AFFYMETRIX INC - 10-Q filing on 2015-04-30

DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 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.

As of March 31, 2015 and December 31, 2014, the total notional values of the Company’s derivative assets and liabilities were as follows (in thousands):



	March 31, 2015		December 31, 2014
Euro	$	27,384	$	15,982
Japanese Yen	2,656		3,391
British Pound	6,941		1,784
Total	$	36,981	$	21,157

The Company records all derivative assets and liabilities on the accompanying Condensed Consolidated Balance sheets at fair value. The following table shows the Company’s derivatives as of March 31, 2015 and December 31, 2014 (in thousands):



	March 31, 2015		December 31, 2014		Balance Sheet Classification
Derivative assets:
Foreign exchange contracts	$	3,063	$	1,258	Prepaid expenses and other current assets
Derivative liabilities:
Foreign exchange contracts	12		—		Accounts payable and accrued liabilities

The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. 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 associated with such derivative instruments are reclassified immediately into operations through Other (expense) income, net on the Condensed Consolidated Statements of Operations. Any subsequent changes in fair value of such derivative instruments are reflected in Other (expense) income, net unless they are re-designated as hedges of other transactions.

All derivative assets and liabilities were designated as hedging relationships as of March 31, 2015 and December 31, 2014.

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 months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015		2014
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI	$	1,788	$	(297	)
Net gain (loss) reclassified from accumulated OCI into Revenue	1,785		(444		)
Net loss reclassified from accumulated OCI into Other (expense) income, net	—		(10		)
Net gain (loss) recognized in Other (expense) income, net	14		(18		)
Derivatives not designated as hedging relationships:
Net gain recognized in Other (expense) income, net	—		1

As of March 31, 2015, the deferred amount recorded in OCI related to the Company's derivatives recorded is a net gain of $2.9 million and is expected to be recognized into earnings over the next 12 months.