Market Risk - SNPS

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates to our cash, cash equivalents, and outstanding debt. As of October 31, 2018, all of our cash, cash equivalents and debt were at short-term variable and fixed interest rates. While par value generally approximates fair value on variable instruments, rising interest rates over time would increase both our interest income and our interest expense. The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing the risk. To achieve this objective, we maintain our portfolio of investments in a mix of tax-exempt and taxable instruments that meet high credit quality standards, as specified in our investment policy. None of these investments are held for trading purposes. Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrument.

The following table presents our cash equivalents and debt by fiscal year of expected maturity and average interest rates:

As of October 31, 2018

Maturing in Year Ending October 31,

2019

2020

2021

2022

Total

Fair Value

(in thousands)

Cash & Cash equivalent (variable rate)

574,959

Average interest rate

0.93

Short-term debt (variable rate):

Revolver

330,000

Average interest rate

LIBOR +1.000%

Term Loan

14,062

17,813

27,187

75,000

134,062

Average interest rate

LIBOR +1.125%

Credit Facility in China

5,535

Average interest rate

Chinese Central Bank rate + 10% of such rate

Foreign Currency Risk. We operate internationally and are exposed to potentially adverse movements in currency exchange rates. The functional currency of the majority of our active foreign subsidiaries is the foreign subsidiary's local currency. We enter into hedges in the form of foreign currency forward contracts to reduce our exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately one month, (3) future billings and revenue on previously shipped orders, and (4) certain future intercompany invoices denominated in foreign currencies. The foreign currency contracts are carried at fair value and denominated in various currencies as listed in the tables below. The duration of forward contracts usually ranges from one month to 21 months. A description of our accounting for foreign currency contracts is included in Note 2 and Note 5 of Notes to Consolidated Financial Statements.

The success of our hedging activities depends upon the accuracy of our estimates of various balances and transactions denominated in non-functional currencies. To the extent our estimates are correct, gains and losses on our foreign currency contracts will be offset by corresponding losses and gains on the underlying transactions. For example, if the Euro were to depreciate by 10% compared to the U.S. dollar prior to the settlement of the Euro forward contracts listed in the table below providing information as of October 31, 2018, the fair value of the contracts would decrease by approximately $12.4 million, and we would be required to pay approximately $12.4 million to the counterparty upon contract maturity. At the same time, the U.S. dollar value of our Euro-based expenses would decline, resulting in a gain and positive cash flow of approximately $12.4 million that would offset the loss and negative cash flow on the maturing forward contracts.

Net unrealized loss of approximately $23.9 million and gain of $4.4 million, net of tax, are included in accumulated other comprehensive income (loss) in our consolidated balance sheets as of October 31, 2018 and 2017, respectively.

If estimates of our balances and transactions prove inaccurate, we will not be completely hedged, and we will record a gain or loss, depending upon the nature and extent of such inaccuracy.

We do not use foreign currency forward contracts for speculative or trading purposes. We enter into foreign exchange forward contracts with financial institutions and have not experienced nonperformance by counterparties. Further, we anticipate performance by all counterparties to such agreements.

The following table provides information about the gross notional values of our foreign currency contracts as of October 31, 2018:

Gross Notional

Amount in

U.S. Dollars

Average

Contract

Rate

(in thousands)

Forward Contract Values:

Japanese yen

291,495

109.506

Hungarian forint

188,192

284.365

Indian rupee

131,679

71.319

Euro

124,091

1.206

Chinese renminbi

113,860

6.756

Taiwanese dollar

85,383

29.476

Canadian dollar

56,496

1.282

Korean won

41,342

1,124.225

Israeli shekel

36,100

3.604

British pound sterling

28,247

1.359

Armenian dram

20,967

475.367

Singapore dollar

9,224

1.368

Swiss franc

8,473

0.953

1,135,549

Equity Risk. We have approximately $10.9 million and $7.8 million of non-marketable equity securities in privately held companies as of October 31, 2018 and 2017, respectively. These investments are accounted for under the cost or equity methods. The cost basis of securities sold is based on the specific identification method. The securities of privately held companies are reported at carrying value. Investments are written down to the fair value if there are any events or changes in circumstances that indicate any other than temporary decline in the value. We did not recognize any impairment during fiscal 2018 and recorded $1.3 million of other-than-temporary impairment during fiscal 2017. None of our investments are held for speculation purposes.