XML 51 R11.htm IDEA: XBRL DOCUMENT  v2.3.0.11
Derivative Instruments and Hedging Activities
 6 Months Ended
May 01, 2011
Derivative Instruments and Hedging Activities [Abstract]  
Derivative Instruments and Hedging Activities
 
Note 5   Derivative Instruments and Hedging Activities
 
Derivative Financial Instruments
 
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.
 
Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. 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 currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.
 
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at May 1, 2011 is expected to be reclassified into earnings within 12 months. 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. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in general and administrative expenses. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and six months ended May 1, 2011 and May 2, 2010.
 
Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
 
Fair values of derivative instruments were as follows:
 
                                         
        Asset Derivatives         Liability Derivatives  
    Balance Sheet
 		  May 1,
 		          Balance Sheet
 		  May 1,
 		       
    Location   2011     October 31, 2010     Location   2011     October 31, 2010  
        (In millions)         (In millions)  
 
Derivatives Designated as Hedging Instruments
                                       
                                         
Foreign exchange contracts
  Other current
assets 		  $ 9     $ 5     Accrued
expenses 		  $ —     $ 1  
                                         
Derivatives Not Designated as Hedging Instruments
                                       
                                         
Foreign exchange contracts
  Other current
assets 		  $ 1     $ 1     Accrued
expenses 		  $ —     $ —  
                                         
Total derivatives
      $ 10     $ 6         $ —     $ 1  
                                         
 
 
The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three and six months ended May 1, 2011 and May 2, 2010 was as follows:
 
                                                     
        Three Months Ended May 1, 2011     Three Months Ended May 2, 2010  
              Ineffective Portion
 		                Ineffective Portion
 		 
              and Amount
 		                and Amount
 		 
              Excluded from
 		                Excluded from
 		 
                    Effectiveness
 		                Effectiveness
 		 
    Location of Gain
 		  Effective Portion     Testing     Effective Portion     Testing  
    or (Loss)
 		  Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		 
    Reclassified from
 		  Recognized in
    Reclassified from
    Recognized in
 		    Recognized in
    Reclassified from
    Recognized in
 		 
    AOCI into Income   AOCI     AOCI into Income     Income     AOCI     AOCI into Income     Income  
        (In millions)     (In millions)  
 
Derivatives in Cash Flow Hedging Relationships
                                                   
                                                     
Foreign exchange contracts
  Cost of products
sold 		  $ 8     $ 1     $ (1 )   $ 1     $ —     $ —  
Foreign exchange contracts
  General and
administrative 		    —       2       (1 )     —       (2 )     —  
                                                     
Total
      $ 8     $ 3     $ (2 )   $ 1     $ (2 )   $ —  
                                                     
 
                                                     
        Six Months Ended May 1, 2011     Six Months Ended May 2, 2010  
              Ineffective Portion
 		                Ineffective Portion
 		 
              and Amount
 		                and Amount
 		 
              Excluded from
 		                Excluded from
 		 
                    Effectiveness
 		                Effectiveness
 		 
    Location of Gain
 		  Effective Portion     Testing     Effective Portion     Testing  
    or (Loss)
 		  Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		    Gain or (Loss)
 		 
    Reclassified from
 		  Recognized in
 		    Reclassified from
 		    Recognized in
 		    Recognized in
 		    Reclassified from
 		    Recognized in
 		 
    AOCI into Income   AOCI     AOCI into Income     Income     AOCI     AOCI into Income     Income  
        (In millions)     (In millions)  
 
Derivatives in Cash Flow Hedging Relationships
                                                   
                                                     
Foreign exchange contracts
  Cost of products
sold 		  $ 12     $ 5     $ (3 )   $ (2 )   $ (1 )   $ —  
Foreign exchange contracts
  General and
administrative 		    —       3       (1 )     —       (1 )     (1 )
                                                     
Total
      $ 12     $ 8     $ (4 )   $ (2 )   $ (2 )   $ (1 )
                                                     
 
                                     
        Three Months Ended     Six Months Ended  
        May 1,
 		    May 2,
 		    May 1,
 		    May 2,
 		 
        2011     2010     2011     2010  
    Location of Gain
 		           
    or (Loss)
 		           
    Recognized in
 		  Amount of Gain or (Loss)
 		    Amount of Gain or (Loss)
 		 
    Income   Recognized in Income     Recognized in Income  
        (In millions)     (In millions)  
 
Derivatives Not Designated as Hedging Instruments
                                   
                                     
Foreign exchange contracts
  General and
administrative 		  $ 1     $ 7     $ 3     $ (4 )
                                     
Total
      $ 1     $ 7     $ 3     $ (4 )
                                     
 
Credit Risk Contingent Features
 
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was not material as of May 1, 2011.
 
Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied does not consider its exposure to be significant.