Foreign Currency Derivatives | 6 Months Ended |
Jun. 30, 2014 |
Foreign Currency Derivatives | ' |
13. FOREIGN CURRENCY DERIVATIVES |
The Company maintains a foreign currency risk management program that is designed to reduce the volatility of the Company’s economic value from the effects of unanticipated currency fluctuations. International operations generate both revenues and costs denominated in foreign currencies. The Company’s policy is to hedge significant foreign currency revenues and costs to improve margin visibility and reduce earnings volatility associated with unexpected changes in currency. |
Non-Designated Hedges |
The Company hedges its net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated revenues and expenses with foreign exchange forward contracts to reduce the risk that the Company’s earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments are carried at fair value with changes in the fair value recorded as interest and other income (expense), net. These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset remeasurement gains and losses on the hedged assets and liabilities. The Company executes non-designated foreign exchange forward contracts primarily denominated in Euros, British Pounds, Israeli Shekels, Brazilian Reals, Chinese Yuan, Japanese Yen and Mexican Pesos. |
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding non-designated hedges at June 30, 2014 (in thousands): |
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| Original Maturities of 360 Days or Less | | Original Maturities of Greater than 360 Days | | | | | | | | | |
| Foreign | | | USD | | | Positions | | Foreign | | | USD | | | Positions | | | | | | | | | |
Currency | Equivalent | Currency | Equivalent | | | | | | | | | |
Brazilian Real | | 2,669 | | | $ | 1,212 | | | Buy | | | — | | | $ | — | | | — | | | | | | | | | |
Brazilian Real | | 4,914 | | | $ | 2,192 | | | Sell | | | — | | | | — | | | — | | | | | | | | | |
Chinese Yuan | | 90,205 | | | $ | 14,745 | | | Buy | | | — | | | $ | — | | | — | | | | | | | | | |
Chinese Yuan | | 83,527 | | | $ | 13,441 | | | Sell | | | — | | | $ | — | | | — | | | | | | | | | |
Euro | | 21,142 | | | $ | 28,945 | | | Buy | | | 9,572 | | | $ | 12,665 | | | Buy | | | | | | | | | |
Euro | | 42,346 | | | $ | 57,854 | | | Sell | | | 27,315 | | | $ | 36,405 | | | Sell | | | | | | | | | |
British Pound | | 17,141 | | | $ | 29,032 | | | Buy | | | 8,877 | | | $ | 13,809 | | | Buy | | | | | | | | | |
British Pound | | 10,263 | | | $ | 17,486 | | | Sell | | | 16,500 | | | $ | 25,903 | | | Sell | | | | | | | | | |
Israeli Shekel | | 10,130 | | | $ | 2,953 | | | Buy | | | 32,074 | | | $ | 8,850 | | | Buy | | | | | | | | | |
Israeli Shekel | | 30,208 | | | $ | 8,767 | | | Sell | | | — | | | $ | — | | | — | | | | | | | | | |
Japanese Yen | | 314,425 | | | $ | 3,105 | | | Buy | | | — | | | $ | — | | | — | | | | | | | | | |
Japanese Yen | | 830,837 | | | $ | 8,191 | | | Sell | | | — | | | $ | — | | | — | | | | | | | | | |
Mexican Peso | | 10,541 | | | $ | 813 | | | Buy | | | — | | | $ | — | | | — | | | | | | | | | |
Mexican Peso | | 19,690 | | | $ | 1,522 | | | Sell | | | — | | | $ | — | | | — | | | | | | | | | |
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The following table shows the effect of the Company’s non-designated hedges in the condensed consolidated statements of operations for the following periods (in thousands): |
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Derivatives Not Designated as | | Location of Gain or (Loss) | | Amount of Gain or (Loss) | | | | | | | | | | | | | | | | | | | |
Hedging Instruments | Recognized in Income on Derivative | Recognized in Income on Derivative | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | | | | | | | | | | | | | | | | | |
| | | | June 30, | | | June 30, | | | | | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | Interest and other income (expense), net | | $ | (35 | ) | | $ | (732 | ) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Six Months Ended | | | | | | | | | | | | | | | | | | | |
| | | | June 30, | | | June 30, | | | | | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | Interest and other income (expense), net | | $ | 299 | | | $ | 1,601 | | | | | | | | | | | | | | | | | | | |
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Cash Flow Hedges |
The Company’s foreign exchange risk management program objective is to reduce volatility in the Company’s economic value from unanticipated foreign currency fluctuations. The Company designates forward contracts as cash flow hedges of foreign currency revenues and expenses, primarily the Chinese Yuan, Euros, British Pounds and Israeli Shekels. All foreign exchange contracts are carried at fair value on the condensed consolidated balance sheets and the maximum duration of foreign exchange forward contracts does not exceed thirteen months. Speculation is prohibited by policy. |
To receive hedge accounting treatment under ASC 815, Derivatives and Hedging, all cash flow hedging relationships are formally designated at hedge inception, and tested both prospectively and retrospectively to ensure the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions. The Company records effective spot to spot changes in these cash flow hedges in cumulative other comprehensive income until they are reclassified to revenue, cost of revenue or operating expenses together with the hedged transaction. The time value on forward contracts is excluded from effectiveness testing and recorded to interest and other income (expense), net over the life of the contract together with any ineffective portion of the hedge. |
The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding cash flow hedges at June 30, 2014 (in thousands): |
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| | Original Maturities | | Original Maturities | | | | | | | | |
of 360 Days or Less | of Greater than 360 Days | | | | | | | |
| | Foreign | | | USD | | | Positions | | Foreign | | | USD | | | Positions | | | | | | | | |
Currency | Equivalent | Currency | Equivalent | | | | | | | |
Chinese Yuan | | | 120,695 | | | $ | 19,228 | | | Buy | | | — | | | $ | — | | | — | | | | | | | | |
Euro | | | 18,500 | | | $ | 25,277 | | | Buy | | | 6,828 | | | $ | 9,195 | | | Buy | | | | | | | | |
Euro | | | 51,100 | | | $ | 69,928 | | | Sell | | | 10,285 | | | $ | 13,866 | | | Sell | | | | | | | | |
British Pound | | | 17,000 | | | $ | 28,345 | | | Buy | | | 4,723 | | | $ | 7,551 | | | Buy | | | | | | | | |
British Pound | | | 23,917 | | | $ | 39,883 | | | Sell | | | — | | | $ | — | | | — | | | | | | | | |
Israeli Shekel | | | 54,200 | | | $ | 15,629 | | | Buy | | | 27,826 | | | $ | 7,839 | | | Buy | | | | | | | | |
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The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges in the condensed consolidated statements of operations for the following periods (in thousands): |
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| | Gain or (Loss) Recognized in OCI-Effective Portion | | | Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion | | Gain or (Loss) Reclassified from OCI into Income-Effective Portion | | | Location of Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from | | Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness | |
Effectiveness Testing | Testing (a) |
| | Three Months Ended | | | | | Three Months Ended | | | | | Three Months Ended | |
| | June 30, | | | June 30, | | | | | June 30, | | | June 30, | | | | | June 30, | | | June 30, | |
2014 | 2013 | 2014 | 2013 | 2014 | 2013 |
Foreign exchange contracts | | $ | 422 | | | $ | (594 | ) | | Product revenues | | $ | (1,409 | ) | | $ | (153 | ) | | Interest and other income (expense), net | | $ | (127 | ) | | $ | 160 | |
| | | | | | | | | | Cost of revenues | | | 330 | | | | 48 | | | | | | | | | | | |
| | | | | | | | | | Sales and marketing | | | 717 | | | | (285 | ) | | | | | | | | | | |
| | | | | | | | | | Research and | | | 277 | | | | 755 | | | | | | | | | | | |
development |
| | | | | | | | | | General and | | | 194 | | | | 47 | | | | | | | | | | | |
administrative |
| | $ | 422 | | | $ | (594 | ) | | | | $ | 109 | | | $ | 412 | | | | | $ | (127 | ) | | $ | 160 | |
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| | Six Months Ended | | | | | Six Months Ended | | | | | Six Months Ended | |
| | June 30, | | | June 30, | | | | | June 30, | | | June 30, | | | | | June 30, | | | June 30, | |
2014 | 2013 | 2014 | 2013 | 2014 | 2013 |
Foreign exchange contracts | | $ | 1 | | | $ | 2,363 | | | Product revenues | | $ | (4,274 | ) | | $ | 474 | | | Interest and other income (expense), net | | $ | (52 | ) | | $ | 160 | |
| | | | | | | | | | Cost of revenues | | | 862 | | | | 48 | | | | | | | | | | | |
| | | | | | | | | | Sales and marketing | | | 1,797 | | | | (107 | ) | | | | | | | | | | |
| | | | | | | | | | Research and | | | 692 | | | | 652 | | | | | | | | | | | |
development |
| | | | | | | | | | General and | | | 366 | | | | 59 | | | | | | | | | | | |
administrative |
| | $ | 1 | | | $ | 2,363 | | | | | $ | (557 | ) | | $ | 1,126 | | | | | $ | (52 | ) | | $ | 160 | |
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(a)There were no gains or losses recognized in income due to ineffectiveness in the periods presented. |
As of June 30, 2014, the Company estimated that all values reported in accumulated other comprehensive income (loss) will be reclassified to income within the next twelve months. |
In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to interest and other income (expense), net on the consolidated statements of operations. For the six months ended June 30, 2014 and 2013, there were no such gains or losses. |
The estimates of fair value are based on applicable and commonly quoted prices and prevailing financial market information as of June 30, 2014 and December 31, 2013. See Note 12 for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities that are measured at fair value in the condensed consolidated financial statements on a recurring basis. |
The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the condensed consolidated balance sheets as of the periods presented (in thousands): |
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| Fair Value of | | | Fair Value of Derivatives | | | | | | | | | | | | | | |
Derivatives Designated | Not Designated as Hedge | | | | | | | | | | | | | |
as Hedge Instruments | Instruments | | | | | | | | | | | | | |
| June 30, | | | December 31, | | | June 30, | | | December 31, | | | | | | | | | | | | | | |
2014 | 2013 | 2014 | 2013 | | | | | | | | | | | | | |
Derivative assets (a): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 2,089 | | | $ | 4,457 | | | $ | 2,699 | | | $ | 2,291 | | | | | | | | | | | | | | |
Derivative liabilities (b): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 1,525 | | | $ | 4,235 | | | $ | 3,877 | | | $ | 2,545 | | | | | | | | | | | | | | |
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(a) | All derivative assets are recorded in “Prepaid and other current assets” in the condensed consolidated balance sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(b) | All derivative liabilities are recorded in “Other accrued liabilities” in the condensed consolidated balance sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting Derivative Assets and Liabilities |
The Company has entered into master netting arrangements with each of its derivative counterparties. These arrangements afford the right to net derivative assets against liabilities with the same counterparty. Under certain default provisions, the Company has the right to setoff any other amounts payable to the payee whether or not arising under this agreement. As a result of the netting provisions, the Company’s maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivative contracts. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the condensed consolidated balance sheets. |
The following table sets forth the offsetting of derivative assets (in thousands): |
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| | | | | | | | | | | | | | Gross Amounts Not Offset in the | | | | | |
Condensed Consolidated Balance Sheets | | | | |
| | Gross Amounts of Recognized Assets | | | Gross Amounts | | | Net Amounts Of Assets Presented In the Condensed Consolidated Balance Sheets | | | Financial | | | Cash | | | Net | | | | | |
Offset in the Condensed Consolidated | Instruments | Collateral | Amount | | | | |
Balance Sheets | | Pledged | | | | | |
As of June 30, 2014: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 4,788 | | | $ | — | | | $ | 4,788 | | | $ | (4,191 | ) | | $ | — | | | $ | 597 | | | | | |
As of December 31, 2013: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 6,748 | | | $ | — | | | $ | 6,748 | | | $ | (5,643 | ) | | $ | — | | | $ | 1,105 | | | | | |
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The following table sets forth the offsetting of derivative liabilities (in thousands): |
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| | | | | | | | | | | | | | Gross Amounts Not Offset in the | | | | | |
Condensed Consolidated Balance Sheets | | | | |
| | Gross Amounts of Recognized Liabilities | | | Gross Amounts | | | Net Amounts Of Liabilities Presented In the Condensed Consolidated Balance Sheets | | | Financial | | | Cash | | | Net | | | | | |
Offset in the Condensed Consolidated | Instruments | Collateral | Amount | | | | |
Balance Sheets | | Pledged | | | | | |
As of June 30, 2014: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 5,402 | | | $ | — | | | $ | 5,402 | | | $ | (4,191 | ) | | $ | — | | | $ | 1,211 | | | | | |
As of December 31, 2013: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 6,780 | | | $ | — | | | $ | 6,780 | | | $ | (5,643 | ) | | $ | — | | | $ | 1,137 | | | | | |
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