v3.5.0.2
Derivative Instruments and Hedging Activities
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9 Months Ended |
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| Derivative Instruments and Hedging Activities Disclosure [Abstract] |
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| Derivative Instruments and Hedging Activities |
Derivative Instruments and Hedging Activities Derivative Financial Instruments Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. During fiscal 2015, Applied entered into and settled a series of forward-starting interest rate swap agreements, with a total notional amount of $600 million to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and settled in conjunction with the issuance of debt in September 2015. The loss from the settlement of the interest rate swap agreement that was included in accumulated other comprehensive income (AOCI) in stockholders' equity is being amortized to interest expense over the term of the senior unsecured 10-year notes issued in September 2015. Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate swap agreements, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses. Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI at July 31, 2016 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and nine months ended July 31, 2016 and July 26, 2015. Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged. In September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the then-anticipated business combination with Tokyo Electron Limited (TEL). These derivatives did not qualify for hedge accounting treatment and were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. Due to the termination of the then-anticipated business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third quarter of fiscal 2015. During the three and nine months ended July 26, 2015, Applied recorded a loss of $3 million and a gain of $89 million, respectively, related to these contracts. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows.
The effects of derivative instruments and hedging activities on the Consolidated Condensed Statements of Operations were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | | | Effective Portion | | Ineffective Portion and Amount
Excluded from
Effectiveness
Testing | | Effective Portion | | Ineffective Portion and Amount
Excluded from
Effectiveness
Testing | | Location of Gain or
(Loss) Reclassified
from AOCI into
Income | | Gain or
(Loss)
Recognized
in AOCI | | Gain or (Loss)
Reclassified
from AOCI into
Income | | Gain or (Loss)
Recognized in
Income | | Gain or
(Loss)
Recognized
in AOCI | | Gain or (Loss)
Reclassified
from AOCI into
Income | | Gain or (Loss)
Recognized in
Income | | | | | | | | | | | | | | | | | | (In millions) | Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | | | | | | Cost of products sold | | $ | (26 | ) | | $ | (13 | ) | | $ | 1 |
| | $ | 5 |
| | $ | 2 |
| | $ | (1 | ) | | General and administrative | | — |
| | 1 |
| | (1 | ) | | — |
| | 3 |
| | — |
| Interest rate swaps | Interest expense | | — |
| | (1 | ) | | — |
| | $ | (8 | ) | | $ | — |
| | $ | — |
| Total | | | $ | (26 | ) | | $ | (13 | ) | | $ | — |
| | $ | (3 | ) | | $ | 5 |
| | $ | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | | | Effective Portion | | Ineffective Portion and Amount
Excluded from
Effectiveness
Testing | | Effective Portion | | Ineffective Portion and Amount
Excluded from
Effectiveness
Testing | | Location of Gain or
(Loss) Reclassified
from AOCI into
Income | | Gain or
(Loss)
Recognized
in AOCI | | Gain or (Loss)
Reclassified
from AOCI into
Income | | Gain or (Loss)
Recognized in
Income | | Gain or
(Loss)
Recognized
in AOCI | | Gain or (Loss)
Reclassified
from AOCI into
Income | | Gain or (Loss)
Recognized in
Income | | | | | | | | | | | | | | | | | | (In millions) | Derivatives in Cash Flow Hedging Relationships | | | | | | | | | | | | | | | Cost of products sold | | $ | (49 | ) | | $ | (21 | ) | | $ | 1 |
| | $ | 10 |
| | $ | 15 |
| | $ | (3 | ) | | General and administrative | | — |
| | (1 | ) | | (2 | ) | | — |
| | (5 | ) | | (1 | ) | Interest rate swaps | Interest expense | | — |
| | (1 | ) | | — |
| | (8 | ) | | — |
| | — |
| Total | | | $ | (49 | ) | | $ | (23 | ) | | $ | (1 | ) | | $ | 2 |
| | $ | 10 |
| | $ | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | Amount of Gain or (Loss) Recognized in Income | | | Three Months Ended | | Nine Months Ended | Location of Gain or
(Loss) Recognized
in Income | | | | | | | | | | | | | | | | | | | | | | (In millions) | Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | Gain on derivatives associated with terminated business combination | | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | 89 |
| | General and
administrative | | (31 | ) | | 11 |
| | (67 | ) | | 31 |
| Total | | | $ | (31 | ) | | $ | 8 |
| | $ | (67 | ) | | $ | 120 |
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Credit Risk Contingent Features If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of July 31, 2016. Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant. |
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- DefinitionThe entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
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