Crucial 2014 Annual Report Download - page 47

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45
Recently Issued Accounting Standards
See "Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Recently
Issued Accounting Standards" note.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness and our investment portfolio. Substantially all of our
indebtedness is at fixed interest rates. As a result, the fair value of our debt fluctuates based on changes in market interest rates.
We estimate that, as of August 28, 2014 and August 29, 2013, a hypothetical decrease in market interest rates of 1% would
increase the fair value of our convertible notes and other notes by approximately $250 million and $147 million, respectively.
The increase in interest expense caused by a 1% increase in the interest rates of our variable-rate debt would not be significant.
As of August 28, 2014 and August 29, 2013, we held debt securities of $1,653 million and $787 million, respectively, that
were subject to interest rate risk. We estimate that a 0.5% increase in market interest rates would decrease the fair value of
these instruments by approximately $6 million as of August 28, 2014 and $4 million as of August 29, 2013.
Foreign Currency Exchange Rate Risk
The information in this section should be read in conjunction with the information related to changes in the exchange rates
of foreign currency in "Item 1A. Risk Factors." Changes in foreign currency exchange rates could materially adversely affect
our results of operations or financial condition.
The functional currency for all of our operations is the U.S. dollar. As a result of our foreign operations, we incur costs
and carry certain assets and liabilities that are denominated in foreign currencies. The substantial majority of our revenues are
transacted in the U.S. dollar; however, significant amounts of our operating expenditures and capital purchases are incurred in
or exposed to other currencies, primarily the euro, the shekel, the Singapore dollar, the New Taiwan dollar, the yen and the
yuan. We have established currency risk management programs for our operating expenditures and capital purchases to hedge
against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. We utilize
currency forward and option contracts in these hedging programs. Our hedging programs reduce, but do not always entirely
eliminate, the impact of currency exchange rate movements. We do not use derivative financial instruments for trading or
speculative purposes.
To hedge our exposure to changes in currency exchange rates from our monetary assets and liabilities, we utilize a rolling
hedge strategy with currency forward contracts that generally mature within 35 days. Based on our foreign currency exposures
from monetary assets and liabilities, offset by balance sheet hedges, we estimate that a 10% adverse change in exchange rates
versus the U.S. dollar would result in losses of approximately $7 million as of August 28, 2014 and $19 million as of
August 29, 2013. To hedge the exposure of changes in cash flows from changes in currency exchange rates for certain capital
expenditures and forecasted operating cash flows, we utilize currency forward contracts that generally mature within 12 months
and currency options that generally mature within 12 to 18 months.
As of August 28, 2018, under the terms and conditions of the MMJ Companies' plans of reorganization, we are obligated to
pay 142 billion yen (or the equivalent of $1.37 billion based on exchange rates as of August 28, 2014) to the external creditors
of the MMJ Companies. The installment payments are due at the end of each calendar year beginning in 2014 through 2019.
To mitigate the risk that increases in exchange rates have on the payments due in 2014 and 2015, we entered into forward
contracts to purchase 20 billion yen on November 28, 2014 and 10 billion yen on November 27, 2015. In addition, the MMJ
Companies' cash and equivalent balances in yen mitigate the foreign currency exchange risk associated with the remaining
installment payments due in 2015 and after. (See "Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – Debt – MMJ Creditor Installment Payments.")