Financial Instruments

9 Months Ended

Jun. 28, 2013

Financial Instruments

Financial Instruments

11. Financial Instruments

        We use derivative and non-derivative financial instruments to manage certain exposures to foreign currency, interest rate, investment, and commodity risks.

• Foreign Exchange Risks

        As part of managing the exposure to changes in foreign currency exchange rates, we utilize foreign currency forward and swap contracts, a portion of which are designated as cash flow hedges. The objective of these contracts is to minimize impacts to cash flows and profitability due to changes in foreign currency exchange rates on intercompany transactions and other cash transactions.

        We expect that significantly all of the balance in accumulated other comprehensive income associated with the cash flow hedge-designated instruments addressing foreign exchange risks will be reclassified into the Condensed Consolidated Statements of Operations within the next twelve months.

• Interest Rate and Investment Risk Management

        We issue debt, as needed, to fund our operations and capital requirements. Such borrowings can result in interest rate exposure. To manage the interest rate exposure, we use interest rate swaps to convert a portion of fixed-rate debt into variable-rate debt. We use forward starting interest rate swaps and options to enter into interest rate swaps ("swaptions") to manage interest rate exposure in periods prior to the anticipated issuance of fixed-rate debt. We also utilize investment swaps to manage earnings exposure on certain non-qualified deferred compensation liabilities.

• Hedges of Net Investment

        We hedge our net investment in certain foreign operations using intercompany non-derivative financial instruments denominated in the same currencies. The aggregate notional value of these hedges was $2,177 million and $2,981 million at June 28, 2013 and September 28, 2012, respectively. We reclassified foreign exchange losses of $6 million and gains of $20 million during the quarters ended June 28, 2013 and June 29, 2012, respectively, and gains of $59 million and $80 million during the nine months ended June 28, 2013 and June 29, 2012, respectively, to currency translation, a component of accumulated other comprehensive income, offsetting foreign exchange gains or losses attributable to the translation of the net investment.

• Commodity Hedges

        As part of managing the exposure to certain commodity price fluctuations, we utilize commodity swap contracts designated as cash flow hedges. The objective of these contracts is to minimize impacts to cash flows and profitability due to changes in prices of commodities used in production.

        At June 28, 2013 and September 28, 2012, our commodity hedges had notional values of $271 million and $246 million, respectively. We expect that significantly all of the balance in accumulated other comprehensive income associated with the commodities hedges will be reclassified into the Condensed Consolidated Statements of Operations within the next twelve months.

• Derivative Instrument Summary

        The fair value of our derivative instruments is summarized below:

	June 28, 2013				September 28, 2012
	Fair Value of Asset Positions(1)		Fair Value of Liability Positions(2)		Fair Value of Asset Positions(1)		Fair Value of Liability Positions(2)
	(in millions)
Derivatives designated as hedging instruments:
Foreign currency contracts(3)	$	—	$	4	$	2	$	1
Interest rate swaps		17		—		26		—
Commodity swap contracts(3)		—		58		18		1
Total derivatives designated as hedging instruments		17		62		46		2
Derivatives not designated as hedging instruments:
Foreign currency contracts(3)		—		3		2		2
Investment swaps		1		—		1		—
Total derivatives not designated as hedging instruments		1		3		3		2
Total derivatives	$	18	$	65	$	49	$	4

(1)

All derivative instruments in asset positions that mature within one year of the balance sheet date are recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets and totaled $1 million and $19 million at June 28, 2013 and September 28, 2012, respectively. All derivative instruments in asset positions that mature more than one year from the balance sheet date are recorded in other assets on the Condensed Consolidated Balance Sheets and totaled $17 million and $30 million at June 28, 2013 and September 28, 2012, respectively.

(2)

All derivative instruments in liability positions that mature within one year of the balance sheet date are recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets and totaled $56 million and $4 million at June 28, 2013 and September 28, 2012, respectively. All derivative instruments in liability positions that mature more than one year from the balance sheet date are recorded in other liabilities on the Condensed Consolidated Balance Sheets and totaled $9 million at June 28, 2013; there were no derivatives in other liabilities at September 28, 2012.

(3)

Contracts are presented gross without regard to any right of offset that exists.

        The effects of derivative instruments designated as fair value hedges on the Condensed Consolidated Statements of Operations were as follows:

	Gain Recognized
		For the Quarters Ended				For the Nine Months Ended
Derivatives Designated as Fair Value Hedges	Location	June 28, 2013		June 29, 2012		June 28, 2013		June 29, 2012
		(in millions)
Interest rate swaps(1)	Interest expense	$	2	$	2	$	4	$	5

(1)

Certain interest rate swaps designated as fair value hedges were terminated in December 2008. Terminated interest rate swaps resulted in all gains presented in this table. Interest rate swaps in place at June 28, 2013 had no gain or loss recognized on the Condensed Consolidated Statements of Operations during the periods.

        The effects of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations for the quarters ended were as follows:

	Gain (Loss) Recognized in OCI (Effective Portion)			Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded From Effectiveness Testing)
Derivatives Designated as Cash Flow Hedges	Amount			Location	Amount			Location	Amount
	(in millions)
For the Quarter Ended June 28, 2013:
Foreign currency contracts	$	(1	)	Cost of sales	$	(1	)	Cost of sales	$	—
Commodity swap contracts		(50	)	Cost of sales		(6	)	Cost of sales		—
Interest rate swaps(1)		—		Interest expense		(2	)	Interest expense		—
Total	$	(51	)		$	(9	)		$	—
For the Quarter Ended June 29, 2012:
Foreign currency contracts	$	(1	)	Cost of sales	$	—		Cost of sales	$	—
Commodity swap contracts		(14	)	Cost of sales		—		Cost of sales		—
Interest rate swaps and swaptions(1)		—		Interest expense		(3	)	Interest expense		—
Total	$	(15	)		$	(3	)		$	—

(1)

During the quarters ended June 28, 2013 and June 29, 2012, there were no outstanding interest rate swaps designated as cash flow hedges. Losses reclassified from accumulated other comprehensive income to interest expense in both periods relate to forward starting interest rate swaps designated as cash flow hedges terminated in February 2012 and September 2007.

        The effects of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations for the nine months ended were as follows:

	Gain (Loss) Recognized in OCI (Effective Portion)			Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded From Effectiveness Testing)
Derivatives Designated as Cash Flow Hedges	Amount			Location	Amount			Location	Amount
	(in millions)
For the Nine Months Ended June 28, 2013:
Foreign currency contracts	$	(5	)	Cost of sales	$	—		Cost of sales	$	—
Commodity swap contracts		(81	)	Cost of sales		(6	)	Cost of sales		—
Interest rate swaps(1)		—		Interest expense		(7	)	Interest expense		—
Total	$	(86	)		$	(13	)		$	—
For the Nine Months Ended June 29, 2012:
Foreign currency contracts	$	(2	)	Cost of sales	$	(1	)	Cost of sales	$	—
Commodity swap contracts		—		Cost of sales		14		Cost of sales		—
Interest rate swaps and swaptions(1)		(5	)	Interest expense		(7	)	Interest expense		—
Total	$	(7	)		$	6			$	—

(1)

During the nine months ended June 28, 2013, there were no outstanding interest rate swaps designated as cash flow hedges. During the nine months ended June 29, 2012, we terminated forward starting interest rate swaps and swaptions designated as cash flow hedges. Prior to the termination, a loss of $3 million was recorded in other comprehensive income related to the effective portions of the hedges during the period. Amounts recognized as interest expense due to ineffectiveness were not material. Also during the nine months ended June 29, 2012, we entered into and terminated an interest rate swap designated as a cash flow hedge, recording a loss of $2 million in other comprehensive income. During the nine months ended June 28, 2013 and June 29, 2012, losses reclassified from accumulated other comprehensive income to interest expense relate to both forward starting interest rate swaps designated as cash flow hedges terminated in February 2012, as well as forward starting interest rate swaps designated as cash flow hedges terminated in September 2007.

        The effects of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Operations were as follows:

	Gain (Loss) Recognized
		For the Quarters Ended					For the Nine Months Ended
Derivatives not Designated as Hedging Instruments	Location	June 28, 2013		June 29, 2012			June 28, 2013		June 29, 2012
		(in millions)
Foreign currency contracts	Selling, general, and administrative expenses	$	5	$	(15	)	$	6	$	(36	)
Investment swaps	Selling, general, and administrative expenses		—		(1	)		4		6
Total		$	5	$	(16	)	$	10	$	(30	)

        During the quarter and nine months ended June 29, 2012, we incurred losses of $15 million and $36 million, respectively, as a result of marking foreign currency derivatives not designated as hedging instruments to fair value. The losses were principally driven by Euro-denominated foreign currency contracts entered into in anticipation of the acquisition of Deutsch and were offset by gains realized as a result of re-measuring certain Euro-denominated intercompany non-derivative financial instruments to the U.S. Dollar.