Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2012

Derivative Instruments, Gain (Loss)

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivatives and Hedging Activities

The Company uses derivative instruments primarily to manage exposures to foreign currency. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. 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 by the Company 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 derivatives 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 forward contracts 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 cash flow hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized as other income (expense) immediately. As of September 30, 2012, the Company had forward contracts in place to hedge future purchases over the next twelve months of 26.3 billion Japanese yen, or approximately $338 million based upon the exchange rate as of September 30, 2012, and the net unrealized gain on the effective portion of these cash flow hedges was $2.9 million. As of September 30, 2012, the Company had no forward contracts in place to hedge future purchases beyond the next twelve months.

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 September 30, 2012 with realized and unrealized gains and losses included in other income (expense). As of September 30, 2012, 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 U.S. dollar equivalents of approximately $230 million and $143 million in foreign currencies, respectively, based upon the exchange rates at September 30, 2012.

The Company currently has cross currency swap contracts 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 $1.0 billion. Liquidity is defined as the sum of the Company’s cash and cash equivalents and short and long-term marketable securities. These cross currency swap contracts were outstanding to sell U.S. dollar equivalents of approximately $185 million based upon the exchange rates at September 30, 2012. 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 date. The Company was in compliance with these covenants as of September 30, 2012.

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 September 30, 2012 and January 1, 2012 were as follows (in thousands):

	Derivative assets reported in
	Other Current Assets				Other Non-current Assets
	September 30, 2012		January 1, 2012		September 30, 2012		January 1, 2012
Designated cash flow hedges
Foreign exchange contracts	$	4,149	$	14,890	$	—	$	—
	4,149		14,890		—		—
Foreign exchange contracts not designated	2,789		6,203		—		—
Total derivatives	$	6,938	$	21,093	$	—	$	—

	Derivative liabilities reported in
	Other Current Accrued Liabilities				Non-current Liabilities
	September 30, 2012		January 1, 2012		September 30, 2012		January 1, 2012
Designated cash flow hedges
Foreign exchange contracts	$	1,243	$	3,265	$	—	$	—
	1,243		3,265		—		—
Foreign exchange contracts not designated	3,029		36,780		2,487		5,790
Total derivatives	$	4,272	$	40,045	$	2,487	$	5,790

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 endedSeptember 30, 2012 and October 2, 2011 was as follows (in thousands):

	Three months ended									Nine months ended
	Amount of gain recognized in OCI				Amount of gain (loss) reclassified from OCI to earnings					Amount of gain (loss) recognized in OCI					Amount of gain (loss) reclassified from OCI to earnings
	September 30, 2012		October 2, 2011		September 30, 2012			October 2, 2011		September 30, 2012			October 2, 2011		September 30, 2012			October 2, 2011
Foreign exchange contracts	$	11,239	$	21,617	$	(11,184	)	$	7,386	$	(27,681	)	$	21,338	$	(6,399	)	$	11,933
Equity market risk contract	—		5,246		—			—		—			8,950		—			—

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. Losses from the equity market risk contract were recorded in other income (expense) when reclassified out of accumulated OCI. The Company expects to realize the majority of the accumulated OCI balance related to foreign exchange contracts within the next twelve months.

The following table includes the ineffective portion of designated cash flow derivative contracts and the forward points excluded for the purposes of cash flow hedging designation recognized in other income (expense) (in thousands):

	Three months ended						Nine months ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Foreign exchange contracts	$	(1,136	)	$	(584	)	$	(6,382	)	$	(3,025	)

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) was as follows (in thousands):

	Three months ended						Nine months ended
	September 30, 2012			October 2, 2011			September 30, 2012		October 2, 2011
Gain (loss) on foreign exchange contracts including forward point income	$	(652	)	$	(13,864	)	$	1,934	$	(15,900	)
Gain from revaluation of foreign currency exposures hedged by foreign exchange contracts	2,359			16,668			390		18,739