Derivative Instruments

6 Months Ended

Mar. 05, 2015

Derivative Instrument Detail [Abstract]

Derivative 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 denominated in currencies other than the U.S. dollar. We have also had convertible note settlement obligations which were accounted for as 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 for 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). 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. In the first quarter of 2015, we paid $33 million to settle the 20 billion yen forward contracts.

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), net.

Convertible Notes Settlement Obligations: In connection with our debt restructure activities in the fourth quarter of 2014 and the first six months of 2015, holders elected to convert the remaining outstanding 2031B Notes and a portion of the 2033E Notes. In the first six months of 2014, holders elected to convert substantially all of the outstanding 2014 Notes, 2027 Notes, and 2031A Notes. As a result of our elections to settle the amounts due upon conversion 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 dates we notified the holder of our intention to settle the obligation in cash through the settlement dates. 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 Liabilities(2)			Noncurrent Liabilities(3)
As of March 5, 2015
Currency forward contracts:
Singapore dollar	$	295	$	(2	)	$	—
Yen	106		(19		)	—
New Taiwan dollar	84		—			—
Euro	78		(1		)	—
Shekel	59		(1		)	—
	$	622	$	(23	)	$	—
As of August 28, 2014
Currency forward contracts:
Singapore dollar	$	330	$	—		$	—
Yen	554		(12		)	(6		)
Euro	245		(1		)	—
Shekel	62		(1		)	—
	$	1,191
Convertible notes settlement obligations	12		(389		)	—
			$	(403	)	$	(6	)

⁽¹⁾ Notional amounts of forward contracts in U.S. dollars and convertible notes settlement obligations in shares.

⁽²⁾  Included in accounts payable and accrued expenses for forward contracts and in current debt for convertible notes settlement obligations.

⁽³⁾  Included in other noncurrent liabilities.

Net gains (losses) for derivative instruments without hedge accounting designation were included in other non-operating income (expense), net as follows:

	Quarter Ended						Six Months Ended
	March 5, 2015			February 27, 2014			March 5, 2015			February 27, 2014
Foreign exchange contracts	$	(15	)	$	(7	)	$	(73	)	$	(21	)
Convertible notes settlement obligations	—			(15		)	6			(52		)

Derivative Instruments with Cash Flow Hedge Accounting Designation

Currency Derivatives: We utilize currency forward contracts that generally mature within 12 months to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures.  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).  

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), net.  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 March 5, 2015
Yen	$	32	$	—
	$	32	$	—
As of August 28, 2014
Yen	$	94	$	(2	)
Euro	24		—
	$	118	$	(2	)

⁽¹⁾  Included in accounts payable and accrued expenses.

For the first six months of 2015, we recognized losses of $15 million in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  For the first six months of 2014, we recognized losses of $2 million in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges are recognized in other non-operating income (expense) and were not significant for the second quarter and first six months of 2015 and 2014.  For the second quarter and first six months of 2015, we reclassified gains of $2 million and $4 million, respectively, from accumulated other comprehensive income (loss) to earnings. As of March 5, 2015, $5 million of gains from cash flow hedges included in accumulated other 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 counterparties may be unable to meet the terms of the contracts.  Our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts would generally equal the fair value of 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.

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 March 5, 2015 and August 28, 2014, amounts netted were not significant.