DERIVATIVE FINANCIAL INSTRUMENTS

The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the foreign currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company’s foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the accompanying Condensed Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. As of June 30, 2014, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company’s derivatives recorded in OCI at June 30, 2014, and expected to be recognized into earnings over the next 12 months is a net loss of $0.3 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through operations.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in association with such derivative instruments are reclassified immediately into operations through Interest income and other, net on the Condensed Consolidated Statement of Operations. Any subsequent changes in fair value of such derivative instruments are reflected in Interest income and other, net unless they are re-designated as hedges of other transactions. The Company recognized less than $0.1 million related to the loss of hedge designation on cash flow hedges related to the Euro that were deemed ineffective due to lower-than-forecasted revenue from Europe for the six months ended June 30, 2014. No additional hedges are deemed ineffective as of June 30, 2014. During the six months ended June 30, 2013, the Company recognized $0.1 million in net gains in Interest income and other, net, related to the loss of hedge designation on a portion of cash flow hedges related to the Japanese yen that were deemed ineffective due to lower-than-forecasted revenue from Japan.

Under the Credit Agreement as defined in Note 7, "Long-Term Debt Obligations", the Company is required to maintain derivative contracts to protect against fluctuations in interest rates with respect to at least 35% of the aggregate principal amount of the Term Loan then outstanding, with such derivative contracts being required to have at least a three-year term. Accordingly, the Company maintains an interest rate swap (the "Interest Rate Swap") to comply with the requirements of the Credit Agreement. The Interest Rate Swap calls for fixed rate quarterly payments of 0.61% of the notional amount in exchange for a variable rate quarterly receipt equal to a 3-month LIBOR rate. The Interest Rate Swap terminates on June 25, 2015.

The Company did not designate the Interest Rate Swap as a hedging instrument and will recognize adjustments to fair value through Interest income and other, net on the accompanying Condensed Consolidated Statements of Operations at each reporting date. As of June 30, 2014, the fair value of the Interest Rate Swap was less than $0.1 million.

As of June 30, 2014 and December 31, 2013, the total notional values of the Company’s derivative assets and liabilities were as follows (in thousands):



	June 30, 2014		December 31, 2013
Euro	$	14,714	$	21,990
Japanese Yen	3,630		4,588
British Pound	3,925		5,653
Interest rate swap	10,307		10,307
Total	$	32,576	$	42,538

Other than the Interest Rate Swap, the Company did not have any derivative assets or liabilities that were not designated or qualifying as hedges as of June 30, 2014 and December 31, 2013.

The Company is exposed to the risk that the counterparties to its hedges may be unable to meet the terms of these agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred; however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.

The following table shows the Company’s foreign currency derivative measures at fair value as reflected on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (in thousands):



	June 30, 2014		December 31, 2013		Balance Sheet Classification
Derivative assets:
Foreign exchange contracts	$	7	$	185	Prepaid expenses and other current assets
Derivative liabilities:
Foreign exchange contracts	296		927		Accounts payable and accrued liabilities
Interest rate swap	22		11		Other long-term liabilities

The following table shows the effect, net of tax, of the Company’s derivative instruments on the accompanying Condensed Consolidated Statements of Operations and OCI for the three and six months ended June 30, 2014 and 2013 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Derivatives in cash flow hedging relationships:
Net (loss) gain recognized in OCI, net of tax (1)	$	(181	)	$	(361	)	$	(478	)	$	725
Net (loss) gain reclassified from accumulated OCI into Revenue, net of tax (2)	(314		)	254			(758		)	1,081
Net (loss) gain reclassified from accumulated OCI into Interest income and other, net, net of tax (3)	(7		)	—			(17		)	158
Net gain recognized in Interest income and other, net, net of tax (4)	19			30			1			45
Derivatives not designated as hedging relationships:
Net gain recognized in Interest income and other, net, net of tax (5)	11			4			12			147


(1)	Net change in the fair value of the effective portion classified in OCI


(2)	Effective portion classified as Revenue


(3)	Ineffective portion classified as Interest income and other, net


(4)	Amount excluded from effectiveness testing classified as Interest income and other, net


(5)	Classified in Interest income and other, net