Note 4. Derivative Financial Instruments

9 Months Ended

Oct. 29, 2011

Derivative Instruments and Hedging Activities Disclosure [Text Block]

4. Derivative financial instruments

Foreign exchange contracts are recognized either as assets or as liabilities on the balance sheet at fair value at the end of each reporting period.  Changes in fair value of the derivatives are recorded as operating expenses or other income (expense) or as accumulated other comprehensive income, or OCI. 

Cash flow and non-designated hedges

We currently use and expect to continue to use foreign currency derivatives such as forward and option contracts as hedges against certain anticipated transactions denominated in Israeli shekels, or NIS.  For derivative instruments that are designated and qualified as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on these derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Beginning in the first quarter of fiscal 2012, we elected to discontinue hedge accounting for current derivative contracts that are used in managing NIS denominated transactions.  As a result of this change, we recognize all gains and losses from changes in the fair value of these derivate contracts immediately into earnings rather than deferring any such amounts in OCI.  For hedge transactions entered into prior to January 30, 2011, which continue to be effective, the gains and losses incurred prior to January 30, 2011 continue to be recorded in OCI and will be reclassified into earnings when those hedge transactions mature.

As of October 29, 2011, we had foreign exchange contracts with notional values of approximately $10.3 million that mature on or before September 24, 2012.  Of this amount, contracts with a notional value of $1.2 million were entered into on or before January 29, 2011 and were designated as cash flow hedges, and contracts with a notional value of $9.1 million were entered into subsequent to January 29, 2011, and are treated as foreign exchange contracts not designated as cash flow hedges.  In the three and nine months ended October 29, 2011, we recognized gains of approximately $0.2 million and $0.5 million, respectively, as a result of foreign exchange contracts.  As of October 30, 2010, we had foreign exchange contracts to sell up to approximately $5.8 million for a total amount of approximately NIS 22.1 million, that matured on or before September 29, 2011.  In the three and nine months ended October 30, 2010, we recognized gains of approximately $0.1 million and $0.2 million, respectively, as a result of derivative instruments.

The following table presents the fair value of our outstanding derivative instruments as of October 29, 2011 and January 29, 2011 (in thousands):

		October 29,		January 29,
Derivative assets	Balance Sheet location	2011		2011
Foreign exchange contracts designated as cash flow hedges	Prepaid expenses and other current assets	$	—	$	85
Foreign exchange contracts not designated as cash flow hedges	Prepaid expenses and other current assets		63		—
Total fair value of derivative instruments		$	63	$	85

The effects of derivative instruments on income and accumulated other comprehensive income for the three and nine months ended October 29, 2011 and October 30, 2010 are summarized below (in thousands):

	Gains (Losses) recognized in accumulated other comprehensive income on derivatives (Effective Portion)			Gains reclassified from accumulated other comprehensive income into earnings			Gains (Losses) recognized in earnings on derivatives (including ineffective portion)
Derivatives instruments	Amount			Amount	Location		Amount		Location
Three months ended October 29, 2011 Foreign      exchange contracts	$	—	$	(9)	Operating expenses and cost of revenue	$	(178	)	Interest and other income, net
Nine months ended October 29, 2011 Foreign      exchange contracts	$	—	$	94	Operating expenses and cost      of revenue	$	422		Interest and other income, net
Three months ended October 30, 2010 Foreign      exchange contracts	$	227	$	73	Operating expenses and cost      of revenue	$	13		Interest and other income, net
Nine months ended October 30, 2010 Foreign      exchange contracts	$	275	$	158	Operating expenses and cost      of revenue	$	10		Interest and other income, net

The impact of the ineffective portion on designated cash flow derivative contracts recognized in interest and other income, net for the three and nine months ended October 29, 2011 and October 30, 2010 is as follows (in thousands):

	Three Months Ended				Nine Months Ended
	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Foreign exchange contracts gains (losses)	$	—	$	13	$	—	$	10

The amount of gain (loss) associated with non-designated derivative contracts recognized in interest and other income, net, for the three and nine months ended October 29, 2011 and October 30, 2010 is as follows (in thousands):

	Three Months Ended				Nine Months Ended
	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Gain (loss) on foreign exchange contracts including forward point income	$	(178)	$	—	$	422	$	—