Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v2.4.0.8
Derivative Financial Instruments
 9 Months Ended
Sep. 27, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments [Text Block]
Note 6: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, commodity price risk, and credit risk. We also enter into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. Generally our master netting agreements allow for net settlement in case of certain triggering events such as bankruptcy or default of one of the counterparties to the transaction. We may also elect to exchange cash collateral with certain of our counterparties on a regular basis. For presentation on our consolidated condensed balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk and generally hedge our exposures with currency forward contracts, currency interest rate swaps, or currency options. Substantially all of our revenue is transacted in U.S. dollars. However, a significant amount of our operating expenditures and capital purchases is incurred in or exposed to other currencies, primarily the euro, the Japanese yen, the Israeli shekel, and the Chinese yuan. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non-U.S.-dollar-denominated investments in debt instruments and loans receivable are generally hedged with offsetting currency forward contracts or currency interest rate swaps. We may also hedge currency risk arising from funding foreign currency denominated forecasted investments. These programs reduce, but do not eliminate, the impact of currency exchange movements.
Our currency risk management programs include:
•
Currency derivatives with cash flow hedge accounting designation that utilize currency forward contracts and currency options to hedge exposures to the variability in the U.S.-dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction.
•
Currency derivatives without hedge accounting designation that utilize currency forward contracts or currency interest rate swaps to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. The majority of these instruments mature within 12 months. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in fair value of the related derivatives. We record net gains or losses in the line item on the consolidated condensed statements of income most closely associated with the related exposures, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) on equity investments, net.
Interest Rate Risk
Our primary objective for holding investments in debt instruments is to preserve principal while maximizing yields. We generally swap the returns on our investments in fixed-rate debt instruments with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns, unless management specifically approves otherwise. These swaps are settled at various interest payment times involving cash payments at each interest and principal payment date, with the majority of the contracts having quarterly payments.
Our interest rate risk management programs include:
•
Interest rate derivatives with cash flow hedge accounting designation that utilize interest rate swap agreements to modify the interest characteristics of debt instruments. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction.
•
Interest rate derivatives without hedge accounting designation that utilize interest rate swaps and currency interest rate swaps in economic hedging transactions, including hedges of non-U.S.-dollar-denominated debt instruments classified as trading assets and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. Floating interest rates on the swaps generally reset on a quarterly basis. Changes in fair value of the debt instruments classified as trading assets and loans receivable recognized at fair value are generally offset by changes in fair value of the related derivatives, both of which are recorded in interest and other, net.
Equity Market Risk
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives. We recognize changes in the fair value of such derivatives in gains (losses) on equity investments, net. We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the losses and gains on the related liabilities, both of which are recorded in cost of sales and operating expenses.
Commodity Price Risk
We operate facilities that consume commodities, and have established forecasted transaction risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in commodity prices, such as those for natural gas. These programs reduce, but do not always eliminate, the impact of commodity price movements.
Our commodity price risk management program includes commodity derivatives with cash flow hedge accounting designation that utilize commodity swap contracts to hedge future cash flow exposures to the variability in commodity prices. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction.
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows: 
(In Millions)
 
Sep 27,
2014
 
Dec 28,
2013
 
Sep 28,
2013
Currency forwards
 
$
13,896

 
$
13,404

 
$
12,458

Currency interest rate swaps
 
5,015

 
4,377

 
3,665

Embedded debt derivatives
 
3,600

 
3,600

 
3,600

Interest rate swaps
 
1,259

 
1,377

 
1,269

Total return swaps
 
1,032

 
914

 
873

Other
 
53

 
67

 
72

Total
 
$
24,855

 
$
23,739

 
$
21,937

The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) at the end of each period were as follows:
(In Millions)
 
Sep 27,
2014
 
Dec 28,
2013
 
Sep 28,
2013
British pound sterling
 
$
420

 
$
549

 
$
403

Chinese yuan
 
1,420

 
1,116

 
648

Euro
 
6,973

 
6,874

 
5,952

Israeli shekel
 
2,170

 
2,244

 
2,006

Japanese yen
 
4,223

 
4,116

 
3,864

Malaysian ringgit
 
771

 
506

 
444

Swiss franc
 
1,361

 
1,189

 
1,416

Other
 
1,573

 
1,187

 
1,390

Total
 
$
18,911

 
$
17,781

 
$
16,123


Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair value of our derivative instruments at the end of each period were as follows:
 
 
September 27, 2014
 
December 28, 2013
(In Millions)
 
Other
Current
Assets
 
Other
Long-Term
Assets
 
Other
Accrued
Liabilities
 
Other
Long-Term
Liabilities
 
Other
Current
Assets
 
Other
Long-Term
Assets
 
Other
Accrued
Liabilities
 
Other
Long-Term
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
$
17

 
$
—

 
$
224

 
$
14

 
$
114

 
$
1

 
$
118

 
$
2

Total derivatives designated as hedging instruments
 
$
17

 
$
—

 
$
224

 
$
14

 
$
114

 
$
1

 
$
118

 
$
2

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
$
121

 
$
—

 
$
39

 
$
—

 
$
66

 
$
—

 
$
63

 
$
—

Currency interest rate swaps
 
164

 
22

 
43

 
—

 
124

 
6

 
163

 
29

Interest rate swaps
 
4

 
—

 
17

 
—

 
5

 
—

 
28

 
—

Total return swaps
 
—

 
—

 
—

 
—

 
48

 
—

 
—

 
—

Other
 
—

 
28

 
—

 
8

 
—

 
29

 
—

 
19

Total derivatives not designated as hedging instruments
 
$
289

 
$
50

 
$
99

 
$
8

 
$
243

 
$
35

 
$
254

 
$
48

Total derivatives
 
$
306

 
$
50

 
$
323

 
$
22

 
$
357

 
$
36

 
$
372

 
$
50



Amounts Offset in the Consolidated Condensed Balance Sheets
The gross amounts of our derivative instruments and reverse repurchase agreements subject to master netting arrangements with various counterparties and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
 
 
September 27, 2014
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
(In Millions)
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
 
Financial Instruments
 
Cash and Non-Cash Collateral Received or Pledged
 
Net Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets subject to master netting arrangements
 
$
312

 
$
—

 
$
312

 
$
(220
)
 
$
(54
)
 
$
38

Reverse repurchase agreements
 
718

 
—

 
718

 
—

 
(715
)
 
3

Total assets
 
$
1,030

 
$
—

 
$
1,030

 
$
(220
)
 
$
(769
)
 
$
41

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities subject to master netting arrangements
 
$
328

 
$
—

 
$
328

 
$
(220
)
 
$
(88
)
 
$
20

Total liabilities
 
$
328

 
$
—

 
$
328

 
$
(220
)
 
$
(88
)
 
$
20

 
 
December 28, 2013
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
(In Millions)
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
 
Financial Instruments
 
Cash and Non-Cash Collateral Received or Pledged
 
Net Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets subject to master netting arrangements
 
$
325

 
$
—

 
$
325

 
$
(158
)
 
$
(3
)
 
$
164

Reverse repurchase agreements
 
800

 
—

 
800

 
—

 
(800
)
 
—

Total assets
 
$
1,125

 
$
—

 
$
1,125

 
$
(158
)
 
$
(803
)
 
$
164

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities subject to master netting arrangements
 
$
401

 
$
—

 
$
401

 
$
(158
)
 
$
(32
)
 
$
211

Total liabilities
 
$
401

 
$
—

 
$
401

 
$
(158
)
 
$
(32
)
 
$
211


Derivatives in Cash Flow Hedging Relationships
The before-tax gains (losses), attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss) for each period were as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In Millions)
 
Sep 27,
2014
 
Sep 28,
2013
 
Sep 27,
2014
 
Sep 28,
2013
Currency forwards
 
$
(241
)
 
$
84

 
$
(201
)
 
$
(105
)
Other
 
—

 
(1
)
 
(3
)
 
—

Total
 
$
(241
)
 
$
83

 
$
(204
)
 
$
(105
)

Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness and amounts excluded from effectiveness testing, were insignificant during all periods presented in the preceding tables. Additionally, for all periods presented, there was an insignificant impact on results of operations from discontinued cash flow hedges, which arises when forecasted transactions are probable of not occurring.
For information on the unrealized holding gains (losses) on derivatives reclassified out of accumulated other comprehensive income into the consolidated condensed statements of income, see "Note 21: Other Comprehensive Income (Loss)."
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated condensed statements of income for each period were as follows:
 
 
 
 
Three Months Ended
 
Nine Months Ended
(In Millions)
 
Location of Gains (Losses)
Recognized in Income on Derivatives
 
Sep 27,
2014
 
Sep 28,
2013
 
Sep 27,
2014
 
Sep 28,
2013
Currency forwards
 
Interest and other, net
 
$
62

 
$
(27
)
 
$
40

 
$
23

Currency interest rate swaps
 
Interest and other, net
 
221

 
(56
)
 
193

 
—

Interest rate swaps
 
Interest and other, net
 
1

 
(5
)
 
(3
)
 
(2
)
Total return swaps
 
Various
 
(7
)
 
70

 
51

 
99

Other
 
Gains (losses) on equity investments, net
 
(3
)
 
(6
)
 
(1
)
 
1

Total
 
 
 
$
274

 
$
(24
)
 
$
280

 
$
121