Derivative and Hedging Activities Derivative and Hedging Activities (Notes)

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure

DERIVATIVES AND HEDGING ACTIVITIES

The Company uses forward contracts, to manage exposures to foreign currency exchange rates. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign currency exchange rates and the Company does not use derivative instruments for trading purposes. The use of derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet their contractual obligations, as such, the potential risk of loss with any one counterparty is closely monitored by the Company.

Derivatives Designated as Hedging Instruments (Cash Flow Hedges)

Beginning in December 2014, the Company entered into forward currency contracts to hedge forecasted operating expenses and service costs related to employee salaries and benefits denominated in Israeli shekels (“ILS”) for its subsidiaries in Israel. These ILS forward contacts mature generally within twelve months and are designated as cash flow hedges. For derivatives that are designated as hedges of forecasted foreign currency denominated operating expenses and service costs, the Company assesses effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivative are recorded as a component of “Accumulated other comprehensive income (loss)” (“AOCI”) in the Consolidated Balance Sheet until such time as the hedged transaction impacts earnings. The change in fair value of the forward points, which reflects the interest rate differential between the two countries on the derivative, is excluded from the effectiveness assessment. Gains or losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)

Balance sheet hedges consist of foreign currency forward contracts, mature generally within three months, are carried at fair value and they are used to minimize the short-term impact of foreign currency exchange rate fluctuation on cash and certain trade and inter-company receivables and payables. Changes in the fair value of these foreign currency forward contracts are recognized in “Other income (expense), net” in the Consolidated Statement of Operations and are largely offset by the changes in the fair value of the assets or liabilities being hedged.

The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the Company’s Consolidated Statements of Operations were as follows (in thousands):

		Years ended December 31,
	Financial Statement Location	2015			2014			2013
Derivatives designated as hedging instruments:
Gains (losses) in AOCI on derivatives (effective portion)	AOCI	$	(133	)	$	311		$	—
Gains reclassified from AOCI into income (effective portion)	Cost of Revenue	$	59
	Operating Expense	365
	Total	$	424		$	—		$	—
Gains (losses) recognized in income on derivatives (amount excluded from effectiveness testing)	Other income (expense), net	$	(87	)	$	18		$	—
Derivatives not designated as hedging instruments:
Gains (losses) recognized in income	Other income (expense), net	$	344		$	(72	)	$	596

The Company anticipates the AOCI balance of $133,000 at December 31, 2015, relating to net unrealized losses from cash flow hedges, will be reclassified to earnings within the next twelve months.

The U.S. dollar equivalent of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):

	December 31,
	2015		2014
Derivatives designated as cash flow hedges:
Purchase	$	12,984	$	16,903
Derivatives not designated as hedging instruments:
Purchase	$	6,942	$	1,043
Sell	$	11,332	$	4,925

The locations and fair value amounts of the Company’s derivative instruments reported in its Consolidated Balance Sheets are as follows (in thousands):

		Asset Derivatives					Asset Liabilities
	Balance Sheet Location	December 31, 2015		December 31, 2014		Balance Sheet Location	December 31, 2015		December 31, 2014
Derivatives designated as hedging instruments:
Foreign currency contracts	Prepaid expenses and other current assets	$	13	$	329	Accrued Liabilities	$	281	$	—
		$	13	$	329		$	281	$	—
Derivatives not designated as hedging instruments:
Foreign currency contracts	Prepaid expenses and other current assets	$	100	$	12	Accrued Liabilities	$	90	$	7
		$	100	$	12		$	90	$	7
Total derivatives		$	113	$	341		$	371	$	7

Offsetting of Derivative Assets and Liabilities

The Company recognizes all derivative instruments on a gross basis in the Consolidated Balance Sheets. However, the arrangements with its counterparties allows for net settlement, which are designed to reduce credit risk by permitting net settlement with the same counterparty. As of December 31, 2015, information related to the offsetting arrangements was as follows (in thousands):

						Gross Amounts of Derivatives Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Derivatives		Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets	Net Amounts of Derivatives Presented in the Consolidated Balance Sheets		Financial Instrument			Cash Collateral Pledged	Net Amount
Derivative Assets	$	113	—	$	113	$	(113	)	—	$	—
Derivative Liabilities	$	371	—	$	371	$	(113	)	—	$	258

As of December 31, 2014, there was no potential effect of rights of offset associated with the outstanding foreign currency forward contracts that would result in a net derivative asset or net derivative liability.

In connection with the foreign currency derivatives entered in Israel, the Company’s subsidiaries in Israel are required to maintain a compensating balance with their bank at the end of each month. These compensating balance arrangements do not legally restrict the use of cash and as of December 31, 2015, the total compensating balance maintained was $2.5 million.