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Summary of Significant Accounting Policies and Basis of Presentation | 12 Months Ended
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Dec. 31, 2012
Summary of Significant Accounting Policies and Basis of Presentation | Note 2 — Summary of Significant Accounting Policies and Basis of Presentation Consolidation The consolidated financial statements at December 31, 2011 and 2012, reflect the consolidated financial position and consolidated operating results of the Company, W.E.T., Gentherm Europe GmbH and Gentherm Asia Pacific Inc. The consolidated financial statement at December 31, 2010 reflect the consolidated financial position and consolidated operating results of the Company, Gentherm Europe GmbH and Gentherm Asia Pacific Inc. Intercompany accounts have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of less than 90 days to be cash equivalents. Cash balances in individual banks may exceed the federally insured limit by the Federal Deposit Insurance Corporation (the “FDIC”). From December 31, 2010 to December 31, 2012, the FDIC provided temporary unlimited deposit insurance. As of January 1, 2013, substantially all of the Company’s cash was uninsured. Disclosures About Fair Value of Financial Instruments The carrying amounts of all financial instruments, comprising cash and cash equivalents, short-term investments, accounts receivable and debt approximate fair value because of the short maturities of these instruments. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accrued Warranty Costs The Company recognizes an estimated cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on estimates of future failure rates and current claim cost experience. The following is a reconciliation of the changes in accrued warranty costs for the reporting period:
|  | December 31, |
|  | 2012 |  |  | 2011 |
Balance at beginning of year |  | $ | 8,487 |  |  | $ | 1,261 |
Assumed warranty from W.E.T. at acquisition |  |  | — |  |  |  | 6,979 |
Warranty claims paid |  |  | (347 | ) |  |  | (81 | )
Expense |  |  | 215 |  |  |  | 551 |
Adjustment due to currency translation |  |  | 233 |  |  |  | (223 | )
Balance at end of year |  | $ | 8,588 |  |  | $ | 8,487 |
Concentration of Credit Risk Financial instruments, which subject the Company to concentration of credit risk, consist primarily of cash equivalents, short-term investments and accounts receivable. Cash equivalents consist of money market funds managed by major financial services companies. The credit risk for these cash equivalents is considered limited. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectability and does not require collateral. As of December 31, 2012 JCI, Lear and Magna comprised 26%, 18% and 7% respectively, of the Company’s accounts receivable balance. As of December 31, 2011 Lear, JCI and Magna comprised 23%, 23%, and 8% respectively, of the Company’s accounts receivable balance. These accounts are currently in good standing. Allowance for doubtful accounts We record an allowance for doubtful accounts once exposure to collection risk of an accounts receivable is specifically identified. We analyze the length of time an accounts receivable is outstanding, as well as a customer’s payment history to determine the need for and amount of an allowance for doubtful accounts. Inventory The Company’s inventory is valued at the lower of cost (the first-in, first-out basis) or market. W.E.T.’s raw materials, consumables and commodities are measured at cost of purchase and unfinished and finished goods are measured at cost of production, using the weighted average method. If the net realizable value expected on the reporting date is below costs, a write-down is recorded to adjust inventory to its net realizable value. The Company provides a reserve for obsolete and slow moving inventories based upon estimates of future sales and product redesign. The following is a reconciliation of the changes in the inventory reserve (in thousands):
|  | December 31, |
|  | 2012 |  |  | 2011 |
Balance at beginning of year |  | $ | 1,127 |  |  | $ | 572 |
Expense |  |  | 1,307 |  |  |  | 532 |
Inventory write off |  |  | (215 | ) |  |  | (10 | )
Adjustment due to currency translation |  |  | (34 | ) |  |  | 33 |
Balance at end of year |  | $ | 2,185 |  |  | $ | 1,127 |
Property and Equipment Property and equipment, including additions and improvements, are recorded at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded as operating income or expense. Depreciation and amortization are computed using the straight-line method. The estimated useful lives of the Company’s property and equipment are as follows:
Asset Category |  | Useful Life
Plant and Equipment |  | 2 to 20 years
Computer equipment and software |  | 1 to 10 years
Leasehold improvements |  | Shorter of estimated life or term of lease
Production tooling |  | Estimated life of tool (2 to 5 years)
Buildings |  | 5 to 50 years
Capital Leases |  | Shorter of useful life or term of lease
Furniture, fixtures and fittings |  | 1 to 15 years
The Company recognized depreciation expense of $14,298, $8,954 and $1,148 for the three years ending December 31, 2012, 2011 and 2010, respectively. Goodwill and Other Intangible Assets Goodwill and other intangible assets recorded in conjunction with the acquisition of W.E.T. were based on the Company’s estimate of fair value, as of the date of acquisition. The fair value and corresponding useful lives for acquired intangible assets were determined with the assistance of an independent third-party valuation firm and are listed below as follows:
Asset Category |  | Useful Life
Customer relationships |  | 10-15 years
Order Backlog |  | 0.5 years
Technology |  | 8-9 years
Production Development Costs |  | 4 years
Our business strategy largely centers on designing products based upon internally developed and licensed technology. When possible, we protect these technologies with patents. During the fourth quarter 2012, we changed our method of accounting for costs, all of which were external, associated with the application for patents. Prior to the change we capitalized the external legal and filing fees associated with new patent applications in addition to the cost of purchased patents. These costs were then amortized on a straight-line basis over their estimated economic useful lives which ranged from 4 to seventeen years. Under the new method, external legal costs are expensed as incurred and classified as research and development expenses in our consolidated statement of operations. We believe that this change is preferable because it will result in consistent treatment for all costs, that is, under our new method both internal and external costs associated with the application for patents are expensed as incurred. In addition, the change will provide a better comparison with our industry peers. Costs associated with the purchase of patents and patent rights, including those acquired in conjunction with a business combination, will continue to be capitalized as before. The change reduced operating income by $1,007, $1,073 and $774 for the three years ending December 31, 2012, 2011 and 2010, respectively. Basic and fully diluted earnings per share was reduced by $0.02, $0.03 and $0.02 for the three year ending December 31, 2012, 2011 and 2010, respectively. We periodically review the recoverability and remaining life of our capitalized patents based upon market conditions, competitive technologies and our projected business plans. Change in these conditions could materially impact the carrying value for our capitalized patents. On September 14 2012, W.E.T. purchased the rights and ownership of certain intellectual property from Johnson Controls for $7,000. The purchased intellectual property, used in the development and manufacturing of W.E.T.’s active cool seat comfort technology, has a useful life of seven years. Amortization of the purchased intellectual property will be recognized on a straight-line basis, of which approximately $285 was amortized during 2012. A total of $2,522 in capitalized patent costs was amortized in 2012. An estimate of total intangible asset amortization by year, including the aforementioned Johnson Control patents and those obtained through the acquisition of W.E.T., is as follows:
2013 |  |  | 15,917 |
2014 |  |  | 15,066 |
2015 |  |  | 13,618 |
2016 |  |  | 12,444 |
2017 |  |  | 11,296 |
Thereafter |  |  | 27,363 |
Gentherm also has $166 of indefinite-lived trademark assets included in other intangible assets on our consolidated balance sheet as of December 31, 2012. Impairments of Long-Lived Assets, Other Intangible Assets and Goodwill Whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable, the Company will compare the carrying amount of the asset to the recoverable amount of the asset. The recoverable amount is defined as the greater of the asset’s fair value less costs to sell or its value in use. An impairment loss is recognized if the carrying amount of an asset exceeds the recoverable or fair value amount. An assessment of fair value could utilize quoted market prices, fair value appraisals, management forecasts or discounted cash flow analyses. No such triggering events occurred during the periods ended December 31, 2012, 2011 and 2010, respectively. On an annual basis and at interim periods when circumstances require, the Company tests the recoverability of its goodwill. The goodwill test utilizes a two-step analysis, whereby the Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value. The fair values of the reporting units are estimated using the net present value of discounted cash flows, excluding any financing costs or dividends, generated by each reporting unit. The Company’s discounted cash flows are based upon reasonable and appropriate assumptions, which are weighted for their likely probability of occurrence, about the underlying business activities of the company’s reporting units. An impairment of goodwill from the acquisition of W.E.T. did not occur during the periods ending December 31, 2012 and 2011, respectively. Product Revenues Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer, the price can be measured reliably, recovery of consideration is probable and costs incurred or to be incurred from the transaction can be reasonably estimated. The Company sells its products under purchase order contracts issued by its customers. These contracts involve the sale of goods at fixed prices and provide for related transfer of ownership risk to the customer upon shipment from the Company’s warehouse location or in some cases upon receipt of the goods at the customers facility. Payment terms of these contracts range from 30 to 120 days from the date of shipment. The Company does not extend cash discounts for early payment. Litigation Reserves We record estimated future costs related to new or ongoing litigation. Recognition of litigation reserves are recorded when there is a current obligation from a past event, a claim is likely, and the amount of the obligation can be reliably measured. These estimates include costs associated with attorney fees and potential claims and assessments less any amounts recoverable under insurance policies. Tooling The Company incurs costs related to tooling used in the manufacture of products sold to its customers. In some cases, the Company enters into contracts with its customers whereby the Company incurs the costs to design, develop and purchase tooling and is then reimbursed by the customer under a reimbursement contract. Tooling costs that will be reimbursed by customers are included in prepaid expenses and other current assets at the lower of accumulated cost or the customer reimbursable amount. Approximately $1,878 and $1,140 of reimbursable tooling was capitalized within prepaid expenses and other current assets as of December 31, 2012 and 2011, respectively. Company-owned tooling is included in property and equipment and depreciated over its expected useful life, generally two to five years. Management periodically evaluates the recoverability of tooling costs, based on estimated future cash flows, and makes provisions, where appropriate, for tooling costs that will not be recovered. Research and Development Expenses Research and development activities are expensed as incurred. The Company groups development and prototype costs and related reimbursements in research and development. The Company recognizes amounts due as reimbursements for expenses as these expenses are incurred. Income Taxes We record income tax expense using the liability method which specifies that deferred tax assets and liabilities be measured each year based on the difference between the financial statement and tax bases of assets and liabilities at the applicable enacted Federal and State tax rates. A valuation allowance is provided for net deferred tax assets when management considers it more likely than not that the asset will not be realized. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties related to income tax matters in income tax expense. Derivative financial instruments — hedge accounting The Company accounts for some of its derivative financial instruments as cash flow hedges as defined in Financial Accounting Standards Board Accounting Standards Codification Topic 815. Since these derivatives are designated as hedging instruments for future anticipated cash flows, the effective portion of the gain or loss resulting from the valuation at the balance sheet date is recognized as a separate item within equity. The ineffective portion of the gain or loss is recognized in the income statement. These hedging transactions and the respective correlations meet the requirements for hedge accounting. The gains or losses recognized in equity are posted in the income statement when the hedged items are realized. Discounts or premiums for hedged contracts are recognized within earnings for the period, until maturity. Net Earnings per Share Basic earnings per share is computed by dividing net income by the weighted average number of shares of Common Stock. The Company’s diluted earnings per common share give effect to all potential shares of Common Stock outstanding during a period that are not anti-dilutive. In computing the diluted earnings per share, the treasury stock method is used in determining the number of shares assumed to be purchased from the conversion of Common Stock equivalents. Stock Based Compensation Share-based payments to employees, including grants of employee stock options are recognized in the financial statements as compensation expense based upon the fair value on the date of grant. The Company’s stock option compensation expense and related deferred tax benefit were $823 and $301, respectively, for the year ended December 31, 2012, $1,403 and $427, respectively, for the year ended December 31, 2011, and $1,275 and $259, respectively, for the year ended December 31, 2010. Non-Controlling Interests Effective January 1, 2009 we adopted ASC 810 “Consolidation”, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the retained interest in a gain or loss when a subsidiary is deconsolidated. ASC 810 requires that a non-controlling interest, previously referred to as a minority interest, be reported as part of equity in the Consolidated Financial Statements and that losses be allocated to the non-controlling interest even when such allocation might result in a deficit balance, reducing the losses attributable to the controlling interest. Non-controlling interest reported in the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity for the periods ended December 31, 2012 and 2011 represent the 24.08% and 24.12%, respectively of W.E.T.’s outstanding voting stock not acquired in share purchases. At the first annual meeting of shareholders of W.E.T. following our acquisition, held on August 16, 2011, the shareholders of W.E.T. approved an arrangement by which Gentherm Europe will take management control of W.E.T. and will directly receive W.E.T.’s annual profits and absorb W.E.T.’s annual losses, subject to certain conditions and obligations of Gentherm Europe. Such an arrangement (a “Domination and Profit and Loss Transfer”) is somewhat unique to German law and is subject to the terms and conditions applicable thereto under German law. Due to litigation filed in opposition to the Domination and Profit and Loss Transfer, registration of the Domination and Profit and Loss Transfer did not occur until February 22, 2013. Under the Domination and Profit and Loss Transfer arrangement: (1) Gentherm Europe will absorb all annual losses incurred by W.E.T., (2) for as long as the Domination and Profit and Loss Transfer remains in effect, the minority shareholders of W.E.T. will be guaranteed a recurring, annual payment (the “Guaranteed Compensation”) of EUR 3.71 per share, subject to statutory taxes and deductions, resulting in a net payment of EUR 3.17 per share, and (3) the minority shareholders of W.E.T. can elect to forego the Guaranteed Compensation and instead tender their shares to Gentherm Europe (the “Tender Option”) for a one-time cash payment of EUR 44.95 per share provided that the Tender Option can only be exercised during the two month period after the registration of the Domination and Profit and Loss Transfer is completed, and further provided that Gentherm has agreed to increase this payment to EUR 85.00 per share in connection with the settlement of the litigation in opposition to the Domination and Profit and Loss Transfer. The Domination and Profit and Loss Transfer has an indefinite term, but can be terminated by Gentherm Europe or W.E.T. anytime after five years from the effective date. For the period ended December 31, 2010, a 15% percent non-controlling interest in Gentherm’s former subsidiary BSST, now Advanced Technology, was held by former BSST President and CEO Dr. Lon Bell. Subsequent Events On February 15, 2013, historical Gentherm acquired 442,253 shares in W.E.T., representing approximately 14% of the total outstanding shares in W.E.T., through a transaction agreement with W.E.T.’s largest minority shareholder. The Company paid 3,300,000 shares of Gentherm common stock and cash payments of €5,408, or $7,247, for these shares. We have since acquired an additional 300,651 shares in W.E.T., pushing our total ownership interest in W.E.T. to approximately 99%. These additional shares were purchased at a price €85 per share for a total of €25,556, or $34,245. Gentherm borrowed an additional $43,429 from the US Bank of America credit facility in connection with the purchase of these shares.

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