Derivative and Hedgiing Activities Derivative and Hedging Activities

6 Months Ended

Jul. 01, 2016

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 contracts mature generally within 12 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 Condensed Consolidated Balance Sheets 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 Condensed 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 Accumulated Other Comprehensive Income (Loss) and Condensed Consolidated Statements of Operations were as follows (in thousands):

		Three months ended						Six months ended
	Financial Statement Location	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Derivatives designated as hedging instruments:
Gains (losses) in AOCI on derivatives (effective portion)	AOCI	$	(165	)	$	516		$	158		$	332
Gains (losses) reclassified from AOCI into income (effective portion)	Cost of Revenue	$	(3	)	$	19		$	(13	)	$	26
	Operating Expense	(19		)	119			(87		)	161
	Total	$	(22	)	$	138		$	(100	)	$	187
Losses recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing)	Other income (expense), net	$	(22	)	$	(10	)	$	(49	)	$	(52	)
Derivatives not designated as hedging instruments:
Gains (losses) recognized in income	Other income (expense), net	$	(50	)	$	133		$	(334	)	$	385

The Company anticipates the AOCI balance of $12,000 at July 1, 2016, relating to net unrealized gains from cash flow hedges, will be reclassified to earnings within the next twelve months.

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

	July 1, 2016		December 31, 2015
Derivatives designated as cash flow hedges:
Purchase	$	6,001	$	12,984
Derivatives not designated as hedging instruments:
Purchase	$	4,048	$	6,942
Sell	$	14,854	$	11,332

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

		Asset Derivatives					Derivative Liabilities
	Balance Sheet Location	July 1, 2016		December 31, 2015		Balance Sheet Location	July 1, 2016		December 31, 2015
Derivatives designated as hedging instruments:
Foreign currency contracts	Prepaid expenses and other current assets	$	23	$	13	Accrued Liabilities	$	51	$	281
		$	23	$	13		$	51	$	281
Derivatives not designated as hedging instruments:
Foreign currency contracts	Prepaid expenses and other current assets	$	36	$	100	Accrued Liabilities	$	74	$	90
		$	36	$	100		$	74	$	90
Total derivatives		$	59	$	113		$	125	$	371

Offsetting of Derivative Assets and Liabilities

The Company recognizes all derivative instruments on a gross basis in the Condensed 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 July 1, 2016, information related to the offsetting arrangements was as follows (in thousands):

						Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts of Derivatives		Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets	Net Amounts of Derivatives Presented in the Condensed Consolidated Balance Sheets		Financial Instrument			Cash Collateral Pledged	Net Amount
Derivative Assets	$	59	—	$	59	$	(36	)	—	$	23
Derivative Liabilities	$	125	—	$	125	$	(36	)	—	$	89

In connection with 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. The compensating balance arrangements do not legally restrict the use of cash and as of July 1, 2016, the total compensating balance maintained was $2.5 million.