Derivative Financial Instruments

3 Months Ended

Dec. 01, 2011

Notes to Financial Statements [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

We are exposed to currency exchange rate risk for monetary assets and liabilities held or denominated in foreign currencies, primarily the euro, Singapore dollar, Israeli shekel and yen.  We are also exposed to currency exchange rate risk for capital expenditures, primarily denominated in the euro and yen.  We use derivative instruments to manage our exposures to changes in currency exchange rates.  For exposures associated with our monetary assets and liabilities, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on our earnings.  For exposures associated with capital expenditures, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on future cash flows.

Our derivatives consist primarily of currency forward contracts.  The derivatives expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  Our maximum exposure to loss due to credit risk that we would incur if parties to forward contracts failed completely to perform according to the terms of the contracts was equal to our carrying value of the forward contracts as of December 1, 2011, as listed in the tables below under asset fair values.  We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple major financial institutions.  In addition, we monitor the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.  We have the following currency risk management programs:

Currency Derivatives without Hedge Accounting Designation

We utilize a rolling hedge strategy with currency forward contracts that generally mature within 35 days to hedge our exposure to changes in currency exchange rates.  At the end of each reporting period, monetary assets and liabilities held or denominated in currencies other than the U.S. dollar are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  Currency forward contracts are valued at fair values based on bid prices of dealers or exchange quotations (referred to as Level 2).  Realized and unrealized gains and losses on derivative instruments and the underlying monetary assets and liabilities are included in other operating income (expense).  Total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

	Notional Amount(1) (in U.S. Dollars)		Fair Value of
Currency			Asset(2)		(Liability)(3)
As of December 1, 2011:
Singapore dollar	$	171	$	—	$	(1	)
Euro	134		—		(1		)
Israeli shekel	62		—		(1		)
Yen	46		—		—
Other	40		—		(1		)
	$	453	$	—	$	(4	)
As of September 1, 2011:
Singapore dollar	$	210	$	—	$	—
Euro	301		3		—
Israeli shekel	98		—		(2		)
Yen	165		3		—
Other	50		—		—
	$	824	$	6	$	(2	)

⁽¹⁾  Represents the face value of outstanding contracts.

⁽²⁾  Included in other receivables.

⁽³⁾  Included in other accounts payable and accrued expenses.

For currency forward contracts without hedge accounting designation, we recognized losses of $20 million and $2 million for the firstquarters of 2012 and 2011, respectively, which were included in other operating income (expense).

Currency Derivatives with Cash Flow Hedge Accounting Designation

We utilize currency forward contracts that generally mature within 12 months to hedge the exposure of changes in cash flows from changes in currency exchange rates for certain forecasted capital expenditures.  Currency forward contracts are valued at their fair values based on market-based observable inputs including currency exchange spot and forward rates, interest rate and credit risk spread (referred to as Level 2).  For those derivatives designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives was included as a component of accumulated other comprehensive income (loss) in shareholders' equity.  The amounts in accumulated other comprehensive income (loss) for those cash flow hedges are reclassified into earnings in the same line items of the consolidated statements of operations and in the same periods in which the underlying transactions affect earnings.  The ineffective or excluded portion of the realized and unrealized gain or loss is included in other operating income (expense).  Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation were as follows:

	Notional Amount(1)  (in U.S. Dollars)		Fair Value of
Currency			Asset(2)		(Liability)(3)
As of December 1, 2011:
Euro	$	105	$	—	$	(3	)
Yen	24		—		(1		)
	$	129	$	—	$	(4	)
As of September 1, 2011:
Euro	$	232	$	8	$	—
Yen	19		1		—
	$	251	$	9	$	—

⁽¹⁾  Represents the face value of outstanding contracts

⁽²⁾  Included in other receivables

⁽³⁾  Included in other accounts payable and accrued expenses

We recognized $9 million of net derivative losses for the first quarter of 2012 and $6 million of net derivative gains for the first quarter of 2011 in other comprehensive income from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges recognized in other operating income (expense) were not significant in the first quarters of 2012 and 2011.  Amounts in accumulated other comprehensive income are amortized to manufacturing cost over the useful life of the underlying hedged equipment and reclassified to earnings when inventory is sold.  In the first quarter of 2012, $2 million of net gains was reclassified from other comprehensive income (loss) to earnings and the amount of net derivative gains included in other accumulated comprehensive income (loss) expected to be reclassified into earnings in the next 12 months was $6 million as of December 1, 2011.