Derivative Financial Instruments

12 Months Ended

Dec. 31, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

5. Derivative Financial Instruments

The Company’s relationships with vendors 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 and subsequently reclassified into earnings when the hedged exposure affects earnings.  Derivatives not designated as hedges are not speculative and are used to manage the Company’s economic exposure to foreign exchange rate movements but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.  Substantially all of the gains and losses related to the hedged forecasted transaction reported in accumulated other comprehensive income at December 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 year ended December 31, 2016 are included within net cash provided by operating activities in the consolidated statements of cash flows.

The Company had notional amounts on foreign currency exchange contracts of 9.1 million euros (a purchased call option on the Euro) that expired in December 2016 and none outstanding at December 31, 2016 and 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 is 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 effect of our foreign currency exchange contracts on the Company’s consolidated financial statements (in thousands):

	As of
	December 31,
	2016			2015
Derivatives designated as hedges:
Gains (losses) recognized in accumulated OCI (effective    portion)	$	(286	)	$	—
Gains (losses) reclassified from accumulated OCI into operating    expenses (effective portion)	$	64		$	—
Gains (losses) recognized in other income (expense), net    (ineffective portion and amounts excluded from effectiveness    testing)	$	—		$	—
Derivatives not designated as hedges:
Gains (losses) recognized in other income (expense), net	$	(80	)	$	—

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 at December 31, 2016 as a result of the discontinuance of cash flow hedges.

As of December 31, 2016, the Company held no derivative contracts.