Derivative Financial Instruments

9 Months Ended

Oct. 02, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

8. Derivative Financial Instruments

The Company's subsidiaries have had and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company's functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company's functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in euros, British pounds, Australian dollars and Japanese yen to manage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities. The Company does not enter into derivatives transactions for trading or speculative purposes.

    Cash flow hedges

To help manage the exposure of operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipated foreign currency revenue, costs of revenue and certain operating expenses. These hedges are designated at the inception of the hedge relationship as cash flow hedges under the authoritative guidance for derivatives and hedging. Effectiveness is tested at least quarterly both prospectively and retrospectively using regression analysis to ensure that the hedge relationship has been effective and is likely to remain effective in the future. The Company typically hedges portions of its anticipated foreign currency exposure for three to five months. The Company enters into about six forward contracts per quarter with an average size of about $6 million USD equivalent related to its cash flow hedging program.

The Company expects to reclassify to earnings all of the amounts recorded in other comprehensive income associated with its cash flow hedges over the next 12 months. Other comprehensive income associated with cash flow hedges of foreign currency revenue is recognized as a component of net revenue in the same period as the related revenue is recognized. Other comprehensive income associated with cash flow hedges of foreign currency costs of revenue and operating expenses are recognized as a component of cost of revenue and operating expense in the same period as the related costs of revenue and operating expenses are recognized.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are reclassified immediately into earnings through other income and expense. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-designated as hedges of other transactions. The Company did not recognize any material net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended October 2, 2011 and October 3, 2010, respectively.

    Non-designated hedges

The Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functional currency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in other income and expense. The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations. Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when the related anticipated foreign revenue and expenses are recognized in the Company's financial statements. The Company also hedges certain non-functional currency monetary assets and liabilities that may not be incorporated into the cash flow hedge program. The Company adjusts its non-designated hedges monthly and enters into about 11 non-designated derivatives per quarter. The average size of its non-designated hedges is about $2 million USD equivalent and these hedges range from one to five months in duration.

The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheet at fair value. The effective portions of cash flow hedges are recorded in other comprehensive income until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of its designated hedges are adjusted to fair value through earnings in "Other income (expense), net."

The Company's foreign currency forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party. In addition, the derivative contracts are limited to a time period of less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.

The fair values of the Company's derivative instruments and the line items on the Unaudited Condensed Consolidated Balance Sheet to which they were recorded as of October 2, 2011 and December 31, 2010 are summarized as follows (in thousands):

Derivative Assets	Balance Sheet Location	Fair Value at October 2, 2011		Balance Sheet Location	Fair Value at December 31, 2010
Derivative assets not designated as hedging instruments	Prepaid expenses and other current assets	$	1,970	Prepaid expenses and other current assets	$	1,381
Derivative assets designated as hedging instruments	Prepaid expenses and other current assets		—	Prepaid expenses and other current assets		8
Total		$	1,970		$	1,389

Derivative Liabilities	Balance Sheet Location	Fair Value at October 2, 2011			Balance Sheet Location	Fair Value at December 31, 2010
Derivative liabilities not designated as hedging instruments	Other accrued liabilities	$	(532	)	Other accrued liabilities	$	(770	)
Derivative liabilities designated as hedging instruments	Other accrued liabilities		(41	)	Other accrued liabilities		(19	)
Total		$	(573	)		$	(789	)

For details of the Company's fair value measurements, please see Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements.

The effects of the Company's derivatives not designated as hedging instruments in other income (expense), net on the Statement of Operations for the three and nine months ended October 2, 2011 and October 3, 2010 is as follows (in thousands):

Derivatives Not Designated as Hedging Instruments	Location of Gains or (Losses) Recognized in Income on Derivative	Amount of Gains or (Losses) Recognized in Income on Derivative
		Three Months  Ended October 2, 2011		Nine Months Ended October  2, 2011
Foreign currency forward contracts	Other income (expense), net	$	1,602	$	(1,294	)

Derivatives Not Designated as Hedging Instruments	Location of Gains or (Losses) Recognized in Income on Derivative	Amount of Gains or (Losses) Recognized in Income on Derivative
		Three Months Ended October 3,2010			Nine Months Ended October 3,2010
Foreign currency forward contracts	Other income (expense), net	$	(3,378	)	$	48

The effects of the Company's derivative instruments on other comprehensive income and the Unaudited Condensed Consolidated Statement of Operations for the three and nine months ended October 2, 2011 are summarized as follows (in thousands):

Derivatives Designated as Hedging Instruments	Three Months Ended October 2, 2011
	Gain or (Loss) Recognized in OCI - Effective Portion (a)		Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion (a)			Location of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing
Cash flow hedges:
Foreign currency forward contracts	$	190	Net revenue	$	280		Other income (expense), net	$	(94	)
Foreign currency forward contracts		—	Cost of revenue		—		Other income (expense), net		—
Foreign currency forward contracts		—	Operating expenses		(20	)	Other income (expense), net		—
Total	$	190		$	260			$	(94	)

Derivatives Designated as Hedging Instruments	Nine Months Ended October 2, 2011
	Gain or (Loss) Recognized in OCI - Effective Portion (a)		Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion (a)			Location of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing	Amount of Gain  or (Loss) Recognized in Income and Excluded from Effectiveness Testing
Cash flow hedges:
Foreign currency forward contracts	$	174	Net revenue	$	511		Other income (expense), net	$	(222	)
Foreign currency forward contracts		—	Cost of revenue		(2	)	Other income (expense), net		—
Foreign currency forward contracts		—	Operating expenses		(18	)	Other income (expense), net		—
Total	$	174		$	491			$	(222	)

The effects of the Company's derivative instruments on other comprehensive income and the Unaudited Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010 are summarized as follows (in thousands):

Derivatives Designated as Hedging Instruments	Three Months Ended October 3, 2010
	Gain or (Loss) Recognized in OCI - Effective Portion (a)			Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion (a)			Location of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing
Cash flow hedges:
Foreign currency forward contracts	$	(5	)	Net revenue	$	220		Other income (expense), net	$	(66	)
Foreign currency forward contracts		—		Cost of revenue		(9	)	Other income (expense), net		—
Foreign currency forward contracts		—		Operating expenses		(176	)	Other income (expense), net		—
Total	$	(5	)		$	35			$	(66	)

Derivatives Designated as Hedging Instruments	Nine Months Ended October 3, 2010
	Gain or (Loss) Recognized in OCI - Effective Portion (a)		Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion (a)			Location of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized in Income and Excluded from Effectiveness Testing
Cash flow hedges:
Foreign currency forward contracts	$	1,391	Net revenue	$	1,860		Other income (expense), net	$	(160	)
Foreign currency forward contracts		—	Cost of revenue		(23	)	Other income (expense), net		—
Foreign currency forward contracts		—	Operating expenses		(610	)	Other income (expense), net		—
Total	$	1,391		$	1,227			$	(160	)

(a) Refer to Note 15, "Comprehensive Income and Cumulative Other Comprehensive Income, Net" of the Notes to Unaudited Condensed Consolidated Financial Statements, which summarizes the activity in other comprehensive income related to derivatives.

The Company did not recognize any net gain or loss related to the ineffective portion of cash flow hedges during the nine months ended October 2, 2011 and October 3, 2010.