XML 46 R17.htm IDEA: XBRL DOCUMENT v2.4.1.9
Derivative Financial Instruments
3 Months Ended
Apr. 04, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
DERIVATIVE FINANCIAL INSTRUMENTS
As a matter of policy, the Company uses derivatives for risk management purposes and it does not use derivatives for trading or speculative purposes. A key risk management objective is to mitigate foreign exchange rate volatility and the associated impact on earnings. The Company's primary way of meeting this objective is for certain of its subsidiaries to enter into derivative contracts with the same critical terms as those subsidiaries’ forecasted amounts of foreign currency costs.

Cash Flow Hedges

In the first quarter of 2015, the Company began to enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications from accumulated other comprehensive income to earnings in the period during which the hedged transactions affect earnings and in the same financial statement line item with the earnings effects of the hedged transaction. The Company may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs. Changes in the value of derivative instruments after dedesignation, but before settlement of the forward contract, are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in earnings on cash flow hedges were not material for the three months ended April 4, 2015. The Company hedges its exposure to the variability in future cash flows of forecasted transactions for periods of up to 24 months. The dollar equivalent gross notional amount of the Company’s foreign exchange forward contracts designated as cash flow hedges at April 4, 2015 was approximately $1.1 billion.

As of April 4, 2015, the Company had a balance of $29 million associated with the after-tax net unrealized gain related to foreign currency forward contracts recorded in accumulated other comprehensive income. Based on exchange rates as of April 4, 2015, the Company expects to reclassify approximately $22 million (after-tax) to earnings over the next 12 months contemporaneously with the earnings effects of the related forecasted transactions (with the impact offset by cash flows from the underlying hedged items).

The following table provides the (gains) losses related to derivative instruments designated as cash flow hedges, including the location in the Condensed Consolidated Statements of Earnings and the Condensed Consolidated Statements of Comprehensive Income (in millions):

 
Pre-tax (Gain) Loss
 
 
 
 
 
 
 
Recognized in
 
Pre-tax (Gain) Loss Recognized
 
 
 
Other
 
in Earnings on Effective Portion
 
Ineffective Portion of (Gain) Loss
 
Comprehensive
 
of Derivative as a Result of
 
on Derivative and Amount
Three
Income on Effective
 
Reclassification from
 
Excluded from Effectiveness
months
Portion of
 
Accumulated Other
 
Testing Recognized
ended
Derivative
 
Comprehensive Income
 
in Earnings
April 4, 2015
Amount
 
Amount
Location
 
Amount
Location
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(34
)
 
$

Cost of sales
 
$

Cost of sales


Reclassifications from accumulated other comprehensive income into earnings include accumulated (gains) losses on dedesignated hedges at the time earnings are impacted.

Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments include dedesignated foreign currency forward contracts that formerly were designated in cash flow hedging relationships (as referenced in the Cash Flow Hedges section above). In addition, the Company enters into foreign currency forward contracts to economically hedge the foreign currency impact of assets and liabilities (including intercompany assets and liabilities) denominated in nonfunctional currencies. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The dollar equivalent gross notional amount of these forward contracts not designated as hedging instruments totaled $190 million as of April 4, 2015. The fair value of the Company's outstanding contracts was immaterial as of April 4, 2015 and January 3, 2015.
The following table provides the (gains) losses related to derivative instruments not designated as hedging instruments, including the location in the Condensed Consolidated Statements of Earnings (in millions):
 
 
Three months ended April 4, 2015
 
 
(Gain) Loss on Derivatives
 
 
Recognized in Earnings
Derivatives Not Designated as Hedging Instruments
 
Amount
Location
Foreign currency forward contracts
 
$
(9
)
Other (income) expense

The net (gains) losses were almost entirely offset by corresponding net (losses) gains on the foreign currency exposures being managed.
Location and Fair Value Amount of Derivative Instruments
The following table summarizes the fair value of the Company’s derivative instruments and their locations in the Condensed Consolidated Balance Sheets as of April 4, 2015 (in millions):
 
 
Assets
Fair Value of Derivative Instruments
 
Amount
Location
Derivatives Designated as Hedging Instruments
 
 
 
Foreign currency forward contracts
 
$
24

Other current assets
Foreign currency forward contracts
 
5

Other assets
Derivatives Not Designated as Hedging Instruments
 
 
 
Foreign currency forward contracts
 
4

Other current assets
Total
 
$
33

 

Additional information with respect to the fair values of derivative instruments is included in Note 9.
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments
 
Fair values of the Company's derivatives can change significantly from period to period based on, among other factors, market movements and changes in the Company's positions. However, the Company’s risk is limited to the fair value of the instruments. The Company monitors its exposure to counterparty credit risk (the risk that counterparties will default and not make payments to the Company according to the terms of the agreements) by selecting major international banks and financial institutions as counterparties and by entering into master netting arrangements with counterparties when possible. A master netting arrangement may allow each counterparty to net settle amounts owed between a St. Jude Medical entity and the counterparty as a result of multiple, separate derivative transactions. As of April 4, 2015, St. Jude Medical had International Swaps and Derivatives Association agreements with three applicable banks and financial institutions that contain netting provisions.

The Company has elected to present the fair values of derivative assets and liabilities within the Company’s Condensed Consolidated Balance Sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following table provides information as though the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of the netting arrangements with each of the counterparties as of April 4, 2015 (in millions):

 
 
 
Gross Amounts not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements
 
 
 
 
Gross Amount of
 
 
 
 
 
Eligible Offsetting
 
 
 
 
Gross Amount of
Recognized
 
 
 
 
Derivative Assets
Derivative Liabilities
 
Net
 
 
Presented in the
Presented in the
Cash
Amount of
 
 
Condensed Consolidated
Condensed Consolidated
Collateral
Derivative
Derivatives as of April 4, 2015
 
Balance Sheet
Balance Sheet
Received
Assets
Derivatives subject to master netting agreements
 
$
9

$

$

$
9

Derivatives not subject to master netting agreements
 
24

 
 
24

Total
 
$
33

$

$

$
33



For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period. Derivatives not subject to master netting agreements are not eligible for net presentation. As of April 4, 2015, no cash collateral had been received or pledged related to these derivative instruments.