XML 24 R11.htm IDEA: XBRL DOCUMENT v3.4.0.3
Derivative Financial Instruments
3 Months Ended
Mar. 31, 2016
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

5. Derivative Financial Instruments

The Company’s operations in foreign countries expose it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. In order to manage this risk, the Company hedges a portion of its foreign currency exposures related to certain forecasted operating expenses using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. By working only with major financial institutions and closely monitoring current market conditions, the Company seeks to limit its counterparty risk to these contracts. Therefore, the Company’s overall risk of loss in the event of a counterparty default is exposed to the currency risk.  The Company does not enter into derivative contracts for trading or speculative purposes.

The Company hedges its exposure to foreign currency exchange rate fluctuations for forecasted operating expenses that are denominated in a non-functional currency. The derivative instruments the Company uses to hedge this exposure are designated as cash flow hedges and have maturity dates of 12 months or less. Upon executing a hedging contract and quarterly thereafter, the Company assesses both retrospective and prospective hedge effectiveness using regression analysis to assert the hedge is highly effective at offsetting changes in cash flow.  The Company includes time value in its effectiveness assessment and recognizes any ineffectiveness in other income (expense). The effective component of the Company’s hedge is recorded in accumulated other comprehensive income (OCI) within stockholders' equity. When the hedged forecasted transaction occurs, the hedge is de-designated and the deferred gains or losses are reclassified into research and development expenses, which corresponds to the Company’s contract manufacturing supplier payments. Substantially all of the gains and losses related to the hedged forecasted transaction reported in accumulated other comprehensive income at March 31, 2016 are expected to be reclassified to research and development expenses within the next 12 months.

The cash flow effects of the Company’s derivative contracts for the three months ended March 31, 2016 are included within net cash provided by operating activities in the condensed consolidated statements of cash flows.

The Company had notional amounts outstanding on foreign currency exchange contracts of 3.2 million euros at March 31, 2016 and none outstanding at December 31, 2015.

While all of the Company’s derivative contracts allow it the right to offset assets or liabilities, the Company has presented amounts on a gross basis. Under the International Swap Dealers Association, Inc. master agreements with the respective counterparties of the foreign currency exchange contracts, subject to applicable requirements, the Company allowed to net settle transactions of the same currency with a single net amount payable by one party to the other.  The Company does not have any credit contingent features associated with its derivatives. 

The following table summarizes the classification and fair values of derivative instruments on the Company’s condensed consolidated balance sheets included within other current assets at March 31, 2016 (none outstanding at December 31, 2015) (in thousands):

 

 

March 31, 2016

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

Classification

 

Fair Value

 

 

Classification

 

Fair Value

 

Derivatives  designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

Other current assets

 

$

53

 

 

Other accrued liabilities

 

$

 

Total derivatives

 

 

$

53

 

 

 

 

$

 

 

The following table summarizes the effect of our foreign currency exchange contracts on the Company’s condensed consolidated financial statements (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Derivatives  designated as hedges:

 

 

 

 

 

 

 

Gains recognized in accumulated OCI  (effective portion)

$

53

 

 

$

 

Gains (losses) reclassified from accumulated OCI into operating expenses (effective portion)

$

 

 

$

 

Gains (losses) recognized in other income (expense), net (ineffective portion and

   amounts excluded from effectiveness testing)

$

 

 

$

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Gains recognized in other income (expense), net

$

 

 

$

 

 

From time to time, the Company may discontinue cash flow hedges and as a result, record related amounts in other income (expense), net on its condensed consolidated statements of operations. The Company did not record any amounts in other income (expense), net for the three months ended March 31, 2016 as a result of the discontinuance of cash flow hedges.

As of March 31, 2016, the Company held one derivative contract related to a foreign currency exchange contract and the derivative was in an asset position at the end of the period.