Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v2.4.0.8
Derivative Instruments and Hedging Activities
 3 Months Ended
Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts, as either assets or liabilities at fair value on the balance sheet. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized in interest income and other, net in the Condensed Consolidated Statement of Operations. In accordance with the guidance, the Company designates foreign currency forward exchange and option contracts as cash flow hedges of certain forecasted foreign currency denominated sales and purchase transactions.
KLA-Tencor’s foreign subsidiaries operate and sell KLA-Tencor’s products in various global markets. As a result, KLA-Tencor is exposed to risks relating to changes in foreign currency exchange rates. KLA-Tencor utilizes foreign currency forward exchange contracts and option contracts to hedge against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the New Taiwan dollar and the Israeli new shekel. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These currency forward exchange contracts and options, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of the Company’s hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience material losses.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses on the derivative is reported as a component of accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
For derivative instruments that are not designated as accounting hedges, gains and losses are recognized in interest income and other, net. The Company uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Derivatives in Cash Flow Hedging Relationships: Foreign Exchange Contracts
The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the condensed consolidated financial statements for the indicated periods were as follows:
 
 
Three months ended
September 30,
(In thousands)
Location in Financial Statements
2014
 
2013
Derivatives Designated as Hedging Instruments
 
 
 
 
Gains (losses) in accumulated OCI on derivatives (effective portion)
Accumulated OCI
$
2,033

 
$
(291
)
Gains reclassified from accumulated OCI into income (effective portion):
Revenues
$
269

 
$
2,450

 
Costs of revenues
(41
)
 
66

 
Net gains reclassified from accumulated OCI into income (effective portion)
$
228

 
$
2,516

Gains (losses) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Interest income and other, net
$
43

 
$
(18
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
Gains recognized in income
Interest income and other, net
$
3,925

 
$
2,626


The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturity of 13 months, as of the dates indicated below was as follows: 
(In thousands)
As of
September 30, 2014
 
As of
June 30, 2014
Cash flow hedge contracts
 
 
 
Purchase
$
11,966

 
$
6,066

Sell
$
37,801

 
$
33,999

Other foreign currency hedge contracts
 
 
 
Purchase
$
74,988

 
$
108,901

Sell
$
105,141

 
$
106,322


The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets as of the dates indicated below were as follows: 
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
As of
September 30, 2014
 
As of
June 30, 2014
 
Balance Sheet Location
 
As of
September 30, 2014
 
As of
June 30, 2014
(In thousands)
 
Fair Value
 
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
2,439

 
$
120

 
Other current liabilities
 
$
628

 
$
100

Total derivatives designated as hedging instruments
 
 
$
2,439

 
$
120

 
 
 
$
628

 
$
100

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
3,168

 
$
546

 
Other current liabilities
 
$
722

 
$
798

Total derivatives not designated as hedging instruments
 
 
$
3,168

 
$
546

 
 
 
$
722

 
$
798

Total derivatives
 
 
$
5,607

 
$
666

 
 
 
$
1,350

 
$
898


The following table provides the balances and changes in accumulated OCI, before taxes, related to derivative instruments for the indicated periods:
 
Three months ended
September 30,
(In thousands)
2014
 
2013
Beginning balance
$
(20
)
 
$
2,484

Amount reclassified to income
(228
)
 
(2,516
)
Net change
2,033

 
(291
)
Ending balance
$
1,785

 
$
(323
)

Offsetting of Derivative Assets and Liabilities
KLA-Tencor presents derivatives at gross fair values in the Condensed Consolidated Balance Sheets. The Company has entered into arrangements with each of its counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. As of September 30, 2014 and June 30, 2014, information related to the offsetting arrangements was as follows (in thousands):
As of September 30, 2014
 
 
 
 
 
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
 
Description
 
Gross Amounts of Derivatives
 
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
 
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Derivatives - Assets
 
$
5,607

 
$
—

 
$
5,607

 
$
(1,350
)
 
$
—

 
$
4,257

Derivatives - Liabilities
 
$
(1,350
)
 
$
—

 
$
(1,350
)
 
$
1,350

 
$
—

 
$
—

As of June 30, 2014
 
 
 
 
 
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
 
Description
 
Gross Amounts of Derivatives
 
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
 
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Derivatives - Assets
 
$
666

 
$
—

 
$
666

 
$
(423
)
 
$
—

 
$
243

Derivatives - Liabilities
 
$
(898
)
 
$
—

 
$
(898
)
 
$
423

 
$
—

 
$
(475
)
Subsequent to September 30, 2014, the Company entered into certain forward contracts in relation to the leveraged recapitalization plan. Refer to “Note 17, “Subsequent Events” to the condensed consolidated financial statements for additional details.