Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.3.1.900
Derivative Instruments and Hedging Activities
 6 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 14 – 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 other expense (income), net in the condensed consolidated statements 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 other expense (income), 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.
In October 2014, in anticipation of the issuance of the Senior Notes, the Company entered into a series of forward contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the Senior Notes. The objective of the Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the changes in the benchmark rate leading up to the closing of the intended financing, on the notional amount being hedged. The Rate Lock Agreements had a notional amount of $1.00 billion in aggregate which matured in the second quarter of the fiscal year ended June 30, 2015. The Company designated each of the Rate Lock Agreements as a qualifying hedging instrument and accounted for as a cash flow hedge, under which the effective portion of the gain or loss on the close out of the Rate Lock Agreements was initially recognized in accumulated other comprehensive income (loss) as a reduction of total stockholders’ equity and subsequently amortized into earnings as a component of interest expense over the term of the underlying debt. The ineffective portion, if any, was recognized in earnings immediately. The Rate Lock Agreements were terminated on the date of pricing of the $1.25 billion of 4.650% Senior Notes due in 2024 and the Company recorded the fair value of a $7.5 million as a gain within accumulated other comprehensive income (loss) as of December 31, 2014. For the three and six months ended December 31, 2015, the Company recognized $0.2 million and $0.4 million, respectively, for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense. As of December 31, 2015, the unamortized portion of the fair value of the forward contracts for the rate lock agreements was $6.7 million. The cash proceeds of $7.5 million from the settlement of the Rate Lock Agreements were included in the cash flows from operating activities in the condensed consolidated statements of cash flows for the six months ended December 31, 2014 because the designated hedged item was classified as interest expense in the cash flows from operating activities in the condensed consolidated statements of cash flows.
In addition, in November 2014, the Company entered into a non-designated forward contract to lock the treasury rate used to determine the redemption amount of the 2018 Senior Notes. The objective of the forward contract was to hedge the risk associated with the variability of the redemption amount due to changes in interest rates through the redemption of the existing 2018 Senior Notes. The forward contract had a notional amount of $750 million. The forward contract was terminated in December 2014 and the resulting fair value of $1.2 million was included in the loss on extinguishment of debt and other, net line in the condensed consolidated statements of operations, partially offsetting the loss on redemption of the debt during the three months ended December 31, 2014. The cash proceeds from the forward contract were included in the cash flows from financing activities in the condensed consolidated statements of cash flows for the three months ended December 31, 2014, partially offsetting the cash outflows for the redemption of the 2018 Senior Notes.
Derivatives in Cash Flow Hedging Relationships: Foreign Exchange and Interest Rate 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
December 31,
 
Six months ended
December 31,
(In thousands)
Location in Financial Statements
2015
 
2014
 
2015
 
2014
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Gains (losses) in accumulated OCI on derivatives (effective portion)
Accumulated OCI
$
707

 
$
11,924

 
$
(1,154
)
 
$
13,957

Gains (losses) reclassified from accumulated OCI into income (effective portion):
Revenues
$
324

 
$
1,933

 
$
1,009

 
$
2,202

 
Costs of revenues
(678
)
 
(475
)
 
(1,150
)
 
(516
)
 
Interest expense
189

 
126

 
378

 
126

 
Net gains reclassified from accumulated OCI into income (effective portion)
$
(165
)
 
$
1,584

 
$
237

 
$
1,812

Gains (losses) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Other expense (income), net
$
(273
)
 
$
77

 
$
(399
)
 
$
120

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Gains (losses) recognized in income
Other expense (income), net
$
747

 
$
7,187

 
$
(5,635
)
 
$
11,112

 
Loss on extinguishment of debt and other, net
$
—

 
$
1,180

 
$
—

 
$
1,180


The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturity of approximately 10 months, as of the dates indicated below was as follows:
(In thousands)
As of
December 31, 2015
 
As of
June 30, 2015
Cash flow hedge contracts
 
 
 
Purchase
$
12,163

 
$
32,775

Sell
$
88,569

 
$
88,800

Other foreign currency hedge contracts
 
 
 
Purchase
$
93,310

 
$
64,012

Sell
$
151,330

 
$
123,091


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
December 31, 2015
 
As of
June 30, 2015
 
Balance Sheet Location
 
As of
December 31, 2015
 
As of
June 30, 2015
(In thousands)
 
Fair Value
 
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
511

 
$
1,722

 
Other current liabilities
 
$
1,009

 
$
1,920

Total derivatives designated as hedging instruments
 
 
$
511

 
$
1,722

 
 
 
$
1,009

 
$
1,920

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
517

 
$
1,342

 
Other current liabilities
 
$
3,083

 
$
1,186

Total derivatives not designated as hedging instruments
 
 
$
517

 
$
1,342

 
 
 
$
3,083

 
$
1,186

Total derivatives
 
 
$
1,028

 
$
3,064

 
 
 
$
4,092

 
$
3,106


The following table provides the balances and changes in accumulated OCI, before taxes, related to derivative instruments for the indicated periods:
 
Three months ended
December 31,
 
Six months ended
December 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
4,847

 
$
1,785

 
$
7,110

 
$
(20
)
Amount reclassified to income
165

 
(1,584
)
 
(237
)
 
(1,812
)
Net change in unrealized gains or losses
707

 
11,924

 
(1,154
)
 
13,957

Ending balance
$
5,719

 
$
12,125

 
$
5,719

 
$
12,125


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 December 31, 2015 and June 30, 2015, information related to the offsetting arrangements was as follows (in thousands):
As of December 31, 2015
 
 
 
 
 
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
 
$
1,028

 
$
—

 
$
1,028

 
$
(1,028
)
 
$
—

 
$
—

Derivatives - Liabilities
 
$
(4,092
)
 
$
—

 
$
(4,092
)
 
$
1,028

 
$
—

 
$
(3,064
)
As of June 30, 2015
 
 
 
 
 
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
 
$
3,064

 
$
—

 
$
3,064

 
$
(2,809
)
 
$
—

 
$
255

Derivatives - Liabilities
 
$
(3,106
)
 
$
—

 
$
(3,106
)
 
$
2,809

 
$
—

 
$
(297
)