Derivative Instruments and Hedging Activities

12 Months Ended

Oct. 01, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro, Japanese Yen, South Korean Won and Chinese Renminbi (RMB). As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of seven months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency rates at each respective date.

For derivative instruments that are not designated as hedging instruments, gains and losses are recognized in other income (expense).

On August 1, 2016, we purchased forward contracts totaling 670.0 million Euros, with a value date of November 30, 2016, to limit our foreign exchange risk related to the commitment of our term loan (denominated in Euros) in an amount of the Euro equivalent of $750.0 million to finance the U.S. dollar payment for the acquisition of Rofin. As of October 1, 2016, we had recognized an unrealized loss of $2.2 million on these contracts in other income (expense) net. Subsequent to October 1, 2016, we settled these hedges at a net gain of $3.1 million, resulting in a realized gain of $5.3 million in the first quarter of fiscal 2017.

Non-Designated Derivatives

The outstanding notional contract and fair value asset (liability) amounts of non-designated hedge contracts, with maximum maturity of seven months, are as follows (in thousands):

	U.S. Notional Contract Value						U.S. Fair Value
	October 1, 2016			October 3, 2015			October 1, 2016			October 3, 2015
Euro currency hedge contracts
Purchase	$	91,108		$	52,699		$	162		$	33
Sell	$	(750,454	)	$	—		$	(2,234	)	$	—
South Korean WON currency hedge contracts
Purchase	$	31,248		$	253		$	413		$	—
Sell	$	(37,929	)	$	(17,747	)	$	(152	)	$	30
Chinese RMB currency hedge contracts
Sell	$	(25,237	)	$	(10,900	)	$	(91	)	$	(106	)
Japanese Yen currency hedge contracts
Purchase	$	—		$	558		$	—		$	8
Sell	$	(36,450	)	$	(15,804	)	$	(343	)	$	(84	)
Other foreign currency hedge contracts
Purchase	$	6,033		$	3,283		$	(4	)	$	(49	)
Sell	$	(1,775	)	$	(5,835	)	$	38		$	146

Designated Derivatives

Cash flow hedges related to anticipated transactions are designated and documented at the inception of the hedge when we enter into contracts for specific future transactions. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of OCI in stockholder's equity and is reclassified into earnings when the underlying transaction affects earnings. We had no cash flow hedges outstanding at October 1, 2016. Changes in the fair value of currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and recognized in other income (expense) as incurred. We classify the cash flows from the foreign exchange forward contracts that are accounted for as cash flow hedges in the same section as the underlying item, primarily within cash flows from operating activities since we do not designate our cash flow hedges as investing or financing activities.

The outstanding notional contract and fair value asset (liability) amounts of designated cash flow hedge contracts, which have all been settled prior to October 1, 2016, are as follows (in thousands):

	U.S. Notional Contract Value					U.S. Fair Value
	October 1, 2016		October 3, 2015			October 1, 2016		October 3, 2015
Japanese Yen currency hedge contracts
Sell	$	—	$	(2,903	)	$	—	$	41

We had entered into certain derivative forward contracts to sell Japanese Yen and buy Euro to hedge revenue exposures related to our photonics-based solutions in Asia. In order to facilitate the hedge, we transacted with counterparties in the U.S. directly and then allocated the hedge contracts to our affiliates through a back-to-back relationship with our German subsidiary. The German subsidiary designated these hedge contracts as cash flow hedges under ASC 815. The hedges were settled prior to October 1, 2016

The fair value of our derivative instruments is included in prepaid expenses and other assets and in other current liabilities in our Consolidated Balance Sheets (See Note 4); such amounts were not material as of October 1, 2016 and October 3, 2015.

The locations and amounts of designated and non-designated derivative instruments’ gains and losses in the consolidated financial statements for the fiscal year ended October 1, 2016 and October 3, 2015 were as follows (in thousands):

	Location in financial statements	Fiscal 2016			Fiscal 2015			Fiscal 2014
Derivatives designated as hedging instruments
Gains(losses) in OCI on derivatives (effective portion), after tax	OCI	$	(28	)	$	601		$	(573	)
Losses reclassified from OCI into income (effective portion)	Cost of sales	$	—		$	(1,720	)	$	—
Gains(losses) reclassified from OCI into income (effective portion)	Revenue	$	(58	)	$	208		$	(13	)
Gains(losses) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Other income (expense)	$	(29	)	$	(108	)	$	20
Derivatives not designated as hedging instruments
Losses recognized in income	Other income (expense)	$	(10,527	)	$	(4,320	)	$	(3,105	)

During the fiscal year ended October 1, 2016 and October 3, 2015, we recognized losses of $31,000 and $107,000, respectively, in other income (expense) as ineffectiveness related to a portion of an anticipated hedged transaction that failed to occur within the original hedge period plus two months. The remainder of the hedged transaction occurred as expected and effective amounts were recognized in revenue or cost of sales as disclosed in the above table.

The amounts that will be reclassified from OCI to earnings are generally offset by the recognition of the hedged transactions (e.g., anticipated cost of sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in foreign exchange rates.

To mitigate credit risk in derivative transactions, we enter into master netting arrangements that allow each counterparty in the arrangements to net settle amounts of multiple and separate derivative transactions under certain conditions. We present the fair value of derivative assets and liabilities within the our consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. Our derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by us or the counterparties.

Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties as of October 1, 2016 and October 3, 2015 (in thousands):

							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Derivative Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Derivative Assets Presented in the Consolidated Balance Sheets		Financial Instruments (1)			Cash Collateral Received		Net Amounts
As of October 1, 2016:
Foreign exchange contracts	$	889	$	—	$	889	$	(860	)	$	—	$	29
As of October 3, 2015:
Foreign exchange contracts	$	258	$	—	$	258	$	(116	)	$	—	$	142

(1) The balances at October 1, 2016 and October 3, 2015 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with the master netting agreements.

									Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Derivative Liabilities			Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Derivative Liabilities Presented in the Consolidated Balance Sheets			Financial Instruments (1)		Cash Collateral Paid		Net Amounts
As of October 1, 2016:
Foreign exchange contracts	$	(3,100	)	$	—	$	(3,100	)	$	860	$	—	$	(2,240	)
As of October 3, 2015:
Foreign exchange contracts	$	(239	)	$	—	$	(239	)	$	116	$	—	$	(123	)

(1) The balances at October 1, 2016 and October 3, 2015 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with the master netting agreements.