Derivative Financial Instruments

3 Months Ended

Mar. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

6. Derivative Financial Instruments

Financial Contracts and Market Risk

We conduct business on a global basis in U.S. and foreign currencies subjecting us to risks associated with fluctuating foreign exchange rates. To mitigate these risks, we use derivative foreign exchange contracts to address nonfunctional exposures that are expected to be settled in one year or less. The derivative foreign exchange contracts consist of foreign currency forward and option contracts.

Derivative financial contracts involve elements of market and credit risk. The market risk that results from these contracts relates to changes in foreign currency exchange rates, which generally are offset by changes in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of the derivative contracts. We do not believe there is a significant credit risk associated with our hedging activities. We monitor the counterparties' credit ratings and other market data to minimize credit risk. In addition, we also limit the aggregate contract amount entered into with any one financial institution to mitigate credit risk.

Balance Sheet Hedges (Non-designated Hedges)

Short-term monetary assets and liabilities denominated in currencies other than the functional currency of the Tellabs entity entering into the transaction are remeasured through income as foreign currency rates fluctuate. Changes in the value of derivative contracts intended to offset these fluctuations are also recorded in income. These derivative contracts are not designated as hedges. At March 30, 2012, we held non-designated foreign currency forward contracts in 12 currencies, with a gross notional equivalent of $167.7 million.

Net Investment Hedges

We entered into three-month foreign currency forward contracts, designated as net investment hedges, to hedge a portion of our net investment in one of our foreign subsidiaries to preserve the U.S. dollar value of our Euro cash. Effective changes in the fair value of these contracts due to exchange rate fluctuations are recorded within Accumulated other comprehensive income. Those amounts will be reflected in income only when we dispose of the investment in the foreign subsidiary. We conduct monthly effectiveness tests of net investment hedges on a spot-to-spot basis, excluding forward points, and any measurement of ineffectiveness is recorded in income. As of March 30, 2012, we had a net unrealized gain of $14.5 million in Accumulated other comprehensive income, which includes a net gain of $14.2 million related to settled contracts and a net gain of $0.3 million related to unsettled contracts. We held net investment hedges with a notional value of 100 million Euros at the end of the quarter.

The fair value of derivative instruments in the Consolidated Balance Sheet as of March 30, 2012, was as follows:

	Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets		Liability Derivatives Reported in Other Accrued Liabilities
Net investment hedges		$0.3		$—
Balance sheet hedges (Non-designated hedges)		0.1		0.2
Total derivatives		$0.4		$0.2

The fair value of derivative instruments in the Consolidated Balance Sheet as of December 30, 2011, was as follows:

	Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets		Liability Derivatives Reported in Other Accrued Liabilities
Net investment hedges		$0.1		$—
Balance sheet hedges (Non-designated hedges)		0.1		0.2
Total derivatives		$0.2		$0.2

 The effect of derivative instruments designated as hedging instruments on the Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended March 30, 2012, and April 1, 2011, was as follows:

	Loss Recognized in Accumulated OCI, net(Effective Portion)						Gain Recognized in Other Expense net: Excluded from Effectiveness testing
	3/30/12			4/1/11			3/30/12		4/1/11
Net investment hedges		$(4.2	)		$(7.3	)		$0.1		$—

The effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended March 30, 2012, and April 1, 2011, was as follows:

	Gain Recognized in OtherExpense, net 1
	3/30/12		4/1/11
Foreign currency forward and option contracts		$1.4		$4.4

¹ The gains or losses from changes in the fair value of the derivative contracts are generally offset by gains or losses of the underlying transactions being hedged.