Derivative Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 6 – Derivative Financial Instruments

We are exposed to market risk from changes in foreign currency exchange rates, short-term interest rates and price fluctuations of certain material commodities such as copper. Market risks for changes in interest rates relate primarily to our debt obligations under our Credit Agreement and obligations from currency related interest rate swaps. 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, and intercompany investments and include exposures to the Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won, Vietnamese Dong, and Macedonian Denar.

The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year.  The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years.  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 (loss) gain in the consolidated condensed statements of income. Though we continuously monitor the hedging program, derivative positions and hedging strategies, foreign currency forward exchange agreements have not always been designated as hedging instruments for accounting purposes.

The Company uses an income approach to value derivative instruments, analyzing quoted market prices to calculate the forward values and then discounts such forward values to the present value using benchmark rates at commonly quoted intervals for the instrument’s full term.

In March, 2008, Gentherm GmbH, entered into a 10 year currency related interest rate swap (“CRS”) having a notional value of €10,000, or $11,167 as of September 30, 2015, in order to offset the interest rate risk associated with a debt financing which was repaid prior to our acquisition of Gentherm GmbH in 2011. The counterparty to the CRS was HypoVereinsbank AG (now UniCredit Bank AG, “UniCredit”), its main bank at the time. Under this agreement, Gentherm GmbH receives interest equal to the six month Euro Interbank Offered Rate (“EURIBOR”), 0.03% at September 30, 2015, 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 1.09 at September 30, 2015), 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 6 – Derivative Financial Instruments – Continued

In 2011, Gentherm GmbH brought forth a lawsuit against UniCredit, because of the recommendation to enter into the CRS. On March 25, 2013, the 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 €8,751 or $9,773 as of September 30, 2015, plus additional accrued liabilities for past due payments under the CRS of approximately €10,803, or $12,064 as of September 30, 2015. 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. 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 condensed balance sheet as of September 30, 2015 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	$	(3,832	)
							Non-current  liabilities		(5,941	)
Total CRS								$	(9,773	)	$	(9,773	)
Foreign currency derivatives	Cash flow hedge	Level 2		Current assets	$	46	Current liabilities	$	(1,290	)	$	(1,244	)
Foreign currency derivatives	Not a hedge	Level 2		Current assets	$	1,510					$	1,510
				Non-current assets		2,647						2,647
Total foreign currency derivatives					$	4,203		$	(1,290	)	$	2,913
Commodity derivatives	Cash flow hedge	Level 2					Current liabilities	$	(421	)	$	(421	)

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

	Location	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015			Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Foreign currency derivatives	Revaluation of derivatives	$	(2,526	)	$	3,752		$	557		$	398
	Product Revenues		—			—			(129	)		(129	)
	Cost of sales		(694	)		(1,014	)		64			94
	Selling, general and administrative		(235	)		(189	)		(73	)		(141	)
	Other comprehensive income		(460	)		(1,237	)		(571	)		(411	)
	Foreign currency (loss) gain		31			320			(606	)		(1,054	)
Total foreign currency derivatives		$	(3,884	)	$	1,632		$	(758	)	$	(1,243	)
CRS	Revaluation of derivatives	$	2,392		$	(4,903	)	$	(263	)	$	(690	)
Interest rate derivatives	Revaluation of derivatives	$	—		$	—		$	—		$	(1	)
	Other comprehensive income		—			—			42			81
Commodity derivatives	Other comprehensive income	$	(373	)	$	(421	)	$	—		$	—

We did not incur any hedge ineffectiveness during the nine months ended September 30, 2015 and 2014.