Derivatives and Hedging Activities

9 Months Ended

Oct. 02, 2011

Derivative Instruments, Gain (Loss) [Line Items]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivatives and Hedging Activities

The Company uses derivative instruments primarily to manage exposures to foreign currency and equity security price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency and equity security prices. The program is not designated for trading or speculative purposes. The Company’s derivatives expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value and provides qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Changes in fair value (i.e., gains or losses) of the derivative instruments are recorded as cost of product revenues or other income (expense), or as accumulated other comprehensive income (“OCI”). The Company does not offset or net the fair value amounts of derivative instruments and separately discloses the fair value amounts of the derivative instruments as either assets or liabilities.

Cash Flow Hedges. The Company uses a combination of forward contracts and options designated as cash flow hedges to hedge a portion of future forecasted purchases in Japanese yen. The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of accumulated OCI and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is recognized, or reclassified into other income (expense) if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is no longer designated because it is no longer probable of occurring or it is related to an ineffective portion of a hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized as other income or expense immediately, and represented a net gain (loss) of ($0.6) million, ($3.0) million, $21 thousand and ($40) thousand for the three and nine months endedOctober 2, 2011 and October 3, 2010, respectively. As of October 2, 2011, the Company had forward contracts in place that hedged future Japanese yen purchases over the next twelve months of approximately 53.5 billion Japanese yen, or approximately $699 million based upon the exchange rate and market forward points as of October 2, 2011, and the net unrealized gain on the effective portion of these cash flow hedges was $11.1 million. As of October 2, 2011, the Company had forward contracts in place that hedged future Japanese yen purchases beyond the next twelve months of approximately 9.0 billion Japanese yen, or approximately $118 million based upon the exchange rate and market forward points as of October 2, 2011, and the net unrealized gain on the effective portion of these cash flow hedges was $0.5 million.

The Company has an outstanding cash flow hedge designated to mitigate equity risk associated with certain available-for-sale investments in equity securities. The gain or loss on the cash flow hedge is reported as a component of accumulated OCI and will be reclassified into other income (expense) in the same period that the equity securities are sold. The securities had a fair value of $72.8 million and $86.5 million as of October 2, 2011 and January 2, 2011, respectively. The cash flow hedge designated to mitigate equity risk of these securities had a fair value of $2.1 million and $(6.9) million as of October 2, 2011 and January 2, 2011, respectively.

Other Derivatives. Other derivatives that are non-designated consist primarily of forward and cross currency swap contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the associated outstanding forward and cross currency swap contracts were marked-to-market at October 2, 2011 with realized and unrealized gains and losses included in other income (expense). As of October 2, 2011, the Company had foreign currency forward contracts hedging exposures in European euros, British pounds and Japanese yen. Foreign currency forward contracts were outstanding to buy and (sell) the U.S. dollar equivalent of approximately $348.4 million and ($422.3) million in foreign currencies, respectively, based upon the exchange rates at October 2, 2011.

The Company currently has currency swap transactions with various counterparties to exchange Japanese yen for U.S. dollars that require the Company to comply with certain covenants, the strictest of which is to maintain a minimum liquidity of $1.5 billion on or prior to June 24, 2012 and $1.0 billion thereafter. These currency swap transactions have a combined notional amount of ($423.3) million.  Liquidity is defined as the sum of the Company’s cash and cash equivalents and short and long-term marketable securities. Should the Company fail to comply with these covenants, the Company may be required to settle the unrealized gain or loss on the foreign exchange contracts prior to the original maturity. The Company was in compliance with these covenants as of October 2, 2011.

The amounts in the tables below include fair value adjustments related to the Company’s own credit risk and counterparty credit risk.

Fair Value of Derivative Contracts. Fair value of derivative contracts as of October 2, 2011 and January 2, 2011 were as follows:

	Derivative assets reported in
	Other Current Assets				Other Non-current Assets
	October 2, 2011		January 2, 2011		October 2, 2011		January 2, 2011
	(In thousands)
Designated cash flow hedges
Foreign exchange contracts	$	13,691	$	14,193	$	—	$	—
Equity market risk contract	2,089		—		—		—
	15,780		14,193		—		—
Foreign exchange contracts not designated	13,057		4,389		189		880
Total derivatives	$	28,837	$	18,582	$	189	$	880

	Derivative liabilities reported in
	Other Current Accrued Liabilities				Non-current Liabilities
	October 2, 2011		January 2, 2011		October 2, 2011		January 2, 2011
	(In thousands)
Designated cash flow hedges
Foreign exchange contracts	$	2,074	$	728	$	—	$	—
Equity market risk contract	—		6,861		—		—
	2,074		7,589		—		—
Foreign exchange contracts not designated	70,608		26,017		6,424		43,156
Total derivatives	$	72,682	$	33,606	$	6,424	$	43,156

Foreign Exchange and Equity Market Risk Contracts Designated as Cash Flow Hedges. The impact of the effective portion of designated cash flow derivative contracts on the Company’s results of operations for the three and nine months endedOctober 2, 2011 and October 3, 2010 was as follows:

	Three months ended									Nine months ended
	Amount of gain (loss), net recognized in OCI					Amount of gain reclassified from OCI to the Statement of Operations				Amount of gain (loss), net recognized in OCI				Amount of gain reclassified from OCI to the Statement of Operations
	October 2, 2011		October 3, 2010			October 2, 2011		October 3, 2010		October 2, 2011		October 3, 2010		October 2, 2011		October 3, 2010
	(In thousands)
Foreign exchange contracts	$	21,617	$	3,098		$	7,386	$	226	$	21,338	$	14,310	$	11,933	$	8,856
Equity market risk contract	5,246		(4,349		)	—		—		8,950		2,970		—		—

Foreign exchange contracts designated as cash flow hedges relate primarily to wafer purchases in Japanese yen. Gains and losses associated with foreign exchange contracts designated as cash flow hedges are expected to be recorded in cost of product revenues when reclassified out of accumulated OCI. Gains and losses from the equity market risk contract are expected to be recorded in other income (expense) when reclassified out of accumulated OCI. The Company expects to realize the accumulated OCI balance related to foreign exchange contracts and equity market risk contract within the next fifteen months.

The impact of the ineffective portion and amount excluded from effectiveness testing on designated cash flow derivative contracts on the Company’s results of operations recognized in other income (expense) for the three and nine months endedOctober 2, 2011 and October 3, 2010 was as follows:

	Three months ended					Nine months ended
	October 2, 2011			October 3, 2010		October 2, 2011			October 3, 2010
	(In thousands)
Foreign exchange contracts	$	(584	)	$	21	$	(3,025	)	$	(40	)

Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations. The effect of non-designated derivative contracts on the Company’s results of operations recognized in other income (expense) for the three and nine months endedOctober 2, 2011 and October 3, 2010 were as follows:

	Three months ended						Nine months ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
	(In thousands)
(Loss) on foreign exchange contracts including forward point income	$	(13,864	)	$	(18,784	)	$	(15,900	)	$	(33,345	)
Gain from revaluation of foreign currency exposures hedged by foreign exchange contracts	16,668			24,007			18,739			33,965