THQ 2011 Annual Report Download - page 47

funds; none of our cash equivalents are classified as trading securities. We generally manage our interest rate risk by maintaining
an investment portfolio generally consisting of debt instruments of high credit quality and relatively short maturities. However,
because short-term investments mature relatively quickly and are generally reinvested at the then current market rates, interest
income on a portfolio consisting of cash equivalents and short-term investments is more subject to market fluctuations than a
portfolio of longer term investments. The value of these investments may fluctuate with changes in interest rates, however, the
contractual terms of the investments do not permit the issuer to call, prepay or otherwise settle the investments at prices less than
the stated par value. Interest income recognized in the year ended March 31, 2011 was $1.0 million and is included in "Interest
and other income (expense), net" in our consolidated statements of operations.
At March 31, 2011, we had no outstanding balances under the Bank of America Credit Facility or under the UBS Credit Agreement,
which was terminated, pursuant to its terms, on July 2, 2010.
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We transact business in many different foreign currencies and are exposed to financial market risk resulting from fluctuations in
foreign currency exchange rates, particularly the GBP and the Euro, which may result in a gain or loss of earnings to us. Our
international business is subject to risks typical of an international business, including, but not limited to, foreign currency exchange
rate volatility. Accordingly, our future results could be materially and adversely affected by changes in foreign currency exchange
rates. Throughout the year, we frequently monitor the volatility of the GBP and the Euro (and all other applicable currencies).
Cash Flow Hedging Activities. From time to time, we hedge a portion of our foreign currency risk related to forecasted foreign
currency denominated sales and expense transactions by entering into foreign exchange forward contracts that generally have
maturities less than 90 days. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate
movements in net sales and operating expenses. During fiscal 2011, we did not enter into any foreign exchange forward contracts,
related to cash flow hedging activities. During fiscal 2010, we entered into foreign exchange forward contracts related to cash
flow hedging activities in the notional amount of $29.2 million. These contracts were settled during fiscal 2010 and resulted in a
loss of $0.7 million, which is included in "Interest and other income (expense), net" in our consolidated statements of operations.
Balance Sheet Hedging Activities. We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with
foreign currency-denominated assets and liabilities, primarily certain inter-company receivables and payables. Our foreign
exchange forward contracts are not designated as hedging instruments and are accounted for as derivatives whereby the fair value
of the contracts are reported as "Prepaid expenses and other current assets" or "Accrued and other current liabilities" in our
consolidated balance sheets, and the associated gains and losses from changes in fair value are reported in "Interest and other
income (expense), net" in our consolidated statements of operations. The forward contracts generally have a contractual term of
one month or less and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not significant
at each month-end.
At March 31, 2011, we had foreign exchange forward contracts related to balance sheet hedging activities in the notional amount
of $100.6 million with a fair value that approximates zero. All of the contracts had maturities of one month and consisted primarily
of Euro, GBP, CAD, and AUD. The net gain recognized from these contracts during fiscal 2011 was $6.9 million and is included
in "Interest and other income (expense), net" in our consolidated statements of operations.
Foreign exchange forward contracts are designed to offset gains and losses on the underlying foreign currency denominated assets
and liabilities. Any movement in foreign currency exchange rates resulting in a gain or loss on our foreign exchange forward
contracts are offset by an opposing gain or loss in the underlying foreign currency denominated assets and liabilities that were
hedged and would not have a material impact on our financial position.
The counterparties to these forward contracts are creditworthy multinational commercial or investment banks. The risks of
counterparty non-performance associated with these contracts are not considered to be material. Notwithstanding our efforts to
manage foreign exchange risks, there can be no assurances that our mitigating or hedging activities will adequately protect us
against the risks associated with foreign currency fluctuations.
We do not hedge foreign currency translation risk. A hypothetical 10% adverse change in foreign currency translation rates would
result in a reduction of reported net sales of approximately $22.0 million and an increase in reported loss from continuing operations
before income taxes of approximately $2.7 million for fiscal 2011. A hypothetical 10% adverse change in foreign currency
translation rates would result in a reduction of reported total assets of approximately $28.8 million. These estimates assume an
adverse shift in all foreign currency exchange rates, which do not always move in the same direction; actual results may differ
materially.
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