Financial Instruments | 3 Months Ended |
Dec. 28, 2013 |
Financial Instruments | ' |
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 December 28, 2013 and September 28, 2013 (in millions): |
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| | December 28, 2013 | |
| | Adjusted | | | Unrealized | | | Unrealized | | | Fair | | | Cash and | | | Short-Term | | | Long-Term | |
Cost | Gains | Losses | Value | Cash | Marketable | Marketable |
| | | | Equivalents | Securities | Securities |
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Cash | | $ | 8,404 | | | $ | 0 | | | $ | 0 | | | $ | 8,404 | | | $ | 8,404 | | | $ | 0 | | | $ | 0 | |
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Level 1 (a): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | | 2,236 | | | | 0 | | | | 0 | | | | 2,236 | | | | 2,236 | | | | 0 | | | | 0 | |
Mutual funds | | | 4,045 | | | | 0 | | | | (248 | ) | | | 3,797 | | | | 0 | | | | 3,797 | | | | 0 | |
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Subtotal | | | 6,281 | | | | 0 | | | | (248 | ) | | | 6,033 | | | | 2,236 | | | | 3,797 | | | | 0 | |
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Level 2 (b): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | | 39,177 | | | | 11 | | | | (62 | ) | | | 39,126 | | | | 629 | | | | 8,498 | | | | 29,999 | |
U.S. agency securities | | | 16,087 | | | | 7 | | | | (37 | ) | | | 16,057 | | | | 1,016 | | | | 3,854 | | | | 11,187 | |
Non-U.S. government securities | | | 5,470 | | | | 25 | | | | (141 | ) | | | 5,354 | | | | 0 | | | | 276 | | | | 5,078 | |
Certificates of deposit and time deposits | | | 1,438 | | | | 0 | | | | 0 | | | | 1,438 | | | | 668 | | | | 494 | | | | 276 | |
Commercial paper | | | 2,212 | | | | 0 | | | | 0 | | | | 2,212 | | | | 1,122 | | | | 991 | | | | 99 | |
Corporate securities | | | 57,709 | | | | 297 | | | | (221 | ) | | | 57,785 | | | | 2 | | | | 7,658 | | | | 50,125 | |
Municipal securities | | | 6,246 | | | | 49 | | | | (13 | ) | | | 6,282 | | | | 0 | | | | 1,021 | | | | 5,261 | |
Mortgage- and asset-backed securities | | | 16,221 | | | | 23 | | | | (93 | ) | | | 16,151 | | | | 0 | | | | 45 | | | | 16,106 | |
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Subtotal | | | 144,560 | | | | 412 | | | | (567 | ) | | | 144,405 | | | | 3,437 | | | | 22,837 | | | | 118,131 | |
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Total | | $ | 159,245 | | | $ | 412 | | | $ | (815 | ) | | $ | 158,842 | | | $ | 14,077 | | | $ | 26,634 | | | $ | 118,131 | |
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| | September 28, 2013 | |
| | Adjusted | | | Unrealized | | | Unrealized | | | Fair | | | Cash and | | | Short-Term | | | Long-Term | |
Cost | Gains | Losses | Value | Cash | Marketable | Marketable |
| | | | Equivalents | Securities | Securities |
| | | | | | | |
Cash | | $ | 8,705 | | | $ | 0 | | | $ | 0 | | | $ | 8,705 | | | $ | 8,705 | | | $ | 0 | | | $ | 0 | |
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Level 1 (a): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | | 1,793 | | | | 0 | | | | 0 | | | | 1,793 | | | | 1,793 | | | | 0 | | | | 0 | |
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 (b): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | | 27,642 | | | | 24 | | | | (47 | ) | | | 27,619 | | | | 431 | | | | 7,554 | | | | 19,634 | |
U.S. agency securities | | | 16,878 | | | | 12 | | | | (52 | ) | | | 16,838 | | | | 177 | | | | 3,412 | | | | 13,249 | |
Non-U.S. government securities | | | 5,545 | | | | 35 | | | | (137 | ) | | | 5,443 | | | | 50 | | | | 313 | | | | 5,080 | |
Certificates of deposit and time deposits | | | 2,344 | | | | 0 | | | | 0 | | | | 2,344 | | | | 1,264 | | | | 844 | | | | 236 | |
Commercial paper | | | 2,998 | | | | 0 | | | | 0 | | | | 2,998 | | | | 1,835 | | | | 1,163 | | | | 0 | |
Corporate securities | | | 54,586 | | | | 275 | | | | (252 | ) | | | 54,609 | | | | 0 | | | | 8,077 | | | | 46,532 | |
Municipal securities | | | 6,257 | | | | 45 | | | | (22 | ) | | | 6,280 | | | | 4 | | | | 1,114 | | | | 5,162 | |
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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(a) | The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(b) | The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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. The net realized gains or losses recognized by the Company related to such sales were not significant during the three months ended December 28, 2013 and December 29, 2012. The maturities of the Company’s long-term marketable securities generally range from one to five years. |
As of December 28, 2013 and September 28, 2013, 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 December 28, 2013, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does 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 the three months ended December 28, 2013 and December 29, 2012, the Company did not recognize any significant impairment charges. |
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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 typically hedges portions 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 Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment for 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 other comprehensive income (“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. |
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 December 28, 2013 are expected to occur within 12 months and five years, respectively. |
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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 the three months ended December 28, 2013 and December 29, 2012. |
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 December 28, 2013 and September 28, 2013. The ineffective portions 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 the three months ended December 28, 2013 and December 29, 2012. |
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 December 28, 2013 and September 28, 2013 (in millions): |
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| | December 28, 2013 | | | September 28, 2013 | | | | | | | | | | | | | |
| | Notional | | | Credit Risk | | | Notional | | | Credit Risk | | | | | | | | | | | | | |
Principal | Amounts | Principal | Amounts | | | | | | | | | | | | |
Instruments designated as accounting hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 23,553 | | | $ | 331 | | | $ | 35,013 | | | $ | 159 | | | | | | | | | | | | | |
Interest rate contracts | | $ | 3,000 | | | $ | 55 | | | $ | 3,000 | | | $ | 44 | | | | | | | | | | | | | |
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Instruments not designated as accounting hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 16,859 | | | $ | 48 | | | $ | 16,131 | | | $ | 25 | | | | | | | | | | | | | |
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 currency and interest rates change. 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. |
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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 December 28, 2013, the Company received $165 million of cash collateral related to the derivative instruments under its collateral security arrangements, which were recorded as accrued expenses in the Condensed Consolidated Balance Sheet. As of September 28, 2013, the Company posted cash collateral related to the derivative instruments under its collateral security arrangements of $164 million, which it recorded as other current assets in the Condensed 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 December 28, 2013 or September 28, 2013. |
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in its Condensed Consolidated Balance Sheets. As of December 28, 2013 and September 28, 2013, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $356 million and $333 million, respectively, resulting in net derivative liabilities of $66 million and $57 million, respectively. |
The following tables show the Company’s derivative instruments at gross fair value as reflected in the Condensed Consolidated Balance Sheets as of December 28, 2013 and September 28, 2013 (in millions): |
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| | December 28, 2013 | | | | | | | | | | | | | | | | | |
| | Fair Value of | | | Fair Value of | | | Total | | | | | | | | | | | | | | | | | |
Derivatives | Derivatives | Fair | | | | | | | | | | | | | | | | |
Designated | Not Designated | Value | | | | | | | | | | | | | | | | |
as Hedge | as Hedge | | | | | | | | | | | | | | | | | |
Instruments | Instruments | | | | | | | | | | | | | | | | | |
Derivative assets (a): | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 263 | | | $ | 48 | | | $ | 311 | | | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | 55 | | | $ | 0 | | | $ | 55 | | | | | | | | | | | | | | | | | |
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Derivative liabilities (b): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 231 | | | $ | 36 | | | $ | 267 | | | | | | | | | | | | | | | | | |
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| | September 28, 2013 | | | | | | | | | | | | | | | | | |
| | Fair Value of | | | Fair Value of | | | Total | | | | | | | | | | | | | | | | | |
Derivatives | Derivatives | Fair | | | | | | | | | | | | | | | | |
Designated | Not Designated | Value | | | | | | | | | | | | | | | | |
as Hedge | as Hedge | | | | | | | | | | | | | | | | | |
Instruments | Instruments | | | | | | | | | | | | | | | | | |
Derivative assets (a): | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 145 | | | $ | 25 | | | $ | 170 | | | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | 44 | | | $ | 0 | | | $ | 44 | | | | | | | | | | | | | | | | | |
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Derivative liabilities (b): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 389 | | | $ | 46 | | | $ | 435 | | | | | | | | | | | | | | | | | |
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(a) | The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Condensed Consolidated Balance Sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(b) | The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Condensed Consolidated Balance Sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The following table shows the pre-tax effect of the Company’s derivative instruments designated as cash flow and net investment hedges in the Condensed Consolidated Statements of Operations for the three months ended December 28, 2013 and December 29, 2012 (in millions): |
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| | Three Months Ended | | | |
| | Gains/(Losses) | | | Gains/(Losses) | | | Gains/(Losses) Recognized - Ineffective | | | |
Recognized in OCI - | Reclassified from AOCI | Portion and Amount Excluded from | | |
Effective Portion | into Net Income - | Effectiveness Testing | | |
| Effective Portion | | | |
| | December 28, | | | December 29, | | | December 28, | | | December 29, | | | Financial Statement | | December 28, | | | December 29, | | | |
2013 | 2012 | 2013 | 2012 | Line Item | 2013 | 2012 | | |
Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 264 | | | $ | 205 | | | $ | (74 | ) | | $ | (159 | ) | | Other income/(expense), net | | $ | (3 | ) | | $ | 9 | | | |
Interest rate contracts | | | 21 | | | | 0 | | | | (4 | ) | | | 0 | | | Other income/(expense), net | | | 0 | | | | 0 | | | |
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Net investment hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | 24 | | | | 36 | | | | 0 | | | | 0 | | | Other income/(expense), net | | | 1 | | | | 0 | | | |
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Total | | $ | 309 | | | $ | 241 | | | $ | (78 | ) | | $ | (159 | ) | | | | $ | (2 | ) | | $ | 9 | | | |
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Accounts Receivable |
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 that are not covered by collateral, third-party financing arrangements or credit insurance. There were no customers that accounted for 10% or more of the Company’s trade receivables as of December 28, 2013. 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%. The Company’s cellular network carriers accounted for 48% and 68% of trade receivables as of December 28, 2013 and September 28, 2013, respectively. |
Additionally, 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. Vendor non-trade receivables from two of the Company’s vendors accounted for 62% and 15% of total non-trade receivables as of December 28, 2013 and three of the Company’s vendors accounted for 47%, 21% and 15% of total non-trade receivables as of September 28, 2013. |