Derivative Instruments and Hedging

6 Months Ended

Jun. 29, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging

Derivative Instruments and Hedging

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we also enter into these transactions in other currencies, primarily Japanese yen as we have direct sales operations in Japan and related orders are often denominated in Japanese yen. This subjects us to a higher degree of risk from currency exchange rate fluctuations.

Our policy is to minimize foreign currency denominated transaction and remeasurement exposure with derivative instruments, mainly forward contracts. We enter into foreign currency forward contracts that generally have maturities of nine months or less. The gains and losses on these derivatives are intended to mitigate the translation gains and losses recognized in earnings. We do not enter into foreign exchange forward contracts for speculative purposes.

Under ASC Topic 815, Derivatives and Hedging (“ASC 815”), all derivatives are recorded on the balance sheet at fair value. The gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. All of our derivatives are designated as hedging instruments under ASC 815. The fair value of derivative instruments recorded in our Condensed Consolidated Balance Sheets is as follows:

	Derivatives
		Fair Value as of
(In thousands)	Balance Sheet Location	June 29, 2013			December 31, 2012
Foreign exchange contracts	Other current assets	$	8		$	28
	Other current liabilities	(19		)	(31		)
Total derivatives		$	(11	)	$	(3	)

Our derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counterparty to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment’s value caused by fluctuations in interest and currency exchange rates, credit spreads or other variables. We monitor the credit-worthiness of the financial institutions that are counterparties to our derivative financial instruments and do not consider the risks of counterparty nonperformance to be material. Credit and market risks, as a result of an offset by the underlying assets being hedged, related to derivative instruments were not considered material at June 29, 2013 and December 31, 2012.

Cash Flow Hedging

We designate and document as cash flow hedges foreign exchange forward contracts that are used by us to hedge the risk that the forecasted sale may be adversely affected by changes in foreign currency exchange rates. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) (“OCI”) until the period in which the forecasted sale being hedged is recognized, at which time the amount in OCI is reclassified to earnings as a component of revenue. To the extent that any of these contracts are not considered to be effective in offsetting the change in the value of the forecasted sales being hedged, the ineffective portion of these contracts is immediately recognized in income as a component of interest and other income, net. For the year ended December 31, 2012, there was one cash flow hedge with $0.1 million excluded from effectiveness testing. This hedge was for 179.0 million yen with a U.S. dollar value of $2.2 million. We calculate hedge effectiveness at a minimum each fiscal quarter. We measure hedge effectiveness by comparing the cumulative change in the spot rate of the derivative with the cumulative change in the spot rate of the anticipated sales transactions. The maturity of these instruments is generally nine months or less. We record any excluded components of the hedge in interest and other income, net. We reclassified an accumulated gain from other comprehensive income (loss) during the six month period ended June 29, 2013 in the amount of $0.1 million. There was no cash flow hedging activity in the three month period ended June 29, 2013.

Fair Value Hedging

We manage the foreign currency risk associated with Japanese yen denominated assets and liabilities using foreign exchange forward contracts. The change in fair value of these derivatives is recognized as a component of interest and other income (expense), net and is intended to offset the remeasurement gains and losses associated with the non-functional currency denominated assets and liabilities. At June 29, 2013, we had one currency buy-forward contract for the purchase of 67.4 million Japanese yen, or approximately $0.7 million and one currency sell-forward contract for the sale of 27.3 million Japanese yen, or approximately $0.3 million. The fair value of derivatives classified as balance sheet hedges at June 29, 2013 and December 31, 2012, respectively, was insignificant. The following sets forth the effect of the derivative instruments on our Condensed Consolidated Statements of Operations for the three and six month periods ended June 29, 2013 and June 30, 2012:

		Amount of Gain (Loss) Recognized in Income on Derivatives During
Derivatives in ASC 815 Fair Value Hedging Relationship	Location of Gain (Loss) Recognized in Income on Derivatives	Three months ended June 29, 2013 (in thousands)			Six months ended, June 29, 2013 (in thousands)
Foreign exchange contracts	Interest and other income (expense), net	$	2		$	(38	)
		Amount of Gain (Loss) Recognized in Income on Derivatives During
Derivatives in ASC 815 Fair Value Hedging Relationship	Location of Gain (Loss) Recognized in Income on Derivatives	Three months ended June 30, 2012 (in thousands)			Six months  ended, June 30, 2012 (in thousands)
Foreign exchange contracts	Interest and other income (expense), net	$	(6	)	$	7