Derivatives and Hedging Activities

9 Months Ended

Sep. 28, 2014

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 derivative instruments 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 derivative instruments 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 derivative instruments, 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 revenue, operating expense, other income (expense), or as other comprehensive income (“OCI”). Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of set-off associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The Company does not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets and separately discloses the gross fair value amounts of the derivative instruments as either assets or liabilities.

Cash Flow Hedges. The Company uses foreign exchange forward contracts designated as cash flow hedges to hedge a portion of future forecasted wafer purchases and research and development (“R&D”) expenses 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 (“AOCI”) and subsequently reclassified into cost of revenue or R&D expense in the same period or periods in which the cost of revenue or R&D expense are 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 related to an ineffective portion of a cash flow hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized immediately as other income (expense). As of September 28, 2014, the notional amount and unrealized loss on the effective portion of the Company’s outstanding foreign exchange forward contracts to purchase Japanese yen that are designated as cash flow hedges are shown in both Japanese yen (in billions) and U.S. dollar (in thousands), based upon the exchange rate as of September 28, 2014, as follows:

	Notional Amount				Unrealized Loss
	(Japanese yen)		(U.S. dollar)		(U.S. dollar)
Foreign exchange forward contracts	¥	19.7	$	180,633	$	(16,366	)

As of September 28, 2014, the maturities of these contracts were 12 months or less.

Other Derivatives. Other derivatives that are non-designated consist primarily of foreign exchange forward 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 foreign exchange forward contracts were marked-to-market at September 28, 2014 with realized and unrealized gains and losses included in other income (expense). As of September 28, 2014, the Company had foreign exchange forward contracts hedging exposures in European euros, British pounds and Japanese yen. Foreign exchange forward contracts were outstanding to buy and sell U.S. dollar-equivalents of approximately $155.1 million and $97.3 million in foreign currencies, respectively, based upon the exchange rates at September 28, 2014.

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. Gross fair value of derivative contracts was as follows (in thousands):

	Derivative assets reported in
	Other Current Assets				Other Non-current Assets
	September 28, 2014		December 29, 2013		September 28, 2014		December 29, 2013
Foreign exchange forward contracts not designated	$	2,254	$	777	$	—	$	—

	Derivative liabilities reported in
	Other Current Accrued Liabilities				Non-current Liabilities
	September 28, 2014		December 29, 2013		September 28, 2014		December 29, 2013
Foreign exchange forward contracts designated	$	16,366	$	38,375	$	—	$	118
Foreign exchange forward contracts not designated	7,665		7,366		—		—
Total derivatives	$	24,031	$	45,741	$	—	$	118

As of September 28, 2014, the potential effect of rights of set-off associated with the above foreign exchange forward contracts would result in a net derivative liability balance of $22.5 million and an immaterial net derivative asset balance. As of December 29, 2013, the potential effect of rights of set-off would result in a net derivative liability balance of $45.2 million and an immaterial net derivative asset balance.

Effect of Foreign Exchange Forward Contracts Designated as Cash Flow Hedges on the Condensed Consolidated Statements of Operations. All designated cash flow derivative contracts were considered effective for the three and nine months endedSeptember 28, 2014 and September 29, 2013. The impact of the effective portion of designated cash flow derivative contracts on the Company’s results of operations was as follows (in thousands):

	Three months ended											Nine months ended
	Amount of gain (loss) recognized in OCI					Amount of loss reclassified from AOCI to earnings						Amount of gain (loss) recognized in OCI					Amount of loss reclassified from AOCI to earnings
	September 28, 2014			September 29, 2013		September 28, 2014			September 29, 2013			September 28, 2014		September 29, 2013			September 28, 2014			September 29, 2013
Foreign exchange forward contracts	$	(15,021	)	$	3,094	$	(6,353	)	$	(14,454	)	$	3,897	$	(34,799	)	$	(15,760	)	$	(33,828	)

Foreign exchange forward contracts designated as cash flow hedges relate to forecasted wafer purchases and R&D expenses in Japanese yen. Gains and losses associated with foreign exchange forward contracts designated as cash flow hedges are expected to be recorded in cost of revenue for wafer purchases or R&D expense when reclassified out of AOCI. The Company expects to realize the majority of the AOCI balance related to foreign exchange contracts within the next twelve months.

The following table presents the forward points on foreign exchange contracts excluded for the purposes of cash flow hedging designation recognized in other income (expense) (in thousands):

	Three months ended						Nine months ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013
Foreign exchange forward contracts	$	(204	)	$	(117	)	$	(915	)	$	(563	)

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 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013
Gain (loss) on foreign exchange forward contracts including forward point income	$	(5,869	)	$	(256	)	$	(2,594	)	$	6,209
Gain (loss) from revaluation of foreign currency exposures hedged by foreign exchange forward contracts	4,676			684			1,926			(8,724		)