Derivative Financial Instruments

9 Months Ended

May 30, 2013

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 a portion of 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 of 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 May 30, 2013, our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts, was generally 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 (Level 2 fair value measurements).  Realized and unrealized gains and losses on derivative instruments and the underlying monetary assets and liabilities are included in other non-operating income (expense).

In connection with the currency exchange rate risk with the Sponsor Agreement and Rexchip Share Purchase Agreement, we entered into the Original Elpida Hedges that were settled on March 26, 2013 and currency options that expired on April 2, 2013, respectively. On March 26, 2013, we entered into the New Elpida Hedges that expire on September 25, 2013 to hedge our exposure to the yen-denominated acquisition payments. On April 9, 2013, we purchased currency call options that expire on September 25, 2013 to hedge our exposure to the New Taiwan dollar acquisition payment. (See "Pending Acquisition of Elpida Memory, Inc. – Currency Hedging" note.) 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 (Level 2 fair value measurements).  These options are marked-to-market at the end of each reporting period and realized and unrealized gains and losses are included in other non-operating income (expense).

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

As of May 30, 2013	Notional Amount (in U.S. Dollars)			Fair Value of
				Asset		(Liability)
Forward contracts:
Yen	$	916		$	—	$	(86	)
Singapore dollar	242			1		(3		)
Euro	206			1		(3		)
Shekel	76			—		(1		)
Currency options:
Yen	849			61		—
New Taiwan dollar	351			—		—
	$	2,640		$	63	$	(93	)
As of August 30, 2012
Forward contracts:
Yen	$	18		$	—	$	—
Singapore dollar	251			—		(1		)
Euro	173			2		(1		)
Shekel	65			—		(1		)
Currency options:
Yen	5,050		(1)	57		—
New Taiwan dollar	342			2		—
	$	5,899		$	61	$	(3	)

⁽¹⁾  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 $50 million and $223 million for the third quarter and first nine months of 2013, respectively, and net losses of $11 million and $28 million for the third quarter and first nine months of 2012, respectively, which were included in other non-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 (Level 2 fair value measurements).  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 (Level 2 fair value measurements). For derivatives designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives is 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 non-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
As of May 30, 2013			Asset		(Liability)
Forward contracts:
Yen	$	20	$	—	$	(2	)
Euro	13		—		—
Currency options:
Yen	35		—		(3		)
	$	68	$	—	$	(5	)
As of August 30, 2012
Forward contracts:
Yen	$	108	$	2	$	—
Euro	35		—		—
Currency options:
Yen	32		—		—
	$	175	$	2	$	—

For the third quarter and first nine months of 2013, we recognized net pre-tax derivative losses of $3 million and $9 million, respectively, in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  For the first nine months of 2012, we recognized net pre-tax derivative losses of $11 million 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 non-operating income (expense) were not significant for the third quarters or first nine months of 2013 or 2012.  In the first nine months of 2013, $2 million of pre-tax net gains were reclassified from accumulated other comprehensive income (loss) to earnings.  For the third quarter and first nine months of 2012, $2 million and $6 million, respectively, of pre-tax net gains were reclassified from accumulated other comprehensive income (loss) to earnings. As of May 30, 2013, 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 $3 million.

Master Netting Arrangements

We seek to enter into master netting arrangements to mitigate credit risk in derivative transactions. These master netting arrangements allow us and our counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in our consolidated balance sheet on a net basis. The following table presents the gross amounts of our derivative assets and liabilities and the net amounts recorded in our consolidated balance sheet:

As of May 30, 2013	Assets(1)			Liability(2)
Gross amount	$	63		$	(98	)
Gross amounts offset in the statement of financial position	(62		)	62
Net amounts presented in the statement of financial position	$	1		$	(36	)

⁽¹⁾Included in receivables - other.

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