Hedging

The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates. The Company manages these risks through the use of forward exchange contracts, designated as foreign-currency cash flow hedges, in an attempt to reduce the potentially adverse effects of foreign currency exchange rate fluctuations that occur in the normal course of business. As such, the Company’s hedging activities are all employed solely for risk management purposes. All hedging transactions are conducted with, in the opinion of management, financially stable and reputable financial institutions. As of September 30, 2012 and December 31, 2011, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Canadian Dollar and Indian Rupee which result from obligations such as payroll and rent paid in these respective currencies.

These derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as other current assets and unrealized loss positions are recorded as other current liabilities. Changes in the fair values of the outstanding derivatives that are highly effective are recorded in other comprehensive income until net income is affected by the variability of the cash flows of the hedged transaction. Typically, hedge ineffectiveness could result when the amount of the Company’s hedge contracts exceed the Company’s forecasted or actual transactions for which the hedge contracts were designed to hedge. Once a hedge contract matures, the associated gain (loss) on the contract will remain in other comprehensive income (loss) until the underlying hedged transaction affects net income (loss), at which time the gain (loss) will be recorded to the expense line item being hedged, which is primarily research and development expense. The Company only enters into derivative contracts in order to hedge foreign currency exposure, and these contracts do not exceed two years from inception. If the Company entered into a contract for speculative reasons or if the Company’s current hedge position becomes ineffective, changes in the fair values of the derivatives would be recognized in earnings in the current period.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives are expected to remain highly effective in future periods. For the nine months ended September 30, 2012 and 2011 and for the year ended December 31, 2011 the Company had no hedge ineffectiveness.

During the three and nine months ended September 30, 2012, the Company entered into 21 and 62 new foreign currency forward contracts, with total notional contractual values of $3.3 million and $10.2 million. During the three months ended September 30, 2011, the Company did not enter into any new foreign currency contracts, while during the nine months ended September 30, 2011, the Company entered into 12 new foreign currency forward contracts, with total notional contractual values of $2.2 million.

A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at September 30, 2012 is as follows (in thousands):



	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Estimated Fair Value
Type of Cash Flow Hedge	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Asset		(Liability)
Foreign currency forward exchange contracts	$	14,215	Other accrued liabilities	$	10	$	(281	)



	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Estimated Fair Value
Type of Cash Flow Hedge	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Asset		(Liability)
Foreign currency forward exchange contracts	$	15,480	Other accrued liabilities	$	—	$	(647	)

The effect of derivative instruments on the consolidated financial statements for the three months ended September 30, 2012 was as follows (in thousands):



	Effective Portion					Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Loss		Condensed Consolidated Statements of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)	Hedge Gain (Loss) Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	781
			Cost of sales	$	123	None	$	—
			Research and development	70		None	—
			Selling, general and administrative	51		None	—

The effect of derivative instruments on the consolidated financial statements for the nine months ended September 30, 2012 was as follows (in thousands):



	Effective Portion					Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Loss		Condensed Consolidated Statements of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)	Hedge Gain (Loss) Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	108
			Cost of sales	$	191	None	$	—
			Research and development	116		None	—
			Selling, general and administrative	35		None	—

The effect of derivative instruments on the consolidated financial statements for the three months ended September 30, 2011 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Loss			Condensed Consolidated Statements of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(660	)
				Cost of sales	$	18	None	$	—
				Research and development	109		None	—
				Selling, general and administrative	52		None	—

The effect of derivative instruments on the consolidated financial statements for the nine months ended September 30, 2011 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Gain Recognized in Other Comprehensive Loss			Condensed Consolidated Statements of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(603	)
				Cost of sales	$	53	None	$	—
				Research and development	339		None	—
				Selling, general and administrative	126		None	—

Over the next twelve months, the Company expects to reclassify into earnings a loss of approximately $0.2 million currently recorded as other comprehensive loss, as a result of the maturity of currently held forward exchange contracts.

The bank counterparties in these contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties who meet its minimum requirements regarding counterparty credit worthiness. In addition, the Company monitors credit ratings, credit spreads and potential downgrades prior to entering into any new hedging contracts.