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7. Derivative Financial Instruments
The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into foreign currency forward exchange contracts to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The changes in the fair values of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive loss until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings. As of March 30, 2012 and July 1, 2011, the Company had a net unrealized loss of $1 million and a net unrealized gain of $2 million, respectively, on cash flow hedges.
The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss are reclassified immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any material net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended March 30, 2012 and April 1, 2011. As of March 30, 2012, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive loss and expected to be recognized into earnings over the next 12 months is a net loss of $1 million.
The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of March 30, 2012 and July 1, 2011:
|
|
|
As of March 30, 2012 |
|
|
(Dollars in millions) |
|
Contracts
Designated as
Hedges |
|
Contracts Not
Designated as
Hedges |
|
|
Thai baht |
|
$ |
— |
|
$ |
123 |
|
|
Singapore dollars |
|
50 |
|
10 |
|
|
Chinese renminbi |
|
14 |
|
— |
|
|
Czech koruna |
|
— |
|
15 |
|
|
|
|
$ |
64 |
|
$ |
148 |
|
|
|
|
As of July 1, 2011 |
|
|
(Dollars in millions) |
|
Contracts
Designated as
Hedges |
|
Contracts Not
Designated as
Hedges |
|
|
Thai baht |
|
$ |
98 |
|
$ |
235 |
|
|
Singapore dollars |
|
212 |
|
9 |
|
|
Chinese renminbi |
|
78 |
|
— |
|
|
Czech koruna |
|
— |
|
11 |
|
|
|
|
$ |
388 |
|
$ |
255 |
|
The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of March 30, 2012:
Fair Values of Derivative Instruments as of March 30, 2012
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|
|
Asset Derivatives |
|
Liability Derivatives |
|
|
(Dollars in millions) |
|
Balance Sheet
Location |
|
Fair Value |
|
Balance Sheet
Location |
|
Fair Value |
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts |
|
Other current assets |
|
$ |
— |
|
Accrued expenses |
|
$ |
(1 |
) |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts |
|
Other current assets |
|
— |
|
Accrued expenses |
|
(2 |
) |
|
Total derivatives |
|
|
|
$ |
— |
|
|
|
$ |
(3 |
) |
The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of July 1, 2011:
Fair Values of Derivative Instruments as of July 1, 2011
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|
|
Asset Derivatives |
|
Liability Derivatives |
|
|
(Dollars in millions) |
|
Balance Sheet
Location |
|
Fair Value |
|
Balance Sheet
Location |
|
Fair Value |
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts |
|
Other current assets |
|
$ |
4 |
|
Accrued expenses |
|
$ |
(2 |
) |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts |
|
Other current assets |
|
1 |
|
Accrued expenses |
|
(4 |
) |
|
Total derivatives |
|
|
|
$ |
5 |
|
|
|
$ |
(6 |
) |
The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (“OCI”) and the Condensed Consolidated Statement of Operations for the three and nine months ended March 30, 2012:
(Dollars in millions)
|
|
|
Amount of
Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion) |
|
Location of
Gain or (Loss)
Reclassified from
Accumulated OCI |
|
Amount of
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) |
|
Location of
Gain or (Loss)
Recognized in Income
on Derivative
(Ineffective Portion and |
|
Amount of
Gain or (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (a) |
|
|
Derivatives Designated as Cash Flow Hedges |
|
For the Three
Months |
|
For the Nine
Months |
|
into Income
(Effective Portion) |
|
For the Three
Months |
|
For the Nine
Months |
|
Amount Excluded from
Effectiveness Testing) |
|
For the Three
Months |
|
For the Nine
Months |
|
|
Foreign currency forward exchange contracts |
|
$ |
4 |
|
$ |
(7 |
) |
Cost of revenue |
|
$ |
— |
|
$ |
(4 |
) |
Cost of revenue |
|
$ |
1 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
Location of |
|
Gain or (Loss) |
|
|
|
|
Gain or (Loss) |
|
Recognized in Income |
|
|
|
|
Recognized in |
|
on Derivative |
|
|
|
|
Income on |
|
For the Three |
|
For the Nine |
|
|
Derivatives Not Designated as Hedging Instruments |
|
Derivative |
|
Months |
|
Months |
|
|
Foreign currency forward exchange contracts |
|
Other, net |
|
$ |
3 |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(a) The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationship for the three and nine months ended March 30, 2012. The amounts excluded from the assessment of hedge effectiveness, for the three and nine months ended March 30, 2012, were a gain of $1 million and $0, respectively.
The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (“OCI”) and the Condensed Consolidated Statement of Operations for the three and nine months ended April 1, 2011:
(Dollars in millions)
|
|
|
|
|
|
|
Amount of |
|
|
|
Amount of |
|
|
|
|
Amount of |
|
|
|
Gain or (Loss) |
|
Location of |
|
Gain or (Loss) |
|
|
|
|
Gain or (Loss) |
|
Location of |
|
Reclassified from |
|
Gain or (Loss) |
|
Recognized in Income |
|
|
|
|
Recognized in OCI |
|
Gain or (Loss) |
|
Accumulated OCI |
|
Recognized in Income |
|
(Ineffective Portion and |
|
|
|
|
on Derivative |
|
Reclassified from |
|
into Income |
|
on Derivative |
|
Amount Excluded from |
|
|
|
|
(Effective Portion) |
|
Accumulated OCI |
|
(Effective Portion) |
|
(Ineffective Portion and |
|
Effectiveness Testing) (a) |
|
|
Derivatives Designated as Cash Flow Hedges |
|
For the Three
Months |
|
For the Nine
Months |
|
into Income
(Effective Portion) |
|
For the Three
Months |
|
For the Nine
Months |
|
Amount Excluded from
Effectiveness Testing) |
|
For the Three
Months |
|
For the Nine
Months |
|
|
Foreign currency forward exchange contracts |
|
$ |
(2 |
) |
$ |
35 |
|
Cost of revenue |
|
$ |
10 |
|
$ |
32 |
|
Cost of revenue |
|
$ |
(2 |
) |
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
Location of |
|
Gain or (Loss) |
|
|
|
|
Gain or (Loss) |
|
Recognized in Income |
|
|
|
|
Recognized in |
|
on Derivative |
|
|
|
|
Income on |
|
For the Three |
|
For the Nine |
|
|
Derivatives Not Designated as Hedging Instruments |
|
Derivative |
|
Months |
|
Months |
|
|
Foreign currency forward exchange contracts |
|
Other, net |
|
$ |
(1 |
) |
$ |
19 |
|
|
Total return swap |
|
Operating expenses |
|
1 |
|
14 |
|
|
|
|
|
|
$ |
— |
|
$ |
33 |
|
(a) The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationship for both the three and nine months ended April 1, 2011. The amounts excluded from the assessment of hedge effectiveness, for the three and nine months ended April 1, 2011, were losses of $2 million and $1 million, respectively. |