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 March 31, 2013 and December 31, 2012, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Indian Rupee, which result from obligations such as payroll and rent paid in this currency.

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 reclassified out of accumulated other comprehensive income and recorded to the expense line item being hedged. 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 three months ended March 31, 2013 and 2012 and for the year ended December 31, 2012, the Company had no hedge ineffectiveness.

During the three months ended March 31, 2013, the Company entered into 12 new foreign currency forward contracts with total notional contractual values of $2.5 million. During the three months ended March 31, 2012, the Company entered into 21 new foreign currency forward contracts with total notional contractual values of $4.5 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 March 31, 2013 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	$	13,966	Other accrued liabilities	$	—	$	(65	)



	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	$	13,986	Other accrued liabilities	$	—	$	(297	)

The effect of derivative instruments on the consolidated financial statements for the three months ended March 31, 2013 was as follows (in thousands):



Effective Portion			Ineffective Portion
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
Cost of sales	$	89	$	—	$	—
Research and development	51		—		—
Selling, general and administrative	38		—		—

The effect of derivative instruments on the consolidated financial statements for the three months ended March 31, 2012 was as follows (in thousands):



Effective Portion				Ineffective Portion
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
Cost of sales	$	(8	)	$	—	$	—
Research and development	9			—		—
Selling, general and administrative	9			—		—

The following is a summary of the change in the Company's other comprehensive income (loss) associated with the Company's hedging activities (in thousands):



	Three Months Ended
	March 31,
	2013			2012
Beginning balance of unrealized loss on forward exchange contracts	$	(765	)	$	(774	)
Other comprehensive income (loss) before reclassifications	(70		)	163
Amounts reclassified from other comprehensive income	178			10
Other comprehensive income (loss)	108			173
Ending balance of unrealized loss on forward exchange contracts	$	(657	)	$	(601	)

Over the next twelve months, the Company expects to reclassify into earnings a loss of approximately $0.4 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.