Derivative Financial Instruments

12 Months Ended

Dec. 31, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 14 — Derivative Financial Instruments

We are exposed to market risk from changes in foreign currency exchange rates and short-term interest rates. Market risks for changes in interest rates relate primarily to our debt obligations under our Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in the location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi and Korean Won.

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

The Company uses a market approach to value derivative instruments, analyzing observable benchmark rates at commonly quoted intervals for the instrument’s full term.

In March 2008, Gentherm GmbH, entered into a 10 year currency related interest rate swap (“CRS”) having a notional value of €10,000, or $12,133 as of December 31, 2014, in order to offset the interest rate risk associated with a debt financing which was repaid prior our acquisition of Gentherm GmbH. The counterparty of the CRS was HypoVereinsbank AG (now UniCredit Bank AG, “UniCredit”), at the time, their main bank. Under this agreement, Gentherm GmbH receives interest equal to the six month Euro Interbank Offered Rate (“EURIBOR”), 0.17% at December 31, 2014, plus 1.40% and pays interest equal to the six month EURIBOR when the exchange rate between the European Euro (“EUR”) and the Swiss Franc (“CHF”) equals or exceeds 1.46 EUR to the CHF.  When the exchange rate is less than 1.46 (it was 1.20 at December 31, 2014), Gentherm GmbH pays interest equal to the six month EURIBOR plus a premium. The premium is calculated as [(1.46 – current EUR/CHF rate)/current EUR/CHF rate] x 100.

Note 14 — Derivative Financial Instruments (Continued)

In 2011, Gentherm GmbH brought a lawsuit against UniCredit, because of the recommendation to enter into the CRS. On March 25, 2013, the Munich District Court in Munich, Germany ruled in favor of Gentherm GmbH, asserting that UniCredit had a conflict of interest as financial advisor and counterparty to the CRS and violated its duty to disclose the initial negative market value of the CRS. The Munich District Court ruled that UniCredit must (1) pay €144 to Gentherm GmbH and (2) bear the costs of all future obligations under the CRS, which were €7,553 or $9,164 as of December 31, 2014, plus additional accrued liabilities for past due payments under the CRS of approximately €7,146, or $8,670 as of December 31, 2014. UniCredit has appealed the decision. The appeal is pending. As a result, the Company cannot be certain that any portion of the award by the Munich District Court will be upheld. See the derivatives table below for information about our future obligations under the CRS as of December 31, 2014 and 2013, respectively. Gentherm GmbH has entered into an offsetting derivative contract designed to limit the market risk of payments due under the CRS through the end of the CRS agreement, in 2018.

Information related to the recurring fair value measurement of derivative instruments in our consolidated balance sheet as of December 31, 2014 is as follows:

			Asset Derivatives				Liability Derivatives				Net Asset/ (Liabilities)
	Hedge Designation	Fair Value Hierarchy	Balance Sheet Location		Fair Value		Balance Sheet Location	Fair Value
CRS	Not a hedge	Level 2					Current liabilities	$	(2,466	)
							Non current liabilities		(6,698	)
Total CRS								$	(9,164	)	$	(9,164	)
Foreign currency derivatives	Not a hedge	Level 2		Current assets	$	145					$	145
				Non‑current assets		1,345					$	1,345
Total foreign currency derivatives					$	1,490					$	1,490

Information related to the recurring fair value measurement of derivative instruments in our consolidated balance sheet as of December 31, 2013 is as follows:

			Asset Derivatives				Liability Derivatives				Net Asset/ (Liabilities)
	Hedge Designation	Fair Value Hierarchy	Balance Sheet Location		Fair Value		Balance Sheet Location	Fair Value
CRS	Not a hedge	Level 2					Current liabilities	$	(2,471	)
							Non current liabilities		(9,358	)
Total CRS								$	(11,829	)	$	(11,829	)
Foreign currency derivatives	Not a hedge	Level 2		Current assets	$	1					$	1
Foreign currency derivatives	Not a hedge	Level 2		Current assets	$	66					$	66
				Non‑current assets		1,969					$	1,969
Total foreign currency derivatives					$	2,036					$	2,036
Interest rate swap derivatives	Cash flow hedge	Level 2					Current liabilities	$	(81	)	$	(81	)

Note 14 — Derivative Financial Instruments (Continued)

Information related to the effect of derivative instruments on our consolidated statements of income is as follows:  

	Location	Year Ended December 31, 2014			Year Ended December 31, 2013
Foreign currency derivatives	Revaluation of derivatives	$	640			(1,327	)
	Product Revenues		(390	)		—
	Cost of Sales		(174	)		—
	Selling, general and administrative		(161	)		—
	Other Comprehensive Income		(10	)		—
	Foreign currency gain (loss)		(976	)		(761	)
Total foreign currency derivatives		$	(1,071	)	$	(2,088	)
CRS	Revaluation of derivatives	$	(1,157	)	$	2,335
Interest Rate derivatives	Revaluation of derivatives	$	(1	)	$	(2	)
	Other Comprehensive Income		81			143

We did not incur any hedge ineffectiveness during the twelve months ended December 31, 2014 and 2013.