Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v2.4.0.6
Derivative Financial Instruments
 3 Months Ended
Mar. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments [Text Block]
Note 5: 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 and commodity price risk. We currently do not hold derivative instruments for the purpose of managing credit risk as we limit the amount of credit exposure to any one counterparty and generally enter into derivative transactions with high-credit-quality counterparties. 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. 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 are incurred in or exposed to other currencies, primarily the euro, the Japanese yen, and the Israeli shekel. 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 foreign 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 are reset on a quarterly basis. Changes in fair value of the debt instruments classified as trading assets and hedges of 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. 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 gains and losses 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)
 
Mar 30,
2013
 
Dec 29,
2012
 
Mar 31,
2012
Currency forwards
 
$
13,141

 
$
13,117

 
$
11,116

Currency interest rate swaps
 
3,464

 
2,711

 
1,812

Embedded debt derivatives
 
3,600

 
3,600

 
3,600

Interest rate swaps
 
1,041

 
1,101

 
1,689

Total return swaps
 
859

 
807

 
821

Other
 
82

 
127

 
151

Total
 
$
22,187

 
$
21,463

 
$
19,189

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)
 
Mar 30,
2013
 
Dec 29,
2012
 
Mar 31,
2012
British pound sterling
 
$
422

 
$
308

 
$
523

Chinese yuan
 
572

 
647

 
803

Euro
 
6,800

 
5,994

 
3,553

Israeli shekel
 
1,974

 
2,256

 
1,823

Japanese yen
 
3,854

 
4,389

 
4,040

Malaysian ringgit
 
520

 
442

 
914

Swiss franc
 
1,312

 
657

 
237

Other
 
1,151

 
1,135

 
1,035

Total
 
$
16,605

 
$
15,828

 
$
12,928



Fair Values of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair values of our derivative instruments at the end of each period were as follows:
 
 
 
March 30, 2013
 
December 29, 2012
(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
 
$
62

 
$
1

 
$
261

 
$
12

 
$
91

 
$
2

 
$
127

 
$
—

Other
 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total derivatives designated as hedging instruments
 
$
63

 
$
1

 
$
261

 
$
12

 
$
91

 
$
2

 
$
127

 
$
—

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
$
96

 
$
—

 
$
70

 
$
—

 
$
85

 
$
—

 
$
58

 
$
—

Currency interest rate swaps
 
92

 
25

 
74

 
9

 
33

 
18

 
72

 
14

Embedded debt derivatives
 
—

 
—

 
—

 
12

 
—

 
—

 
—

 
6

Interest rate swaps
 
—

 
—

 
37

 
—

 
—

 
—

 
34

 
—

Total return swaps
 
—

 
—

 
—

 
—

 
11

 
—

 
—

 
—

Other
 
1

 
21

 
—

 
—

 
1

 
18

 
1

 
—

Total derivatives not designated as hedging instruments
 
$
189

 
$
46

 
$
181

 
$
21

 
$
130

 
$
36

 
$
165

 
$
20

Total derivatives
 
$
252

 
$
47

 
$
442

 
$
33

 
$
221

 
$
38

 
$
292

 
$
20


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 during each period were as follows:
 
 
Three Months Ended
(In Millions)
 
Mar 30,
2013
 
Mar 31,
2012
Currency forwards
 
$
(236
)
 
$
(74
)
Other
 
1

 
—

Total
 
$
(235
)
 
$
(74
)


Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness, as well as 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 17: Comprehensive Income".
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated condensed statements of income during each period were as follows:
 
 
 
 
 
Three Months Ended
(In Millions)
 
Location of Gains (Losses)
Recognized in Income on Derivatives
 
Mar 30,
2013
 
Mar 31,
2012
Currency forwards
 
Interest and other, net
 
$
56

 
$
15

Currency interest rate swaps
 
Interest and other, net
 
100

 
(56
)
Interest rate swaps
 
Interest and other, net
 
—

 
30

Total return swaps
 
Various
 
48

 
59

Other
 
Gains (losses) on equity investments, net
 
2

 
(2
)
Total
 
 
 
$
206

 
$
46