Note 4. Derivative Financial Instruments

3 Months Ended

May 04, 2013

Derivative Instruments and Hedging Activities Disclosure [Text Block]

 4.             Derivative financial instruments

We use derivative instruments primarily to manage exposures to foreign currency exchange rate risks. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Substantially all of our revenue is transacted in U.S. dollars; however, a significant amount of our operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the Israeli shekel, or NIS.

Foreign exchange contracts are recognized either as assets or as liabilities on the balance sheet at fair value at the end of each reporting period. The accounting treatment of these instruments is based on whether the instruments are designated as hedge or non-hedge instruments. For those derivatives qualifying for hedge accounting, the effective portions of derivative’s gains or losses on these hedges are initially recorded in accumulated other comprehensive income (“AOCI”) until the hedged item is recognized in earnings. The effective portions of net investment hedges are recorded in OCI as a part of the cumulative translation adjustment. We record the ineffective portions of the hedging instruments in interest and other income, net in our condensed consolidated statements of operations. For those derivative instruments that do not qualify for hedge accounting, we record the changes in fair value directly in earnings as interest and other income, net in our condensed consolidated statement of operations.

Beginning in the first quarter of fiscal 2012, we elected to discontinue assessing new derivative contracts that are used in managing NIS denominated transactions for hedge effectiveness and thus such contracts do not qualify for hedge accounting. As a result of this change, we recognize all gains and losses from changes in the fair value of these derivate contracts directly into earnings rather than deferring any such amounts in OCI.

As of May 4, 2013, we had foreign exchange contracts to sell up to approximately $7.9 million for a total amount of approximately NIS 30.1 million that mature on or before February 24, 2014.  As of February 2, 2013, we had foreign exchange contracts to sell up to approximately $10.4 million for a total amount of approximately NIS 42.3 million that mature on or before December 23, 2013.  For the three months ended May 4, 2013 and April 28, 2012, we recognized gains of approximately $0.3 million and $0.1 million, respectively, as a result of foreign exchange contracts.

The following table presents the fair value of our outstanding derivative instruments as of May 4, 2013 and February 2, 2013 (in thousands):

Derivative Assets	Balance Sheet Location	May 4, 2013		February 2, 2013
Foreign exchange contracts not designated as cash flow hedges	Prepaid expenses and other current assets	$	522	$	438
Total fair value of derivative instruments		$	522	$	438

The effects of derivative instruments on income and accumulated other comprehensive income for the three months ended May 4, 2013 and April 28, 2012 are summarized as follows (in thousands):

	Gains (Losses) Recognized in Accumulated Other Comprehensive Income on Derivatives (Effective Portion)		Gains Reclassified from Accumulated Other Comprehensive Income into Earnings			Gains (Losses) Recognized in Earnings on Derivatives (Including Ineffective Portion)
Derivatives instruments	Amount		Amount		Location	Amount		Location
Three months ended May 4, 2013, foreign exchange contracts	$	-	$	-	Operating expenses and cost of revenue	$	285	Interest and other income, net
Three months ended April 28, 2012, foreign exchange contracts	$	-	$	-	Operating expenses and cost of revenue	$	82	Interest and other income, net

There was no impact from ineffective portions on designated cash flow derivative contracts for the three months ended May 4, 2013 and April 28, 2012.