Financial Instruments

Derivative Financial Instruments

The Company is exposed to changes in foreign currency exchange rates relating to certain anticipated cash flows from its international operations and potential changes in the value of reported net assets of certain of its foreign operations. Consequently, the Company periodically uses derivative financial instruments to manage such risks. The Company does not enter into derivative transactions for speculative or trading purposes.

The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in the consolidated balance sheets as of September 28, 2013 and March 30, 2013:



	Notional Amounts				Derivative Assets						Derivative Liabilities
Derivative Instrument^(a)	September 28, 2013		March 30, 2013		September 28, 2013			March 30, 2013			September 28, 2013				March 30, 2013
					Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value			Balance Sheet Line^(b)	Fair Value
	(millions)
Designated Hedges:
FC — Inventory purchases	$	339	$	366	PP	$	2	PP	$	14	^(c)	$	(4	)	AE	$	(2	)
FC — Other^(d)	147		25		PP	1		—	—		AE	(2		)	AE	(1		)
NI — Euro Debt	—		140		—	^(e)		—	^(e)		—	^(e)			—	^(e)
Total Designated Hedges	$	486	$	531		$	3		$	14		$	(6	)		$	(3	)
Undesignated Hedges:
FC — Other^(f)	$	446	$	270	^(g)	$	21	PP	$	1	AE	$	(1	)	AE	$	(2	)
Total Hedges	$	932	$	801		$	24		$	15		$	(7	)		$	(5	)


^(a)	FC = Forward foreign currency exchange contracts; NI = Net Investment Hedge; Euro Debt = Euro-denominated 4.5% notes due October 4, 2013.


^(b)	PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCL = Other non-current liabilities; ONCA = Other non-current assets.


^(c)	$3 million included within AE and $1 million included within ONCL.


^(d)	Primarily related to designated hedges of foreign currency-denominated intercompany royalty payments and marketing contributions, and other net operational exposures.


^(e)	As of March 30, 2013, a portion of the Euro Debt's principal amount was designated as a net investment hedge, and the entire principal amount has been de-designated as of September 28, 2013. See Note 12 for a summary of the carrying values and the estimated fair values of the Euro Debt as of September 28, 2013 and March 30, 2013.


^(f)	Primarily related to undesignated hedges of foreign currency-denominated intercompany loans, third-party debt obligations, and other net operational exposures.


^(g)	$17 million included within PP and $4 million included within ONCA.

The Company records and presents the fair values of all of its derivative assets and liabilities in the consolidated balance sheets on a gross basis, even though they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its forward foreign currency exchange contracts on a net basis in accordance with the terms of each of its master netting arrangements, as spread across eight separate counterparties, the amounts presented in the consolidated balance sheets as of September 28, 2013 and March 30, 2013 would be adjusted from the current gross presentation as detailed in the following table:



	September 28, 2013									March 30, 2013
Derivative Instrument	Gross Amounts Presented in the Consolidated Balance Sheet			Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Master Netting Agreements			Net Amount			Gross Amounts Presented in the Consolidated Balance Sheet			Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Master Netting Agreements			Net Amount
	(millions)
FC — Derivative assets	$	24		$	(2	)	$	22		$	15		$	(3	)	$	12
FC — Derivative liabilities	$	(7	)	$	2		$	(5	)	$	(5	)	$	3		$	(2	)

The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. Refer to Note 3 for further discussion of the Company’s master netting arrangements.

The following tables summarize the gross impact of the effective portion of gains and losses from the Company's derivative instruments on its unaudited interim consolidated financial statements for the three-month and six-month periods ended September 28, 2013 and September 29, 2012:



	Gains (Losses) Recognized in OCI
	Three Months Ended						Six Months Ended
Derivative Instrument	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
				(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	(7	)	$	(1	)	$	(8	)	$	8
FC — Other	(1		)	(1		)	(1		)	(4		)
	$	(8	)	$	(2	)	$	(9	)	$	4
Designated Hedge of Net Investment:^(a)
Euro Debt	$	1		$	(4	)	$	—		$	10
Total Designated Hedges	$	(7	)	$	(6	)	$	(9	)	$	14



	Gains (Losses) Reclassified from AOCI to Earnings										Location of Gains (Losses) Reclassified from AOCI to Earnings
	Three Months Ended					Six Months Ended
Derivative Instrument	September 28, 2013			September 29, 2012		September 28, 2013			September 29, 2012
				(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	1		$	8	$	6		$	11	Cost of goods sold
FC — Other	(1		)	—		(1		)	2		Foreign currency gains (losses)
	$	—		$	8	$	5		$	13


^(a)	Amounts would be recognized as a gain (loss) on the sale or liquidation of the hedged net investment.

During the six months ended September 28, 2013, the Company also recorded a foreign currency gain of $2 million associated with the discontinuance of certain cash flow hedges, as the related forecasted transactions were no longer probable of occurring.

Over the next twelve months, it is expected that approximately $2 million of net gains deferred in AOCI related to derivative financial instruments as of September 28, 2013 will be recognized in earnings. No material gains or losses relating to ineffective hedges were recognized during any of the fiscal periods presented.

The following table summarizes the impact of gains and losses from the Company's undesignated hedge contracts on its unaudited interim consolidated statements of income for the three-month and six-month periods ended September 28, 2013 and September 29, 2012:



	Gains (Losses) Recognized in Earnings										Location of Gains (Losses) Recognized in Earnings
	Three Months Ended					Six Months Ended
Derivative Instrument	September 28, 2013		September 29, 2012			September 28, 2013		September 29, 2012
	(millions)
Undesignated Hedges:
FC — Other	$	10	$	(3	)	$	18	$	(5	)	Foreign currency gains (losses)
Total Undesignated Hedges	$	10	$	(3	)	$	18	$	(5	)

The following is a summary of the Company’s risk management strategies and the effect of those strategies on its unaudited interim consolidated financial statements.

Foreign Currency Risk Management

Forward Foreign Currency Exchange Contracts

The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risk from exchange rate fluctuations on inventory purchases made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, intercompany contributions to fund certain marketing efforts of its international operations, interest payments made in connection with outstanding debt, and other foreign currency-denominated operational cash flows. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the Hong Kong Dollar, the South Korean Won, the British Pound Sterling, the Australian Dollar, and the Vietnamese Dong, the Company hedges a portion of its foreign currency exposures anticipated over a two-year period. In doing so, the Company uses foreign currency exchange forward contracts that generally have maturities of three months to two years to provide continuing coverage throughout the hedging period.

Hedge of Net Investment in Certain European Subsidiaries

Historically, the Company designated the entire €209 million principal amount outstanding of its Euro Debt as a hedge of its net investment in certain of its European subsidiaries. Accordingly, changes in the Euro Debt's carrying value resulting from fluctuations in the Euro exchange rate have historically been reported in equity as a component of AOCI, as the debt has been a highly effective hedge. As of September 28, 2013, in connection with the execution of undesignated hedge contracts during Fiscal 2013 and Fiscal 2014 to fully hedge the repayment of the Euro Debt, the entire principal amount of this hedge has been de-designated. Upon de-designation, changes in the Euro Debt's carrying value resulting from fluctuations in the Euro exchange rate were recorded in earnings within foreign currency gains (losses), and were largely offset by changes in the fair values of the related undesignated forward foreign currency exchange contracts.

Investments

The following table summarizes the Company’s short-term and non-current investments recorded in its consolidated balance sheets as of September 28, 2013 and March 30, 2013:



	September 28, 2013						March 30, 2013
Type of Investment	Short-term < 1 year		Non-current 1 - 3 years		Total		Short-term < 1 year		Non-current 1 - 3 years		Total
					(millions)
Available-for-Sale:
Government bonds — U.S.	$	27	$	5	$	32	$	21	$	8	$	29
Government bonds — non-U.S.	—		—		—		67		25		92
Corporate bonds — non-U.S.	—		—		—		36		46		82
Variable rate municipal securities — U.S.	—		—		—		17		—		17
Auction rate securities^(a)	—		2		2		—		2		2
Total available-for-sale investments	$	27	$	7	$	34	$	141	$	81	$	222
Other:
Time deposits	$	545	$	—	$	545	$	184	$	—	$	184
Total Investments	$	572	$	7	$	579	$	325	$	81	$	406


^(a)	Auction rate securities have characteristics similar to short-term investments. However, the Company has classified these securities as non-current investments in its consolidated balance sheets as current market conditions call into question its ability to redeem these investments for cash within the next twelve months.

No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded in any of the fiscal periods presented. Refer to Note 16 for further detail.

See Note 3 to the Fiscal 2013 10-K for further discussion of the Company’s accounting policies relating to its investments.