Derivative Instruments

9 Months Ended

Sep. 08, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

The Company is exposed to certain market risks relating to its ongoing business operations.  The primary market risks managed by using derivative instruments are interest rate risk and cash flow volatility arising from foreign currency fluctuations.

We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk and lowering interest expense for a portion of our fixed-rate debt.  At September 8, 2012, our interest rate derivative instruments outstanding had notional amounts of $300 million and have been designated as fair value hedges of a portion of our debt.  These fair value hedges meet the shortcut method requirements and no ineffectiveness has been recorded.

We enter into foreign currency forward contracts with the objective of reducing our exposure to cash flow volatility arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany short-term receivables and payables.  The notional amount, maturity date, and currency of these contracts match those of the underlying receivables or payables.  For those foreign currency exchange forward contracts that we have designated as cash flow hedges, we measure ineffectiveness by comparing the cumulative change in the fair value of the forward contract with the cumulative change in the fair value of the hedged item.  At September 8, 2012, foreign currency forward contracts outstanding had a total notional amount of $554 million.

The fair values of derivatives designated as hedging instruments as of September 8, 2012 and December 31, 2011 were:

	9/8/2012		12/31/2011			Condensed Consolidated Balance Sheet Location
Interest Rate Swaps - Asset	$	—	$	10		Prepaid expenses and other current assets
Interest Rate Swaps - Asset	26		22			Other assets
Foreign Currency Forwards - Asset	27		3			Prepaid expenses and other current assets
Foreign Currency Forwards - Liability	—		(1		)	Accounts payable and other current liabilities
Total	$	53	$	34

The unrealized gains associated with our interest rate swaps that hedge the interest rate risk for a portion of our debt have been reported as an addition of $23 million to Long-term debt at September 8, 2012 and as an addition of $5 million and $21 million to Short-term borrowings and Long-term debt, respectively at December 31, 2011.  During the quarter and year to date ended September 8, 2012, Interest expense, net was reduced by $2 million and $10 million, respectively, for recognized gains on these interest rate swaps. During the quarter and year to date ended September 3, 2011, Interest expense, net was reduced by $5 millionand $18 million, respectively, for recognized gains on these interest rate swaps.

Changes in fair value of derivative instruments:

	Year to date
	9/8/2012			9/3/2011
Beginning of Year Balance	$	34		$	45
Changes in fair value recognized into Other Comprehensive Income ("OCI")	25			(20		)
Changes in fair value recognized into income	7			19
Cash settlements	(13		)	(21		)
Ending Balance	$	53		$	23

For our foreign currency forward contracts the following effective portions of gains and losses were recognized into Accumulated OCI and reclassified into income from Accumulated OCI into income:

	Quarter ended					Year to date
	9/8/2012		9/3/2011			9/8/2012		9/3/2011
Gains (losses) recognized into Accumulated OCI, net of tax	$	9	$	(2	)	$	16	$	(12	)
Gains (losses) reclassified from Accumulated OCI into income, net of tax	$	9	$	(1	)	$	16	$	(12	)

The gains/losses reclassified from Accumulated OCI into income were recognized as Other income (expense) in our Condensed Consolidated Statement of Income, largely offsetting foreign currency transaction losses/gains recorded when the related intercompany receivables and payables were adjusted for foreign currency fluctuations.  Changes in fair values of the foreign currency forwards recognized directly in our results of operations either from ineffectiveness or exclusion from effectiveness testing were insignificant in the quarters and years to date ended September 8, 2012 and September 3, 2011.

Additionally, we had a net deferred loss of $12 million, net of tax, as of September 8, 2012 within Accumulated OCI due primarily to treasury locks and forward-starting interest rate swaps that were cash settled in prior years.  The majority of this loss arose from the 2007 settlement of forward starting interest rate swaps entered into prior to the issuance of our Senior Unsecured Notes due in 2037, and is being recognized in interest expense through 2037 consistent with interest payments made on the related Senior Unsecured Notes.  In the quarters and years to date ended September 8, 2012 and September 3, 2011, an insignificant amount was reclassified from Accumulated OCI to Interest expense, net as a result of these previously settled cash flow hedges.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations.  To mitigate counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties.  At September 8, 2012, all of the counterparties to our interest rate swaps and foreign currency forwards had investment grade ratings.  To date, all counterparties have performed in accordance with their contractual obligations.