Derivative Financial Instruments

12 Months Ended

Aug. 28, 2014

Derivative Instrument Detail [Abstract]

Derivative Financial Instruments

Derivative Instruments

We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from our monetary assets and liabilities and to reduce the volatility that changes in interest rates on variable-rate debt have on our earnings. We also have convertible note settlement obligations which became derivative instruments as a result of our elections to settle conversions in cash. We do not use derivative instruments for speculative purpose.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives: We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from 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.

To hedge our exposures to monetary assets and liabilities, we generally utilize a rolling hedge strategy with currency forward contracts that mature within 35 days.  At the end of each reporting period, monetary assets and liabilities 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). In connection with the currency exchange rate risk associated with the MMJ Acquisition in July 2013, we entered into currency exchange transactions (the "MMJ Acquisition Hedges"). The MMJ Acquisition Hedges were not designated for hedge accounting and were remeasured at fair value each period. We recorded losses from the MMJ Acquisition Hedges of $228 million in 2013 and gains of $8 million in 2012. To mitigate the risk of the yen strengthening against the U.S. dollar on the MMJ creditor installment payments due in December 2014 and December 2015, we entered into forward contracts to purchase 20 billion yen on November 28, 2014 and 10 billion yen on November 27, 2015.

Realized and unrealized gains and losses on currency derivatives without hedge accounting designation as well as the change in the underlying monetary assets and liabilities due to changes in currency exchange rates are included in other non-operating income (expense).

Interest Rate Swaps: As of August 29, 2013 we were party to interest rate swap contracts scheduled to mature in August 2017 to hedge against the variability of future interest payments due on variable-rate debt, which effectively converted the variable-rate debt to fixed-rate debt. We designated 80% of the swaps as cash flow hedges and the remaining 20% were not designated for hedge accounting treatment. On August 27, 2014, we repaid the remaining carrying value of $252 million of the note prior to its scheduled maturity and terminated the interest rate swaps.

Convertible Notes Settlement Obligations: In connection with our debt restructure activities in 2014, holders elected to convert substantially all of the outstanding 2014 Notes, 2027 Notes, 2031A Notes and 2031B Notes. As a result of our elections to settle the conversion amounts in cash, each of the settlement obligations became derivative debt liabilities subject to mark-to-market accounting treatment for a period of approximately 30 days, beginning on the date we notified the holder of our intention to settle the obligation in cash through the settlement date. The fair values of the underlying derivative settlement obligations were initially determined using the Black-Scholes option valuation model (Level 2 fair value measurements). The Black-Scholes model requires the input of assumptions, including the stock price, expected stock-price volatility, estimated option life, risk-free interest rate and dividend rate. The subsequent measurements and final settlement amounts of our convertible notes settlement obligations were based on the volume-weighted average stock price (Level 1 fair value measurements). Changes in fair values of the derivative settlement obligations were included in other non-operating income (expense), net.

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

	Notional Amount(1)		Fair Value of
			Current Assets(2)		Noncurrent Assets(3)		Current Liabilities(4)			Noncurrent Liabilities(5)
As of August 28, 2014
Currency forward contracts:
Yen	$	554	$	—	$	—	$	(12	)	$	(6	)
Singapore dollar	330		—		—		—			—
Euro	245		—		—		(1		)	—
Shekel	62		—		—		(1		)	—
	$	1,191
Convertible notes settlement obligations	12		—		—		(389		)	—
			$	—	$	—	$	(403	)	$	(6	)
As of August 29, 2013
Currency forward contracts:
Yen	$	336	$	1	$	3	$	—		$	—
Singapore dollar	218		—		—		—			—
Euro	217		1		—		(1		)	—
Shekel	78		—		—		(1		)	—
Interest rate swap contracts	62		—		—		—			—
Currency options - New Taiwan dollar	351		—		—		—			—
	$	1,262	$	2	$	3	$	(2	)	$	—

⁽¹⁾ Notional amounts of forward, option and interest rate swap contracts in U.S. dollars and convertible notes settlement obligations in shares.

⁽²⁾  Included in receivables - other.

⁽³⁾  Included in other noncurrent assets.

⁽⁴⁾  Included in accounts payable and accrued expenses - other for forward, option and interest rate swap contracts and in current debt for convertible notes settlement obligations.

⁽⁵⁾  Included in other noncurrent liabilities.

Net gains (losses) for derivative instruments without hedge accounting designation were as follows:

For the year ended	2014			2013			2012			Location
Convertible notes settlement obligations	$	(59	)	$	—		$	—		Other non-operating income (expense)
Foreign exchange contracts	(27		)	(222		)	(17		)	Other non-operating income (expense)

Derivative Instruments with Cash Flow Hedge Accounting Designation

Currency Derivatives: We utilize currency forward contracts that generally mature within 12 months and currency options that generally mature within 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 measured at fair value 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 measured 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, maturity, volatility and credit-risk spread (Level 2 fair value measurements).

Interest Rate Swaps: As noted above in "Derivative Instruments without Hedge Designation – Interest Rate Swaps," we were party to interest rate swap contracts scheduled to mature in August 2017 to hedge against the variability in future interest payments due on variable-rate debt and we designated 80% of the swaps as cash flow hedges. On August 27, 2014, we repaid the remaining carrying value of $252 million of the note prior to its scheduled maturity and terminated the interest rate swaps. Amounts reclassified from accumulated other comprehensive income (loss) were not significant.

For derivative instruments 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).  Amounts in accumulated other comprehensive income (loss) 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. 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 derivative instruments with cash flow hedge accounting designation were as follows:

	Notional Amount (in U.S. Dollars)		Fair Value of Current Liabilities(1)
As of August 28, 2014
Currency forward contracts:
Yen	$	94	$	(2	)
Euro	24		—
	$	118	$	(2	)
As of August 29, 2013
Currency forward contracts:
Yen	$	6	$	(1	)
Euro	6		—
Interest swap contracts	250		—
Currency options - Yen	21		(2		)
	$	283	$	(3	)

⁽¹⁾  Included in accounts payable and accrued expenses - other.

For 2014, 2013 and 2012, we recognized losses of $4 million, $8 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 non-operating income (expense) were not significant in 2014, 2013 or 2012.  For 2014, 2013 and 2012, we reclassified gains of $4 million, $1 million and $9 million, respectively, from accumulated other comprehensive income (loss) to earnings. As of August 28, 2014, $8 million of gains from cash flow hedges included in accumulated other accumulated comprehensive income (loss) is expected to be reclassified into earnings in the next 12 months.

Derivative Counterparty Credit Risk and Master Netting Arrangements

Our derivative instruments expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  As of August 28, 2014, 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 above.  We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple 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 also seek to enter into master netting arrangements with our counterparties to mitigate credit risk in derivative hedge 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 with each counterparty under these arrangements have been presented in our consolidated balance sheet on a net basis. As of August 28, 2014 amounts netted were not significant.