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Note 10. Derivative Financial Instruments
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Mar. 31, 2013
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
10.
Derivative Financial Instruments
Beginning
in the second quarter of fiscal 2012, the Company entered
into multiple foreign exchange forward contracts to hedge
certain operational exposures resulting from movements in
Japanese yen (JPY) exchange rates. The Company’s
hedging policy is designed to mitigate the impact of foreign
currency exchange rate movements on operating results. Some
foreign currency forward contracts were considered to be
economic hedges that were not designated as hedging
instruments while others were designated as cash flow hedges.
Whether designated or undesignated, these forward contracts
protect the Company against the variability of forecasted
foreign currency cash flows resulting from revenues and net
asset or liability positions designated in currencies other
than the U.S. dollar and they are not speculative in
nature.
Cash
Flow Hedges
The
Company’s foreign currency forward contracts that were
designated as cash flow hedges are carried at fair value and
have maturities between three and eight months. There were no
such gains or losses recognized in interest and other income
(expense), for the three months ended March 31, 2013 on
account of non-occurrence or probability of non-occurrence of
forecasted transactions.
The
Company evaluates hedge effectiveness at the inception of the
hedge prospectively as well as retrospectively and records
any ineffective portion of the hedge in interest and other
income (expense) in its Condensed Consolidated Statements of
Operations. There was no net gain or loss recognized for cash
flow hedges due to hedge ineffectiveness for the three months
ended March 31, 2013.
At
March 31, 2013, the Company had outstanding forward contracts
to sell JPY 12,251 million in exchange for $136.4 million.
Over the next twelve months, the Company expects to
reclassify $6.0 million from accumulated other comprehensive
gain to earnings as the related forecasted transactions
occur.
The
following table summarizes the activity related to
derivatives in accumulated other comprehensive loss, net of
tax:
Non-designated
hedges
The
Company also hedges net receivables and payables denominated
in Japanese yen with foreign exchange forward contracts to
reduce the risk that its earnings and cash flows will be
affected by changes in foreign currency exchange rates. These
forward contracts are not designated hedges and are carried
at fair value with changes in the fair value recorded to
interest and other income (expense) in the accompanying
Condensed Consolidated Statements of Income. These forward
contracts do not subject the Company to additional material
balance sheet risk due to exchange rate movements because
gains and losses on these derivatives are intended to offset
gains and losses on the monetary assets and liabilities being
hedged. Total notional amounts of outstanding contracts were
as summarized in the table below:
Interest
Rate Swap
The
Company is exposed to the variability of future quarterly
interest payments on its Senior Secured Term Loan (the Term
Loan) due to changes in the LIBOR above the floor rate of
1.25 percent. To mitigate this interest rate risk and comply
with the hedging requirement in the initial Term Loan
agreement, the Company entered into a series of interest rate
swaps to manage the interest rate risk associated with its
borrowings in the third quarter of fiscal 2010. The hedging
requirement in the Term Loan agreement was removed when the
Term Loan was amended in November 2010. However,
the interest rate swaps remained in place as of March 31,
2013.
The
Company has approximately $215 million outstanding under the
Term Loan as of March 31, 2013. The swap agreements have an
aggregate notional amount of $250 million and expire on May
17, 2013. Under these agreements, the Company pays the
independent swap counterparty a fixed rate of 2.42 percent
and, in exchange, the swap counterparty pays the Company an
interest rate equal to the floor rate of 2 percent or
three-month LIBOR, whichever is higher. The mark-to-market of
the swap has been reported as a component of interest expense
as it does not qualify as a cash flow hedge.
The
effect of derivative instruments on the Condensed
Consolidated Statements of Operations for the three and nine
months ended March 31, 2013 and March 25, 2012 was as
follows:
(1)
Net
change in the fair value of the effective portion classified
in other comprehensive income (OCI)
(2)
Effective
portion classified as net product
revenue
(3)
Classified
in interest expense
(4)
Classified
in interest income and other
The
gross fair values of derivative instruments on the Condensed
Consolidated Balance Sheets were as follows:
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