Spansion Inc. - 10-Q filing on 2014-08-01

Note 11 - Derivative Financial Instruments

6 Months Ended

Jun. 29, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

11. Derivative Financial Instruments

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 its 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 have maturities between three and eight months. The maximum original duration of any contract allowable under the Company’s hedging policy is fifteen months.

At June 29, 2014, the Company had outstanding forward contracts to buy USD for $145.3 million with Japanese Yen.

Over the next twelve months, the Company expects to reclassify $3.9 million from accumulated other comprehensive loss 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:

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
				(in thousands)

Beginning Balance	$	(3,330	)	$	5,991		$	2		$	1
Net loss (gain) reclassified into earnings on cash flow hedges (effective portion)		1,601			(2,835	)		2,983			(4,588	)
Net gain reclassified into earnings on cash flow hedges (ineffective portion)		-			(2,415	)		-			(2,415	)
Net unrealized hedge gain (loss) arising during the period		(2,176	)		6,317			(6,890	)		14,060
Ending Balance	$	(3,905	)	$	7,058		$	(3,905	)	$	7,058

Non-designated hedges

Total notional amounts of outstanding contracts were as summarized below:

Buy / Sell	June 29, 2014		December 29, 2013
	(in millions)

Japanese Yen / US dollar		-	JPY 2,945/$28.2
US dollar / Japanese Yen	$51.1/JPY 5,206		$42.0/JPY 4,047
US dollar / EUR	$33.4/EUR 24.5		$23.4/EUR 17.1

As of June 30, 2013, the Company had entered into an economic hedge using foreign exchange forward contracts and options to mitigate the impact of foreign currency fluctuations relating to the acquisition of the MCA business. These forward contracts and options are not designated hedges and are carried at fair value with changes in the fair value recorded in Interest income and other, net in the accompanying Condensed Consolidated Statement of Operations.

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2014 and June 30, 2013 was as follows:

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
	(in thousands)
Derivatives Designated as Hedging Instruments
Foreign Exchange Forward Contracts
Net unrealized gain (loss) recognized in OCI ⁽¹⁾	$	(2,176	)	$	6,317		$	(6,890	)	$	14,060
Net loss (gain) reclassified from accumulated OCI into income (effective portion)⁽²⁾	$	1,601		$	(2,835	)	$	2,983		$	(4,588	)
Net gain reclassified from accumulated OCI into income (ineffective portion) ⁽³⁾	$	-		$	(2,415	)	$	-		$	(2,415	)
Derivatives Not Designated as Hedging Instruments
Net gain (loss) recognized in income
Swap interest expense ⁽⁴⁾	$	-		$	(2	)	$	-		$	(8	)
Foreign Exchange Forward Contracts ⁽⁵⁾	$	1,204		$	(2,349	)	$	1,994		$	240
Foreign Exchange Options Contracts ⁽⁵⁾	$	-		$	197		$	-		$	197

(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 income and other, net

(4)

Classified in interest expense

(5)

Classified in interest income and other, net

The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of June 29, 2014 and December 29, 2013 were as follows:

	June 29, 2014				December 29, 2013
Balance sheet location	Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments		Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments
	(in thousands)
Prepaid expenses and other current assets Foreign Exchange Forward Contracts	$	-	$	-	$	-	$	3,493

Accrued liabilities and other Foreign Exchange Forward Contracts	$	3,757	$	272	$	-	$	313

The Company had an unrealized loss for the three and six months ended June 29, 2014, and a derivative liability from its cash flow hedges as of June 29, 2014, due to the strengthening of the Yen against the US Dollar during the first six months of fiscal 2014. The Company had an unrealized gain for the three and six months ended June 29, 2013, and a derivative asset from its cash flow hedges as of December 29, 2013, due to the weakening of the Yen against the US Dollar during the first six months of fiscal 2013. Cash flow hedges are usually entered into at the beginning of each fiscal year.

Offsetting Derivative Assets and Liabilities

The Company presents its derivatives at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. The following table sets forth the offsetting of derivative assets December 29, 2013. The Company did not have derivative assets as of June 29, 2014.

							Gross amounts not offset in the Condensed Consolidated Balance Sheets but have legal rights to offset
	Gross amounts of recognized Assets		Gross amounts offset in the Condensed Consolidated Balance Sheets		Net amounts of Assets presented in the Condensed Consolidated Balance Sheets		Financial Instruments ⁽¹⁾			Cash collateral pledged		Net amount
	(in thousands)
As of December 29, 2013:
Foreign exchange contracts	$	3,493	$	-	$	3,493	$	(1,572	)	$	-	$	1,921

⁽¹⁾ Financial Instruments as of December 29, 2013 relates to derivative liabilities and the Term Loan facility which are allowed to be net settled against derivative assets in accordance with our master netting agreements.

The following table sets forth the offsetting of derivative liabilities as of June 29, 2014 and December 29, 2013:

							Gross amounts not offset in the Condensed Consolidated Balance Sheets but have legal rights to offset
	Gross amounts of recognized Liabilities		Gross amounts offset in the Condensed Consolidated Balance Sheets		Net amounts of Liabilities presented in the Condensed Consolidated Balance Sheets		Financial Instruments			Cash collateral pledged		Net amount
	(in thousands)
As of June 29, 2014:
Foreign exchange contracts	$	4,029	$	-	$	4,029	$	(2,076	)⁽¹⁾	$	-	$	1,953
As of December 29, 2013:
Foreign exchange contracts	$	313	$	-	$	313	$	(226	)⁽²⁾	$	-	$	87

(1)

Financial Instruments as of June 29, 2014 relates to cash and cash equivalents and short-term investments, which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.

(2)

Financial Instruments as of December 29, 2013 relates to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.