13. FOREIGN CURRENCY DERIVATIVES

The Company maintains a foreign currency risk management program that is designed to reduce the volatility of the Company’s economic value from the effects of unanticipated currency fluctuations. International operations generate both revenues and costs denominated in foreign currencies. The Company’s policy is to hedge significant foreign currency revenues and costs to improve margin visibility and reduce earnings volatility associated with unexpected changes in currency.

Non-Designated Hedges

The Company hedges its net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated revenues and expenses with foreign exchange forward contracts to reduce the risk that the Company’s earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments are carried at fair value with changes in the fair value recorded as interest and other income (expense), net. These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset remeasurement gains and losses on the hedged assets and liabilities. The Company executes non-designated foreign exchange forward contracts primarily denominated in Euros, British Pounds, Israeli Shekels, Brazilian Reals, Chinese Yuan, Japanese Yen and Mexican Pesos.

The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding non-designated hedges at September 30, 2014 (in thousands):

	Original Maturities of 360 Days or Less					Original Maturities of Greater than 360 Days
	Foreign Currency		USD Equivalent		Positions	Foreign Currency		USD Equivalent		Positions
Brazilian Real		10,508	$	4,287	Buy		—	$	—	—
Brazilian Real		19,975	$	8,487	Sell		—		—	—
Chinese Yuan		132,129	$	21,457	Buy		—	$	—	—
Chinese Yuan		128,938	$	20,724	Sell		—	$	—	—
Euro		21,287	$	27,031	Buy		6,400	$	8,629	Buy
Euro		50,325	$	65,702	Sell		20,800	$	28,043	Sell
British Pound		22,223	$	36,504	Buy		6,600	$	10,551	Buy
British Pound		19,126	$	31,426	Sell		7,800	$	12,469	Sell
Israeli Shekel		18,043	$	4,923	Buy		30,900	$	8,706	Buy
Israeli Shekel		41,125	$	11,305	Sell		—	$	—	—
Japanese Yen		514,868	$	4,694	Buy		—	$	—	—
Japanese Yen		930,002	$	8,745	Sell		—	$	—	—
Mexican Peso		14,129	$	1,052	Buy		—	$	—	—
Mexican Peso		24,673	$	1,861	Sell		—	$	—	—

The following table shows the effect of the Company’s non-designated hedges in the condensed consolidated statements of operations for the following periods (in thousands):

Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended
		September 30, 2014		September 30, 2013
Foreign exchange contracts	Interest and other income (expense), net	$	3,991	$	(1,783	)

		Nine Months Ended
		September 30, 2014		September 30, 2013
Foreign exchange contracts	Interest and other income (expense), net	$	4,290	$	(182	)

Cash Flow Hedges

The Company’s foreign exchange risk management program objective is to reduce volatility in the Company’s economic value from unanticipated foreign currency fluctuations. The Company designates forward contracts as cash flow hedges of foreign currency revenues and expenses, primarily the Chinese Yuan, Euros, British Pounds and Israeli Shekels. All foreign exchange contracts are carried at fair value on the condensed consolidated balance sheets and the maximum duration of foreign exchange forward contracts does not exceed thirteen months. Speculation is prohibited by policy.

To receive hedge accounting treatment under ASC 815, Derivatives and Hedging, all cash flow hedging relationships are formally designated at hedge inception, and tested both prospectively and retrospectively to ensure the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions. The Company records effective spot to spot changes in these cash flow hedges in cumulative other comprehensive income until they are reclassified to revenue, cost of revenue or operating expenses together with the hedged transaction. The time value on forward contracts is excluded from effectiveness testing and recorded to interest and other income (expense), net over the life of the contract together with any ineffective portion of the hedge.

The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent of the outstanding cash flow hedges at September 30, 2014 (in thousands):

	Original Maturities of 360 Days or Less					Original Maturities of Greater than 360 Days
	Foreign Currency		USD Equivalent		Positions	Foreign Currency		USD Equivalent		Positions
Chinese Yuan		119,271	$	18,931	Buy		—	$	—	—
Euro		25,966	$	34,655	Buy		—		—		—
Euro		62,368	$	83,220	Sell		—		—		—
British Pound		21,054	$	34,737	Buy		—		—		—
British Pound		25,028	$	41,308	Sell		—		—		—
Israeli Shekel		82,564	$	23,359	Buy		—		—		—

The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges in the condensed consolidated statements of operations for the following periods (in thousands):

	Gain or (Loss) Recognized in OCI-Effective Portion					Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion	Gain or (Loss) Reclassified from OCI into Income-Effective Portion						Location of Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing	Gain or (Loss) Recognized-Ineffective Portion and Amount Excluded from Effectiveness Testing (a)
	Three Months Ended						Three Months Ended							Three Months Ended
	September 30, 2014		September 30, 2013				September 30, 2014			September 30, 2013				September 30, 2014			September 30, 2013
Foreign exchange contracts	$	2,573	$	(570	)	Product revenues	$	1,222		$	716		Interest and other income (expense), net	$	49		$	113
						Cost of revenues		17			90
						Sales and marketing		(60	)		34
						Research and development		3			423
						General and administrative		160			(33	)
	$	2,573	$	(570	)		$	1,342		$	1,230			$	49		$	113

	Nine Months Ended						Nine Months Ended							Nine Months Ended
	September 30, 2014		September 30, 2013				September 30, 2014			September 30, 2013				September 30, 2014			September 30, 2013
Foreign exchange contracts	$	2,574	$	1,793		Product revenues	$	(3,052	)	$	1,190		Interest and other income (expense), net	$	(3	)	$	273
						Cost of revenues		879			138
						Sales and marketing		1,737			(73	)
						Research and development		695			1,075
						General and administrative		526			26
	$	2,574	$	1,793			$	785		$	2,356			$	(3	)	$	273

(a)There were no gains or losses recognized in income due to ineffectiveness in the periods presented.

As of September 30, 2014, the Company estimated that all values reported in accumulated other comprehensive income (loss) will be reclassified to income within the next twelve months.

In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to interest and other income (expense), net on the consolidated statements of operations. For the nine months ended September 30, 2014 and 2013, there were no such gains or losses.

The estimates of fair value are based on applicable and commonly quoted prices and prevailing financial market information as of September 30, 2014 and December 31, 2013. See Note 12 for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities that are measured at fair value in the condensed consolidated financial statements on a recurring basis.

The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the condensed consolidated balance sheets as of the periods presented (in thousands):

	Fair Value of Derivatives Designated as Hedge Instruments				Fair Value of Derivatives Not Designated as Hedge Instruments
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Derivative assets (a):
Foreign exchange contracts	$	5,122	$	4,457	$	5,332	$	2,291
Derivative liabilities (b):
Foreign exchange contracts	$	3,281	$	4,235	$	1,981	$	2,545

(a)	All derivative assets are recorded in “Prepaid and other current assets” in the condensed consolidated balance sheets.

(b)	All derivative liabilities are recorded in “Other accrued liabilities” in the condensed consolidated balance sheets.

Offsetting Derivative Assets and Liabilities

The Company has entered into master netting arrangements with each of its derivative counterparties. These arrangements afford the right to net derivative assets against liabilities with the same counterparty. Under certain default provisions, the Company has the right to setoff any other amounts payable to the payee whether or not arising under this agreement. As a result of the netting provisions, the Company’s maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivative contracts. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the condensed consolidated balance sheets.

The following table sets forth the offsetting of derivative assets (in thousands):

							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts Of Assets Presented In the Condensed Consolidated Balance Sheets		Financial Instruments			Cash Collateral Pledged		Net Amount
As of September 30, 2014:
Foreign exchange contracts	$	10,454	$	—	$	10,454	$	(5,259	)	$	—	$	5,195
As of December 31, 2013:
Foreign exchange contracts	$	6,748	$	—	$	6,748	$	(5,643	)	$	—	$	1,105

The following table sets forth the offsetting of derivative liabilities (in thousands):

							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts Of Liabilities Presented In the Condensed Consolidated Balance Sheets		Financial Instruments			Cash Collateral Pledged		Net Amount
As of September 30, 2014:
Foreign exchange contracts	$	5,262	$	—	$	5,262	$	(5,259	)	$	—	$	3
As of December 31, 2013:
Foreign exchange contracts	$	6,780	$	—	$	6,780	$	(5,643	)	$	—	$	1,137