Note 2 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of September 28, 2013 and September 29, 2012 (in millions):
| 2013 | ||||||||||||||||||||||||||||
| Adjusted Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
Cash and Cash Equivalents |
Short-Term Marketable Securities |
Long-Term Marketable Securities |
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Cash |
$ | 8,705 | $ | 0 | $ | 0 | $ | 8,705 | $ | 8,705 | $ | 0 | $ | 0 | ||||||||||||||
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Level 1: |
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Money market funds |
1,793 | 0 | 0 | 1,793 | 1,793 | 0 | 0 | |||||||||||||||||||||
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Mutual funds |
3,999 | 0 | (197 | ) | 3,802 | 0 | 3,802 | 0 | ||||||||||||||||||||
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Subtotal |
5,792 | 0 | (197 | ) | 5,595 | 1,793 | 3,802 | 0 | ||||||||||||||||||||
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Level 2: |
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U.S. Treasury securities |
27,642 | 24 | (47 | ) | 27,619 | 431 | 7,554 | 19,634 | ||||||||||||||||||||
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U.S. agency securities |
16,878 | 12 | (52 | ) | 16,838 | 177 | 3,412 | 13,249 | ||||||||||||||||||||
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Non-U.S. government securities |
5,545 | 35 | (137 | ) | 5,443 | 50 | 313 | 5,080 | ||||||||||||||||||||
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Certificates of deposit and time deposits |
2,344 | 0 | 0 | 2,344 | 1,264 | 844 | 236 | |||||||||||||||||||||
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Commercial paper |
2,998 | 0 | 0 | 2,998 | 1,835 | 1,163 | 0 | |||||||||||||||||||||
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Corporate securities |
54,586 | 275 | (252 | ) | 54,609 | 0 | 8,077 | 46,532 | ||||||||||||||||||||
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Municipal securities |
6,257 | 45 | (22 | ) | 6,280 | 4 | 1,114 | 5,162 | ||||||||||||||||||||
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Mortgage- and asset-backed securities |
16,396 | 23 | (89 | ) | 16,330 | 0 | 8 | 16,322 | ||||||||||||||||||||
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Subtotal |
132,646 | 414 | (599 | ) | 132,461 | 3,761 | 22,485 | 106,215 | ||||||||||||||||||||
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Total |
$ | 147,143 | $ | 414 | $ | (796 | ) | $ | 146,761 | $ | 14,259 | $ | 26,287 | $ | 106,215 | |||||||||||||
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| 2012 | ||||||||||||||||||||||||||||
| Adjusted Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
Cash and Cash Equivalents |
Short-Term Marketable Securities |
Long-Term Marketable Securities |
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Cash |
$ | 3,109 | $ | 0 | $ | 0 | $ | 3,109 | $ | 3,109 | $ | 0 | $ | 0 | ||||||||||||||
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Level 1: |
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Money market funds |
1,460 | 0 | 0 | 1,460 | 1,460 | 0 | 0 | |||||||||||||||||||||
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Mutual funds |
2,385 | 79 | (2 | ) | 2,462 | 0 | 2,462 | 0 | ||||||||||||||||||||
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Subtotal |
3,845 | 79 | (2 | ) | 3,922 | 1,460 | 2,462 | 0 | ||||||||||||||||||||
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Level 2: |
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U.S. Treasury securities |
20,088 | 21 | (1 | ) | 20,108 | 2,608 | 3,525 | 13,975 | ||||||||||||||||||||
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U.S. agency securities |
19,540 | 58 | (1 | ) | 19,597 | 1,460 | 1,884 | 16,253 | ||||||||||||||||||||
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Non-U.S. government securities |
5,483 | 183 | (2 | ) | 5,664 | 84 | 1,034 | 4,546 | ||||||||||||||||||||
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Certificates of deposit and time deposits |
2,189 | 2 | 0 | 2,191 | 1,106 | 202 | 883 | |||||||||||||||||||||
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Commercial paper |
2,112 | 0 | 0 | 2,112 | 909 | 1,203 | 0 | |||||||||||||||||||||
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Corporate securities |
46,261 | 568 | (8 | ) | 46,821 | 10 | 7,455 | 39,356 | ||||||||||||||||||||
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Municipal securities |
5,645 | 74 | 0 | 5,719 | 0 | 618 | 5,101 | |||||||||||||||||||||
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Mortgage- and asset-backed securities |
11,948 | 66 | (6 | ) | 12,008 | 0 | 0 | 12,008 | ||||||||||||||||||||
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Subtotal |
113,266 | 972 | (18 | ) | 114,220 | 6,177 | 15,921 | 92,122 | ||||||||||||||||||||
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Total |
$ | 120,220 | $ | 1,051 | $ | (20 | ) | $ | 121,251 | $ | 10,746 | $ | 18,383 | $ | 92,122 | |||||||||||||
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The net unrealized losses as of September 28, 2013 and the net unrealized gains as of September 29, 2012 are related primarily to long-term marketable securities. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. During 2013, 2012 and 2011, the net realized gains recognized by the Company were not significant. The maturities of the Company’s long-term marketable securities generally range from one to five years.
As of September 28, 2013 and September 29, 2012, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.
As of September 28, 2013, the Company considered the declines in market value of its marketable securities investment portfolio to be temporary in nature and did not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. During 2013, 2012 and 2011 the Company did not recognize any significant impairment charges.
Derivative Financial Instruments
The Company uses derivatives to partially offset its business exposure to foreign currency and interest rate risk. The Company may enter into forward contracts, option contracts, swaps, or other derivative instruments to offset some of the risk on expected future cash flows, on net investments in certain foreign subsidiaries, and on certain existing assets and liabilities.
To help protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar hedge a portion of forecasted foreign currency revenue. The Company’s subsidiaries whose functional currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company hedges a portion of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates.
To help protect against adverse fluctuations in interest rates, the Company may enter into interest rate swaps, options, or other instruments to offset a portion of the changes in income or expense due to fluctuations in interest rates.
The Company may also enter into foreign currency forward and option contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. However, the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment of these instruments is based on whether the instruments are designated as hedge or non-hedge instruments. The effective portions of cash flow hedges are recorded in AOCI until the hedged item is recognized in earnings. The effective portions of net investment hedges are recorded in OCI as a part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and net investment hedges are recorded in other income and expense. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
The Company had net deferred losses of $175 million and $240 million associated with cash flow hedges, net of taxes, recorded in AOCI as of September 28, 2013 and September 29, 2012, respectively. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized as a component of other income/(expense), net in the same period as the related income or expense is recognized. The Company’s hedged foreign currency transactions and hedged interest rate transactions as of September 28, 2013 are expected to occur within 12 months and five years, respectively.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified immediately into other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any significant net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during 2013, 2012 and 2011.
The Company’s unrealized net gains and losses on net investment hedges, included in the cumulative translation adjustment account of AOCI, were not significant as of September 28, 2013 and September 29, 2012. The ineffective portions of and amounts excluded from the effectiveness test of net investment hedges are recorded in other income and expense.
The gain/loss recognized in other income and expense for foreign currency forward and option contracts not designated as hedging instruments was not significant during 2013, 2012 and 2011, respectively. These amounts represent the net gain or loss on the derivative contracts and do not include changes in the related exposures, which generally offset a portion of the gain or loss on the derivative contracts.
The following table shows the notional principal amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 28, 2013 and September 29, 2012 (in millions):
| 2013 | 2012 | |||||||||||||||
| Notional Principal |
Credit Risk Amounts |
Notional Principal |
Credit Risk Amounts |
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Instruments designated as accounting hedges: |
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Foreign exchange contracts |
$ | 35,013 | $ | 159 | $ | 41,970 | $ | 140 | ||||||||
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Interest rate contracts |
$ | 3,000 | $ | 44 | $ | 0 | $ | 0 | ||||||||
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Instruments not designated as accounting hedges: |
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Foreign exchange contracts |
$ | 16,131 | $ | 25 | $ | 13,403 | $ | 12 | ||||||||
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s gross exposure on these transactions may be further mitigated by collateral received from certain counterparties. The Company’s exposure to credit loss and market risk will vary over time as a function of currency and interest rates. Although the table above reflects the notional principal and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values. As of September 28, 2013 and September 29, 2012, the Company posted $164 million and $278 million, respectively, of cash collateral related to the derivative instruments under its collateral security arrangements, which were recorded as other current assets in the Consolidated Balance Sheet. The Company did not have any derivative instruments with credit-risk related contingent features that would require it to post additional collateral as of September 28, 2013 or September 29, 2012.
The following tables show the Company’s derivative instruments at gross fair value as reflected in the Consolidated Balance Sheets as of September 28, 2013 and September 29, 2012 (in millions):
| 2013 | ||||||||||||
| Fair Value of Derivatives Designated as Hedge Instruments |
Fair Value of Derivatives Not Designated as Hedge Instruments |
Total Fair Value |
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Derivative assets (a): |
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Foreign exchange contracts |
$ | 145 | $ | 25 | $ | 170 | ||||||
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Interest rate contracts |
$ | 44 | $ | 0 | $ | 44 | ||||||
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Derivative liabilities (b): |
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Foreign exchange contracts |
$ | 389 | $ | 46 | $ | 435 | ||||||
| 2012 | ||||||||||||
| Fair Value of Derivatives Designated as Hedge Instruments |
Fair Value of Derivatives Not Designated as Hedge Instruments |
Total Fair Value |
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Derivative assets (a): |
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Foreign exchange contracts |
$ | 138 | $ | 12 | $ | 150 | ||||||
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Derivative liabilities (b): |
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Foreign exchange contracts |
$ | 516 | $ | 41 | $ | 557 | ||||||
| (a) |
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Consolidated Balance Sheets. |
| (b) |
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Consolidated Balance Sheets. |
The following table shows the pre-tax effect of the Company’s derivative instruments designated as cash flow and net investment hedges in the Consolidated Statements of Operations for the years ended September 28, 2013 and September 29, 2012 (in millions):
| Gains/(Losses)
Recognized in OCI – Effective Portion |
Gains/(Losses) Reclassified from AOCI into Net Income – Effective Portion |
Gains/(Losses) Recognized – Ineffective Portion and Amount Excluded from Effectiveness Testing |
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| September 28, 2013 |
September 29, 2012 |
September 28, 2013 (a) |
September 29, 2012 (b) |
Location | September 28, 2013 |
September 29, 2012 |
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Cash flow hedges: |
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Foreign exchange contracts |
$ | 891 | $ | (175 | ) | $ | 676 | $ | 607 | Other income/ (expense), net |
$ | (301 | ) | $ | (658 | ) | ||||||||||
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Interest rate contracts |
12 | 0 | (6 | ) | 0 | Other income/ (expense), net |
0 | 0 | ||||||||||||||||||
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Net investment hedges: |
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Foreign exchange contracts |
143 | (5 | ) | 0 | 0 | Other income/ (expense), net |
1 | 3 | ||||||||||||||||||
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Total |
$ | 1,046 | $ | (180 | ) | $ | 670 | $ | 607 | $ | (300 | ) | $ | (655 | ) | |||||||||||
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| (a) |
Includes gains/(losses) reclassified from AOCI into net income for the effective portion of cash flow hedges, of which $44 million, $632 million and $(6) million were recognized within net sales, cost of sales and other income/(expense), net, respectively, within the Consolidated Statement of Operations for the year ended September 28, 2013. |
| (b) |
Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $537 million and $70 million were recognized within net sales and cost of sales, respectively, within the Consolidated Statement of Operations for the year ended September 29, 2012. |
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses, and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 28, 2013, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 13% and the other 10%. As of September 29, 2012, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 14% and the other 10%. The Company’s cellular network carriers accounted for 68% and 66% of trade receivables as of September 28, 2013 and September 29, 2012, respectively. The additions and write-offs to the Company’s allowance for doubtful accounts during 2013, 2012 and 2011 were not significant.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. Vendor non-trade receivables from three of the Company’s vendors accounted for 47%, 21% and 15% of total non-trade receivables as of September 28, 2013 and vendor non-trade receivables from three of the Company’s vendors accounted for 45%, 21% and 12% of total non-trade receivables as of September 29, 2012. The Company does not reflect the sale of these components in net sales and does not recognize any profits on these sales until the related products are sold by the Company, at which time any profit is recognized as a reduction of cost of sales.