Derivative Financial Instruments

12 Months Ended

Dec. 31, 2016

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, 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 Amended Credit Agreement. Foreign currency exchange risks are attributable to sales to foreign customers and purchases from foreign suppliers not denominated in a location’s functional currency, foreign plant operations, intercompany indebtedness, intercompany investments and include exposures to the European Euro, Mexican Peso, Canadian Dollar, Hungarian Forint, Macedonian Denar, Ukrainian Hryvnia, Japanese Yen, Chinese Renminbi, Korean Won and Vietnamese Dong.

The Company regularly enters into derivative contracts with the objective of managing its financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on the financial instruments used to hedge them. The maximum length of time over which we hedge our exposure to foreign currency exchange risks is one year. We had foreign currency derivative contracts with a notional value of $29,538 and $0 outstanding at December 31, 2016 and 2015, respectively,

The maximum length of time over which we hedge our exposure to price fluctuations in material commodities is two years.  We had copper commodity swap contracts with a notional value of $407 and $4,885 outstanding at December 31, 2016 and 2015, respectively.  

We do not enter into derivative financial instruments for speculative or trading purposes. Our hedging relationships are formally documented at the inception of the hedge, and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions both at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment. For derivative contracts which can be classified as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded to accumulated other comprehensive loss in the consolidated balance sheet.  When the underlying hedge transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings in the consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk.  We record the ineffective portion of foreign currency hedging instruments, if any, to foreign currency gain (loss) in the consolidated statements of income. See Note 16 for the amount of unrealized loss associated with copper commodity derivatives reported in accumulated other comprehensive income as of December 31, 2015 that was reclassified into earnings during 2016. 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.

Note 14 — Derivative Financial Instruments (Continued)

In December 2015, Gentherm GmbH (“Gentherm Germany”), a subsidiary of Gentherm Incorporated (the “Company”) entered into an agreement settling all claims against UniCredit Bank AG pertaining to a 10 year currency related swap (“CRS”) entered into a by Gentherm Germany in March 2008. Prior to the settlement, a lawsuit filed by Gentherm GmbH in 2011 was pending appeal at the Higher Regional Court in Munich, Germany. As a result of the settlement, the CRS and its related liability to Gentherm have been terminated and Gentherm’s remaining interest in an offsetting derivative contract designed to limit the market risk of payments due under the CRS was sold. Gentherm realized a one-time, pre-tax gain of $9,949 in the fourth quarter of 2015. Gentherm made a final cash settlement payment of $7,593 during the fourth quarter of 2015.

Information related to the recurring fair value measurement of derivative financial instruments in our consolidated balance sheet as of December 31, 2016 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

Foreign currency derivatives

Cash flow hedge

Level 2

Current liabilities

$

(1,395

)

$

(1,395

)

Commodity derivatives

Cash flow hedge

Level 2

Current assets

$

18

$

18

Information related to the recurring fair value measurement of derivative financial instruments in our consolidated balance sheet as of December 31, 2015 is as follows:  

			Liability Derivatives				Net Asset/ (Liabilities)
	Hedge Designation	Fair Value Hierarchy	Balance Sheet Location	Fair Value
Commodity derivatives	Cash flow hedge	Level 2	Current liabilities	$	(725	)	$	(725	)

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

	Location	Year Ended December 31, 2016			Year Ended December 31, 2015
Foreign currency derivatives	Product revenues		—			(1,102	)
	Cost of sales		(608	)		(1,782	)
	Selling, general and administrative		139			(477	)
	Other comprehensive (loss) income		(1,395	)		10
	Foreign currency gain		102			351
Total foreign currency derivatives		$	(1,762	)	$	(3,000	)
CRS	Revaluation of derivatives	$	—		$	—
	Gain on settlement of derivatives		—			9,949
Total CRS		$	—		$	9,949
Commodity derivatives	Cost of sales	$	(666	)	$	(123	)
	Other comprehensive income (loss)	$	743		$	(725	)
Total commodity derivatives		$	77		$	(848	)

We did not incur any hedge ineffectiveness during the years ended December 31, 2016 and 2015.