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 forward 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 forward contracts are for risk management purposes only. The Company does not purchase foreign exchange forward contracts for speculative or trading purposes. As of December 30, 2016, the Company had outstanding foreign exchange forward 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 AOCI, 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 forward 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 and six months ended December 30, 2016 and January 1, 2016.

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 December 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 and six months ended December 30, 2016 and January 1, 2016.

As of December 30, 2016, the net amount of unrealized gains with respect to the Company’s foreign exchange forward contracts that is expected to be reclassified into earnings within the next 12 months was $65 million. In addition, as of December 30, 2016, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

See Note 4 to the condensed consolidated financial statements for additional disclosures related to the fair value of the Company’s foreign exchange forward 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
	December 30, 2016		July 1, 2016		December 30, 2016		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	2	$	114	$	—	$	—
Foreign exchange forward contracts not designated	2		12		—		—
Call options	—		70		—		1
Total derivatives	$	4	$	196	$	—	$	1



	Derivative Liabilities Reported in
	Accrued Expenses				Other Liabilities
	December 30, 2016		July 1, 2016		December 30, 2016		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	167	$	23	$	—	$	—
Foreign exchange forward contracts not designated	11		—		—		—
Exchange option	1		141		—		14
Total derivatives	$	179	$	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 December 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 forward contracts:
Financial assets	$	2		$	—	$	2		$	—	$	—	$	2
Financial liabilities	(167		)	—		(167		)	—		—		(167		)
Total derivative instruments	$	(165	)	$	—	$	(165	)	$	—	$	—	$	(165	)

The Company had a gross and net asset of $118 million and $114 million, respectively, and a gross and net liability of $27 million and $23 million, respectively, related to its derivative instruments outstanding as of July 1, 2016.

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

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



	Three Months Ended
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives					Amount of Gain (Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationships	December 30, 2016			January 1, 2016		December 30, 2016		January 1, 2016
	(in millions)
Foreign exchange forward contracts	$	(119	)	$	13	$	16	$	(25	)



	Six Months Ended
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives						Amount of Gain (Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationships	December 30, 2016			January 1, 2016			December 30, 2016		January 1, 2016
	(in millions)
Foreign exchange forward contracts	$	(97	)	$	(40	)	$	42	$	(53	)

The total net realized transaction and foreign exchange forward contract currency gains and losses were not material to the condensed consolidated financial statements for the three and six months ended December 30, 2016 and January 1, 2016.