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 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, 2016 and December 31, 2015, 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 (loss) 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 (loss) 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 and nine months ended September 30, 2016 and 2015, the Company had no hedge ineffectiveness.

During the three and nine months ended September 30, 2016 the Company entered into 9 and 30 new foreign currency forward contracts, with total contractual values of $3.2 million and $9.8 million. During the three and nine months ended September 30, 2015, the Company entered into 16 new foreign currency contracts, with total contractual values of $7.5 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 September 30, 2016 is as follows (in thousands):

Contractual/ Notional

Amount

Condensed Consolidated Balance Sheet

Classification

Estimated Fair Value

Type of Cash Flow Hedge

Asset

(Liability)

Foreign currency forward exchange contracts

13,912

Other current assets

265

—



	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	$	14,024	Other accrued liabilities	$	—	$	(277	)

There were no ineffective hedges for the three and nine months ended September 30, 2016 and 2015. The following table summarizes the effect of derivative instruments on the consolidated financial statements as a loss (gain) as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Cost of sales	$	39	$	75	$	222	$	104
Research and development	60		122		355		171
Selling, general and administrative	23		91		137		83
Total	$	122	$	288	$	714	$	358

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



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Beginning balance of unrealized loss on forward exchange contracts	$	(603	)	$	(685	)	$	(819	)	$	(752	)
Other comprehensive income (loss) before reclassifications	127			(497		)	(249		)	(500		)
Amounts reclassified from other comprehensive income (loss)	122			288			714			358
Other comprehensive income (loss)	249			(209		)	465			(142		)
Ending balance of unrealized loss on forward exchange contracts	$	(354	)	$	(894	)	$	(354	)	$	(894	)

Over the next twelve months, the Company expects to reclassify into earnings a loss of approximately $0.2 million currently recorded as accumulated other comprehensive income (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.