EDGAR 10-K Filing

Company CIK: 903129
Filing Year: 2023
Filename: 903129_10-K_2023_0000950170-23-004405.json

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ITEM 1. BUSINESS
ITEM 1.	BUSINESS
Unless otherwise indicated, references to “Gentherm”, “the Company”, “we”, “our” and “us” in this Annual Report refer to Gentherm Incorporated and its consolidated subsidiaries.
Except to the extent expressly noted herein, the content of our website or the websites of other third parties noted herein are not incorporated by reference in this Annual Report.
Overview
Gentherm Incorporated is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, valve system technologies, and other electronic devices. Medical products include patient temperature management systems. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and will lead to new product applications for existing and new markets. 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.
On July 13, 2022, Gentherm acquired Jiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”), a manufacturer of medical materials and medical equipment, including patient temperature management solutions. The acquisition was accounted for as a business combination within our Medical segment.
On August 1, 2022, Gentherm acquired Alfmeier Präzision SE (“Alfmeier”), a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. The acquisition was accounted for as a business combination within our Automotive segment.
We are incorporated under the laws of the State of Michigan. Our website is www.gentherm.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge through our website, www.gentherm.com, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission (“SEC”). These reports are also available on the SEC’s website, www.sec.gov.
Impact of Supply Chain Disruptions and Other Matters
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm S&P Global Mobility (February 2023 release), global light vehicle production in 2022 in the Company’s key markets of North America, Europe, China, Japan and Korea, was up 4.7%, as compared to 2021. The production growth in 2022 primarily is due to the significant decrease in vehicle production in 2020 that was driven by the adverse impacts of the COVID-19 pandemic continuing into 2021, and the impacts of the 2021 global supply chain disruptions, including the worldwide semiconductor supply shortage.
In 2022 and 2021, the Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, including Gentherm, were unable to fully meet the vehicle production demands of the OEMs largely due to events outside the control of the Company and its suppliers and customers, as well as the automotive industry generally. Supply shortages of semiconductor chips and other components not only resulted in decreased global automotive vehicle production but also caused significant volatility in customer vehicle production schedules. Sudden changes in the production schedules of OEMs and Tier 1s resulted in operating inefficiencies that adversely affected our profitability and results of operations. In addition, we experienced inflationary cost increases in certain component parts, raw materials, labor and transportation as a result of the supply-constrained environment and general economic conditions. While these broad-based operational and inflationary impacts are easing, they continued to impact the Company’s financial condition, results of operations and cash flows as of this filing.
In response to the global supply chain instability and inflationary cost increases, the Company has taken several actions to reduce 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 macroeconomic and geopolitical conditions, 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.
See further discussion of risks in Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
Automotive
The Automotive reporting segment is comprised of the results from our global automotive businesses, including the design, development, manufacturing and sales of automotive climate comfort systems, automotive cable systems, battery performance solutions, lumbar and massage comfort solutions, valve system technologies, and automotive electronic and software systems.
Climate comfort systems include seat heaters, blowers and thermoelectric devices for variable temperature Climate Control Seats® (“CCS”) and steering wheel heaters designed to provide individualized thermal comfort to automobile passengers, and integrated electronic components, such as electronic control units that utilize our proprietary electronics technology and software. Other climate comfort systems include neck and shoulder conditioners and climate control system products for door panels, armrests, cup holders and storage bins.
Automotive cable systems include ready-made individual cables and ready-to-install cable networks used to connect automotive components to power sources.
Battery performance solutions consist of cell connecting devices and battery cable technologies used for various types of automotive batteries and thermal management products for heating or cooling 12 volts, 48 volts and high voltage batteries and battery modules.
Lumbar and massage comfort solutions include lumbar support, side bolster adjustment, multi-contour seats and massage systems that can be regulated according to the vehicle occupant.
Valve system technologies consist of applications that offer solutions in fuel management, ranging from the design of tank ventilation and filling functions to the closed-coupled fuel regulation. The modular systems allow for customizable adaptations.
Automotive electronic and software systems include electronic control units for climate comfort systems, electronic control units for memory seat modules and other devices.
Medical
The Medical reporting segment is comprised of the results from the patient temperature management business in the medical industry.
Patient temperature management includes temperature management systems across multiple product categories addressing the needs of hyper-hypothermia therapy in intensive care, normothermia in surgical procedures and additional warming/cooling therapies utilized in acute care, ambulatory, clinics and home health.
Business Strategy
Globally, we develop, manufacture, and deliver differentiated solutions for automotive and patient thermal management markets that make meaningful differences in everyday life by improving health, wellness, comfort and energy efficiency.
We recently updated our business strategy, which consists of four major pillars:
Leverage World Class Talent and Culture
We have built a remarkably talented global team by ingraining throughout the organization four Winning Culture Behaviors: Customer Focus, Global Mindset, Employee Engagement & Inclusion, and Performance & Accountability. Combined with DE&I as a cornerstone of the company, we have laid a strong foundation for future growth across the company.
Extend Technology Leadership
We will continue to expand our technology leadership with focused investments in key core technologies and competencies, including advanced sensing, human-centric science-based design, system engineering, and software and electronics.
Focused Growth
The focused growth strategy includes four key goals:
▪Accelerate thermal comfort growth by leveraging human thermophysiology and smart ClimateSense® control algorithms to increase personalized passenger comfort and improve energy efficiency;
▪Grow pneumatic comfort business by leveraging the thermal products market share and customer relationships, as well as introducing products and technologies featuring the benefits of combined thermal and pneumatic solutions;
▪Drive battery performance solutions with an increased focus on gaining a foothold in cell connecting market with our innovative and environmentally friendly flex foil solution, as well continuing to solve customer challenges with battery heating and cooling solutions; and
▪Expand patient thermal solutions that leverage our expertise in thermophysiology and drive synergies from our automotive climate and comfort businesses, as well as introducing new products and technologies.
These areas of the focused growth strategy are underpinned and enabled by our electronic and software systems.
Deliver Financial Excellence
We will continue to build a culture of performance that includes a focus on high-return growth opportunities. In recent years, we undertook restructuring actions to reduce global overhead costs to improve Selling, general and administrative expenses. We are
continuing to strengthen our operational discipline and striving to expand margins and return on invested capital through manufacturing productivity, sourcing excellence and cash flow generation.
Research, Development and Partnerships
Our research, development and partnerships activities are an essential part of our efforts to develop new or improved innovative products. Through both internal and external programs, we are working to develop a comprehensive knowledge of thermal management and pneumatic comfort systems that demonstrates functionality and performance. These activities are critical to optimize energy utilization and production efficiencies, improve effectiveness in our products and minimize the cost to integrate our products with those of our customers.
We perform advanced research and development on thermal and pneumatic comfort technologies, including thermal management systems that utilize new proprietary comfort software algorithms, to enhance the efficiency and functionality of our automotive heating and cooling products. We believe there are substantial opportunities to expand our human-centric value proposition beyond thermal in comfort, health and wellness, through the integration of pneumatic comfort technologies.
To offer our customers cutting-edge products and technologies, our strategy includes partnering with key technology leaders in our industry. Our advanced partnership with global automakers and manufacturers address and work to solve industry preferences of today and tomorrow by leveraging our expertise in human thermophysiology and physiotherapy.
Research and development is conducted globally and predominantly at our world headquarters in Northville, Michigan, our Technology Center in Farmington Hills, Michigan, our European research facility in Odelzhausen, Germany and our Asian research facility in Shanghai, China.
Product design and development also is performed at all of our manufacturing facilities to support our geographically diverse customers. We believe the localized development model employed at our manufacturing facilities improves our ability to effectively serve our customers and increases our innovative capacity.
Core Technologies
In Automotive, Gentherm is the global market leader of innovative thermal management and pneumatic comfort technologies. For our Medical business, our expertise in thermal management is focused on managing the thermal conditions of people.
ClimateSense®
ClimateSense® is an integrated comfort system we are designing to create a personalized microclimate for passengers using localized convective, conductive and radiative heating and cooling products. Using automatic regulation technology in combination with our unique occupant-centric control algorithm, ClimateSense® offers the ability to personalize and improve overall occupant thermal comfort, improve time to comfort with (all-electric) pre-conditioning, provide comfort with less energy consumption thereby lowering greenhouse gas emissions by conventional internal combustion and hybrid powertrains, and extend range for electrified powertrains through a reduction in central heating, ventilation and air conditioning (“HVAC”) system usage. In July 2021, we received the first production vehicle award for our ClimateSense® technology that will launch on the all-new 2024 Cadillac CELESTIQ. In June 2022, we received our second ClimateSense® technology award on a battery electric version of a popular SUV launching in 2025 and is a strong validation of the progress we are making with General Motors.
Electronics
The electronics in our core climate comfort solution products are manufactured by us. We also supply value-added electronic products to third parties for adjacent areas within the automotive interior. In addition, Gentherm manufacturers and supplies electronic control units for memory seat modules that include electric motor position sensing technology. This technology further applies to other automotive products requiring fine motor controls.
Air Moving Devices
Our highly durable and quiet air moving devices, some of which include our proprietary blower and fan designs, are essential to all of our products that require air movement. We have a broad portfolio of these products that are tailored to various automotive applications, including seat ventilation and electric vehicle battery cooling.
Thermoelectric Technologies
Many of our thermal products manage the thermal conditions of people using our internally developed advanced thermoelectric device technology (“TED”). A TED is a solid-state circuit that has the capability to produce both hot and cold thermal conditions by use of the Peltier effect. The advantages of advanced TED over conventional compressed gas systems include a reduced environmental impact and less complexity as they have no moving parts and are compact and light weight. Our work on this technology has yielded improvements in areas of functionality, efficiency, durability and performance.
Resistive Heaters
Resistive heater technologies are comprised of wire, carbon fiber or positive thermal coefficient (“PTC”) heating elements that quickly and effectively deliver heat to people and objects. Wire heating elements are designed from stainless steel, copper, our proprietary carbon fiber woven lattice technology called Carbotex® or printed circuit PTC heaters based on the specifications for a particular product application. Resistive heaters have multiple automotive applications, including seat heating, steering wheel heating, interior panel heating and battery heating.
Pneumatic
Pneumatic massage and lumbar operate by inflation and deflation of air bladders to achieve desired comfort effect. Our products' differentiation is that our underlying technology is based on shape memory alloy valves ("SMA"). Gentherm has developed actuators and valves with SMA technology that replace heavy, noisy and less accurate electromagnetic valves. Our innovative control elements produce precise mechanical forces and movements using the finest wires made of memory metals and without the labor-intensive use of additional sensors.
Products
Climate Comfort Solutions - Seat Comfort
CCS
Gentherm offers a range of CCS products utilizing proprietary technologies for regulating temperature and enhancing the comfort of vehicle passengers. Our ventilated CCS products move air through the seat to provide conditioning. Our active CCS products utilize TEDs to heat and cool air used to condition the seat. The conditioning air circulates by one of our specially designed air moving devices through an air distribution system installed in the seat cushion and seat back, so that the seat surface can be heated, ventilated or cooled. Each seat has individual electronic controls to adjust the level of heating, ventilating or cooling. Our CCS products improve comfort compared with conventional vehicle cabin air conditioners by focusing heating and cooling directly on the passenger through the seat. Our CCS products can be combined with our resistive heating elements to increase heating capacity and reduce time to comfort.
By offering different models of the CCS product, our customers have the opportunity to purchase a wider range of climate control products at different price points. Sales of CCS products, primarily ventilated CCS products, contributed 35%, 38% and 38% to our total product revenues for the years ended December 31, 2022, 2021 and 2020, respectively.
Heated Seat
Heated seats, based on our resistive heater core technology, are seamlessly integrated into automotive seat designs, and are constructed using materials that offer the best capacity, installation characteristics and durability. Our design and manufacturing capabilities allow customers to choose among a variety of resistive heater materials based on their individual vehicle specifications. Sales of heated seat products contributed 24%, 26% and 27% to our total product revenues for the years ended December 31, 2022, 2021 and 2020, respectively.
Intelligent Neck Conditioner
Intelligent neck conditioning systems ventilate warm or temperature-controlled air directly onto the passenger’s neck and shoulder area. The system combines electronics, air moving device technologies and a heating element into a compact, integrated headrest design that can be adjusted to suit the body size of the passenger.
Climate Comfort Solutions - Surface Climate Control Systems
Heated Steering Wheel
Heated steering wheels deliver heating comfort to automobile drivers through resistive elements. This product can be applied to both leather and wood steering wheels. A solution for drivers in cold and mild weather climates, the heated steering wheel is designed for the global automotive market.
Heated Surfaces
Gentherm’s thermally conductive or radiative surfaces, such as door panel armrest and center console armrest products, are powered by our core technologies. The system is thermally managed by a heating control system which can be discretely located in the door panel or seat of the vehicle. Heated door panels and armrests complement our climate-controlled seat and steering wheel products and provide a superior level of thermal comfort to the driving experience.
Pneumatic Seat Massage
Gentherm's seat ergonomics system consists primarily of pneumatic lifting elements (air bladders) which are mounted under the surface of seat cushion and back. Through the cyclical inflation and deflation of the lifting elements, the contour of the seat cushion is selectively modified. The lifting elements are controlled by valves, utilizing software that can be enabled in modes by the vehicle occupant in accordance with their preferences and specific body types.
Electronics Solutions
Memory Seat Modules
Gentherm has developed a unique way to control certain electrical motors in a vehicle. Our Intelligent Positioning System, IPS® product suite utilizes proprietary software to determine the position of a power seat and control the memory seat module.
Hands-On Detection
All vehicles manufactured with autonomous driving level 2 or higher capabilities are required to ensure that the driver stays in control of the vehicle during operation. In order to accomplish this task, Gentherm developed PilotSenseTM - a sensor integrated into the steering wheel that monitors whether the driver’s hands are maintaining contact with the steering wheel. This product is available for both heated and non-heated steering wheels.
Battery Performance Solutions
Cell Connecting Systems
Cell connecting systems provide secure connections between advanced automotive batteries to transmit a continuous flow of information about battery temperature and cell voltage during the charging and discharging process to monitor battery system performance. Gentherm has developed a range of cell connecting system products, including flexible foil cell connecting boards that offer improved packaging, weight and functionality. We offer these products in a variety of materials to cover customers’ requirements.
Thermoelectric Battery Thermal Management
Thermal management is critically important for the long-term operation of advanced automotive batteries. The expansion of electrified vehicle applications, such as electric vehicles, plug-in hybrids and mild hybrids, have increased the demand for battery thermal management (“BTM”) systems that enable wider operating temperature ranges, enhanced driving range and prolonged life of the battery. Gentherm’s BTM system can provide precision battery cooling of 48-volt mild hybrid systems on pack or cell-level using patented TED technology. The BTM system maintains the temperature of the lithium-ion battery or other advanced chemistry battery within an acceptable temperature range without the use of chilled liquids or refrigerant loops, making it a light weight, highly scalable, compact solution ideal for automotive applications. Gentherm’s proprietary BTM system is compact and energy efficient, resulting in a minimal energy usage, which is important for an electrified vehicle.
Aside from battery cooling, Gentherm’s BTM portfolio includes battery heating applications. Based on our proprietary technology, we offer solutions to our customers that enable efficient heating of lithium-ion batteries for most electrified vehicles.
Climate Comfort Solutions - Thermal Convenience
TrueThermTM Cup Holder
The TrueThermTM Cup Holder applies Gentherm’s patented TED technologies to keep beverages of automobile drivers and passengers either warm or cool. We have developed a range of cup holder models with varying degrees of functionality, designed to be manufactured in multiple configurations to accommodate different console environments. Our dual independent design provides separate temperature settings in each holder allowing the driver and passenger to individually maintain a heated or cooled beverage.
TrueThermTM Storage Unit
Gentherm’s TrueThermTM Storage Unit provide for food or beverage cooling for the global automotive market. Using patented TED or refrigeration technologies, the TrueThermTM Storage Unit provides temperature control independently from a vehicle’s heating and air conditioning system. It can be custom designed to accommodate tight interior spaces, such as the front floor console of a sport utility vehicle and provide additional cooling capacity to those who have long work commutes or transport multiple passengers.
Automotive Cable Systems
Gentherm manufactures automotive cable systems used to connect automotive components to power sources. The automotive cable systems are an important element in the production of many of our products and form a significant component in how we generate value to our customers by being an efficient, low-cost and high-quality manufacturer. We offer cable systems as integrated parts of our products and also as stand-alone components for other automotive applications, such as oxygen sensors. Our cable systems business includes both ready-made individual cables and ready-to-install cable networks.
Valve Systems Technology
Gentherm has deep expertise in automotive fluid management, providing intelligent solutions for applications such as fuel supply, servo assistance, flap control, crank case ventilation and thermal management. We have many years of experience in precision injection molding and valve technology, which include innovative technologies such as the SMA actuating elements. Due to our modular systems, we implement customized adaptations at attractive costs and are prepared to address future global regulatory emissions requirements.
Patient Temperature Management Systems
Gentherm aspires to provide healthcare professionals with superior temperature management solutions and clinical expertise that improve patient outcomes, increase the standard of care and enhance patient satisfaction. We provide a full line of patient temperature management systems that utilizes air, water and resistive technologies across multiple product categories addressing the needs of hyper-hypothermia therapy in intensive care, normothermia in surgical procedures and additional warming/cooling therapies utilized in acute care settings, medical clinics and home health. Our core brands include Blanketrol®/Kool-Kit® hyper-hypothermia system, WarmAir®/FilteredFlo® convective warming system, ASTOPAD® resistive patient warming system (leveraging technology used in our automotive products), Electri-Cool®/Micro-Temp® localized cooling/warming systems, ASTOTHERM®/ASTOFLO® IV fluid and blood warming systems, and Hemotherm® cardiovascular cooling/warming system that delivers precise blood temperature control during cardiopulmonary by-pass and other related cardiovascular procedures.
Automotive Customers
Our Automotive segment customers include primarily light vehicle OEMs and Tier 1s, including automotive seat manufacturers. We also directly supply CCS products to aftermarket seat distributors and installers.
The Company’s automotive marketing is directed primarily at the OEMs and their Tier 1s and focuses on the enhanced value consumers attribute to vehicles with thermal and pneumatic solutions. In many cases, the OEMs direct us to work with their suppliers, primarily their Tier 1s, to integrate our products into the vehicle’s seat or interior design.
Once the integration work is complete, prototypes are sent to the OEMs for evaluation and testing. If an OEM accepts our product, a program can then be launched for a particular model on a production basis, but it normally takes one to three years from the time an OEM decides to include any of our products in a vehicle model to actual production for that vehicle. During this process, we derive funding from prototype sales but obtain no significant revenue until mass production begins. Upon commencement of mass production, our products are sold by Tier 1s to the OEMs. Inherent to the automotive supplier market are costs and commitments that are incurred well in advance of the receipt of orders and resulting revenues from customers.
The volume of products we sell is significantly affected by global and regional automotive production levels and the general business conditions in the automotive industry. Our product revenues are generally based upon purchase orders issued by our customers, with updated production schedules for volume adjustments. As such, we typically do not have a backlog of firm orders at any point in time. Once we are selected to supply products for a particular platform, we typically supply those products for the platform life, which is normally five to seven years, although there is no guarantee that this will occur. In addition, when we are the incumbent supplier to a given platform, we believe we have a competitive advantage in winning the redesign or replacement platform, although there is no guarantee that this will occur.
For 2022, our revenues from sales to our two largest customers, Lear Corporation (“Lear”) and Adient plc (“Adient”) were $189 million and $179 million, respectively, representing 16% and 15% of our product revenues, respectively. Revenues from Lear and Adient represent sales of our climate comfort and pneumatic comfort products. Lear acquired the Interior Comfort Systems business unit of Kongsberg Automotive ASA (“Kongsberg”) in February 2022, and entered into an agreement to acquire I.G. Bauerhin ("IGB") in May 2022, which are both key competitors of the Company’s climate comfort and pneumatic comfort products. In 2022 we believe there was an immaterial impact to our business as a result of the Kongsberg acquisition. Lear has expressed an intent to become a leading provider of thermal comfort solutions as part of a vertical integration strategy, and the magnitude of the future adverse impact on our business and financial statements remains subject to significant uncertainty.
The loss of or significant reduction of business from Lear or Adient would likely have a material adverse impact on our business, results of operations and cash flows. However, as noted above, in many cases automotive OEMs direct their suppliers such as Lear and Adient to work with us for our climate comfort solutions, pneumatic comfort solutions, battery performance solutions and cable technology products. It is, therefore, relevant to understand how our revenues are divided among the OEMs, as shown below.
Our total product revenues for each of the past three years were divided among the OEMs as follows:
General Motors
%
%
%
Hyundai
%
%
%
Volkswagen
%
%
%
Ford Motor Company
%
%
%
Stellantis(a)
%
%
%
BMW
%
%
%
Daimler
%
%
%
Honda
%
%
%
Mazda
%
%
%
Jaguar/Land Rover
%
%
%
Toyota Motor Corporation
%
%
%
Renault/Nissan
%
%
%
Other (including Medical)
%
%
%
Total
%
%
%
(a)Reflective of the 2021 merger of Peugeot S.A. and Fiat Chrysler Automobiles N.V.
Automotive Market Trends
The Gentherm automotive product portfolio aligns well with near-term and long-term consumer and technological trends:
▪Increased efficiency and electric range - Our solutions, including the ClimateSense® and pneumatic comfort systems that we continue to develop, help reduce weight and overall energy consumption of a vehicle, resulting in improved fuel consumption for vehicles with an internal combustion engine, and increased range for electric vehicles. Our
Battery Performance Solutions products help improve the life and efficiency of batteries, contributing to increased adoption of powertrain electrification.
▪Increased demand for comfort products - We believe increased consumer demand for personalized comfort in a vehicle is driving increased adoption of our thermal and pneumatic comfort products. We are striving continuously to bring to market products and technologies that improve the well-being of vehicle occupants. From improved performance of our seat heating and cooling devices, to our introduction of the neck climate control system, heated surface products, and pulsating massage treatment - our focus is to make vehicle comfort an integral part of vehicle occupants' experience. In recent years, we are seeing a trend of equipping second, and in some cases, third row seats with thermal management solutions. This trend is accelerating in all major markets where Gentherm is present, including North America, Europe, Japan, Korea and China.
▪Growth of connected/smart devices - One of the most important objectives in achieving comfort is to create a system that is able to sense the needs of vehicle occupants and make performance adjustments based on personalized needs. We utilize machine learning to create and optimize state of the art algorithms to make our products smarter and more advanced with each generation.
▪Focus on health and wellness - Consumers have an increased focus on personal health and wellness. Our technologies are at the nexus of health, wellness and comfort, where our solutions adjust to enable vehicle occupants to address their health and wellness needs.
▪Emergence of shared mobility - As the world transitions from vehicle ownership to mobility as a service model, our focus on individual personalized comfort becomes even more important. Our focus is to create microclimate solutions, in which each vehicle occupant can create a personalized thermal experience tailored to individual needs.
Production and Suppliers
Our global manufacturing and distribution facilities are located close to our key customers. In Automotive, we operate four manufacturing sites in Europe located within North Macedonia, Ukraine, Germany and Czech Republic and one distribution center located in Hungary. In North America, we operate three manufacturing sites in Mexico and one manufacturing site in the United States. In Asia, we operate three manufacturing sites in China and one in Vietnam, and one distribution center in South Korea.
For Medical, we operate three manufacturing sites within China, Germany and the United States.
We procure our raw materials from a variety of suppliers around the world. In the normal course of business, we do not carry substantial inventories of these raw materials in excess of levels reasonably required to meet our near-term production requirements. The automotive industry is highly reliant on semiconductors and there has been a supply shortage of semiconductors since 2021. See further discussion of the risks relating to the supply shortage of semiconductors and related risks, as well as certain mitigating activities we have undertaken, above in “-Impact of Supply Chain Disruptions and Other Matters”, in Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
Proprietary Rights and Patents
The development of new or improved technologies is critical to the execution of our business strategy. Currently owned patents and patents obtained for new or improved technologies form an important basis for the success of the Company and underpin the success of our research and development efforts. We have adopted a policy of obtaining, where practical, the exclusive rights to use technology related to our products through patents or licenses for proprietary technologies or processes. We adapt and commercialize such technologies in products for mass production. We also have developed technologies or furthered the development of acquired technologies through internal research and development efforts.
As of December 31, 2022, Gentherm held 531 issued patents, of which 261 were U.S. patents and 270 were non-U.S. patents. Gentherm held 265 patents directed to climate control products and thermoelectric technologies (including 5 patents directed to ClimateSense®), 74 patents directed to battery cell connecting and cable technologies, 44 patents directed to massage and lumbar technologies, 37 patents directed to air moving devices, 34 patents directed to medical technologies, 30 patents directed to heating elements and technologies, 24 patents directed to occupant sensing technologies, 18 patents directed to fluid valve technologies, and 5 patents directed to electronics technologies. The Company continued to evaluate its patents during 2022 and made strategic decisions
to reduce low-value patents and patents unrelated to current or planned business strategies. The acquisitions of Alfmeier and Dacheng added 68 issued patents to the Company’s patent portfolio.
Competition
Gentherm faces competition from other automotive suppliers and, with respect to certain products, from the OEMs and Tier 1s who manufacture or have the capability to manufacture certain products that Gentherm manufactures and supplies. The automotive supply industry competes on the basis of technology, quality, reliability of supply and price. Design, engineering capability and competitive pricing are increasingly important factors. Although the overall number of our automotive competitors has decreased due to ongoing industry consolidation, the automotive technology and components industry remains extremely competitive. The competitive landscape for patient temperature management systems includes patient thermal management medical device manufactures.
We believe our expertise in core thermal management and pneumatic comfort technologies, as well as our capability in applying specific component design, global footprint and broad product offerings make us well positioned to compete against the traditional thermal management systems and pneumatic comfort suppliers, global Tier 1s and component specialists.
See further discussion of the risks relating to competition in Item 1A, “Risk Factors” in this Annual Report.
Seasonality
Our principal operations are directly related to the automotive industry. Consequently, we have historically experienced seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants close for model year changeovers and in December when many customer plants close for the holidays.
Human Capital Management
Employees
At Gentherm, our mission is to “create and deliver extraordinary thermal solutions that make meaningful differences in everyday life, by improving health, wellness, comfort and energy efficiency.” Our people are the foundation for making our mission come to life every day.
Our human capital focus is to inspire people to achieve their aspirations and achieve strong business results. We also strive to promote a safe work environment and a culture that values fairness, diversity, equity, inclusion and belonging.
Our global workforce creates a competitive advantage and operates in 14 countries in over 32 locations. As of December 31, 2022, and 2021, Gentherm’s employment levels worldwide were as follows:
2022(a)
Mexico
5,047
3,293
Macedonia
2,503
1,845
China
2,070
1,456
Ukraine
1,761
1,906
Vietnam
Germany
United States and Canada
Hungary
Czech Republic
-
Korea
Japan
Malta
United Kingdom
Total
14,568
10,474
(a)Approximately 2,000 employees were added to Gentherm in 2022 as a result of the Alfmeier and Dacheng acquisitions.
Notable statistics as of December 31, 2022:
▪39% of our workforce resides in North America; 39% of our workforce resides in Europe; and 22% of our workforce resides in Asia.
▪We have cooperative relationships in our facilities where we operate with unions and workers councils. Approximately 31% of the Company's workforce are members of industrial trade unions or works councils and are employed under the terms of various labor agreements.
▪Two of eight Board members are female. Four of ten executive committee members are female and two are diverse.
▪Over 56% of our global workforce is female.
▪We experienced a 3.3% growth of diversity representation (global females and minorities in the U.S.) for our global Director and VP population of Legacy Gentherm
▪Within the United States, over 36% of our employees self-disclose as racially or ethnically diverse.
Racially and Ethnically Diverse (Self-reported)
All Employees
%
%
Leadership
%
%
Key Highlights of our Human Capital Strategy
In November 2021, we completed our first global engagement survey with a best-in-class response rate of 97%. In 2022, we developed action plans at every location to ensure we are creating a culture of feedback and continual improvement. We plan to complete another benchmark survey in 2023, including employees from our Alfmeier and Dacheng acquisitions.
Health and Safety
At Gentherm, our “Safety Culture” has become a core strength. Our Vision Zero strategy helped us achieve significant progress in reducing accidents across our sites. We had fewer than 20 lost time accidents in 2022.
Diversity, Equity and Inclusion (DE+I)
Our DE+I mission “Embracing Diversity Inspires Innovation” cascades from our corporate mission. Our Diversity, Equity and Inclusion Council has built strong momentum. In 2022, we set a robust goal for talent acquisition. Such focus helped us increase diversity candidate slates, and through this effort we increased Director and VP population of Gentherm (excluding acquisitions of Alfmeier and Dacheng) representation by over 3%. We took another step forward on our DE+I journey with scaling our inclusion trainings to all global salaried-professional employees with the purpose of building local and global awareness of DE+I at Gentherm. We also held several sessions to educate our employees on unconscious bias. Our goal is ensuring all team members are educated on consistent standards, identifying feedback mechanisms to solve for conflict, and creating a culture that unites us all.
Total Rewards
Gentherm’s compensation and benefits programs are designed to attract and retain our employees in the locations where we compete for talent using a mix of elements that allow us to achieve our Company’s short and long-term goals.
▪We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location.
▪We align our executives’ and eligible employees’ annual bonus opportunity and long-term equity compensation with our shareholders’ interests by linking realizable pay with company financial and stock performance.
▪We have refreshed our overall compensation structure to ensure we are providing contemporary and equitable total rewards across our business.
▪We completed a global pay equity study as part of our efforts to ensure fairness with respect to employee pay. The study found minimal pay gaps between groups of employees.
Total Talent Development
At Gentherm, we provide foundational leadership development programs to ensure our current and future people leaders are well equipped to engage and lead in today’s complex business environment. We have offered additional training programs to provide
on-demand, flexible learning solutions for our global workforce. We continue to invest in our Accelerator program for high potential employee development to retain our future leaders. In 2022, our workforce completed over 500,000 hours of training.
Environmental, Social, and Governance
In 2022, we issued our third sustainability report and continued to incorporate ESG into our everyday business operations and future strategies. Our sustainability efforts are based on three pillars: People, Planet, and Places.
▪People: At Gentherm, our leaders treat employees with respect and provide a safe working environment. We provide career opportunities, development, support and more. People create our success.
▪Planet: We strive to minimize our environmental impact. We believe our product lineup reduces the environmental impact of automobiles through our innovative products and technologies, and we continue to improve our operations through more efficient use of resources and reduced emissions. As part of this pillar, we also focus on our products - what materials go into them, what are the impacts of our products, both upstream and downstream, and even how our products are dealt with at the end of their useful life.
▪Places: As a global company, we strive to be a positive force in the communities where we do business. Our teams support an array of causes, including STEM education and training, financial support for local charities and providing volunteer time to support efforts to improve the local communities. Types of community involvement and support vary across our sites, based on local needs, requirements, and culture.
These actions indicate the strength of our commitment to sustainability across Gentherm.
Environmental and Regulatory Compliance
Applicable laws and regulations, and significant changes to such laws and regulations, will potentially lead to increases in costs and complexity, and failure to comply with global and specific country regulations could subject us to civil penalties, production disruptions, or limitations on the sale of affected products. We believe we are materially in compliance with substantially all these requirements or expect to be materially in compliance by the required dates.
Chemical Regulation
There are numerous global laws and regulations that prohibit or restrict the selection and use of certain chemicals for product development and manufacturing and potentially impact an automobile manufacturer’s responsibility for vehicle components at the end of a vehicle’s life. New chemical regulations continue to be introduced and passed, such as the new European requirements that require suppliers of parts and vehicles to the European market to disclose certain substances of concern in parts. Further, increases in the use of circuit boards and other electronics may require additional assessment under the directives related to certain hazardous substances and waste from electrical and electronic equipment.
Vehicle Safety
In the U.S., the National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates motor vehicle equipment that we manufacture and sell as well as vehicles. The Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable federal motor vehicle safety standards established by the National Highway Traffic Safety Administration (“NHTSA”). The Safety Act further requires that if a vehicle manufacturer or NHTSA determine a vehicle or an item of vehicle equipment does not comply with a safety standard, or that vehicle or equipment contains a defect that poses an unreasonable safety risk, the vehicle manufacturer must conduct a safety recall to remedy that condition in the affected vehicles. Should a vehicle manufacturer or NHTSA determine a safety defect or noncompliance issue exists with respect to any of our products, the cost of such recall campaigns could be substantial. Further, many other countries have established vehicle and vehicle equipment safety standards and regulations. Meeting or exceeding the many safety standards is costly as global compliance and non-governmental assessment requirements continue to evolve and grow more complex, and lack harmonization globally.

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ITEM 1A. RISK FACTORS
ITEM 1A.	RISK FACTORS
You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this Annual Report, as well as any amendments or updates reflected in subsequent filings or furnishings with the SEC. We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity.
Industry and Operational Risks
The automotive industry, our primary market, is cyclical and is significantly impacted by macroeconomic, geopolitical and similar global factors, and a decline in the production levels of our major customers and OEMs, particularly with respect to models for which we supply significant amounts of product, could adversely affect our business, results of operations and financial condition.
Our Automotive segment represents 96%, 96% and 95% of our product revenues for the years ended December 31, 2022, 2021 and 2020, respectively. Demand for our automotive products is directly related to automotive vehicle production, 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. Automotive sales and production are cyclical and are materially affected by macroeconomic, geopolitical and industry conditions that are outside of our control and the control of our customers and suppliers, including monetary fiscal policy, economic recessions, inflation, political instability, labor relations issues, energy prices, regulatory requirements, government initiatives, trade restrictions and agreements, capital and liquidity constraints, acts or war and terrorism, and natural and man-made disasters. Our operational costs are similarly impacted by such macroeconomic, geopolitical and industry conditions, which has and may continue to adversely impact our margins and profitability.
In recent years, macroeconomic, geopolitical and industry conditions were significantly impacted by the COVID-19 pandemic and related government actions and restrictions, as well as health and safety measures implemented by companies and persons; any future impacts from such pandemic are highly uncertain and cannot be predicted. To the extent the COVID-19 pandemic materially adversely affects the Company's business and financial results, it may also have the effect of significantly heightening many of the other risks associated with the Company's business, results of operations, financial condition, cash flows, liquidity and stock price, including in ways that we cannot predict.
If we fail to manage our growth effectively or to integrate successfully any new or future business ventures, acquisitions, investments or strategic alliance into our business, including our recent acquisitions, our business and financial performance could be materially adversely harmed.
We regularly consider opportunities to pursue business ventures, acquisitions, investments and strategic alliances that could leverage our products, technologies and capabilities, as well as, enhance our customer base, geographic penetration and scale, to complement our current businesses, some of which could be material. We completed two acquisitions in 2022, Alfmeier and Dacheng, and we have completed other acquisitions and investments in recent years. Finding and assessing a potential growth opportunity and completing a transaction involves extensive due diligence, management time and expense; however, the amount of information we can obtain about a potential growth opportunity may be limited, and we may not be able to identify suitable candidates, negotiate appropriate terms, obtain financing on acceptable terms, complete proposed acquisitions, or expand into new geographies or markets. Further, we can give no assurance that new business ventures, acquisitions, investments and strategic alliances will positively affect our financial performance or will perform as planned, including regarding anticipated synergies or other financial or operational benefits. For significant transactions, we would expect to incur additional debt, issue equity and/or increase capital expenditures, which may increase leverage risks, result in dilution or reduce capital available for other investments in ongoing operations. If we fail to identify and complete suitable acquisition and investment opportunities in a timely and successful manner, our business, growth strategy reputation and results of operations could be materially impacted.
Furthermore, the success of our acquisitions is dependent, in part, on our ability to realize the expected benefits from the integration of the acquired businesses or assets. We may incur an unexpected amount of liabilities or make incorrect estimates regarding the planned accounting for acquisitions, such as the need to record non-recurring charges or write-off of significant amounts of goodwill or other assets that could adversely affect our results of operations, and we could have unexpected challenges due to the limitations of our due diligence process or contractual provisions. Further, 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 our operations, the inability to maintain or increase its competitive presence, inconsistencies in and incompatibility of information technology and accounting systems, as well as other compliance standards, controls, procedures and policies, difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition, additional litigation, compliance or regulatory risk, the diversion of management’s attention to integration matters and difficulties in the assimilation of employees and corporate cultures, especially if the acquisition involves a business, supply chain or operations in one or more countries in which we have a limited history and lack of experience. Any or all of these factors and our increased debt leverage following the closing of any significant transaction, such as the acquisition of Alfmeier, could have an adverse effect on our business and financial performance. In addition, many of these factors are outside of our 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 our business, financial condition and results of operations. Likewise, our failure to integrate and manage acquired companies successfully may lead to reduced profitability and future impairment of any associated goodwill and intangible asset balances.
Our inability to effectively manage the development, timing, quality and costs of new product launches could adversely affect our financial performance.
Gentherm develops and launches new products and related technologies through internal research and development, and from acquisitions and investments in joint ventures. Further, winning new business awards will include specific customer requirements regarding, among other things, timing, performance and quality standards. The launch of new products and technologies is complex, the success of which depends on a wide range of factors, including the robustness of our product and manufacturing process development, success in sourcing new components and commodities with suitable suppliers, readiness of our and our suppliers' manufacturing facilities and manufacturing processes, as well as factors related to tooling, equipment, employees, initial product quality and other factors. New launches have become even more complicated given the increased use of advanced electronics that must be integrated throughout a vehicle. Given the complexity of new product and technology launches, we may experience difficulties managing product quality, timeliness and associated costs.
In addition, new program launches require a significant ramp up of costs up to a few years prior to sales of such products. However, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could have a materially adverse effect on our business, results of operations and financial condition.
To the extent we are not able to successfully launch new business, vehicle production at our customers could be significantly delayed or shut down. Such operating failures could result in significant financial penalties to us or a diversion of personnel and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives, and could result in our customers shifting work away from us to a competitor. Any of the foregoing matters could result in a significant loss of revenue and market share and could have an adverse effect on our profitability and cash flows.
We operate in a highly competitive industry and efforts by our competitors, as well as new non-traditional entrants to the industry could adversely affect our business, results of operations and financial condition.
The automotive component supply industry is subject to intense competition. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, timely delivery, technological innovation and service. There can be no assurance that we will be able to compete successfully with the products of our competitors. Further, our competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. Many of our competitors are substantially larger in size and have substantially greater financial, marketing and other resources than we do, and therefore may be more effective in adapting to customer requirements while being more profitable. In addition, our customers may increase levels of production insourcing and compete directly with us for a variety of reasons, such as shifts in business strategies or the emergence of low-cost production opportunities in other countries, which may adversely affect our sales as well as the profit margins on our products.
The global automotive supply chain has been adversely impacted by raw material and component shortages, manufacturing disruptions and delays, logistics challenges and inflationary and other cost pressures, and we expect such conditions to continue to adversely affect our business, profitability and results of operations.
Our products contain a significant number of components that we source globally from suppliers who, in turn, source components from their global suppliers. If our supply chain fails to deliver products to us in sufficient quality and quantity on a timely
basis, we will be challenged to meet our production schedules and fulfill our orders due to the “just-in-time” manufacturing process that is broadly utilized in our industry, which would decrease sales and profits and could damage our commercial reputation and customer relationships. Similarly, OEMs and Tier 1s to whom we supply our products are dependent on an ever-greater number of global suppliers to manufacture and sell their products to consumers, which drives sales of our products.
We and our customers, and our respective supply chains, have operated in a supply-constrained environment for over one year and are continuing to manage through raw material and component shortages, manufacturing disruptions and delays, logistics challenges and inflationary and other operational challenges and costs pressures, each of which is described in the risk factors below and has adversely affected, and is expected to continue to adversely effect, our business, profitability and results of operations. We have taken certain mitigation efforts to address such matters, which has led to increased operating costs and carrying costs due to the build-up of inventory.
Raw material and component shortages and pricing impacts have adversely impacted our business and financial performance and we expect these conditions to continue.
The availability of raw materials and product components fluctuates due to factors outside of our control, including supply and demand imbalances, geopolitical and macroeconomic factors, trade laws and tariffs, natural disasters, and global pandemics such as COVID-19, which has and we expect will continue to impact the ability of our supply chain to meet our production requirements and therefore our ability to meet the production demands of our customers. Even a single small subcomponent necessary to manufacture our product could force us to cease production, potentially for a prolonged period.
In particular, since 2021, the automotive industry is continuing to navigate through a significant shortage of semiconductors, a critical component in the automotive industry. We, the OEMs and Tier 1s must compete among the automotive supply chain and with other industries to satisfy current and near-term requirements for semiconductors, and such allocation is not within our control even though we have continued to attempt various mitigating actions. Certain semiconductors we utilize are sourced from a very limited number of suppliers and many suppliers are based in Taiwan (and therefore such supply may be impacted by China-Taiwan geopolitical matters), which further exacerbates the risks to our operations. The shortage of semiconductors and other key components (historically, such as TEDs), has disrupted our production schedule and has caused us to procure components on the open market, from time to time, at prices significantly above the contractual pricing we have with our current long-term suppliers. OEM and Tier 1 production also has been impacted by the shortage, which has resulted in reduced sales of our products. While the global semiconductor supply shortage is easing, it has had, and is continuing to have, wide-ranging effects.
Furthermore, sudden changes in the production schedules of OEMs and Tier 1s caused by raw material and component shortages also have resulted and may continue to result in operating inefficiencies, which could adversely affect our profitability and results of operations. If we were to fail to make timely deliveries in accordance with contractual obligations, we generally must absorb our own costs for identifying and solving the problem as well as expeditiously producing replacement components or products. Generally, we must also carry the costs associated with catching up, such as overtime and premium freight. Additionally, if we are the primary cause for a customer being forced to halt production, the customer may seek to recoup all of its losses and expenses from the Company. The raw material and component shortages have had and may continue to have a material adverse effect on our business, profitability and results of operations.
We also have experienced and we may continue to experience margin pressure due to the pricing of components and certain other raw materials. Some of our products contain certain components, such as semiconductor chips, tellurium, a raw material used in TEDs, and other key raw materials including copper, silver and petroleum-based engineered plastics and raw materials, which generally cannot be substituted. The prices for these components and raw materials fluctuate depending on market conditions. The automotive industry has seen a period of sustained price increases for commodities, primarily related to steel, and to a lesser extent petrochemicals. If the market prices and related logistics costs (in particular for imported goods) for these components and raw materials remain higher than normal or they further increase, our gross profit may continue to be adversely impacted, including to the extent our suppliers pass cost increases on to us that we cannot pass on in full to our customers in spite of our mitigation efforts.
Inflationary pressures impacting our suppliers, customers, transportation companies and other third parties have increased our costs to manufacture and deliver our products, and therefore adversely impacted our margins and profitability.
The automotive industry has experienced a period of sustained price increases for various material components and transportation and other logistics services. These price increases are expected to continue into the foreseeable future due to continuing challenges with supply-demand imbalances. Although the Company has developed and implemented strategies to mitigate the impact
of higher material component costs and transportation and other logistics costs, these strategies, together with commercial negotiations with Gentherm's customers and suppliers, have not historically and may not in the future fully offset our price increases, which may result in adverse impacts to the Company’s profitability and results of operations. A highly inflationary environment also can have a negative impact on customers’ willingness to purchase our products. We generally have been unable to raise prices to address in full the foregoing inflationary pricing pressures, together with price downs for our products that are customary in our industry, and therefore our margins and profitability have been and may continue to be adversely impacted.
The supply-constrained environment has led to a significant increase in inventory, which has had an adverse impact on profitability and could lead to future impairment.
In order to secure components for our products, we have and may continue to strategically purchase components in advance of demand to take advantage of favorable pricing or to address concerns about future availability. If we fail to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components, which could adversely affect our business and financial performance, including due to impairment of such assets.
Our global operations subject us to risks that may harm our operations and financial results.
In 2022, 61% of our product revenue was generated from sales to customers outside the United States. We have significant personnel, property, equipment and operations in a number of countries outside of the United States, including China, Germany, Hungary, North Macedonia, Mexico, South Korea, Czech Republic, Ukraine and Vietnam. Our exposure to the risks described below is substantial. We also derive a significant portion of revenues from Europe and Asia and conduct certain investing and financing activities in local currencies.
In addition to the general risks relating to our operations, our international operations are subject to unique risks inherent in doing business abroad, including:
•exposure to local economic, political, social and labor practices and conditions;
•different and complex local laws and regulations and enforcement thereof;
•compliance with the requirements of an increasing body of applicable anti-bribery and anti-corruption laws, including compliance by any acquired companies;
•increases in duties, tariffs and taxation on our products related to U.S. trade disputes, trade restrictions and potential trade wars;
•exposure to infectious disease and epidemics, including the effects on our business operations, and those of our customers and suppliers, in geographic locations impacted by an outbreak;
•violence and civil unrest (including acts of terrorism, drug-cartel related and other forms of violence and outbreaks of war);
•expropriation, nationalization or other protectionist activities;
•currency exchange rate fluctuations and currency controls;
•local business and cultural factors that differ from our customary standards and practices;
•withholding and other taxes on repatriated funds and other payments by subsidiaries;
•other cultural and linguistic differences;
•difficulties in managing or overseeing foreign operations and agents;
•potentially longer payment cycles;
•different credit risks; and
•difficulty of enforcing agreements, collecting receivables and protecting intellectual property and other assets through non-U.S. legal systems.
Additionally, our primary manufacturing locations are in Mexico, China, Vietnam, North Macedonia, Czech Republic and Ukraine, all countries that have historically experienced a heightened degree of political, civil and labor uncertainty. In China, continued U.S.-China trade tensions and weakening economic conditions, among other factors, may result in reduced sales, profitability and margins, increased operating costs and challenges to gaining or holding market share. Furthermore, certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, including Chinese regulation of the scope of our business and investments in China, as well as our ability to provide cash to and repatriate cash from our business entities in China. In order to maintain access to the Chinese market, we may be required to comply with significant technical and other regulatory requirements that are unique to the Chinese market, at times with challenging lead times. These actions may increase the cost of doing business in China or limit how and under what conditions we may do business in China, which could materially and adversely affect our profitability and financial condition.
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 due to the escalation of geopolitical tensions and the military conflict between Russia and Ukraine. The conflict and certain measures taken in response have impacted the availability and prices of certain raw materials and energy (especially in Europe), and could have a lasting impact on regional and global economies. For example in response to Russia’s invasion in Ukraine, a number of countries, including the United States, the United Kingdom and members of the European Union, have implemented economic sanctions on Russia, Belarus and nearby regions, as well as numerous Russian individuals and enterprises including several large banks and state-owned entities.
Our facility in Vynohradiv is on the far western corner within the Transcarpathia region of Ukraine near the Hungary border. In 2022, products manufactured at our Ukraine facility represented approximately 8% of the Company’s total revenue, including automotive cables, seat heaters and steering wheel heaters, compared to 11% in 2021. At this time, our Ukraine facility is operating at normal levels and we continue to execute contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. We have incurred, and will likely continue to incur costs to support our employees and relocate equipment and production based on customer and company needs. We have also experienced and may continue to experience interruptions in power supply at our Ukraine facility. We have contingency measures in place to address intermittent power supply interruptions, however, extended interruptions could significantly impact our ability to operate the facility. Further, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we may experience a significant disruption to our operations. Our response to the ongoing conflict is based on a severity level contingency response plan that has been developed with certain customers. As the situation in Ukraine is very fluid, we continue to monitor its effects on our business and we continue to work closely with our customers to adjust our contingency response as necessary.
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 the prices and availability of certain commodities and energy, volatility in credit and capital markets, interruptions in our supply chain, increased costs and reduced availability 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 results and stock price.
Labor shortages, work stoppages and additional workforce disruptions impacting us, our suppliers or customers periodically have disrupted our operations and our growth strategies, and resulting increases in labor and related operating costs may adversely impact our financial performance.
Labor shortages, work stoppages and additional workforce disruptions due to illness, quarantines and absenteeism, including ours and those at our suppliers or customers, periodically have disrupted our business and adversely impacted our financial performance. Because the automotive industry relies heavily on “just-in-time” delivery of components, labor shortages or work stoppages at one or more of Gentherm's production facilities or those of our suppliers could have adverse effects on the business and financial results, including if the OEMs elect to manufacture and sell cars without our products if we are unable to deliver our products on a timely basis or at all. Similarly, if one or more of our direct customers or an OEM were to experience labor shortages or work stoppages, such as what occurred during the General Motors labor strike occurring in the Fall of 2019 or the prolonged work stoppages that occurred in the first half of 2020 as a result of the COVID-19 pandemic, they likely would halt or limit purchases of our products, which could result in the temporary shutdown of the related Gentherm production facilities or other restructuring initiatives.
Approximately 31% of the Company's workforce are members of industrial trade unions and we believe a significant percentage of employees of our largest customers and suppliers are members of industrial trade unions, all of whom are employed under the terms of various labor agreements. A union strike or inability to enter into a new labor agreement prior to expiration of an existing agreement could have an adverse impact on us or our suppliers or customers. In addition, competition for skilled workers due to labor shortages has increased labor costs and created employee retention and recruitment challenges, which has adversely impacted our profitability and operations and ability to execute on certain strategic initiatives.
Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial performance.
Downward pricing pressure is customarily applied by automotive manufacturers to the automotive supply chain. Our customer contracts generally provide for annual price reductions over the production life of the vehicle, while requiring us to assume significant responsibility for the design, development and engineering of our products, as well as the costs incurred through our supply chain. Prices may also be adjusted on an ongoing basis to reflect changes in product content/costs and other commercial factors. Our inability to achieve product cost reductions that offset customer-imposed price reductions could adversely affect our financial condition, results of operations and cash flows.
Security breaches and other disruptions to our information technology networks and systems, including a disruption related to cybersecurity, could interfere with our operations and could compromise the confidentiality of our proprietary information or personal information.
We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, suppliers, employees and other sensitive matters. We rely upon the capacity, reliability and security of our IT and data security infrastructure, as well as our ability to expand and continually update this infrastructure in response to the changing needs of our business. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, due to failure to timely upgrade systems or during system upgrades and/or new system implementations, or resulting from failures of our third-party service providers, the resulting disruptions could have an adverse effect on our business.
As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which were material in 2022. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; delay our ability to deliver products to customers; and jeopardize the security of our facilities. A cyber incident could be caused by malicious outsiders (including state-sponsored espionage or cyberwarfare) or insiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware, “ransomware” and other cyber-attacks, are increasing in both frequency and sophistication. Many victims of ransomware are forced to pay significant ransoms to regain access to their critical business data, and we may not be permitted under various regulations and laws to make such payments. With more of our employees working part-time remotely and in periods of significant acquisition integration activity such as we are currently undertaking, there may be increased opportunities for unauthorized access and cyber-attacks. Further, the United States government has warned of the potential risk of Russian cyberattacks stemming from the ongoing Russian-Ukraine conflict. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could subject us to legal or regulatory sanctions and have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
Despite our implementation of security measures, our IT systems, like those of other companies, are vulnerable to damages from computer viruses, natural disasters (which may become more frequent due to climate change), unauthorized access, cyber-attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations and include the theft of our intellectual property, trade secrets, customer information, human resources information or other confidential information. The foregoing matters could cause significant damage to our reputation, affect our relationships with its customers, lead to claims against us, fines and other penalties assessed upon us by governmental authorities, and ultimately harm our business and financial performance. In addition, we may be required to incur significant costs to remediate and protect against damage caused by these disruptions or security breaches in the future.
There is ongoing significant competition to address the evolution of the automotive industry towards electric vehicles, autonomous vehicles and mobility on demand services, and our failure to adapt our strategies and operations successfully could have a material adverse effect on our business, results of operations and financial condition.
The global automotive industry is experiencing a period of significant technological change, and we are making significant investments to develop and acquire technologies and products that will enhance our competitiveness. Future automotive vehicle production is expected to be affected significantly by additional industry or consumer behaviors, including the development and use of autonomous and electric vehicles and increasing use of car and ridesharing and on-demand transportation as a service, as well as related regulations. Our future success is dependent on our ability to execute our long-term strategies addressing the evolution of the automotive industry and customer utilization of personal transportation. The rapidly evolving nature of the markets in which we compete has attracted, and may continue to attract, new entrants, including new entrants from outside the traditional automotive supply industry. Further, in comparison to us, our competitors may foresee the course of market developments more accurately, develop superior products and technologies, produce similar products at a lower cost, or adapt quicker to new industry technologies. If we do not accurately predict, prepare for and respond to new kinds of technological innovations, market developments and changing customer needs, our long-term competitiveness could be harmed significantly and our business, results of operations and financial condition could be materially and adversely impacted.
Our ability to market our products successfully depends on acceptance of our products by existing and potential customers and consumers, as well as the success of our customers.
We have been, and will continue to be, required to educate potential customers and demonstrate that the merits of our existing products justify the costs associated with them. Similar and enhanced efforts will be required with existing and potential customers for additional products and technologies we develop, acquire or license. Customers will only include our products if there appears to be consumer demand. For our automotive products, we rely on OEMs and applicable dealer networks to market our products to consumers, and we do not have any control over the marketing budget or messaging nor the training of employees and agents regarding our products. Further, OEMs and dealer networks may market products offered by our competitors, including products manufactured by such OEMs. If customers or consumers conclude that our automotive products are unnecessary or too expensive or that our competitors offer more favorable sales terms or better products, OEMs and other customers may reduce availability or decline to include our products in their vehicles.
Our ongoing efforts to optimize our global supply chain could cause supply disruptions and be more costly, time-consuming and resource-intensive than expected.
Our ongoing efforts to optimize the efficiency of our global supply chain could cause supply disruptions and could be more expensive, time-consuming and resource-intensive than expected. Furthermore, certain of our suppliers may decide to discontinue business with us or limit the allocation of products to us or we may become too dependent on one or more suppliers, which could result in our inability to fill our supply needs and jeopardize our ability to fulfill our contractual obligations, which could in turn, result in a decrease in revenues and profitability, contract penalties or terminations, and damage to customer relationships.
We manage our business based on projected future sales volume, which is highly dependent on information received from customers and general market data, and any inaccuracies or changes in such information could adversely affect our business, results of operations and financial condition.
We manage our business based upon projected future sales volumes, which are based upon many factors, including awarded business and assumptions of conversion rates thereof, customers’ forecasts and general macroeconomic and industry market data. Our product revenues generally are based upon purchase orders issued by our customers, with updated production schedules for volume adjustments, and our customers generally do not guarantee sales volumes. As such, we typically do not have a backlog of firm orders at any point in time. In addition, awarded business may include business under arrangements that our customers have the right to terminate without penalty at any time. Further, our customers’ forecasts are subject to numerous assumptions, and such forecasts often are changed rapidly with limited notice. Therefore, our actual sales volumes, and thus the ultimate amount of revenue that we derive from such sales, are not committed. We also must incur costs and make commitments well in advance of the receipt of orders and resulting revenues from customers. If actual production orders from our customers are not consistent with our projected future sales volumes, especially for our higher-margin products, we could realize substantially less revenue and incur greater expenses over the life of vehicle programs.
The receipt of orders and resulting revenues from customers is significantly affected by global automotive production levels. Recent macroeconomic, geopolitical and industry factors noted above have made it particularly challenging for us to project future sales volumes and manage our business.
The material reduction in sales from any of our principal customers, due to acquisition activity, insolvency or otherwise, could materially and adversely affect our business, results of operations, cash flows and financial condition.
For the year ended December 31, 2022, our top two customers were Lear and Adient, which comprised 16% and 15%, respectively, of our product revenues. Combined, approximately 70% of product revenues to these customers was sourced directly by the OEMs. Our products supplied to General Motors and Hyundai represented 15% and 11% of our total product revenues for the year ended December 31, 2022. The continued growth, viability and financial stability of our principal customers, as well as the OEMs to which our products are supplied, are critical to our success. The loss of any significant portion of our sales from either of these customers or other significant customers, whether due to acquisition activity, insolvency or otherwise, would have a material adverse effect on our business, results of operations, cash flows and financial condition. We sometimes experience, and we expect to continue to experience, a delay in our collection of accounts receivable balances from our customers, which may be significant and could be at risk in the event of their bankruptcy or other restructuring.
In addition, if any of our significant customers successfully insources products that we currently manufacture, whether by the acquisition of one of our competitors or otherwise, the discontinuation or loss of business as a result would have an adverse impact on our business and financial performance. For example, Lear recently has acquired certain companies that have competed with us historically and has announced its intent to insource more products and technologies in the future, and Lear may compete with us directly in the future. The impact of Lear’s acquisitions on our business with Lear, as well as with OEMs and other Tier 1s, is unknown and could adversely impact our financial condition, results of operations and cash flows.
Our business is subject to risks associated with manufacturing processes.
If certain of our existing production facilities become incapable of manufacturing products or production capacity is limited for any reason, such as terror attacks, war, or other civil disturbances, natural disasters (which may be more frequent due to climate change), other catastrophic events, public health crises, labor shortages, work stoppages, or other events that cause facility closures or production disruptions, we may be unable to meet production requirements, sales and profits could decline, and our commercial reputation could be damaged. For example, we experienced extended work stoppages in the first half of 2020 as the pandemic spread and governmental authorities initiated “lock-down” orders for all non-essential activities. Without operation of certain existing production facilities, we may be limited in our ability to deliver products until we restore the manufacturing capability at the particular facility, find an alternative manufacturing facility or arrange an alternative source of supply.
We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our insurance policies may not offset the lost sales, harm to our business reputation or increased costs that may be experienced during the disruption of operations. Further, any such proceeds may be received and accounted for in a different reporting period, which could materially and adversely affect our business, financial condition, results of operations and cash flow generally or for a specific reporting period.
We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights and trade secrets. Our intellectual property plays an important role in maintaining our competitive position in many of the markets that we serve.
We cannot guarantee, however, that we will be able to secure all desired protection, nor that the steps we have taken to protect our intellectual property will be adequate, to prevent infringement of our rights or misappropriation or theft of our technology, trade secrets or know-how. For example, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some of the countries in which we operate. In addition, while we generally enter into confidentiality agreements with our employees and third parties to protect our trade secrets, know-how, business strategy and other proprietary information, such confidentiality agreements could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the design, manufacture or operation of our products. If it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail. Further, adequate remedies may not be available in
the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. Finally, for those products in our portfolio that rely on patent protection, once a patent has expired, the product is generally open to competition. Products under patent protection usually generate higher revenues and profitability than those not protected by patents. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows.
In addition, our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Foreign governments may adopt regulations, and foreign governments or courts may render decisions, requiring compulsory licensing of intellectual property rights, or foreign governments may require products to meet standards that serve to favor local companies or provide reduced protection relative to other countries.
Our Board approved the Company’s plan to exit its non-automotive electronics business, including a potential sale or wind-down of the business, and will incur significant non-cash expenses.
In December 2022, our Board approve the Company’s plan to exit its non-automotive electronics business to strengthen the Company’s core business and focus its resources and equipment with businesses and investments that are more strategic and profitable. The Company will continue to sell certain business products until the exit is complete. For the twelve months ended December 31, 2022, the Company’s product revenues from the business were $17.1 million. In connection with approval of the plan to exit the non-automotive electronics business, the Company recorded non-cash impairment charges of $9.4 million, $5.6 million and $0.7 million for write-downs of inventory, intangible assets, and property and equipment, respectively. The Company is expected to incur total non-cash expenses of between $13 million and $18 million. The Company may be unable sell the business or substantially all of its assets on a timely basis, for a reasonable purchase price or at all, any wind-down of the business may not occur on a timely basis or require more of the Company’s resources than anticipated, the Company’s incurred expense related to the exit from or wind-down of the business may exceed the Company’s projections and there may be additional expense and costs in future periods.
Legal, Regulatory and Compliance Risks
Economic and trade policy, including tariffs and customs regulations, could have a material and adverse effect on our business.
The U.S. has established free trade laws and regulations that set certain duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as China and Mexico, could have a material adverse effect on our business and financial results. In recent years, the U.S. and Chinese governments have imposed a series of significant incremental retaliatory tariffs to certain imported products. Most notably with respect to the automotive industry, the U.S. imposed tariffs on imports of certain steel, aluminum and automotive components, and China imposed retaliatory tariffs on imports of U.S. vehicles and certain automotive components. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these tariffs and any other future regulatory actions implemented on a broader range of products or raw materials could materially affect our business, including in the form of increased cost of goods sold, decreased margins, increased pricing for customers, reduced sales and disruption in our supply chain.
In addition, various countries regulate cross-border transactions of certain products through import permitting and licensing requirements. The exportation, re-exportation, transfers within foreign countries and importation of our products, including by our suppliers and vendors, must comply with these laws and regulations, and any violations may result in reputational harm, government investigations and penalties, and a denial or curtailment of importing or exporting activities. Complying with export control and sanctions laws may be time consuming, may increase our costs, and may result in the delay or loss of sales opportunities. If we are found to be in violation of U.S. sanctions or export control laws, or similar laws in other jurisdictions, we and the individuals working for us could incur substantial fines and penalties. Changes in export, sanctions or import laws or regulations may delay the introduction and sale of our products in the U.S. and international markets, require us to spend resources to seek necessary government authorizations or to develop different versions of our products, or, in some cases, prevent the export or import of our products to certain countries, regions, governments, persons or entities, which could adversely affect our business, financial condition and operating results.
We may face particular privacy, data security and data protection risks.
We are subject to several data privacy and data security laws and regulations in the various jurisdictions that we operate. An increasing number of U.S. states have enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of personal information, such as social security numbers, financial information and other information. For example, several U.S. territories and all 50 states have adopted data breach rules that require timely notification if a company has experienced the unauthorized access or acquisition of personal information. Similarly, many of the requirements mandated by the California Consumer Protection Act (“CCPA”) that went into effect on January 1, 2020 have not yet been interpreted by courts, and best practices are still being developed by the industry, all of which increase the risk of compliance failure and related adverse impacts. Furthermore, on January 1, 2023, substantive provisions of the California Privacy Rights Act (“CPRA”) became effective, in some cases requiring new or modified practices and operations. Other states enacted similar privacy laws in recent years and other states are considering doing so. These privacy laws may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow private class-action litigation and carry significant potential liability for our business.
Legislators and/or regulators in foreign countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws as well. In particular, the European Union’s General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018, imposes additional obligations and risk upon our business and which increases substantially the penalties to which we could be subject in the event of any non-compliance. Many countries have enacted similar types of legislative and regulatory requirements concerning data protection, and additional countries are considering similar legal frameworks.
The CCPA, CPRA, GDPR and other similar laws and regulations including those recently or soon to be enacted (such as the SECs proposed cybersecurity disclosure regulations), as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention to monitor and be in compliance with, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
Defects or quality issues associated with our automotive and medical products, as well as a significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers, or an investigation regarding vehicle safety generally, could adversely affect the results of our operations.
Our design, manufacture and marketing of automotive products may subject us to warranty claims and product liability in the event that our products (or the products of our customers that incorporate our products) fail to perform as expected and, in the case of product liability, such failure of our products (or the products of our customers that incorporate our products) results or is alleged to result in bodily injury or property damage. This risk may be enhanced for any new developed products or recently acquired products, which has been a significant part of our growth in recent years. If any of our products are or are alleged to be defective, we also may be required by our customers or regulators to participate in a recall or other corrective action involving such products, which we have been subject to periodically. Automotive manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims, as well as requiring their suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. OEMs historically have recalled vehicles for perceived defects in seat heaters, and we have incurred liabilities in connection with the recalls and other field actions. In addition, governmental regulatory agencies throughout the world, such as NHTSA in the U.S., have safety standards that require manufacturers to remedy defects related to vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard.
Any large liability claims, if made, could exceed our insurance coverage limits and insurance may not continue to be available on commercially acceptable terms, if at all, and we may incur significant costs to defend these claims. In addition, we may not be successful in recovering amounts from third parties, including suppliers, in connection with these claims. In certain instances, allegedly defective products may be the result of components supplied by our supply chain, and we may be limited in our ability to obtain recovery from our suppliers of materials or services included within our products that are associated with product liability and warranty claims, particularly if the affected items relate to global platforms or involve defects that are identified years after production. A recall, product liability or warranty claim brought against us that is not insured or is in excess of our available insurance, and if other third parties do not contribute or indemnify us, could have an adverse impact on our results of operations and reputation or market acceptance of our products.
The design, manufacture and marketing of medical products involve certain inherent risks. Manufacturing or design defects, component failures, unapproved or improper use of our products, or inadequate disclosure of risks or other information relating to the use of our products can lead to regulatory action, injury or other serious adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or as required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall, inadequate disclosure or defect could result in significant costs and lost sales and customers, enforcement actions and/or investigations by state and federal governments or other enforcement bodies, as well as negative publicity and damage to our reputation that could reduce future demand for our products. Personal injuries relating to the use of our products can also result in significant product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in regulatory approval of new products or the imposition of post-market approval requirements, such as further clinical testing. Such clinical testing is costly and time-consuming and could delay market approval or the meeting of additional post-market requirements.
Our business may be negatively impacted by the effects of climate change and by regulatory and stakeholder-imposed requirements to address climate change and other sustainability issues.
As evidenced by shifting industry and consumer behaviors, including the development and use of electric vehicles, the automotive industry and consumers have a heightened focus on climate change and the environmental impact of product manufacturing and end use. This increased focus on sustainability and the environmental impact of the automotive industry and manufacturing processes has caused our customers and other stakeholders to impose additional requirements on us and our suppliers, which often exceed regulatory standards. These customer requirements include increased tracking and reporting of greenhouse gas emissions and other environmental metrics, reduced waste and wastewater from operations, increased use of sustainable materials in our products, and the use of renewable energy sources in our factory operations. We expect to incur increased operating costs and capital expenditures to procure renewable energy and additional equipment or make operational and process changes to comply with customer requirements. To the extent we are unable to meet or exceed customer sustainability requirements, demand for our products and our revenues could be adversely impacted. A failure to adequately meet other stakeholder expectations may result in the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent.
Climate change is continuing to receive ever increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to and we expect will continue to lead to legislative and regulatory efforts in many jurisdictions to limit greenhouse gas emissions. New federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell, lead to changes in automotive technology, and expedite the transition to electric vehicles. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require increased capital expenditures to improve our product portfolio to meet such new laws, regulations and standards. Such legislative developments could adversely impact our business by increasing costs and could require us to make changes to our operations and result in substantial additional capital expenditures and operating costs. These additional costs, changes in operations, or loss of revenues could have a material adverse effect on our business, financial condition, and results of operations.
Finally, the effects of climate change, such as increased intensity, frequency or duration of storms, droughts or other severe weather events may create financial or physical risk to us. Physical risks include disrupting the manufacturing, logistics and procurement activities and employee working conditions of us, our supply chain and our customers. Financial risks include the fluctuating demand for our products and technologies based on the climate where consumers live, since our business involves thermal management technologies, as well as potential additional costs of insurance and maintaining facilities in certain regions prone to climate risk. We could also face indirect financial risks passed through the supply chain, and process disruptions due to physical climate changes could result in price modifications for our products and the resources needed to produce them. Any of the foregoing could have a material adverse effect on our financial condition and results of operations.
Our patient temperature management business is subject to extensive industry regulation and failure to comply with all applicable rules and regulation may adversely impact us.
Our patient temperature management products are subject to extensive, complex, costly and evolving government regulation. In the United States, this is principally administered by the Food and Drug Administration (“FDA”). Various regulatory agencies in foreign countries where our medical products are sold also regulate that business. Under both United States and foreign country regulations, we are subject to periodic inspection of our facilities (including third-party facilities that are performing services for us), procedures and operations and testing of our products. Following such FDA inspections, should any noncompliance with regulations
or other quality issues be noted, we may receive observations, notices, citations and/or warning letters that could require us to get FDA approval of a corrective action plan and modify certain activities identified during the inspection, possibly at a significant cost. We are also required to report adverse events associated with our medical products to the FDA and other foreign regulatory authorities where our products have been approved or received market clearance. Unexpected or serious health or safety concerns could result in liability claims, recalls, market withdrawals or other regulatory actions. Changes in laws or regulations could require us to change the way we operate or to utilize resources to maintain compliance, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in fines or revocation of our operating permits and licenses or, in rare circumstances, market withdrawal of the product.
The process for obtaining governmental approval to manufacture and market new medical devices is time-consuming and costly. We are dependent on receiving FDA and other governmental or third-party approvals prior to manufacturing, marketing and shipping any new medical products. We cannot be certain that any new medical products we develop will receive FDA or other necessary approvals. Also receipt of approval in one country does not guarantee approval by the FDA or any other foreign regulatory agency.
Any failure to comply with anti-corruption laws and regulations could have a material and adverse effect on our reputation, business and financial results.
Our operations outside of the United States require us to comply with various anti-bribery and anti-corruption regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act and the China Anti-Unfair Competition Law. Violations of these laws, which are complex and often difficult to interpret and apply, could result in significant criminal penalties or sanctions that could adversely affect our business, financial condition, results of operations and cash flows.
We are involved from time to time in various legal and regulatory proceedings and claims, which could adversely affect our financial performance.
We are involved in various legal and regulatory proceedings and claims that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our customers, suppliers or competitors, intellectual property matters, personal injury claims, environmental matters, tax matters and employment matters. Such legal and regulatory proceedings could result in an adverse outcome for the Company that would adversely affect our financial condition, results of operations and cash flows.
Tax matters, including changes in the corporate tax rates, disagreement with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
We are subject to income and other taxes in the U.S. and internationally. We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our result of operations and financial position.
We also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other changes in the application or interpretation of tax legislation and other initiatives, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
The value of our deferred tax assets may not be realized, which could materially and adversely affect our operating results.
As of December 31, 2022, we had approximately $49 million in net deferred tax assets, inclusive of a $37 million valuation allowance. These deferred tax assets include net operating loss carryovers and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our financial statements.
We are required to comply with environmental laws and regulations that could cause us to incur significant costs.
Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future. We may also assume, or be deemed to assume, significant environmental liabilities in acquisitions. Environmental liability may be imposed without regard to fault, and under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Violations of these requirements could result in fines or sanctions, obligations to investigate or remediate contamination, third party property damage or personal injury claims due to the migration of contaminants off-site, or modification or revocation of our operating permits, which could materially and adversely affect our financial condition, results of operations and cash flows.
Financial Risks
We are subject to significant foreign currency risk and foreign exchange exposure related to our global operations.
A significant portion of our global transactions is conducted in currencies other than the U.S. Dollar, including the Euro, the Chinese Renminbi, the Vietnamese Dong, the Hungarian Forint, the North Macedonian Denar, the Ukrainian Hryvnia, the South Korean Won and the Mexican Peso. While we sometimes employ financial instruments to hedge some of our transactional foreign exchange exposure, developing an effective and economical foreign currency risk strategy is complex and expensive and no strategy can completely insulate us from those exposures. Exchange rates can be volatile and could adversely affect our financial results and comparability of results from period to period. Such exchange rate volatility could also increase the costs of raw materials or components from foreign suppliers, and as a result, our profitability could be adversely affected.
Our existing indebtedness and the inability to access capital markets could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance.
As of December 31, 2022, our total consolidated indebtedness was $235.1 million, with $264.9 million available for additional borrowings under the Second Amended and Restated Credit Agreement subject to specified conditions that Gentherm currently satisfies. In 2022, we incurred significant indebtedness in connection with our acquisitions of Alfmeier and Dacheng. We may also incur additional indebtedness in the future, including in connection with additional acquisitions or significant capital expenditures. If our outstanding borrowings increase, including under existing availability of revolving credit or if we incur additional indebtedness, the amount of our outstanding debt could have important, adverse consequences to us and our investors, including:
•requiring a substantial portion of our cash flow from operations to make interest payments;
•making it more difficult to satisfy other obligations;
•increasing our vulnerability to general adverse economic and industry conditions;
•reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our businesses;
•limiting our flexibility in planning for, or reacting to, changes in our businesses and industries; and
•limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise.
Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: incur additional debt, create liens, make certain payments or distributions (including for the repurchase or redemption of our shares), engage in mergers or consolidations, make certain dispositions and transfers of assets, enter into transactions with affiliates and guarantee indebtedness. While not unusual for financings of the type that we have, the restrictions in our credit facilities may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute our business plans, take advantage of business opportunities, or react to changing industry conditions.
To the extent that we incur additional indebtedness, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our ability to make payments of principal and interest on our indebtedness depends upon our future performance. If our cash flow from operations is not sufficient to service our outstanding debt or to repay the
outstanding debt as it becomes due, we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt and we may have to reduce or delay planned capital or operating expenditures. The occurrence of any of such events could have a material adverse effect upon our business, cash flows, financial condition and results of operations. If an event of default would occur under our existing debt agreements or any additional indebtedness, our lenders could declare all amounts outstanding to be immediately due and payable, which may cause cross-defaults under our other debt obligations. If our lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to all lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our existing credit facilities, the lenders would have the right to foreclose on certain of our assets, which could have a material adverse effect on our business, results of operations and financial condition.
We utilize various strategies to move funds between countries to manage global liquidity needs without material adverse tax consequences. Any repatriation of cash to the U.S. may result in various tax consequences and the movement of capital remains subject to evolving government regulation, which could have an adverse impact on our liquidity and cash flows.
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 and currently there are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Gentherm Incorporated. As of December 31, 2022, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled $108.6 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. In addition, the movement of capital between our subsidiaries and us in different countries remains subject to evolving government regulation and geopolitical stability, and our liquidity and cash flows could be impacted adversely upon regulatory and geopolitical changes in the future.
We are exposed to risks related to accounts receivable sales agreements.
We have entered into several receivables factoring arrangements, including acquired in connection with the Alfmeier acquisition, that permit us to sell certain accounts receivable on a revolving basis, subject to outstanding balances and concentration limits. These agreements permit us to recover on our accounts receivable for specific customers sooner than if they were not in place and help reduce the risk of non-payment by such customers. A limited number of our customers participate in these programs to date. If we do not enter into these agreements, our financial condition, results of operations and cash flows could be materially and adversely affected by delays or failures in collecting trade accounts receivables for the applicable customers. In addition, if any of the financial institutions with which we have these agreements experiences financial difficulties or otherwise modifies or terminates these agreements, such modification, termination or other loss of these arrangements could have a material and adverse effect upon our liquidity and cash flows.
We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations.
We have undertaken significant restructuring activities in recent years that remain ongoing and may take future restructuring actions to realign and resize our production capacity and cost structure, lower our cost base, improve our financial performance and cash flow generation, and create a simplified organization best positioned to deliver on our key financial and operational priorities. Charges related to these actions or any further restructuring actions may have a material adverse effect on our results of operations and financial condition. We cannot ensure that any current or future restructuring will be completed as planned, on a timely basis or at all, will be on budget, or achieve the desired results.
Common Stock Investment Risks
The price of our Common Stock may fluctuate significantly.
The price of our Common Stock on the Nasdaq Global Select Market has experienced substantial price volatility and may continue to do so in the future. Additionally, the Company, the automotive industry and the stock market as a whole have experienced significant stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its stock to exceed the stock’s price at a given point in time. If the Company fails to meet expectations related to future
growth, profitability, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.
On December 11, 2020, the Board of Directors authorized a new stock repurchase program, pursuant to which the Company is authorized to repurchase up to $150 million of common stock over a three-year period. Repurchases 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 Company stock repurchases under the program may result in stock price and volume fluctuations. During the year ended December 31, 2022, the Company did not make any repurchases under the 2020 Stock Repurchase Program and have a remaining repurchase authorization of $130.0 million as of December 31, 2022.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.	UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. 	PROPERTIES
As of December 31, 2022, we operate in over 32 locations across 14 countries, which are primarily for manufacturing, assembly, distribution, warehousing, engineering and testing. The majority of our Automotive facilities located outside of the U.S. are principally used in manufacturing and distribution and are located in China, Hungary, Mexico, North Macedonia, South Korea, Ukraine, Czech Republic, Germany, and Vietnam. Our global headquarters is located in Northville, Michigan, our European headquarters is located in Odelzhausen, Germany and our Asia-Pacific headquarters is located in Shanghai, China. Our Medical business is principally comprised of our headquarters and manufacturing site located in Cincinnati, Ohio and our manufacturing sites in Germany and China. We also have sales offices, warehouses and engineering centers, strategically located throughout the world. Nearly all of our manufacturing and distribution sites in Mexico and Asia are leased, while most of our European sites are owned.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.	LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of our business, however, there is no current material pending litigation to which we are a party and no material legal proceedings were terminated, settled or otherwise resolved during the fourth quarter of the fiscal year ended December 31, 2022.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.	MINE SAFETY DISCLOSURES.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock trades on the Nasdaq Global Select Market under the symbol “THRM.”
Holders
As of February 17, 2023, our Common Stock was held by 32 shareholders of record. A substantially greater number of holders are beneficial owners whose shares of record are held by banks, brokers and other nominees.
Dividends
We have not paid any Common Stock cash dividends since formation, and we do not expect to pay any in the foreseeable future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon business conditions, our earnings and financial condition and other factors. Currently, our bank credit facilities limit payment of dividends on our Common Stock.
Stock Repurchase Program
In December 2020, the Board of Directors authorized a new stock repurchase program (the “2020 Stock Repurchase Program”). pursuant to which 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. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions (including Rule 10b5-1 trading plans), and may be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The 2020 Stock Repurchase Program may be modified, extended or terminated at any time without prior notice.
Issuer Purchases of Equity Securities During Fourth Quarter 2022
Period
(a)
Total Number of Shares Purchased
(b)
Average Price
Paid Per Share
(c)
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs
(d)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the 2020 Stock Repurchase Program
October 1, 2022 to October 31, 2022
-
$
-
-
130,000,105
November 1, 2022 to November 30, 2022
-
$
-
-
130,000,105
December 1, 2022 to December 31, 2022
-
$
-
-
130,000,105
Performance graph
The following graph reflects the comparative changes in the value from December 31, 2017 through December 31, 2022, assuming an initial investment of $100 and the reinvestment of dividends, if any, in (1) our Common Stock, (2) the NASDAQ Composite index, (3) the Russell 2000 Index and (4) the Dow Jones U.S. Auto Parts Index. Historical performance may not be indicative of future shareholder returns.
As of December 31,
Gentherm Incorporated
$
100.00
$
125.92
$
139.81
$
205.42
$
273.70
$
205.64
NASDAQ Composite
$
100.00
$
97.16
$
132.81
$
192.47
$
235.15
$
158.65
Russell 2000
$
100.00
$
88.99
$
111.70
$
134.00
$
153.85
$
122.41
Dow Jones US Auto Parts
$
100.00
$
69.37
$
88.40
$
103.88
$
125.69
$
92.46

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. 	RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. 	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (and notes related thereto) and other more detailed financial information appearing elsewhere in this Annual Report. Further, you should read the following discussion and analysis of our financial condition and results of operations together with the “Risk Factors” included elsewhere in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Forward-Looking Statements” in Part I of this Annual Report.
Overview
Gentherm Incorporated is the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry. Automotive products include variable temperature Climate Control Seats, heated automotive interior systems (including heated seats, steering wheels, armrests and other components), battery performance solutions, cable systems, lumbar and massage comfort solutions, valve system technologies, and other electronic devices. Medical products include patient temperature management systems. The Company is also developing a number of new technologies and products that will help enable improvements to existing products and will lead to new product applications for existing and new markets. 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.
Our sales are driven by the number of vehicles produced by the OEMs, which is ultimately dependent on consumer demand for automotive vehicles, our product content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. Historically, new vehicle demand and product content (i.e. vehicle features) have been driven by macroeconomic and other factors, such as interest rates, automotive manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. Vehicle content has also been driven by trends in consumer preferences, such as preferences for smart devices and features, personalized user experience, and comfort, health and wellness. Economic volatility or weakness, as well as geopolitical factors, in North America, Europe or Asia, have had and could result in a significant reduction in automotive sales and production by our customers, which have had and would have an adverse effect on our business, results of operations and financial condition. Since 2020, the automotive industry has experienced fluctuating demand and production disruptions related to supply chain challenges, facility closures, labor shortages, work stoppages and inflationary pressures, as described below. We believe our diversified OEM customer base and geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns and benefit from industry upturns in the ordinary course. However, shifts in the mix of global automotive production to higher cost regions or to vehicles that contain less of our product content as well as continuing production challenges and inflationary pressures could adversely impact our profitability. In addition, we may be adversely impacted by volatility or weakness in markets for hybrid or electric vehicles specifically. We believe our products offer certain advantages for hybrid and electric vehicles, including improved energy efficiency, and position us well to withstand changes in the volume mix between vehicles driven by internal combustion engines and hybrid and other electric vehicles. We believe our industry is increasingly progressing towards a focus on human comfort and health, which is evidenced by increasing adoption rates for comfort products. We believe that products we are developing, such as ClimateSense® and our acquisition of Alfmeier’s pneumatic comfort solutions, position us well to address trends in consumer preferences such as personalized user experience, comfort, health and wellness.
Recent Trends
General Macroeconomic and Geopolitical Conditions
Since 2020, the global economy has experienced significant volatility and disrupted supply chains, which has had a widespread adverse effect on the global automotive industry. These macroeconomic conditions have resulted in longer lead times and delays in procuring component parts and raw materials, and resulted in inflationary cost increases in certain raw materials, labor and transportation. These broad-based inflationary impacts have negatively impacted the Company’s financial condition, results of operations and cash flows. Although we are optimistic that the worst of the global macroeconomic volatility is in the past, the direct and indirect impacts on our markets, operations, and financial performance have been unpredictable. As a result of this continued uncertainty, there may still be impacts on our industry, operations, workforce, supply chains, distribution systems, and demand for our products in the future which cannot be reasonably estimated at this time.
Additionally, the United States and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflict between Russia and Ukraine. In February 2022, Russia launched a full-scale military invasion of Ukraine. As a result of the conflict, the United States, United Kingdom, European Union and other countries have levied economic sanctions and bans on Russia and Russia has responded with its own retaliatory measures. These measures have impacted the price of certain raw materials and energy and could have a lasting impact on regional and global economies.
Our facility in Vynohradiv is on the far western corner within the Transcarpathia region of Ukraine near the Hungary border. In 2022, products manufactured at our Ukraine facility represented approximately 8% of the Company’s total revenue, including automotive cables, seat heaters and steering wheel heaters, compared to 11% in 2021. At this time, our Ukraine facility is operating at normal levels and we continue to execute contingency plans and, in coordination with certain customers, specific equipment and production relocations leveraging our flexible global manufacturing footprint. Certain of our employees in Ukraine are routinely conscripted into the military and/or sent to the Russian border to fight in the ongoing conflict. We have incurred, and will likely continue to incur costs to support our employees and relocate equipment and production based on customer and company needs. Further, most of our products manufactured in Ukraine are shipped across the border from Ukraine to Hungary for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, we may experience a significant disruption to our operations. Our response to the ongoing conflict is based on a severity level contingency response plan that has been developed with certain customers. As the situation in Ukraine is very fluid, we continue to monitor its effects on our business and we continue to work closely with our customers to adjust our contingency response as necessary.
Supply shortages of semiconductor chips and other components have resulted in decreases in global automotive vehicle production and significant volatility in customer vehicle production schedules. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, including Gentherm, have been unable to fully meet the vehicle production demands of the OEMs due to events which are outside the Company's control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, fires at suppliers’ facilities, significant weather events impacting semiconductor supplier facilities in the southern United States, and other extraordinary events. The Company has experienced and may continue to experience direct impacts of ongoing shortages of semiconductors. Our ability to meet customer orders without significant delay and/or expense remains subject to significant uncertainty.
Global inflation has increased significantly over the past year. Changing costs of freight, materials, equipment, labor and other inputs used to manufacture and sell our products and logistics costs, in particular, have impacted and may in the future impact operating costs and, accordingly, may affect the prices of our products. We are involved in continuing programs to mitigate the impact of cost increases through identification of sourcing and manufacturing efficiencies where possible. However, there have been, and there may still be, impacts we are not able to fully mitigate or pass through the increases in our operating costs.
We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain international operations into U.S. Dollars as part of the consolidation process. Therefore, fluctuations in foreign currency exchange rates can create volatility in the results of operations and may adversely affect our financial condition.
In response to the global supply chain instability and inflationary cost increases, the Company has taken several actions to minimize any potential and actual adverse impacts by working closely with its suppliers and customers to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise. We expect global supply chain instability will continue to have an adverse impact on our business and financial performance for the foreseeable future, and such adverse impact may be material. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy continue to evolve. Accordingly, the significance of the future adverse impact on our business and financial statements remains subject to significant uncertainty as of the date of this filing.
Acquisitions
On July 13, 2022, the Company completed the acquisition of Jiangmen Dacheng Medical Equipment Co. Ltd (“Dacheng”) and its wholly owned subsidiary, IOB Medical, Inc. Dacheng, a privately held manufacturer of medical materials and medical equipment, including patient temperature management solutions, for numerous local and international customers. The acquisition provides Gentherm Medical a local presence in China’s high-growth market for patient warming devices and other medical device products, while also expanding overall manufacturing capacity to include a low-cost manufacturing site. The total consideration for this acquisition was $35.0 million, which is comprised of cash payments, net of cash acquired. The purchase agreement also includes future cash payments of up to $3.0 million, contingent upon the achievement of certain performance metrics and continued
employment of the former majority shareholder through a series of defined dates. These contingent payments will be accounted for as compensation expense and will be recorded as a component of selling, general and administrative.
On August 1, 2022, the Company acquired 100% of the equity interests of Alfmeier Präzision SE (“Alfmeier”) a global leader in automotive lumbar and massage comfort solutions and a leading provider of advanced valve systems technology, integrated electronics and software. The acquisition further expands the Company's current value proposition beyond thermal in comfort, health, wellness, and energy efficiency and aligns well with global consumer demand for expanded offerings in vehicle passenger comfort. The total consideration for this acquisition was $170.7 million. The Company made cash payments of approximately $170.4 million, net of cash acquired.
See Note 4, “Acquisitions” of the consolidated financial statements included in this Report for additional information.
Impairments - Non-Automotive Electronics Business
On December 31, 2022, the Company approved a plan to exit its non-automotive electronics business to strengthen the Company’s core business and focus its resources and equipment with businesses and investments that are more strategic and profitable. The Company will continue to sell certain non-automotive electronics products until the exit is complete.
The Company is evaluating a potential sale of the non-automotive electronics business or substantially all of its assets. If such sale is not pursued or is unsuccessful, the Company intends to wind-down the operations of the business over approximately eight to twelve months, subject to discussions with customers and suppliers. In the event of a wind-down, certain property, plant and equipment will be utilized by other operations of the Company.
During the year ended December 31, 2022, the Company recorded non-cash impairment charges of $9.4 million, $5.6 million and $0.7 million for write downs of inventory, intangible assets and property and equipment, respectively, within the Automotive segment. Write downs of inventory are recorded in Cost of sales. Write downs of intangible assets and property and equipment are recorded in Impairment of intangible assets and property and equipment.
Light Vehicle Production Volumes
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle, and other factors that may limit or otherwise impact production by us, our supply chain and our customers. According to the forecasting firm S&P Global Mobility (February 2023 release), global light vehicle production in 2022 in the Company’s key markets of North America, Europe, China, Japan and Korea, as compared to 2021, are shown below (in millions of units):
% Change
North America
14.3
13.0
9.7
%
Europe
15.8
15.9
(0.5
)%
Greater China
26.4
24.8
6.3
%
Japan / South Korea
11.2
10.9
2.6
%
Total light vehicle production volume in key markets
67.7
64.7
4.7
%
The S&P Global Mobility report (February 2023 release) forecasted light vehicle production volume in the Company’s key markets for full year 2023 to increase to 70.0 million units, a 3.4% increase from full year 2022 light vehicle production volumes. Forecasted light vehicle production volumes are a component of the data we use in forecasting future business. However, these forecasts generally are updated monthly, and future forecasts have been and may continue to be significantly different from period to period due to changes in macroeconomic conditions or matters specific to the automotive industry. Further, due to differences in regional product mix at our manufacturing facilities, as well as material production schedules from our customers for our products on specific vehicle programs, our future forecasted results do not directly correlate with the global and/or regional light vehicle production forecasts of S&P Global Mobility or other third-party sources.
New Business Awards
We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. During 2022, we secured an estimated $1,793 million of automotive new business awards (inclusive of three full quarters of Alfmeier), which is at the high end of the range of new business awards in recent years. 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 December 31, 2022, the date of this Annual 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 2022 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 as described in Item 1 under “Forward-Looking Statements” of this Annual Report.
Reportable Segments
The Company has two reportable segments for financial reporting purposes: Automotive and Medical.
See Note 19, “Segment Reporting,” to the consolidated financial statements included in this Annual Report for a description of our reportable segments as well as their proportional contribution to the Company’s reported product revenues and operating income.
Results of Operations Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
This section discusses our consolidated results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a detailed discussion of our consolidated results of operations for the years ended December 31, 2021 compared to the year ended December 31, 2020, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Results of Operations Year Ended December 31, 2021 Compared to December 31, 2020” in our annual report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 17, 2022.
The results of operations for the years ended December 31, 2022 and 2021, in thousands, were as follows:
Year Ended December 31,
Favorable /
(Unfavorable)
Product revenues
$
1,204,656
$
1,046,150
$
158,506
Cost of sales
931,006
742,519
(188,487
)
Gross margin
273,650
303,631
(29,981
)
Operating expenses:
Net research and development expenses
85,722
75,214
(10,508
)
Selling, general and administrative expenses
132,693
109,554
(23,139
)
Impairment of intangible assets and property and equipment
6,291
-
(6,291
)
Restructuring expenses
3,857
3,220
Total operating expenses
225,343
188,625
(36,718
)
Operating income
48,307
115,006
(66,699
)
Interest expense, net
(4,294
)
(2,758
)
(1,536
)
Foreign currency (loss) gain
(6,778
)
1,487
(8,265
)
Other income
1,147
1,030
Earnings before income tax
38,382
113,852
(75,470
)
Income tax expense
13,941
20,418
6,477
Net income
$
24,441
$
93,434
$
(68,993
)
Product revenues by product category, in thousands, for the years ended December 31, 2022 and 2021 were as follows:
Year Ended December 31,
% Change
Climate Control Seat
$
426,046
$
393,816
8.2
%
Seat Heaters
283,970
270,054
5.2
%
Steering Wheel Heaters
120,949
102,496
18.0
%
Automotive Cables
76,962
84,114
(8.5
)%
Battery Performance Solutions
71,907
69,594
3.3
%
Electronics
44,106
51,648
(14.6
)%
Lumbar and Massage Comfort Solutions (a)
56,980
-
100.0
%
Valve System Technologies (a)
41,980
-
100.0
%
Other Automotive
38,716
32,911
17.6
%
Subtotal Automotive segment
1,161,616
1,004,633
15.6
%
Medical segment (a)
43,040
41,517
3.7
%
Total Company
$
1,204,656
$
1,046,150
15.2
%
(a)Includes product revenues from acquisitions since their respective acquisition dates (see Note 4).
Product Revenues
Below is a summary of our Product revenues, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Variance Due To:
Favorable /
(Unfavorable)
Automotive Volume
FX
Acquisition
Pricing/ Other
Total
Product revenues
$
1,204,656
$
1,046,150
$
158,506
$
108,356
$
(55,109
)
$
102,322
$
2,937
$
158,506
Product revenues for the year ended December 31, 2022 increased 15.2% as compared to the year ended December 31, 2021. Revenue increased in all product categories except Electronics and Automotive Cables. The increase in product revenues is due to favorable volumes in our Automotive segment, the inclusion of sales from Alfmeier and Dacheng since the acquisitions, and the negotiation of lower annual price reductions and cost recoveries from customers, partially offset by unfavorable foreign currency impacts, primarily related to the Euro, Chinese Renminbi and Korean Won.
Cost of Sales
Below is a summary of our Cost of sales and Gross margin, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Variance Due To:
Favorable /
(Unfavorable)
Automotive Volume
FX
Operational Performance
Acquisitions and Other
Total
Cost of sales
$
931,006
$
742,519
$
(188,487
)
$
(65,942
)
$
30,778
$
(34,056
)
$
(119,267
)
$
(188,487
)
Gross margin
273,650
303,631
(29,981
)
$
42,414
$
(24,331
)
$
(29,696
)
$
(18,368
)
$
(29,981
)
Gross margin - Percentage of product revenues
22.7
%
29.0
%
Cost of sales for the year ended December 31, 2022 increased by 25.4% as compared to the year ended December 31, 2021. The increase in cost of sales is primarily related to increased volumes in our Automotive segment, the inclusion of expenses from Alfmeier and Dacheng since the acquisitions, inflation associated with wages, higher transportation costs and material costs, and impairment recorded related to the exit of the non-automotive electronics business. These increases were partially offset by favorable foreign currency impacts primarily attributable to the Euro and Chinese Renminbi.
Net Research and Development Expenses
Below is a summary of our Net research and development expenses, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Research and development expenses
$
105,914
$
91,807
$
(14,107
)
Reimbursed research and development expenses
(20,192
)
(16,593
)
3,599
Net research and development expenses
$
85,722
$
75,214
$
(10,508
)
Percentage of product revenues
7.1
%
7.2
%
Net research and development expenses for the year ended December 31, 2022 increased 14% as compared to the year ended December 31, 2021. The increase in net research and development expenses is primarily related to the inclusion of expenses from Alfmeier since the acquisition and increased investments in ClimateSense® and battery performance solutions, partially offset by favorable foreign currency impacts.
Selling, General and Administrative Expenses
Below is a summary of our Selling, general and administrative expenses, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Selling, general and administrative expenses
$
132,693
$
109,554
$
(23,139
)
Percentage of product revenues
11.0
%
10.5
%
Selling, general and administrative expenses for the year ended December 31, 2022 increased 21% as compared to the year ended December 31, 2021. The increase in selling, general and administrative expenses is primarily related to the inclusion of expenses from Alfmeier since the acquisition and increases in acquisition related costs, partially offset by lower incentive compensation and favorable foreign currency impacts.
Impairment of intangible assets and property and equipment
Below is a summary of our Impairment of intangible assets and property and equipment, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Impairment of intangible assets and property and equipment
$
6,291
$
-
$
(6,291
)
Impairment of intangible assets and property and equipment primarily related to the intangible asset and property and equipment impairment recorded as a result of the Company’s plan to exit its non-automotive electronics business.
Restructuring Expenses
Below is a summary of our Restructuring expenses, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Restructuring expenses
$
$
3,857
$
3,220
Restructuring expenses primarily relate to the Manufacturing Footprint Rationalization restructuring program and other discrete restructuring activities focused on optimizing our manufacturing and engineering footprint and the reduction of global overhead
expenses. See Note 5, "Restructuring and Impairments," in the notes to the consolidated financial statements included in this Annual Report for additional information.
Interest Expense
Below is a summary of our Interest expense, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Interest expense, net
$
(4,294
)
$
(2,758
)
$
(1,536
)
The increase in interest expense during the year ended December 31, 2022 compared to 2021 primarily relates to the increased interest from a higher balance on our revolving credit agreement. See Note 9, "Debt," in the notes to the consolidated financial statements included in this Annual Report for additional information.
Foreign Currency (Loss) Gain
Below is a summary of our Foreign currency (loss) gain, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Foreign currency (loss) gain
$
(6,778
)
$
1,487
$
(8,265
)
Foreign currency loss for the year ended December 31, 2022, included net realized foreign currency loss of $2.1 million and unrealized net foreign currency loss of $4.7 million.
Foreign currency gain for the year ended December 31, 2021, included net realized foreign currency loss of $1.6 million and unrealized net foreign currency gain of $3.1 million.
Other Income
Below is a summary of our Other income, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Other income
$
1,147
$
$
1,030
The increase in other income primarily is driven by the repayment of a loan to the buyer of Global Power Technologies, which previously was considered uncollectible and written-off.
Income Tax Expense
Below is a summary of our Income tax expense, in thousands, for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Favorable /
(Unfavorable)
Income tax expense
$
13,941
$
20,418
$
6,477
Income tax expense was $13.9 million for the year ended December 31, 2022, on earnings before income tax of $38.4 million, representing an effective tax rate of 36.3 %. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the unfavorable impact of the global intangible low-tax income (“GILTI”), withholding taxes, other non-deductible expenses and acquisition costs and uncertain tax positions, offset by certain favorable tax effects on equity vesting, research and development credits in various jurisdictions and the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate.
Income tax expense was $20.4 million for the year ended December 31, 2021, on earnings before income tax of $113.9 million, representing an effective tax rate of 17.9%. The effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to
certain favorable tax effects on equity vesting, intercompany transactions during the year and the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, offset by the unfavorable impact of the GILTI, withholding taxes, other non-deductible expenses and uncertain tax positions.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our Second Amended and Restated Credit Agreement. Our cash requirements consist principally of working capital, capital expenditures, research and development, operating lease payments, income tax payments and general corporate purposes. We generally reinvest available cash flows from operations into our business, while opportunistically utilizing our authorized stock repurchase program. Further, we continuously evaluate acquisition and investment opportunities that will enhance our business strategies.
As of December 31, 2022, the Company had $153.9 million of cash and cash equivalents and $264.9 million of availability under our Second Amended and Restated Credit Agreement. See Note 13, “Financial Instruments” of the consolidated financial statements included in this Report for details regarding our factoring arrangements. Significant changes in our liquidity occurred during July 2022 in connection with the close of the Alfmeier and Dacheng acquisitions. See "Material Cash Requirements" below for further information. 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 December 31, 2022, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled approximately $108.6 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 Second Amended and Restated Credit Agreement, receivables factoring arrangements, and cash flows from operations will be adequate to meet anticipated cash requirements for at least the next twelve months and the foreseeable future.
Cash and Cash Flows
The table below summarizes our cash activity for each of the last two fiscal years (in thousands):
Year Ended December 31,
Cash and cash equivalents at beginning of period
$
190,606
$
268,345
Net cash provided by operating activities
14,947
143,076
Net cash used in investing activities
(239,899
)
(48,830
)
Net cash provided by (used in) financing activities
189,927
(169,141
)
Foreign currency effect on cash and cash equivalents
(1,690
)
(2,844
)
Cash and cash equivalents at end of period
$
153,891
$
190,606
Cash Flows From Operating Activities
Net cash provided by operating activities totaled $14.9 million and $143.1 million for the years ended December 31, 2022 and 2021, respectively. Cash flow provided by operating activities for the year ended December 31, 2022 consisted primarily of net income of $24.4 million, increased by $51.8 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, and loss on disposition of property and equipment, $15.9 million for inventory provisions, and impairments of intangible assets and property and equipment of $6.3 million related to the planned exit of the non-automotive electronics business, partially offset by non-cash charges of $7.3 million for deferred income taxes and other, and $76.9 million related to changes in assets and liabilities. Cash flow provided by operating activities for the year ended December 31, 2021 consisted primarily of net income of $93.4 million, increased by $54.3 million for non-cash charges for depreciation, amortization, non-cash stock based compensation, and loss on disposition of property and equipment, partially offset by non-cash charges of $0.5 million for deferred income taxes and other, and $4.2 million related to changes i1n assets and liabilities.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $239.9 million and $48.8 million for the years ended December 31, 2022 and 2021, respectively. The increase in usage is primarily attributable to payments for the Alfmeier and Dacheng acquisitions of $205.5 million and increases in the purchases of property and equipment during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $189.9 million for the year ended December 31, 2022 and net cash used in financing activities totaled $169.1 million for the year ended December 31, 2021. Cash flows provided by financing activities for the year ended December 31, 2022 primarily included $207.0 million of debt borrowings to fund acquisitions and $1.7 million of proceeds from the exercise of common stock options, partially offset by $13.1 million of debt repayments and $5.5 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year. Cash flows used in financing activities for the year ended December 31, 2021 primarily included $153.2 million of debt repayments, $20.0 million paid to repurchase common stock and $4.1 million paid for employee taxes related to the net settlement of restricted stock units that vested during the year, partially offset by $8.3 million of proceeds from the exercise of common stock options.
Debt
The following table summarizes the Company’s debt at December 31, 2022 and 2021 (dollars in thousands):
December 31,
Interest
Rate
Principal
Balance
Interest
Rate
Principal
Balance
Credit Agreement:
U.S. Revolving Note (U.S. Dollar denominations)
5.80
%
$
232,000
1.35
%
$
35,000
Other loans
3.89% - 5.21%
2,011
5.21
%
3,750
Finance leases
N/A
1,085
N/A
-
Total debt
235,096
38,750
Current maturities
(2,443
)
(2,500
)
Long-term debt, less current maturities
$
232,653
$
36,250
Credit Agreement
Gentherm, together with certain of its subsidiaries, maintain a revolving credit note (“U.S. Revolving Note”) 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 amends and restates 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.
Finance Leases
As of December 31, 2022, there was $1.1 million of outstanding finance leases.
Other Sources of Liquidity
Receivable Factoring
The Company is party to receivable factoring agreements with unrelated third parties under which we can sell receivables for certain account debtors, on a revolving basis, subject to outstanding balances and concentration limits. The receivable factoring agreements are transferred in their entirety to the acquiring entities and are accounted for as a sale. Some of the agreements, including those assumed through the acquisition of Alfmeier, have deferred purchase price arrangements. See Note 13, “Financial Instruments” of the consolidated financial statements included in this Report for further details regarding our factoring arrangements.
Material Cash Requirements
The following table summarizes current and long-term material cash requirements as of December 31, 2022, which we expect to fund primarily with operating cash flows.
Payments Due by Period
Material Cash Requirements (in thousands)
Total
Less than 1 year
1 to 3 years
3 to 5 years
More than 5 years
Long-term debt obligations (1)
$
2,011
$
2,011
$
-
$
-
$
-
Operating lease obligations (2)
31,352
8,074
11,987
4,753
6,538
Finance lease obligations (2)
1,085
-
Purchase obligations (3)
40,130
34,809
5,321
-
-
Capital commitments (4)
6,853
6,853
-
-
-
Other
Total
$
81,631
$
52,229
$
17,943
$
4,871
$
6,588
(1)Long-term debt obligations do not include an amount payable for interest. See Note 9, “Debt,” to the consolidated financial statements included in this Annual Report for additional information.
(2)See Note 8, “Leases,” to the consolidated financial statements included in this Annual Report for additional information.
(3)Purchase obligations are comprised of commitments to secure the supply of certain semiconductor chips. We have entered into agreements with various suppliers to reserve the rights to certain semiconductor chips over the next 12 to 24 months, with volume commitments determined based on our anticipated production requirements. Such agreements provide the Company with priority access to semiconductor chips as they become available, however, these agreements do not guarantee that our suppliers will meet our requested timing and quantity. We have not included amounts for other material and component purchase obligations related to standard recurring purchases of materials for use in our manufacturing operations as these amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature. See Note 11, “Commitments and Contingencies” of the consolidated financial statements included in this Report for additional information.
(4)Capital commitments is comprised of commitments for capital expenditures. Such commitments are typically less than one year.
Additional cash payments may be required for contingent payments of up to $3.0 million related to the Dacheng acquisition. See Note 4, "Acquisitions," to the consolidated financial statements included in this Annual Report for additional information about the purchase prices associated with recent acquisition transactions.
Other Commitments
In December 2021, the Company committed to make a $5 million investment in Autotech Fund III, L.P., pursuant to a limited partnership agreement. As a limited partner, the Company will periodically make capital contributions toward this total commitment amount over the expected ten year life of the fund. The Company has made contributions of approximately $0.5 million to the Autotech Fund III, LP as of December 31, 2022. Timing of the capital contributions is unknown and therefore amounts have been excluded from the Material Cash Requirements table above.
Capital Expenditures
We anticipate capital expenditures in fiscal year 2023 of approximately $60 million to $70 million. We will continue support organic growth through capacity expansion in our facilities and make capital improvements as necessary. We believe cash on hand, cash generated from operations, and the borrowing capacity available under our Credit Agreement will be sufficient to support our capital expenditures.
Stock Repurchase Program
On December 11, 2020, the Board of Directors authorized the 2020 Stock Repurchase Program, pursuant to which 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. During the year ended December 31, 2022, the Company did not make any repurchases under the 2020 Stock Repurchase Program. The 2020 Stock Repurchase Program has $130 million of repurchase authorization remaining as of December 31, 2022.
Repurchases 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, 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.
For further information related to our stock repurchase program, see Note 15, "Equity" in the notes to the consolidated financial statements included in this Annual Report.
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 and components, labor and transportation. These inflationary cost increases are expected to continue for the foreseeable future as demand remains elevated and supply remains constrained. Although the Company has developed and implemented strategies to mitigate the impact of higher material component costs and transportation costs, these strategies, together with commercial negotiations with Gentherm's customers and suppliers have not fully offset to date and may not fully offset our future cost increases. Such inflationary cost increase may increase the cash required to fund our operations by a material amount.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In preparing these consolidated financial statements, management was required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. These estimates and assumptions are subject to an inherent degree of uncertainty. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material to our financial statements.
We have identified the following estimates as our most critical accounting estimates, which are those that are most important to aid in fully understanding and evaluating the Company’s financial condition and results of operations, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 2, "Summary of Significant Accounting Policies", of the notes to the consolidated financial statements.
Impairments of Goodwill
Critical estimates: Goodwill is tested for impairment at least annually as of December 31 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized.
The Company utilizes an income approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow that is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in our industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates and terminal value margin rates. To further support the fair value estimate determined by the income approach, the Company utilizes a market valuation approach to estimate the fair value of a reporting unit. The market approach considers historical and/or anticipated financial metrics of a reporting unit and applies valuation multiples based on recent observed transactions involving companies similar enough to the reporting units from which to draw meaningful conclusions.
Judgments and uncertainties: These fair value calculations contain uncertainties as they require management to make assumptions about future cash flows and appropriate discount rates to reflect the risk inherent in the future cash flows and to derive a reasonable enterprise value and related premium. Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape, including estimates of revenue based on production volumes over the foreseeable future and long-term growth rates, and operating margins based on historical trends and future cost containment activities.
Also, the market valuation approach is highly subjective as it requires the selection of comparable companies and valuation multiples.
Impact if actual results differ from assumptions: As of December 31, 2022, our goodwill balance included $73.1 million related to our Automotive segment and $46.7 million related to our Medical segment. These balances could be fully or partially impaired if management does not achieve the expected cash flows assumed in the fair value estimates or if assumptions and cash flow estimates change in future periods.
The Company’s Medical segment is comprised of one reporting unit (the “Medical Reporting Unit”). The estimated fair value of the Medical Reporting Unit exceeded its carrying value by less than 10% as of December 31, 2022. The Medical Reporting Unit is at risk of failing future impairment tests, as the estimate of fair value does not substantially exceed its carrying value. The Company’s estimated future cash flow projections for the Medical Reporting Unit for the period of 2023 through 2025 assume a compound annual growth rate for revenue of approximately 24%, which we deem to be a critical assumption in the fair value determination as of December 31, 2022. This forecasted revenue growth, which is significantly higher than historical periods, is primarily driven by anticipated product launches that are expected to increase volume and price due to new features and product capabilities. Realization of this assumed revenue growth is dependent on the successful launch of these new products and product features and the acceptance of customers. If this revenue growth is not achieved or if the estimated growth rates are reduced because of new information or experience, the fair value of the Medical Reporting Unit could decrease, which could result in a material impairment of goodwill. Additionally, forecasted cash flows assume margin expansion as a direct result of the forecasted revenue growth. If we experience higher costs than assumed in our forecast or if we experience other deviations from forecasted results and/or external factors (e.g., continued increasing of interest rates), it could result in a material impairment.
For the reporting units of the Company’s recently acquired Alfmeier, the estimated fair values at the acquisition date were determined to approximate the estimated fair values as of December 31, 2022. The Company had no other material reporting units in
its Automotive segment with a fair value that was not substantially in excess of its respective carrying value as of the fourth quarter of 2022.
Income Taxes
Critical estimates: The Company is subject to income taxes in the United States and numerous international jurisdictions. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. When determining whether we will be able to realize deferred tax assets, judgment is used to evaluate the positive and negative evidence, including forecasting taxable income using historical and future operating results. The provision for income taxes includes current income taxes as well as deferred income taxes. Deferred tax assets and liabilities are measured based on the difference between the financial statement and tax base of assets and liabilities at the applicable enacted tax rates.
Judgments and uncertainties: We have various tax filing positions with regard to the timing and amount of deductions and credits and the allocation of income among various tax jurisdictions, based on our interpretation of local tax laws, supported by external advisor review for material positions.
Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized when management considers it more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is based on the evaluation of positive and negative evidence, which includes historical profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis.
The Company is subject to ongoing tax examinations and assessments in various jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities and a number of years may elapse before a particular matter, for which a liability has been established, is audited and fully resolved or clarified. In evaluating the exposures associated with various tax filing positions, the Company may record liabilities for such exposures. The Company generally adjusts its liabilities for unrecognized tax benefits and related indemnification obligations through earnings in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and may materially increase or decrease the effective tax rate, as well as impact the Company’s operating results.
Impact if actual results differ from assumptions: Some or all of management’s judgments are subject to review by the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows. Further, if the Company is unable to generate sufficient future taxable income, there is a material change in the actual effective tax rates, a change to the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then the Company could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate.
For the year ended December 31, 2022, each change of the effective tax rate by one percentage point would impact income tax expense by $0.4 million.
Business combinations
Critical estimates: The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating results.
Judgments and uncertainties: The Company uses a variety of information sources to determine the value of acquired assets and liabilities including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories. Goodwill is assigned to reporting units as of the date of the related acquisition. If goodwill is assigned to more than one reporting unit, the Company utilizes a method that is consistent with the manner in which the amount of goodwill in a business combination is determined. Costs related to the acquisition of a business are expensed as incurred.
The Company estimates the fair value of acquired customer relationships using the multi-period excess earnings method. Value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated earnings from contributory assets. Assumptions used in these calculations are considered from a market participant perspective and include revenue growth rates, estimated earnings, contributory asset charges, customer attrition and discount rates.
The Company estimates the fair value of trade names and developed technology using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Assumptions in the determination of the fair value of the developed technology included revenue growth rates, royalty rates, obsolescence factors and discount rates. Assumptions used in the determination of the fair value of the trade name included the revenue growth rates, the royalty rate and discount rate.
Impact if actual results differ from assumptions: While the Company uses its best estimates and assumptions, fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statement of earnings. Future changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.
Recent Accounting Pronouncements
For a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations, as well as significant accounting standards that have been adopted during the year ended December 31, 2022, see Note 3, “New Accounting Pronouncements,” to the consolidated financial statements included in this Annual Report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.	QUANTITATIVE AND QUALITATIVE 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 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 statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The Company records the ineffective portion of foreign currency and copper commodity hedging instruments, if any, to cost of sales, and the ineffective portion of interest rate swaps, if any, to interest expense in the consolidated
statements of income. Cash flows associated with derivatives are reported in net cash (used in) provided by operating activities in the Company’s consolidated statements of cash flows.
Information related to the fair values of all derivative instruments in our consolidated balance sheet as of December 31, 2022 is set forth in Note 13, “Financial Instruments” in the consolidated 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, excluding finance leases. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency.
Expected Maturity Date
Total
Fair Value
Liabilities
Long-Term Debt:
Variable rate
$
-
$
-
$
-
$
-
$
232,000
$
232,000
$
232,000
Variable interest rate as of December 31, 2022
5.80
%
5.80
%
Fixed rate
$
2,011
$
-
$
-
$
-
$
-
$
2,011
$
2,005
Fixed interest rate
3.89% - 5.21%
3.89% - 5.21%
Based on the amounts outstanding as of December 31, 2022, a hypothetical 100 basis point change (increase or decrease) in interest rates would impact annual interest expense by $2.3 million. To hedge the Company's exposure to interest payment fluctuations on a portion of the borrowings, we entered into a floating-to-fixed interest rate swap agreement with a notional amount of $100.0 million.
Exchange Rate Sensitivity
The table below provides information about the Company’s foreign currency forward exchange rate agreements that are sensitive to changes in foreign currency exchange rates. The table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates for each type of foreign currency forward exchange agreement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.
Expected Maturity or Transaction Date
Anticipated Transactions and Related Derivatives
Total
Fair Value
USD Functional Currency
Forward Exchange Agreements:
(Receive MXN / Pay USD)
Total contract amount
$
27,093
$
12,970
$
40,063
$
3,791
Average contract rate
22.15
23.13
22.46
The table below presents the potential gain and loss in fair value for the foreign currency derivative contracts from a hypothetical 10% change in quoted currency exchange rates.
Exchange Rate Sensitivity
Potential loss in fair value
Potential gain in fair value
Forward Exchange Agreement:(Receive MXN / Pay USD)
$
3,999
$
4,888

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. 	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements and related financial information required to be filed hereunder are indexed on page of this Annual Report and are incorporated herein by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.	CONTROLS AND PROCEDURES
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 December 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 December 31, 2022.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (2013).” Based on that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022.
Our acquisition of Dacheng became effective on July 13, 2022 and the acquisition of Alfmeier became effective on August 1, 2022. The Company currently is integrating Dacheng and Alfmeier into its operations, compliance programs and internal control processes. Dacheng and Alfmeier constituted approximately 4% and 27%, respectively, of the Company's total assets as of December 31, 2022, including the goodwill and other intangible assets recorded as part of the purchase price allocations, and less than 1% and 9%, respectively, of the Company's product revenues for the year ended December 31, 2022. SEC rules and regulations allow companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year following an acquisition. The Company has excluded the acquired operations of Dacheng and Alfmeier from its assessment of the Company’s internal control over financial reporting.
The attestation report of the Company’s independent registered public accounting firm, regarding the effectiveness of the Company’s internal control over financial reporting, is set forth in Item 15, "Exhibits and Financial Statement Schedules," included under the caption "Report of Independent Registered Public Accounting Firm".
Changes in Internal Control Over Financial Reporting
In conjunction with our recent acquisition activity, we utilized our existing framework of internal control over financial reporting specific to business combinations. The applicable controls address the various elements of a business combination, including but not limited to: 1) calculation of the consideration transferred; 2) identifying and properly accounting for transactions that are separate from the business combination; 3) use and oversight of competent and qualified personnel in performing the valuation of assets acquired and liabilities assumed; 4) review of inputs and outputs to the valuation models; 5) identifying and disclosing provisional amounts; and 6) tracking measurement period adjustments.
Except as described above with regard to the acquisition and integration of Alfmeier and Dacheng, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

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ITEM 9B. OTHER INFORMATION
ITEM 9B.	OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. 	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth under the following captions in our proxy statement to be filed with respect to the 2023 annual meeting of shareholders (the “Proxy Statement”), all of which is incorporated herein by reference: “Proposal No. 1 - Election of Directors”, “Board Matters - The Board of Directors”, “Board Matters - Standing Committees of the Board”, “Board Matters - Corporate Governance”, “Executive Officers” and “Additional Information - Requirements for Submission of Shareholder Proposals and Nominations for 2024 Annual Meeting.”

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. 	EXECUTIVE COMPENSATION.
The information required by this item set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Board Matters - Director Compensation”, “Compensation Discussion and Analysis”, “Compensation and Talent Committee Report”, “Named Executive Officer Compensation Tables”, “Pay Versus Performance” and “CEO Pay Ratio.”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. 	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management” and “Proposal No. 5 - Approval of the Gentherm Incorporated 2023 Equity Incentive Plan.”

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. 	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Board Matters - A Board Substantially Consisting of Independent Directors” and “Related Person Transactions.”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. 	PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is set forth under the following captions in our Proxy Statement, all of which is incorporated herein by reference: “Audit Committee Matters.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report:
1.Financial Statements.
The following financial statements of the Company and reports of independent accountants are included in Item 15 of this Annual Report:
Page
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2.Financial Statement Schedule.
The following Schedule to Financial Statements is included herein:
Schedule II - Valuation and Qualifying Accounts.
3.Exhibits.
The exhibits to this Annual Report are as follows:
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed/Furnished Herewith
Form
Period Ending
Exhibit / Appendix Number
Filing Date
2*
Share Purchase and Transfer Agreement, dated May 4, 2022, by and among Gebhardt Holding GmbH, ELBER GmbH, Gentherm GmbH, and Andreas Gebhardt, Markus Gebhardt and Dr. Johann Vialberth
10-Q
3/31/22
2.1
5/4/22
3.1
Second Amended and Restated Articles of Incorporation of Gentherm Incorporated
8-K
3.2
3/5/18
3.2
Amended and Restated Bylaws of Gentherm Incorporated
8-K
3.1
5/26/16
Description of Securities
10-K
12/31/19
2/20/20
10.1**
Summary of Non-Employee Director Compensation (effective starting with the 2021 annual meeting of shareholders)
10-Q
6/30/21
10.3
7/30/21
10.2**
Second Amended and Restated Gentherm Incorporated Senior Level Performance Bonus Plan
8-K
10.1
3/15/21
10.3.1**
2013 Equity Incentive Plan
Schedule 14A
A
4/22/13
10.3.2**
Amendment to the Gentherm Incorporated 2013 Equity Incentive Plan
8-K
10.2
5/19/17
10.3.3**
Second Amendment to the Gentherm Incorporated 2013 Equity Incentive Plan, effective as of May 21, 2020
8-K
10.1
5/26/20
10.3.4**
Form of Stock Option Award Agreement under the 2013 Equity Incentive Plan
8-K
10.1
6/27/13
10.3.5**
Form of Stock Appreciation Right Award Agreement under the 2013 Equity Incentive Plan
8-K
10.2
6/27/13
10.3.6**
Form of Restricted Stock Award Agreement under the 2013 Equity Incentive Plan
8-K
10.3
6/27/13
10.3.7**
Form of Restricted Stock Award Agreement (Retention Award) under the 2013 Equity Incentive Plan
8-K
10.1
10/4/17
10.3.8**
Form of Restricted Stock Unit Award Agreement (Performance-Based) under the 2013 Equity Incentive Plan
8-K
10.1
6/13/18
10.3.9**
Form of Restricted Stock Unit Award Agreement (Time-Based) under the 2013 Equity Incentive Plan
8-K
10.2
6/13/18
10.3.10**
Form of Restricted Stock Unit Award Agreement (Performance-Based) under the 2013 Equity Incentive Plan - Anversa
8-K
10.2
12/12/18
10.3.11**
Form of Restricted Stock Unit Award Agreement (Time-Based) under the 2013 Equity Incentive Plan - Anversa
8-K
10.3
12/12/18
10.3.12**
Form of Restricted Stock Unit Award Agreement (Performance-Based) under the 2013 Equity Incentive Plan (effective as of 2020 grants)
10-Q
3/31/20
10.1
5/7/20
10.3.13**
Form of Restricted Stock Unit Award Agreement (Time-Based) under the 2013 Equity Incentive Plan (effective as of 2020 grants)
10-Q
3/31/20
10.2
5/7/20
10.3.14**
Form of Restricted Stock Award Agreement (Director) under the Gentherm Incorporated 2013 Equity Incentive Plan
10-Q
6/30/20
10.7
8/4/20
10.3.15**
Form of Restricted Stock Award Agreement (Director) (effective as of 2021 grants)
10-Q
6/30/21
10.2
7/30/21
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed/Furnished Herewith
Form
Period Ending
Exhibit / Appendix Number
Filing Date
10.3.16**
Form of Restricted Stock Unit Award Agreement under the 2013 Equity Incentive Plan (effective as of 2021 grants)
8-K
10.2
3/15/21
10.3.17**
Form of Performance Stock Unit Award Agreement under the 2013 Equity Incentive Plan (effective as of 2021 grants)
8-K
10.3
3/15/21
10.4.1
Second Amended and Restated Credit Agreement, dated as of June 10, 2022, by and among Gentherm Incorporated, Gentherm (Texas), Inc., Gentherm Licensing, Limited Partnership, Gentherm Medical, LLC, Gentherm GmbH, Gentherm Enterprises GmbH and Gentherm Licensing GmbH, the lenders party thereto, and Bank of America, N.A., as administrative agent, swing line lender and L/C issuer.
8-K
10.1
6/13/22
10.4.2
Second Amended and Restated Pledge and Security Agreement, dated as of June 10, 2022, by and among Gentherm Incorporated, Gentherm (Texas), Inc., Gentherm Medical, LLC, Gentherm Properties I, LLC, Gentherm Properties II, LLC and Bank of America, N.A.
8-K
10.2
6/13/22
10.5.1**
Employment Contract between Gentherm Incorporated and Phillip Eyler, dated as of September 18, 2017
8-K
10.1
10/3/17
10.5.2**
Amendment to Employment Terms between Gentherm Incorporated and Phillip Eyler, dated as of December 7, 2018
8-K
10.1
12/7/18
10.5.3**
Second Amendment to Employment Terms between Gentherm Incorporated and Phillip Eyler dated as of April 21, 2020
10-Q
6/30/20
10.4
8/4/20
10.6.1**
Offer Letter between Gentherm Incorporated and Matteo Anversa, dated as of October 22, 2018
8-K
10.1
12/12/18
10.6.2**
First Amendment to Offer Letter Agreement between Gentherm Incorporated and Matteo Anversa dated as of April 21, 2020
10-Q
6/30/20
10.5
8/4/20
10.6.3**
Second Amendment to Offer Letter Agreement between Gentherm Incorporated and Matteo Anversa, dated as of March 12, 2021
8-K
10.5
3/15/21
10.7.1**
Employment Contract between Gentherm GmbH and Thomas Stocker, effective September 1, 2019
10-Q
9/30/19
10.1
10/29/19
10.7.2**
First Amendment to the Employment Agreement between Gentherm Enterprises GmbH and Thomas Stocker, effective June 28, 2021
10-Q
6/30/21
10.1
7/30/21
10.8**
Offer Letter between Gentherm Incorporated and Hui (Helen) Xu, effective November 4, 2019
10-K
12/31/19
10.11
2/20/20
10.9**
Offer Letter between Gentherm Incorporated and Matt Fisch dated January 29, 2020
10-K
12/31/21
10.11
2/17/22
10.10**
Severance Pay Plan for Eligible Employees of Gentherm Incorporated
8-K
10.4
3/15/21
10.11**
Form of First Amendment to Executive Offer Letter
8-K
10.7
3/15/21
10.12.1**
Amended and Restated Gentherm Incorporated Deferred Compensation Plan, dated May 20, 2019 (and effective January 1, 2019)
10-Q
6/30/19
10.4
7/26/19
10.12.2**
Deferred Compensation Agreement, between Gentherm Incorporated and Phillip Eyler, dated as of December 31, 2018.
8-K
10.2
1/4/19
List of Subsidiaries (Direct and Indirect) of the Company
X
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed/Furnished Herewith
Form
Period Ending
Exhibit / Appendix Number
Filing Date
23.1
Consent of Ernst & Young LLP
X
Power of Attorney
X
31.1
Section 302 Certification - CEO
X
31.2
Section 302 Certification - CFO
X
32.1***
Section 906 Certification - CEO
X
32.2***
Section 906 Certification - CFO
X
101.INS
Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
X
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
X
Cover Page Interactive Date File - the cover page XBRL tags are embedded within the Inline XBRL document
X
* Schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish any omitted schedules or exhibits upon the request of the SEC.
** Indicates management contract or compensatory plan or arrangement.
*** Documents are furnished not filed.