Derivative Financial Instruments

3 Months Ended

Dec. 03, 2015

Derivative Instrument Detail [Abstract]

Derivative Financial 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: To hedge our exposures of monetary assets and liabilities to changes in currency exchange rates, 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 quarters of 2016 and 2015, we paid $21 million and $33 million, respectively, upon settlement of the 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 the first quarter of 2015, we settled conversions of our remaining outstanding 2031B notes and holders elected to convert a portion of the 2033E 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 holders of our intention to settle the obligations 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 note settlement obligations were based on the volume-weighted average stock price (Level 2 fair value measurements). Changes in fair values of the derivative settlement obligations were included in other non-operating income (expense), net.

Total notional amounts and gross fair values for derivative instruments without hedge accounting designation were as follows:

	Notional Amount (in U.S. dollars)		Fair Value of
			Current Assets(1)		Current Liabilities(2)
As of December 3, 2015
Yen	$	919	$	—	$	(4	)
Singapore dollar	229		—		(1		)
New Taiwan dollar	35		—		—
Shekel	28		—		—
Euro	17		—		—
British Pound	16		—		—
Yuan	15		—		—
	$	1,259	$	—	$	(5	)
As of September 3, 2015
Yen	$	928	$	—	$	(24	)
Singapore dollar	282		—		—
New Taiwan dollar	89		—		—
Shekel	27		—		—
Euro	29		—		—
British Pound	19		—		—
Yuan	32		1		—
	$	1,406	$	1	$	(24	)

⁽¹⁾  Included in receivables – other.

⁽²⁾  Included in accounts payable and accrued expenses – other.

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

Quarter ended	December 3, 2015			December 4, 2014
Foreign exchange contracts	$	(21	)	$	(58	)
Convertible notes settlement obligations	—			6

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 operations 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 notional amounts and gross fair values for derivative instruments with cash flow hedge accounting designation were as follows:

	Notional Amount (in U.S. Dollars)		Fair Value of
			Current Assets(1)		Current Liabilities(2)
As of December 3, 2015
Yen	$	102	$	1	$	(2	)
As of September 3, 2015
Yen	$	81	$	3	$	—
Euro	12		—		—
	$	93	$	3	$	—

⁽¹⁾  Included in receivables – other.

⁽²⁾  Included in accounts payable and accrued expenses – other.

For the first quarters of 2016 and 2015, we recognized losses of $4 million and $15 million, respectively, in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges recognized in other non-operating income (expense) were not significant in the first quarters of 2016 and 2015.  For the first quarters of 2016 and 2015, we reclassified gains of $1 million and $2 million, respectively, from accumulated other comprehensive income (loss) to earnings. As of December 3, 2015, $1 million of net gains from cash flow hedges included in accumulated other comprehensive income (loss) is expected to be reclassified into earnings in the next 12 months.