Derivative Financial Instruments

12 Months Ended

Jun. 26, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

5. Derivative Financial Instruments

The Company is exposed to financial market risks, including fluctuations in interest rates, foreign currency exchange rates and market value risk related to its investments. The Company uses derivative financial instruments primarily to mitigate foreign exchange rate risks but also as part of its strategic investment program. In the normal course of business, the Company also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk, and are not discussed or quantified in the following analyses.  In prior periods, the Company has designated certain derivatives as fair value hedges or cash flow hedges qualifying for hedge accounting treatment.  As of June 26, 2011, however, the Company’s only derivatives were currency forward contracts which were not designated as accounting hedges, a put option on one of the Company’s strategic investments and a call option on the equity of a private domestic company (See Note 4, “Investments”). The private domestic company is a development stage entity and, as such, the Company is unable to determine the fair value the call option at this time.

Interest Rates

 The Company is subject to interest rate risk through its investments.  The objectives of the Company’s investments in debt securities are to preserve principal and maintain liquidity while maximizing returns.  To achieve these objectives, the returns on the Company’s investments in short-term debt generally will be compared to yields on money market instruments such as U.S. Commercial Paper programs, LIBOR or U.S. Treasury Bills.  Investments in long-term debt securities will be generally compared to yields on comparable maturity of U.S. Treasury obligations, investment grade corporate instruments with an equivalent credit rating or an aggregate benchmark index. 

The Company had no outstanding interest rate derivatives as of June 26, 2011.

Foreign Currency Exchange Rates

The Company generally hedges the risks of foreign currency-denominated repetitive working capital positions with offsetting foreign currency denominated exchange transactions, and currency forward contracts or currency swaps.  Transaction gains and losses on these foreign currency-denominated working capital positions are generally offset by corresponding gains and losses on the related hedging instruments, usually resulting in reduced net exposure.  The aggregate foreign currency gains (losses) included in net income for the fiscal years ending June 26, 2011, June 27, 2010 and June 28, 2009 were $(1.2) million, $(1.9) million and $(0.7) million, respectively.

A significant amount the Company’s revenues, expense, and capital purchasing transactions are conducted on a global basis in several foreign currencies.  At various times, the Company has currency exposure related to the British Pound Sterling, the Euro and the Japanese Yen.  For example, in the United Kingdom, the Company has a sales office and a semiconductor wafer fabrication facility with revenues primarily in U.S. Dollars and Euros and expenses in British Pounds Sterling and U.S. Dollars.  The Company does not hedge its revenues and expenses against changes in foreign currency exchange rates as it does notperceive the net risk of changes to translated revenues and expenses from changes in exchange rates as significant enough at this time to justify hedging.  To protect against exposure to currency exchange rate fluctuations on non-functional currency payables and receivables, the Company has established balance sheet transaction risk hedging program.  This risk management program generally uses currency forward contracts.  These currency forward contracts are not designated as hedging instruments for accounting purposes.  Through these hedging programs the Company seeks to reduce, but does not always entirely eliminate, the impact of currency exchange rate movements.

In May 2006, the Company entered into a forward contract for the purpose of reducing the effect of exchange rate fluctuations on forecasted inter-company purchases by its Japan subsidiary.  The Company had designated the forward contract as a cash flow hedge.  Under the terms of the forward contract, the Company was required to exchange 507.5 million Yen for $5.0 million on a quarterly basis starting in June 2006 and expiring in March 2011.  In December 2007, the Company terminated the forward contract and received $2.8 million of cash as part of the settlement.  The net gain at the forward contract’s termination date was reported in accumulated other comprehensive income.  The Company planned to recognize the gain over the originally specified time period.

The Company concluded that beginning in the fourth quarter of fiscal year 2009, the May 2006 forward contract in Yen would not have been an effective hedge. As a result of this ineffectiveness in the hedge on a retroactive basis, the Company reassessed the effectiveness of the hedge on a prospective basis and determined that the hedge was ineffective on a prospective basis.  As a result of the determination that the hedge was ineffective, the Company recognized the remaining unamortized balance of the gain of $1.6 million in other income during the first three months of fiscal year 2010.

In October 2004, the Company’s Japan subsidiary entered into a currency swap agreement to hedge intercompany payments in U.S. Dollars.  The transaction commencement date was in March 2005 and the termination date was in April 2011.  Each month, the Company exchanged JPY 9,540,000 for $100,000.  When the applicable currency exchange rate is less than or equal to 95.40, the Company exchanged JPY 18,984,600 for $199,000.

For its balance sheet transaction risk hedging program, the Company had approximately $77.1 million and $58.3 million in notional amounts of forward contracts not designated as accounting hedges outstanding at June 26, 2011 and June 27, 2010, respectively.  Net realized and unrealized foreign-currency gains (losses) related to foreign currency forward contracts not designated as accounting hedges recognized in earnings, as a component of other expense, were $(4.7) million and $1.3 million for the fiscal years ended June 26, 2011 and June 27, 2010, respectively.

In the normal course of business, the Company also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the preceding analysis. 

At June 26, 2011, the fair value carrying amount of the Company’s derivative instruments were as follows (in thousands):

	Derivative Assets June 26, 2011			Derivative Liabilities June 26, 2011
Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Put option	Other assets	$	2,773
Currency forward contracts				Other accrued expenses	$	309
Total		$	2,773		$	309

At June 27, 2010, the fair value carrying amount of the Company’s derivative instruments were as follows (in thousands):

	Derivative Assets June 27, 2010			Derivative Liabilities June 27, 2010
Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Put option	Other assets	$	2,121
Currency forward contracts	Prepaid expenses and other receivables		226
Foreign currency swap contract				Other accrued expenses	$	146
Total		$	2,347		$	146

 The gain or (loss) recognized in earnings for the fiscal years ended June 26, 2011 and June 27, 2010 was comprised of the following (in thousands):

		Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivatives	June 26, 2011			June 27, 2010
Put option	Other expense	$	652		$	2,121
Currency forward contracts	Other expense		(4,682	)		1,334
Foreign currency swap contract	Other expense		158			(27	)
Total		$	(3,872	)	$	3,428

Fair Value

The following table presents derivative instruments measured at fair value on a recurring basis as of June 26, 2011 (in thousands):

	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Put option	$	2,773		$	—	$	—		$	2,773
Foreign currency derivatives:
Liabilities		(309	)		—		(309	)		—
Total derivative instruments at fair value	$	2,464		$	—	$	(309	)	$	2,773

The following table presents derivative instruments measured at fair value on a recurring basis as of June 27, 2010 (in thousands):

	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Put option	$	2,121		$	—	$	—		$	2,121
Foreign currency derivatives:
Assets		226			—		226			—
Liabilities		(146	)		—		(146	)		—
Total derivative instruments at fair value	$	2,201		$	—	$	80		$	2,121