a summary of our foreign currency (loss) gain, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Foreign currency (loss) gain $ (6,213 ) $ 384 $ (6,597 ) Foreign currency loss for the nine months ended September 30, 2024 included net unrealized foreign currency loss of $6.2 million. Foreign currency gain for the nine months ended September 30, 2023 included net realized foreign currency gain of $4.6 million and net unrealized foreign currency loss of $4.2 million. Other Income Below is a summary of our other income, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Other income $ 263 $ 272 $ (9 ) 32 Other income for the three months ended September 30, 2024 decreased as compared to the three months ended September 30, 2023. The decrease in other income is due to an increase in miscellaneous expenses. Below is a summary of our other income, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Other income $ 952 $ 1,058 $ (106 ) Other income for the nine months ended September 30, 2024 decreased as compared to the nine months ended September 30, 2023. The decrease in other income is due to an increase in miscellaneous expenses, partially offset by an increase in the fair value of our investment in Carrar Ltd. due to observable transactions. Income Tax Expense Below is a summary of our income tax expense, in thousands, for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Income tax expense $ 3,445 $ 6,908 $ 3,463 Income tax expense was $3.4 million for the three months ended September 30, 2024, on earnings before income tax of $19.4 million, representing an effective tax rate of 17.7%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. Federal statutory rate, the release of the uncertain tax position reserve accrual due to tax audit settlement, partial valuation allowance release in the U.S. related to its capital loss carryforward, and favorable tax effects of equity vesting, partially offset by the unfavorable impact of the global intangible low-tax income (“GILTI”). Income tax expense was $6.9 million for the three months ended September 30, 2023 on earnings before income tax of $22.8 million, representing an effective tax rate of 30.4%. 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. Federal statutory rate and the unfavorable impact of the GILTI, partially offset by the impact of the release of accruals for uncertain tax positions. Below is a summary of our income tax expense, in thousands, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Favorable / (Unfavorable) Income tax expense $ 16,531 $ 15,478 $ (1,053 ) Income tax expense was $16.5 million for the nine months ended September 30, 2024, on earnings before income tax of $66.2 million, representing an effective tax rate of 25.0%. The effective tax rate differed from the U.S. Federal statutory rate of 21.0% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. Federal statutory rate and the unfavorable impact of the GILTI, partially offset by favorable tax effects of equity vesting, a partial valuation allowance release in the U.S. related to its capital loss carryforward and a one-time benefit related to the Alfmeier acquisition. Income tax expense was $15.5 million for the nine months ended September 30, 2023 on earnings before income tax of $37.7 million, representing an effective tax rate of 41.0%. The pre-tax earnings included the effect of an impairment loss of $19.5 million with a tax benefit of $2.3 million. Adjusted for the impairment impacts, the effective rate was 31.0%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the impact of income taxes on foreign earnings taxed at rates varying from the U.S. Federal statutory rate and the unfavorable impact of the GILTI, partially offset by the impact of research and development credits in various jurisdictions, certain favorable tax effects of equity vesting and the release of accruals for uncertain tax positions. 33 Liquidity and Capital Resources Overview Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our Second Amended and Restated Credit Agreement. Our cash requirements consist principally of working capital, capital expenditures, research and development, operating lease payments, income tax payments and general corporate purposes. We generally reinvest available cash flows from operations into our business, while opportunistically utilizing our authorized stock repurchase program. Further, we continuously evaluate acquisition, disposition, exits, and investment opportunities that will enhance our business strategies. As of September 30, 2024, the Company had $150.6 million of cash and cash equivalents and $278.0 million of availability under our Second Amended and Restated Credit Agreement. We may issue debt or equity securities, which may provide an additional source of liquidity. However, there can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current shareholders. We continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and the terms of the Second Amended and Restated Credit Agreement. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of September 30, 2024, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled $109.0 million. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S.; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts. We currently believe that our cash and cash equivalents, borrowings available under our Second Amended and Restated Credit Agreement, and cash flows from operations will be adequate to meet anticipated cash requirements for at least the next twelve months and the foreseeable future. Cash and Cash Flows The following table represents our cash and cash equivalents, in thousands: Nine Months Ended September 30, 2024 2023 Cash and cash equivalents at beginning of period $ 149,673 $ 153,891 Net cash provided by operating activities 73,089 80,042 Net cash used in investing activities (33,141 ) (16,945 ) Net cash used in financing activities (40,605 ) (60,751 ) Foreign currency effect on cash and cash equivalents 1,565 (1,883 ) Cash and cash equivalents at end of period $ 150,581 $ 154,354 Cash Flows From Operating Activities Net cash provided by operating activities totaled $73.1 million during the nine months ended September 30, 2024 primarily reflecting $50.7 million for non-cash charges for depreciation, amortization, stock based compensation, gain on disposition of property and equipment, provision for inventory and deferred income taxes and net income of $49.6 million, partially offset by $26.2 million related to changes in assets and liabilities, and $1.0 million of other. 34 Cash Flows From Investing Activities Net cash used in investing activities was $33.1 million during the nine months ended September 30, 2024, reflecting purchases of property and equipment of $50.3 million and investments in technology companies of $0.6 million, partially offset by proceeds from deferred purchase price of factored receivables of $10.3 million and proceeds from the sale of property and equipment of $7.5 million. Cash Flows From Financing Activities Net cash used in financing activities was $40.6 million during the nine months ended September 30, 2024, reflecting $53.5 million of debt repayments, $41.6 million paid to repurchase Common Stock and $3.2 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year, partially offset by the borrowing on debt of $53.0 million and the proceeds from the exercise of Common Stock options totaling $4.7 million. Debt The following table summarizes the Company’s debt, in thousands, as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Interest Rate Principal Balance Interest Rate Principal Balance Credit Agreement: Revolving Credit Facility (U.S. Dollar denominations) 6.07 % $ 222,000 6.58 % $ 222,000 Other loans — — 3.90 % 233 Finance leases 3.50 % 314 3.53 % 605 Total debt 222,314 222,838 Current maturities (210 ) (621 ) Long-term debt, less current maturities $ 222,104 $ 222,217 Credit Agreement Gentherm, together with certain of its subsidiaries, maintain a revolving credit note (the “Revolving Credit Facility”) under its Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a consortium of lenders and Bank of America, N.A. as administrative agent. The Second Amended and Restated Credit Agreement was entered into on June 10, 2022 and amended and restated in its entirety the Amended and Restated Credit Agreement dated June 27, 2019, by and among Gentherm, certain of its direct and indirect subsidiaries, the lenders party thereto and the Agent. The Second Amended and Restated Credit Agreement has a maximum borrowing capacity of $500 million and matures on June 10, 2027. The Second Amended and Restated Credit Agreement contains covenants, that, among other things, (i) prohibit or limit the ability of the borrowers and any material subsidiary to incur additional indebtedness, create liens, pay dividends, make certain types of investments (including acquisitions), enter into certain types of transactions with affiliates, prepay other indebtedness, sell assets or enter into certain other transactions outside the ordinary course of business, and (ii) require that Gentherm maintain a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Net Leverage Ratio (based on consolidated EBITDA for the applicable trailing four fiscal quarters) as of the end of any fiscal quarter. As of September 30, 2024, the Company was in compliance, in all material respects, with the terms of the Second Amended and Restated Credit Agreement. Finance Leases As of September 30, 2024 and December 31, 2023, there was $0.3 million and $0.6 million, respectively, of outstanding finance leases. 35 Other Sources of Liquidity The Company was party to receivable factoring agreements with unrelated third parties under which we could sell receivables for certain account debtors, on a revolving basis, subject to outstanding balances and concentration limits. The receivable factoring agreements are transferred in their entirety to the acquiring entities and are accounted for as a sale. Some of the agreements have deferred purchase price arrangements. As of September 30, 2024, there was no availability for new factoring under the receivable factoring agreements as the factoring agreements the Company was party to either expired or were terminated during the three months ended September 30, 2024. Material Cash Requirements In September 2023, the Company committed to a restructuring plan to improve the Company’s manufacturing productivity and rationalize its footprint. The Company expects to incur less than $1.0 million of additional restructuring costs for the 2023 Plan. See Note 3, “Restructuring,” to the consolidated condensed financial statements included in this Report for additional information related to this plan. Except as described above, there have been no material changes in our cash requirements since December 31, 2023, the end of fiscal year 2023. 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, 2023 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. Since 2021, the automotive industry has experienced a period of significant volatility in the costs of certain materials and components, labor and transportation. Although supply chain conditions have steadily improved and certain inflationary pressures have moderated, rising costs of materials, labor, equipment and other inputs used to manufacture and sell our products, including freight and logistics costs, have impacted, and may in the future impact, operating costs and operating results. These higher costs and cost increases due to inflation are expected to continue for the foreseeable future as demand remains elevated and supply remains constrained. Although the Company has developed and implemented strategies to mitigate the impact of higher material component costs and transportation costs through sourcing and manufacturing efficiencies where possible, these strategies together with commercial negotiations with Gentherm's customers and suppliers have not fully offset to date and may not fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount. Critical Accounting Estimates 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, 2023. There have been no significant changes in our critical accounting policies or critical accounting estimates during the three months ended September 30, 2024. 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. 36 ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates, changes in interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to the Company's debt obligations under the Second Amended and Restated Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in a location’s functional currency, foreign plant operations, intercompany indebtedness, acquisitions denominated in foreign currencies, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, North Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Czech Koruna and Vietnamese Dong. The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The decision of whether and when to execute derivative financial instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not enter into derivative financial instruments for speculative or trading purposes. Some derivative contracts do not qualify for hedge accounting; for other derivative contracts, we elect to not apply hedge accounting. The Company’s designated hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts that can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to accumulated other comprehensive loss in the consolidated condensed balance sheets. When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings in the consolidated condensed statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency and copper commodity hedging instruments, if any, to cost of sales, and the ineffective portion of interest rate swaps, if any, to interest expense, net in the consolidated condensed statements of income. Cash flows associated with derivatives are reported in net cash provided by operating activities in the consolidated condensed statements of cash flows. Information related to the fair values of all derivative instruments in the consolidated condensed balance sheet as of September 30, 2024 is set forth in Note 10, “Financial Instruments” in the consolidated condensed financial statements included in this Report. Interest Rate Sensitivity The table below presents principal cash flows and related weighted average interest rates by expected maturity dates for each of the Company’s debt obligations, excluding finance leases. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency. Expected Maturity Date 2024 2025 2026 2027 2028 2029 Total Fair Value Liabilities Long-Term Debt: Variable rate $ — $ — $ — $ 222,000 $ — $ — $ 222,000 $ 222,000 Variable interest rate as of September 30, 2024 6.07 % 6.07 % Based on the amounts outstanding as of September 30, 2024, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense by $2.2 million. To hedge the Company's exposure to interest payment fluctuations on a portion of these borrowings, we entered into a floating-to-fixed interest rate swap agreement with a notional amount of $100.0 million. 37 Exchange Rate Sensitivity The table below provides information about the Company’s foreign currency 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 maturity dates for each type of foreign currency exchange agreement. These notional amounts generally are used to calculate the payments to be exchanged under the contract. Expected Maturity or Transaction Date Anticipated Transactions and Related Derivatives 2024 2025 Total Fair Value USD Functional Currency Exchange Agreements: (Receive MXN / Pay USD) Total contract amount $ 19,477 $ 44,237 $ 63,714 $ (490 ) Average contract rate 19.25 19.33 19.30 The table below presents the potential gain and loss in fair value for the foreign currency derivative contracts from a hypothetical 10% change in quoted currency exchange rates. September 30, 2024 December 31, 2023 Exchange Rate Sensitivity Potential loss in fair value Potential gain in fair value Potential loss in fair value Potential gain in fair value Exchange Agreement:(Receive MXN / Pay USD) $ 3,732 $ 4,857 $ 7,179 $ 9,798