Derivative Financial Instruments

3 Months Ended

Nov. 29, 2012

Disclosure Text Block [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, shekel, Singapore dollar and yen.  We are also exposed to currency exchange rate risk for capital expenditures and operating cash flows, primarily denominated in the euro and yen.  In connection with the Sponsor Agreement and Rexchip Share Purchase Agreement entered into in July 2012, we are exposed to significant currency exchange rate risk for the yen and New Taiwan dollar. 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 our capital expenditures and operating cash flows, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on future cash flows. For exposures associated with our yen or New Taiwan dollar denominated payment obligations under the Sponsor Agreement and Rexchip Share Purchase Agreement, our primary objective for entering into currency derivatives is to mitigate risks if those currencies strengthen relative to the U.S. dollar, while preserving some ability for us to benefit if those currencies weaken.

Our derivatives consist primarily of currency forward contracts and currency options.  The derivatives expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  As of November 29, 2012, our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts, was equal to the fair value of our assets for these contracts as listed in the tables below.  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 from our monetary assets and liabilities.  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 the middle of bid and ask 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.

In connection with the currency exchange rate risk with the Sponsor Agreement and Rexchip Share Purchase Agreement, we entered into currency options that expire on April 3, 2013 and April 2, 2013, respectively. Currency options are valued at their fair value using a modified Black-Scholes option valuation model using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (referred to as Level 2).  These options are marked-to-market at the end of each reporting period and realized and unrealized gains and losses are included in other operating (income) expense.

Total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

Currency	Notional Amount (in U.S. Dollars)			Fair Value of
				Asset(1)		(Liability)(2)
As of November 29, 2012
Forward contracts:
Euro	$	224		$	2	$	(1	)
Singapore dollar	173			—		—
Shekel	67			1		—
Yen	34			—		(1		)
Currency options:
Yen	5,050		(3)	—		(5		)
New Taiwan dollar	342			6		—
	$	5,890		$	9	$	(7	)
As of August 30, 2012
Forward contracts:
Euro	$	173		$	2	$	(1	)
Singapore dollar	251			—		(1		)
Shekel	65			—		(1		)
Yen	18			—		—
Currency options:
Yen	5,050		(3)	57		—
New Taiwan dollar	342			2		—
	$	5,899		$	61	$	(3	)

⁽¹⁾  Included in receivables – other.

⁽²⁾  Included in accounts payable and accrued expenses – other.

⁽³⁾  Notional amount includes purchased options of $2,527 million and sold options of $2,523 million.

For currency forward contracts and options without hedge accounting designation, we recognized net losses of $51 million and $20 million for the first quarters of 2013 and 2012, 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 and currency options that generally mature from 12 to 18 months to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures and forecasted operating cash flows.  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).  Currency options are valued at their fair value using a modified Black-Scholes option valuation model using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (referred to as Level 2). For 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).  For derivatives hedging capital expenditures, the amounts in accumulated other comprehensive income (loss) for these cash flow hedges are reclassified into earnings in the same line items of the consolidated statements of operation and in the same periods in which the underlying transactions affect earnings. Amounts in accumulated other comprehensive income (loss) for inventory purchases are reclassified to earnings when inventory is sold. 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  (in U.S. Dollars)		Fair Value of
Currency			Asset(1)		(Liability)(2)
As of November 29, 2012
Forward contracts:
Yen	$	82	$	—	$	(3	)
Euro	40		1		—
Currency options:
Yen	40		—		—
	$	162	$	1	$	(3	)
As of August 30, 2012
Forward contracts:
Yen	$	108	$	2	$	—
Euro	35		—		—
Currency options:
Yen	32		—		—
	$	175	$	2	$	—

⁽¹⁾  Included in receivables – other.

⁽²⁾  Included in accounts payable and accrued expenses – other.

For the first quarters of 2013 and 2012, we recognized net pre-tax derivative losses of $4 million and $9 million, respectively, in accumulated other comprehensive income (loss) 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 2013 and 2012.  In the first quarters of 2013 and 2012, $3 million and $2 million, respectively, of pre-tax net gains were reclassified from accumulated other comprehensive income (loss) to earnings. As of November 29, 2012, the amount of pre-tax net derivative gains included in accumulated other accumulated comprehensive income (loss) expected to be reclassified into earnings in the next 12 months was $6 million.