Derivatives

The majority of the Company’s transactions are in U.S. dollars; however, some transactions are based in various foreign currencies. The Company purchases short-term, foreign exchange contracts to hedge the impact of foreign currency exchange fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies. The purpose of entering into these hedging transactions is to minimize the impact of foreign currency fluctuations on the Company’s results of operations. These contract maturity dates do not exceed 12 months. All foreign exchange contracts are for risk management purposes only. The Company does not purchase foreign exchange contracts for speculative or trading purposes. As of September 30, 2016, the Company had outstanding foreign exchange contracts with commercial banks for British Pound Sterling, Euro, Japanese Yen, Malaysian Ringgit, Philippine Peso, Singapore Dollar and Thai Baht, which were designated as either cash flow or fair value hedges.

If the derivative is designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is initially deferred in accumulated other comprehensive income (loss), net of tax. These amounts are subsequently recognized into earnings when the underlying cash flow being hedged is recognized into earnings. Recognized gains and losses on foreign exchange contracts entered into for manufacturing-related activities are reported in cost of revenue and presented within cash flow from operations. Hedge effectiveness is measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the underlying exposure’s terminal value. The Company determined the ineffectiveness associated with its cash flow hedges to be immaterial to the condensed consolidated financial statements for the three months ended September 30, 2016 and October 2, 2015.

A change in the fair value of fair value hedges is recognized in earnings in the period incurred and is reported as a component of cost of revenue or operating expenses, depending on the nature of the underlying hedged item. All fair value hedges were determined to be effective as of September 30, 2016 and July 1, 2016. The changes in fair value on these contracts were immaterial to the condensed consolidated financial statements during the three months ended September 30, 2016 and October 2, 2015.

As of September 30, 2016, the net amount of unrealized gains with respect to the Company’s foreign exchange contracts that is expected to be reclassified into earnings within the next 12 months was $70 million. In addition, as of September 30, 2016, the Company did not have any foreign exchange contracts with credit-risk-related contingent features.

See Note 10 to the condensed consolidated financial statements for additional disclosures related to the Company’s foreign exchange contracts.

Derivative Instruments

The fair value and balance sheet location of the Company’s derivative instruments were as follows:



	Derivative Assets Reported in
	Other Current Assets				Other Non-current Assets
	September 30, 2016		July 1, 2016		September 30, 2016		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	65	$	114	$	—	$	—
Foreign exchange forward contracts not designated	11		12		—		—
Call options	—		70		—		1
Total derivatives	$	76	$	196	$	—	$	1



	Derivative Liabilities Reported in
	Accrued Expenses				Other Liabilities
	September 30, 2016		July 1, 2016		September 30, 2016		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	22	$	23	$	—	$	—
Exchange option	1		141		—		14
Total derivatives	$	23	$	164	$	—	$	14

Netting Arrangements

The following table presents the gross amounts of the Company’s derivative instruments, amounts offset due to master netting arrangements with the Company’s various counterparties and the net amounts recognized in the condensed consolidated balance sheet as of September 30, 2016:



Derivatives Designated as Hedging Instruments	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Balance Sheet			Net Amounts of Assets (Liabilities) Presented in the Balance Sheet			Gross Amounts Not Offset in the Balance Sheet				Net Amount
Derivatives Designated as Hedging Instruments	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Balance Sheet						Financial Instruments		Cash Collateral Received or Pledged		Net Amount
	(in millions)
Foreign exchange contracts
Financial assets	$	70		$	(5	)	$	65		$	—	$	—	$	65
Financial liabilities	(27		)	5			(22		)	—		—		(22		)
Total derivative instruments	$	43		$	—		$	43		$	—	$	—	$	43

The Company had a gross and net liability of $91 million related to its derivative instruments outstanding at July 1, 2016. There were no amounts offset due to master netting arrangements in place at July 1, 2016.

Effect of Foreign Exchange Contracts on the Condensed Consolidated Statements of Operations

The impact of foreign exchange contracts on the consolidated financial statements was as follows:



	Three Months Ended
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivatives					Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Derivatives in Cash Flow Hedging Relationships	September 30, 2016		October 2, 2015			September 30, 2016		October 2, 2015
	(in millions)
Foreign exchange contracts	$	22	$	(53	)	$	26	$	(28	)

The total net realized transaction and foreign exchange contract currency gains and losses were not material to the condensed consolidated financial statements for the three months ended September 30, 2016 and October 2, 2015.