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Derivative Financial Instruments
6 Months Ended
Jul. 02, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments

The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars, British pounds, Euros, Canadian dollars, and Japanese yen to manage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities. The Company does not enter into derivatives transactions for trading or speculative purposes.

The Company’s foreign currency forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions. In addition, the derivative contracts typically mature in less than eleven months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large, highly rated financial institutions and the Company does not consider non-performance a material risk.

The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheet at fair value. The effective portions of cash flow hedges are recorded in other comprehensive income ("OCI") until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of its designated hedges are adjusted to fair value through earnings in other income (expense), net in the unaudited condensed consolidated statement of operations.

The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of July 2, 2017 and December 31, 2016 are summarized as follows:
Derivative Assets
 
Balance Sheet
Location
 
Fair Value at
July 2, 2017
 
Balance Sheet
Location
 
Fair Value at
December 31, 2016
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Derivative assets not designated as hedging instruments
 
Prepaid expenses and other current assets
 
$
438

 
Prepaid expenses and other current assets
 
$
5,873

Derivative assets designated as hedging instruments
 
Prepaid expenses and other current assets
 
1,237

 
Prepaid expenses and other current assets
 
2,890

Total
 
 
 
$
1,675

 
 
 
$
8,763


Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value at
July 2, 2017
 
Balance Sheet
Location
 
Fair Value at
December 31, 2016
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Derivative liabilities not designated as hedging instruments
 
Other accrued liabilities
 
$
2,935

 
Other accrued liabilities
 
$
1,002

Derivative liabilities designated as hedging instruments
 
Other accrued liabilities
 
6,365

 
Other accrued liabilities
 
703

Total
 
 
 
$
9,300

 
 
 
$
1,705



For details of the Company’s fair value measurements, see Note 12, Fair Value Measurements.

Offsetting Derivative Assets and Liabilities

The Company has entered into master netting arrangements which allow net settlements under certain conditions. 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 unaudited condensed consolidated balance sheets.

The following tables set forth the offsetting of derivative assets as of July 2, 2017 and December 31, 2016:
As of July 2, 2017
 
 
 
 
 
 
 
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
 
 
(In thousands)
Bank of America
 
$
1,180

 
$

 
$
1,180

 
$
(1,180
)
 
$

 
$

Wells Fargo
 
495

 

 
495

 
(495
)
 

 

Total
 
$
1,675

 
$

 
$
1,675

 
$
(1,675
)
 
$

 
$


As of December 31, 2016
 
 
 
 
 
 
 
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
 
 
(In thousands)
J.P. Morgan Chase
 
$
1,492

 
$

 
$
1,492

 
$
(442
)
 
$

 
$
1,050

Wells Fargo
 
7,271

 

 
7,271

 
(1,263
)
 

 
6,008

Total
 
$
8,763

 
$

 
$
8,763

 
$
(1,705
)
 
$

 
$
7,058



The following tables set forth the offsetting of derivative liabilities as of July 2, 2017 and December 31, 2016:
As of July 2, 2017
 
 
 
 
 
 
 
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

 
(In thousands)
Bank of America
 
$
6,587

 
$

 
$
6,587

 
$
(1,180
)
 
$

 
$
5,407

Wells Fargo
 
2,713

 

 
2,713

 
(495
)
 

 
2,218

Total
 
$
9,300

 
$

 
$
9,300

 
$
(1,675
)
 
$

 
$
7,625


As of December 31, 2016
 
 
 
 
 
 
 
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
 
 
(In thousands)
J.P. Morgan Chase
 
$
442

 
$

 
$
442

 
$
(442
)
 
$

 
$

Wells Fargo
 
1,263

 

 
1,263

 
(1,263
)
 

 

Total
 
$
1,705

 
$

 
$
1,705

 
$
(1,705
)
 
$

 
$



Cash flow hedges

To help manage the exposure of operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipated foreign currency revenue, costs of revenue and certain operating expenses. These hedges are designated at the inception of the hedge relationship as cash flow hedges under the authoritative guidance for derivatives and hedging. Effectiveness is tested at least quarterly both prospectively and retrospectively using regression analysis to ensure that the hedge relationship has been effective and is likely to remain effective in the future. The Company typically hedges portions of its anticipated foreign currency exposure for five to eleven months. The Company enters into about ten forward contracts per quarter with an average size of approximately $8.0 million USD equivalent related to its cash flow hedging program.

The Company expects to reclassify to earnings all of the amounts recorded in OCI associated with its cash flow hedges over the next twelve months. OCI associated with cash flow hedges of foreign currency revenue is recognized as a component of net revenue in the same period as the related revenue is recognized. OCI associated with cash flow hedges of foreign currency costs of revenue and operating expenses are recognized as a component of cost of revenue and operating expense in the same period as the related costs of revenue and operating expenses are recognized.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. Deferred gains and losses in OCI with such derivative instruments are reclassified immediately into earnings through other income (expense), net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-designated as hedges of other transactions. The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the six months ended July 2, 2017 and July 3, 2016.

The pre-tax effects of the Company’s derivative instruments on OCI and the unaudited condensed consolidated statement of operations for the three and six months ended July 2, 2017 and July 3, 2016 are summarized as follows:

Derivatives Designated as Hedging Instruments
 
Three Months Ended July 2, 2017
 
Gains (Losses)
Recognized in
OCI -
Effective
Portion
 
Location of
Gain (Loss)
Reclassified from OCI
into Income - Effective
Portion
 
Gains (Losses)
Reclassified
from
OCI into
Income -
Effective
Portion (1)
 
Location of
Gains (Losses)
Recognized in
Income and
Excluded from
Effectiveness Testing
 
Amount of Gains (Losses) Recognized in
Income and
Excluded from
Effectiveness Testing
 
 
(In thousands)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
(6,935
)
 
Net revenue
 
$
(1,008
)
 
Other income (expense), net
 
$
381

Foreign currency forward contracts
 

 
Cost of revenue
 
(1
)
 
Other income (expense), net
 

Foreign currency forward contracts
 

 
Operating expenses
 
77

 
Other income (expense), net
 

Total
 
$
(6,935
)
 
 
 
$
(932
)
 
 
 
$
381

_________________________
(1) Refer to Note 9, Stockholders' Equity, which summarizes the accumulated other comprehensive income activity related to derivatives.

Derivatives Designated as Hedging Instruments
 
Six Months Ended July 2, 2017
 
Gains (Losses)
Recognized in
OCI -
Effective
Portion
 
Location of
Gain (Loss)
Reclassified from OCI
into Income - Effective
Portion
 
Gains (Losses)
Reclassified
from
OCI into
Income -
Effective
Portion (1)
 
Location of
Gains (Losses)
Recognized in
Income and
Excluded from
Effectiveness Testing
 
Amount of Gains (Losses) Recognized in
Income and
Excluded from
Effectiveness Testing
 
 
(In thousands)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
(7,052
)
 
Net revenue
 
$
1,027

 
Other income (expense), net
 
$
668

Foreign currency forward contracts
 

 
Cost of revenue
 
(14
)
 
Other income (expense), net
 

Foreign currency forward contracts
 

 
Operating expenses
 
(365
)
 
Other income (expense), net
 

Total
 
$
(7,052
)
 
 
 
$
648

 
 
 
$
668

_________________________
(1) Refer to Note 9, Stockholders' Equity, which summarizes the accumulated other comprehensive income activity related to derivatives.


Derivatives Designated as Hedging Instruments
 
Three Months Ended July 3, 2016
 
Gains (Losses)
Recognized in
OCI -
Effective
Portion
 
Location of
Gain (Loss)
Reclassified from OCI
into Income - Effective
Portion
 
Gains (Losses)
Reclassified
from
OCI into
Income -
Effective
Portion (1)
 
Location of
Gains (Losses)
Recognized in
Income and
Excluded from
Effectiveness Testing
 
Amount of Gains (Losses) Recognized in
Income and
Excluded from
Effectiveness Testing
 
 
(In thousands)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
88

 
Net revenue
 
$
(407
)
 
Other income (expense), net
 
$
18

Foreign currency forward contracts
 

 
Cost of revenue
 
(2
)
 
Other income (expense), net
 

Foreign currency forward contracts
 

 
Operating expenses
 
(14
)
 
Other income (expense), net
 

Total
 
$
88

 
 
 
$
(423
)
 
 
 
$
18


_________________________
(1) Refer to Note 9, Stockholders' Equity, which summarizes the accumulated other comprehensive income activity related to derivatives.


Derivatives Designated as Hedging Instruments
 
Six Months Ended July 3, 2016
 
Gains (Losses)
Recognized in
OCI -
Effective
Portion
 
Location of
Gain (Loss)
Reclassified from OCI
into Income - Effective
Portion
 
Gains (Losses)
Reclassified
from
OCI into
Income -
Effective
Portion (1)
 
Location of
Gains (Losses)
Recognized in
Income and
Excluded from
Effectiveness Testing
 
Amount of Gains (Losses) Recognized in
Income and
Excluded from
Effectiveness Testing
 
 
(In thousands)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
(699
)
 
Net revenue
 
$
(719
)
 
Other income (expense), net
 
$
53

Foreign currency forward contracts
 

 
Cost of revenue
 

 
Other income (expense), net
 

Foreign currency forward contracts
 

 
Operating expenses
 
56

 
Other income (expense), net
 

Total
 
$
(699
)
 
 
 
$
(663
)
 
 
 
$
53

_________________________
(1) Refer to Note 9, Stockholders' Equity, which summarizes the accumulated other comprehensive income activity related to derivatives.

Non-designated hedges

The Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functional currency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in other income and expense. The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations. Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when the related anticipated foreign revenue and expenses are recognized in the Company’s financial statements. The Company also hedges certain non-functional currency monetary assets and liabilities that may not be incorporated into the cash flow hedge program. The Company adjusts its non-designated hedges monthly and enters into about four non-designated derivatives per quarter. The average size of its non-designated hedges is approximately $2.0 million USD equivalent and these hedges range from one to three months in duration.


The effects of the Company’s non-designated hedge included in other income (expense), net in the unaudited condensed consolidated statements of operations for the six months ended July 2, 2017 and July 3, 2016 are as follows:

Derivatives Not Designated as Hedging Instruments
 
Location of Gains (Losses)
Recognized in Income on Derivative
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
 
 
 
(In thousands)
Foreign currency forward contracts
 
Other income (expense), net
 
$
(2,893
)
 
$
1,185

 
$
(4,246
)
 
$
(759
)