Foreign Currency Derivatives | 12. 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 receivables and payables 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 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, 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 March 31, 2016 (in thousands): Original Maturities of 360 Days or Less Original Maturities of Greater than 360 Days Foreign Currency USD Equivalent Positions Foreign Currency USD Equivalent Positions Brazilian Real 14,046 $ 3,947 Buy — $ — — Brazilian Real 26,676 $ 7,025 Sell — $ — — Chinese Yuan — $ — — 56,384 $ 8,763 Buy Chinese Yuan 53,555 $ 8,118 Sell — $ — — Euro 28,688 $ 32,690 Buy 14,303 $ 15,936 Buy Euro 42,475 $ 47,793 Sell 52,357 $ 58,468 Sell British Pound 9,927 $ 14,247 Buy 14,801 $ 22,629 Buy British Pound 15,561 $ 22,105 Sell 17,194 $ 26,021 Sell Israeli Shekel 11,940 $ 3,101 Buy 31,600 $ 8,047 Buy Israeli Shekel 42,167 $ 10,977 Sell — $ — — Mexican Peso 22,737 $ 1,325 Buy — $ — — Mexican Peso 45,430 $ 2,569 Sell — $ — — The following table shows the effect of the Company’s non-designated hedges in the condensed consolidated statements of operations (in thousands): Derivatives Not Designated as Hedging Instruments Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative Three Months Ended March 31, 2016 March 31, 2015 Foreign exchange contracts Interest and other income (expense), net $ (2,147 ) $ 4,673 Cash Flow Hedges 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 13 months. The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding cash flow hedges at March 31, 2016 (in thousands): Original Maturities of 360 Days or Less Original Maturities of Greater than 360 Days Foreign Currency USD Equivalent Positions Foreign Currency USD Equivalent Positions Chinese Yuan — $ — — 121,716 $ 18,469 Buy Euro — $ — — 27,397 $ 30,691 Buy Euro — $ — — 84,143 $ 94,174 Sell British Pound — $ — — 24,299 $ 35,845 Buy British Pound — $ — — 26,506 $ 39,390 Sell Israeli Shekel 12,960 $ 3,366 Buy — $ — — 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): 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 Effectiveness Testing Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing (a) Three Months Ended March 31, 2016 Foreign exchange contracts $ (1,627 ) Product revenues $ 1,298 Interest and other income (expense), net $ (9 ) Cost of revenues (297 ) Sales and marketing (833 ) Research and development (47 ) General and administrative (180 ) $ (1,627 ) $ (59 ) $ (9 ) Three Months Ended March 31, 2015 Foreign exchange contracts $ 6,298 Product revenues $ 6,636 Interest and other income (expense), net $ (31 ) Cost of revenues (801 ) Sales and marketing (1,787 ) Research and development (715 ) General and administrative (775 ) $ 6,298 $ 2,558 $ (31 ) (a) There were no gains or losses recognized in income due to ineffectiveness in the periods presented. As of March 31, 2016, the Company estimated that all values reported in accumulated other comprehensive 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 condensed consolidated statements of operations. For the three months ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015. See Note 11 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 (in thousands): Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 Derivative assets (a) Foreign exchange contracts $ 2,548 $ 2,283 $ 2,187 $ 5,501 Derivative liabilities (b) Foreign exchange contracts $ 4,299 $ 2,269 $ 4,578 $ 4,401 (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 set off 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): Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets Gross Amounts of Recognized Assets Gross Amounts Offset in the Condensed Consolidated Balance Sheets Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount As of March 31, 2016: Foreign exchange contracts $ 4,735 $ — $ 4,735 $ (4,735 ) $ — $ — As of December 31, 2015: Foreign exchange contracts $ 10,396 $ — $ 10,396 $ (5,413 ) $ — $ 4,983 The following table sets forth the offsetting of derivative liabilities (in thousands): Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Condensed Consolidated Balance Sheets Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount As of March 31, 2016: Foreign exchange contracts $ 8,877 $ — $ 8,877 $ (4,735 ) $ — $ 4,142 As of December 31, 2015: Foreign exchange contracts $ 6,031 $ — $ 6,031 $ (5,413 ) $ — $ 618 |