10-Q 1 goog10-qq32014.htm 10-Q GOOG 10-Q Q3 2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
___________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-36380
___________________________________________________
Google Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________
Delaware
77-0493581
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1600 Amphitheatre Parkway
Mountain View, CA 94043
(Address of principal executive offices, including zip code)
(650) 253-0000
(Registrant’s telephone number, including area code) 
___________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
  
Large accelerated filer  ý
  
Accelerated filer  ¨
  
 
Non-accelerated filer (Do not check if a smaller reporting company)  ¨             Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
At October 16, 2014, there were 284,816,184 shares of Google’s Class A common stock outstanding, 54,210,195 shares of Google’s Class B common stock outstanding and 339,339,275 Class C capital stock outstanding.





Google Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2014
TABLE OF CONTENTS

 
 
Page No.
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 6
 
 
 


i


NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;
our plans to continue to invest in new businesses, products and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions;
seasonal fluctuations in internet usage and advertiser expenditures, traditional retail seasonality and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results;
the potential for declines in our revenue growth rate;
our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network Members’ websites, which will have a positive impact on our operating margins;
our expectation that we will continue to pay most of the fees we receive from advertisers on our Google Network Members’ websites to our Google Network Members;
our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks;
fluctuations in aggregate paid clicks and average cost-per-click;
our belief that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates;
the expected increase of costs related to hedging activities under our foreign exchange risk management program;
our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues;
our potential exposure in connection with pending investigations, proceedings, and other contingencies;
our expectation that our traffic acquisition costs will fluctuate in the future;
our continued investments in international markets;
estimates of our future compensation expenses;
fluctuations in our effective tax rate;
the sufficiency of our sources of funding;
our payment terms to certain advertisers, which may increase our working capital requirements;
fluctuations in our capital expenditures;
our expectations regarding the trading price of our Class A common stock and Class C capital stock; and
our expectations about the disposition of the Motorola Mobile business;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (SEC). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, “Google,” “we,” “our,” and similar terms include Google Inc. and its subsidiaries, unless the context indicates otherwise.
“Google” and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

1


PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
Google Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts which are reflected in thousands
and par value per share amounts)
 
As of
December 31,
2013
 
As of
September 30,
2014
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
18,898

 
$
15,605

Marketable securities
39,819

 
46,552

Total cash, cash equivalents, and marketable securities (including securities loaned of $5,059 and $4,219)
58,717

 
62,157

Accounts receivable, net of allowance of $631 and $230
8,882

 
8,237

Inventories
426

 
279

Receivable under reverse repurchase agreements
100

 
825

Deferred income taxes, net
1,526

 
1,372

Income taxes receivable, net
408

 
957

Prepaid revenue share, expenses and other assets
2,827

 
2,700

Assets held for sale
0

 
3,588

Total current assets
72,886

 
80,115

Prepaid revenue share, expenses and other assets, non-current
1,976

 
2,010

Non-marketable equity investments
1,976

 
2,470

Property and equipment, net
16,524

 
20,981

Intangible assets, net
6,066

 
4,744

Goodwill
11,492

 
15,461

Total assets
$
110,920

 
$
125,781

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,453

 
$
1,368

Short-term debt
3,009

 
2,009

Accrued compensation and benefits
2,502

 
2,428

Accrued expenses and other current liabilities
3,755

 
3,933

Accrued revenue share
1,729

 
1,761

Securities lending payable
1,374

 
3,402

Deferred revenue
1,062

 
820

Income taxes payable, net
24

 
0

Liabilities held for sale
0

 
2,199

Total current liabilities
15,908

 
17,920

Long-term debt
2,236

 
3,230

Deferred revenue, non-current
139

 
154

Income taxes payable, non-current
2,638

 
3,117

Deferred income taxes, net, non-current
1,947

 
1,554

Other long-term liabilities
743

 
991

Stockholders’ equity:
 
 
 
Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding
0

 
0

Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 671,664 (Class A 279,325, Class B 56,507, Class C 335,832) and par value of $672 (Class A $279, Class B $57, Class C $336) and 678,277 (Class A 284,674, Class B 54,321, Class C 339,282) and par value of $678 (Class A $285, Class B $54, Class C $339) shares issued and outstanding
25,922

 
27,948

Accumulated other comprehensive income (loss)
125

 
(82
)
Retained earnings
61,262

 
70,949

Total stockholders’ equity
87,309

 
98,815

Total liabilities and stockholders’ equity
$
110,920

 
$
125,781

See accompanying notes.

2


Google Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share amounts which are reflected in thousands and per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
 
(unaudited)
Revenues
$
13,754

 
$
16,523

 
$
39,812

 
$
47,898

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues (1)
5,409

 
6,695

 
15,740

 
18,770

Research and development (1)
1,821

 
2,655

 
5,204

 
7,019

Sales and marketing (1)
1,628

 
2,084

 
4,646

 
5,754

General and administrative (1)
1,135

 
1,365

 
3,248

 
4,258

Total costs and expenses
9,993

 
12,799

 
28,838

 
35,801

Income from operations
3,761

 
3,724

 
10,974

 
12,097

Interest and other income, net
14

 
133

 
384

 
635

Income from continuing operations before income taxes
3,775

 
3,857

 
11,358

 
12,732

Provision for income taxes
612

 
859

 
1,893

 
2,594

Net income from continuing operations
3,163

 
2,998

 
9,465

 
10,138

Net income (loss) from discontinued operations (1)
(193
)
 
(185
)
 
79

 
(451
)
Net income
$
2,970

 
$
2,813

 
$
9,544

 
$
9,687

Net income (loss) per share -- basic:
 
 
 
 
 
 
 
Continuing operations
$
4.74

 
$
4.42

 
$
14.25

 
$
15.02

Discontinued operations
(0.29
)
 
(0.27
)
 
0.12

 
(0.67
)
Net income per share - basic
$
4.45

 
$
4.15

 
$
14.37

 
$
14.35

Net income (loss) per share -- diluted:
 
 
 
 
 
 
 
Continuing operations
$
4.66

 
$
4.36

 
$
14.00

 
$
14.77

Discontinued operations
(0.28
)
 
(0.27
)
 
0.12

 
(0.66
)
Net income per share - diluted
$
4.38

 
$
4.09

 
$
14.12

 
$
14.11

 
 
 
 
 
 
 
 
Shares used in per share calculation - basic
667,232

 
677,097

 
664,366

 
674,933

Shares used in per share calculation - diluted
678,470

 
688,215

 
676,156

 
686,597

______________________
 
 
 
 
 
 
 
(1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenues
$
133

 
$
169

 
$
342

 
$
364

Research and development
436

 
666

 
1,175

 
1,569

Sales and marketing
155

 
197

 
398

 
502

General and administrative
132

 
223

 
339

 
539

Discontinued operations
30

 
35

 
187

 
118

Total stock-based compensation expense
$
886

 
$
1,290

 
$
2,441

 
$
3,092

See accompanying notes.

3



Google Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
    
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
 
(unaudited)
Net income
$
2,970

 
$
2,813

 
$
9,544

 
$
9,687

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
261

 
(677
)
 
57

 
(623
)
Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
257

 
(195
)
 
(402
)
 
250

Less: reclassification adjustment for net (gains) losses included in net income
21

 
(15
)
 
(133
)
 
(122
)
Net change (net of tax effect of $31, $66, $208 and $38)
278

 
(210
)
 
(535
)
 
128

Cash flow hedges:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
(28
)
 
310

 
97

 
304

Less: reclassification adjustment for net gains included in net income
(14
)
 
(7
)
 
(58
)
 
(16
)
Net change (net of tax effect of $24, $122, $23 and $113)
(42
)
 
303

 
39

 
288

Other comprehensive income (loss)
497

 
(584
)
 
(439
)
 
(207
)
Comprehensive income
$
3,467

 
$
2,229

 
$
9,105

 
$
9,480

See accompanying notes.

4


Google Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine Months Ended
 
September 30,
 
2013
 
2014
 
(unaudited)
Operating activities
 
 
 
Net income
$
9,544

 
$
9,687

Adjustments:
 
 
 
Depreciation expense and loss on disposal of property and equipment
2,024

 
2,513

Amortization and impairment of intangibles and other assets
879

 
1,199

Stock-based compensation expense
2,441

 
3,092

Excess tax benefits from stock-based award activities
(302
)
 
(467
)
Deferred income taxes
125

 
(498
)
Gain on divestiture of businesses
(705
)
 
0

Gain on equity interest
0

 
(126
)
Gain on sale of non-marketable equity investments
0

 
(139
)
Other
44

 
45

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(454
)
 
(490
)
Income taxes, net
(79
)
 
351

Inventories
(46
)
 
46

Prepaid revenue share, expenses and other assets
(149
)
 
460

Accounts payable
285

 
(113
)
Accrued expenses and other liabilities
(270
)
 
416

Accrued revenue share
8

 
36

Deferred revenue
76

 
0

Net cash provided by operating activities
13,421

 
16,012

Investing activities
 
 
 
Purchases of property and equipment
(5,103
)
 
(7,408
)
Purchases of marketable securities
(31,746
)
 
(43,192
)
Maturities and sales of marketable securities
23,241

 
36,650

Investments in non-marketable equity investments
(471
)
 
(536
)
Cash collateral related to securities lending
220

 
2,029

Investments in reverse repurchase agreements
600

 
(725
)
Proceeds from divestiture of businesses
2,525

 
0

Acquisitions, net of cash acquired, and purchases of intangibles and other assets
(1,328
)
 
(4,632
)
Net cash used in investing activities
(12,062
)
 
(17,814
)
Financing activities
 
 
 
Net payments related to stock-based award activities
(637
)
 
(1,548
)
Excess tax benefits from stock-based award activities
302

 
467

Proceeds from issuance of debt, net of costs
8,350

 
9,167

Repayments of debt
(8,904
)
 
(9,181
)
Net cash used in financing activities
(889
)
 
(1,095
)
Effect of exchange rate changes on cash and cash equivalents
(6
)
 
(236
)
Net increase (decrease) in cash and cash equivalents
464

 
(3,133
)
Cash and cash equivalents at beginning of period
14,778

 
18,898

Reclassification to assets held for sale
0

 
(160
)
Cash and cash equivalents at end of period
$
15,242

 
$
15,605

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for taxes
$
1,304

 
$
2,382

Cash paid for interest
$
36

 
$
56

Non-cash investing and financing activities:
 
 
 
Receipt of Arris shares in connection with divestiture of Motorola Home
$
175

 
$
0

Property under capital lease
$
258

 
$
0

See accompanying notes.


5


Google Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Google Inc. and Summary of Significant Accounting Policies
We were incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. We generate revenues primarily by delivering relevant, cost-effective online advertising.
On January 29, 2014, we entered into an agreement with Lenovo Group Limited (Lenovo) providing for the disposition of the Motorola Mobile business. As such, the financial results of Motorola Mobile are presented as "Net income (loss) from discontinued operations" on the Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2014; and assets and liabilities of Motorola Mobile to be disposed of are presented as "Assets held for sale" and "Liabilities held for sale" on the Consolidated Balance Sheet as of September 30, 2014, respectively.
On April 2, 2014, we completed a two-for-one stock split effected in the form of a stock dividend (the Stock Split). All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the Stock Split. See Notes 11 and 12 for additional information about the Stock Split.
Basis of Consolidation
The consolidated financial statements include the accounts of Google Inc. and our subsidiaries. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of September 30, 2014, the Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2014, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2014, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2014 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2014, our results of operations for the three and nine months ended September 30, 2013 and 2014, and our cash flows for the nine months ended September 30, 2013 and 2014. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 12, 2014.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, inventory valuations, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recent Accounting Pronouncement
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08 (ASU 2014-08) “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both

6


discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. We do not expect the impact of the adoption of ASU 2014-08 to be material to our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10) "Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation". ASU 2014-10 removes the definition of a development stage entity from the Master Glossary of the ASC thereby removing the financial reporting distinction between development stage entities and other reporting entities. The amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application of these amendments is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-10 on our consolidated financial statements.
Prior Period Reclassifications
Reclassifications of prior period amounts related to discontinued operations as a result of the expected Motorola Mobile disposition, and share and per share amounts due to the Stock Split have been made to conform to the current period presentation.

Note 2. Financial Instruments
Fair Value Measurements
We measure our cash equivalents, marketable securities, and foreign currency and interest rate derivative contracts at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
Level 3 - Unobservable inputs that are supported by little or no market activities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.


7


Cash, Cash Equivalents and Marketable Securities
 The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of December 31, 2013 and September 30, 2014 (in millions):
 
 
As of December 31, 2013
 
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
 
$
9,909

 
$
0

 
$
0

 
$
9,909

 
$
9,909

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
 
4,428

 
0

 
0

 
4,428

 
4,428

 
0

U.S. government notes
 
18,276

 
23

 
(37
)
 
18,262

 
2,501

 
15,761

Marketable equity securities
 
197

 
167

 
0

 
364

 
0

 
364

 
 
22,901

 
190

 
(37
)
 
23,054

 
6,929

 
16,125

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
 
1,207

 
0

 
0

 
1,207

 
790

 
417

Money market and other funds(2)
 
1,270

 
0

 
0

 
1,270

 
1,270

 
0

U.S. government agencies
 
4,575

 
3

 
(3
)
 
4,575

 
0

 
4,575

Foreign government bonds
 
1,502

 
5

 
(26
)
 
1,481

 
0

 
1,481

Municipal securities
 
2,904

 
9

 
(36
)
 
2,877

 
0

 
2,877

Corporate debt securities
 
7,300

 
162

 
(67
)
 
7,395

 
0

 
7,395

Agency residential mortgage-backed securities
 
5,969

 
27

 
(187
)
 
5,809

 
0

 
5,809

Asset-backed securities
 
1,142

 
0

 
(2
)
 
1,140

 
0

 
1,140

 
 
25,869

 
206

 
(321
)
 
25,754

 
2,060

 
23,694

Total
 
$
58,679

 
$
396

 
$
(358
)
 
$
58,717

 
$
18,898

 
$
39,819

 
 
As of September 30, 2014
 
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
 
(unaudited)
Cash
 
$
9,311

 
$
0

 
$
0

 
$
9,311

 
$
9,311

 
$
0

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market and other funds
 
2,992

 
0

 
0

 
2,992

 
2,992

 
0

U.S. government notes
 
14,226

 
28

 
(8
)
 
14,246

 
2

 
14,244

Marketable equity securities
 
186

 
154

 
0

 
340

 
0

 
340

 
 
17,404

 
182

 
(8
)
 
17,578

 
2,994

 
14,584

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits(1)
 
2,199

 
0

 
0

 
2,199

 
1,191

 
1,008

Money market and other funds(2)
 
2,099

 
0

 
0

 
2,099

 
2,099

 
0

Fixed-income bond funds(3)
 
385

 
0

 
(19
)
 
366

 
0

 
366

U.S. government agencies
 
4,246

 
3

 
(4
)
 
4,245

 
0

 
4,245

Foreign government bonds
 
1,706

 
12

 
(11
)
 
1,707

 
0

 
1,707

Municipal securities
 
2,893

 
31

 
(4
)
 
2,920

 
10

 
2,910

Corporate debt securities
 
10,561

 
119

 
(74
)
 
10,606

 
0

 
10,606

Agency residential mortgage-backed securities
 
8,008

 
63

 
(88
)
 
7,983

 
0

 
7,983

Asset-backed securities
 
3,145

 
1

 
(3
)
 
3,143

 
0

 
3,143

 
 
35,242

 
229

 
(203
)
 
35,268

 
3,300

 
31,968

Total
 
$
61,957

 
$
411

 
$
(211
)
 
$
62,157

 
$
15,605

 
$
46,552


(1) 
The majority of our time deposits are foreign deposits.


8


(2) 
The balances at December 31, 2013 and September 30, 2014 were related to cash collateral received in connection with our securities lending program, which was invested in reverse repurchase agreements maturing within three months. See section titled "Securities Lending Program" below for further discussion of this program.

(3) 
Fixed-income bond funds consist of mutual funds that primarily invest in corporate and government bonds.
Cash, cash equivalents and marketable securities to be disposed of as a result of the Motorola Mobile disposition were included in "Assets held for sale" on the Consolidated Balance Sheet as of September 30, 2014, and accordingly, are not included in this table.
During the second quarter of 2013, we received approximately $175 million in Arris Group, Inc. (Arris) common stock (10.6 million shares) in connection with the sale of the Motorola Home business (see details in Note 8). These shares are accounted for as available-for-sale marketable equity securities.
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $35 million and $252 million for the three and nine months ended September 30, 2013 and $33 million and $189 million for the three and nine months ended September 30, 2014. We recognized gross realized losses of $61 million and $117 million for the three and nine months ended September 30, 2013 and $15 million and $49 million for the three and nine months ended September 30, 2014. We reflect these gains and losses as a component of "Interest and other income, net" in the accompanying Consolidated Statements of Income.
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions):
 
As of September 30, 2014
 
(unaudited)
Due in 1 year
$
8,854

Due in 1 year through 5 years
22,010

Due in 5 years through 10 years
6,790

Due after 10 years
8,192

Total
$
45,846

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2013 and September 30, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
 
 
As of December 31, 2013
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
U.S. government notes
 
$
4,404

 
$
(37
)
 
$
0

 
$
0

 
$
4,404

 
$
(37
)
U.S. government agencies
 
496

 
(3
)
 
0

 
0

 
496

 
(3
)
Foreign government bonds
 
899

 
(23
)
 
83

 
(3
)
 
982

 
(26
)
Municipal securities
 
1,210

 
(32
)
 
99

 
(4
)
 
1,309

 
(36
)
Corporate debt securities
 
2,583

 
(62
)
 
69

 
(5
)
 
2,652

 
(67
)
Agency residential mortgage-backed securities
 
4,065

 
(167
)
 
468

 
(20
)
 
4,533

 
(187
)
Asset-backed securities
 
643

 
(2
)
 
0

 
0

 
643

 
(2
)
Total
 
$
14,300

 
$
(326
)
 
$
719

 
$
(32
)
 
$
15,019

 
$
(358
)

9


 
 
As of September 30, 2014
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
 
 
 
 
 
(unaudited)
 
 
 
 
U.S. government notes
 
$
3,623

 
$
(4
)
 
$
296

 
$
(4
)
 
$
3,919

 
$
(8
)
U.S. government agencies
 
1,457

 
(4
)
 
0

 
0

 
1,457

 
(4
)
Foreign government bonds
 
480

 
(6
)
 
208

 
(5
)
 
688

 
(11
)
Municipal securities
 
268

 
(1
)
 
198

 
(3
)
 
466

 
(4
)
Corporate debt securities
 
4,901

 
(62
)
 
294

 
(12
)
 
5,195

 
(74
)
Agency residential mortgage-backed securities
 
1,763

 
(5
)
 
2,518

 
(83
)
 
4,281

 
(88
)
Asset-backed securities
 
1,454

 
(2
)
 
189

 
(1
)
 
1,643

 
(3
)
Fixed-income bond funds
 
366

 
(19
)
 
0

 
0

 
366

 
(19
)
Total
 
$
14,312

 
$
(103
)
 
$
3,703

 
$
(108
)
 
$
18,015

 
$
(211
)
We periodically review our marketable debt and equity securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For marketable debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three and nine months ended September 30, 2013 and 2014, we did not recognize any other-than-temporary impairment loss.

Securities Lending Program
From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. We loan selected securities which are collateralized in the form of cash or securities. Cash collateral is invested in reverse repurchase agreements which are collateralized in the form of securities.
We classify loaned securities as cash equivalents or marketable securities and record the cash collateral as an asset with a corresponding liability in the accompanying Consolidated Balance Sheets. We classify reverse repurchase agreements maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase agreements in the accompanying Consolidated Balance Sheets. For security collateral received, we do not record an asset or liability except in the event of counterparty default.
Derivative Financial Instruments
We recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e. gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as "Interest and other income, net", as part of revenues, or as a component of accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, as discussed below.
We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and our anticipated debt issuance. Our program is not used for trading or speculative purposes.
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of December 31, 2013 and September 30, 2014, we received cash collateral related to the derivative instruments under our collateral security arrangements of $35 million and $199 million.
Cash Flow Hedges
We use options designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately $10.0 billion and

10


$13.6 billion as of December 31, 2013 and September 30, 2014. These foreign exchange contracts have maturities of 36 months or less.
In 2012, we entered into forward-starting interest rate swaps, with a total notional amount of $1.0 billion and terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate, that effectively locked in an interest rate on our anticipated debt issuance of $1.0 billion in 2014. We issued $1.0 billion of unsecured senior notes in February 2014 (See details in Note 3). As a result, we terminated the forward-starting interest rate swaps upon the debt issuance. The gain associated with the termination is reported within operating activities in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2014, consistent with the impact of the hedged item.
We reflect gains or losses on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to "Interest and other income, net". Further, we exclude the change in the time value of the options from our assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase as an asset. Thereafter, we recognize changes to this time value in "Interest and other income, net".
As of September 30, 2014, the effective portion of our cash flow hedges before tax effect was $495 million, of which $339 million is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changes in the time value for these forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.2 billion and $1.4 billion as of December 31, 2013 and September 30, 2014.
Starting in the quarter ended September 30, 2014, we used interest rate swaps designated as fair value hedges to hedge interest rate risk for certain fixed rate securities. The notional principal of these contracts was $0 million and $30 million as of December 31, 2013 and September 30, 2014.
Gains and losses on these forward contracts and interest rate swaps are recognized in "Interest and other income, net" along with the offsetting losses and gains of the related hedged items.
Other Derivatives
Other derivatives not designated as hedging instruments consist of forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in "Interest and other income, net" along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $9.4 billion and $6.1 billion at December 31, 2013 and September 30, 2014.
We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in "Interest and other income, net". The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into "Interest and other income, net". The total notional amounts of interest rate contracts outstanding were $13 million at December 31, 2013 and $125 million at September 30, 2014.

11


The fair values of our outstanding derivative instruments were as follows (in millions):
 
 
 
 
As of December 31, 2013
  
 
Balance Sheet Location
 
Fair Value of
Derivatives
Designated as
Hedging Instruments
 
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
 
Total Fair
Value
Derivative Assets:
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid revenue share, expenses and other assets, current and non-current
 
$
133

 
$
12

 
$
145

Interest rate contracts
 
Prepaid revenue share, expenses and other assets, current and non-current
 
87

 
0

 
87

Total
 
 
 
$
220

 
$
12

 
$
232

Derivative Liabilities:
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Accrued expenses and other current liabilities
 
$
0

 
$
4

 
$
4

 
 
 
 
$
0

 
$
4

 
$
4


 
 
 
 
As of September 30, 2014
  
 
Balance Sheet Location
 
Fair Value of
Derivatives
Designated as
Hedging Instruments
 
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
 
Total Fair
Value
 
 
 
 
(unaudited)
Derivative Assets:
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid revenue share, expenses and other assets, current and non-current and assets held for sale
 
$
571

 
$
2

 
$
573

Total
 
 
 
$
571

 
$
2

 
$
573

Derivative Liabilities:
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Accrued expenses, and other current liabilities and liabilities held for sale
 
$
0

 
$
3

 
$
3

Total
 
 
 
$
0

 
$
3

 
$
3


12


The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions):
 
Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship
2013
 
2014
 
2013
 
2014
 
(unaudited)
Foreign exchange contracts
$
(43
)
 
$
436

 
$
87

 
$
458

Interest rate contracts
(1
)
 
0

 
67

 
(31
)
Total
$
(44
)
 
$
436

 
$
154

 
$
427

 
 
Gains Reclassified from AOCI into Income (Effective Portion)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship
Income Statement Location
 
2013
 
2014
 
2013
 
2014
 
 
 
(unaudited)
Foreign exchange contracts
Revenues
 
$
22

 
$
10

 
$
92

 
$
24

Interest rate contracts
Interest and other income,net
 
0

 
1

 
0

 
2

Total
 
 
$
22

 
$
11

 
$
92

 
$
26

 
 
Gains (Losses) Recognized in Income on Derivatives (Amount
Excluded from  Effectiveness Testing and Ineffective Portion) (1)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship
Income Statement Location
 
2013
 
2014
 
2013
 
2014
 
 
 
(unaudited)
Foreign exchange contracts
Interest and
other income, net
 
$
(135
)
 
$
(52
)
 
$
(224
)
 
$
(186
)
Interest rate contracts
Interest and other income, net
 
0

 
0

 
0

 
4

Total
 
 
$
(135
)
 
$
(52
)
 
$
(224
)
 
$
(182
)
 
(1) 
Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.
The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions):
 
 
Gains (Losses) Recognized in Income on Derivatives(2)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Fair Value Hedging Relationship
Income Statement Location
 
2013
 
2014
 
2013
 
2014
 
 
 
(unaudited)
Foreign exchange contracts
Interest and
other income, net
 
$
(49
)
 
$
73

 
$
13

 
$
52

Hedged item
Interest and
other income, net
 
46

 
(75
)
 
(19
)
 
(58
)
Total
 
 
$
(3
)
 
$
(2
)
 
$
(6
)
 
$
(6
)
 

13


(2) 
Losses related to the amount excluded from effectiveness testing of the hedges were $3 million and $6 million for the three and nine months ended September 30, 2013 and $2 million and $6 million for the three and nine months ended September 30, 2014.
The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):
 
Gains (Losses) Recognized in Income on Derivatives
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives Not Designated As Hedging Instruments
Income Statement Location
 
2013
 
2014
 
2013
 
2014
 
 
 
(unaudited)
Foreign exchange contracts
Interest and
other income, net, and net income (loss) from discontinued operations
 
$
(55
)
 
$
172

 
$
102

 
$
59

Interest rate contracts
Interest and
other income, net
 
2

 
2

 
2

 
2

Total
 
 
$
(53
)
 
$
174

 
$
104

 
$
61

 

Offsetting of Derivatives, Securities Lending and Reverse Repurchase Agreements

We present our derivatives, securities lending and reverse repurchase agreements at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2013 and September 30, 2014, information related to these offsetting arrangements was as follows (in millions):

14


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Offsetting of Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
 
Description
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
 Cash Collateral Received
 
Non-Cash Collateral Received
 
Net Assets Exposed
Derivatives
 
$
232

 
$
0

 
$
232

 
$
(2
)
(1) 
$
(35
)
 
$
(52
)
 
$
143

Reverse repurchase agreements
 
1,370

 
0

 
1,370

(2) 
0

 
0

 
(1,370
)
 
0

Total
 
$
1,602

 
$
0

 
$
1,602

 
$
(2
)
 
$
(35
)
 
$
(1,422
)
 
$
143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2014
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
 
Description
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Non-Cash Collateral Received
 
Net Assets Exposed
 
 
(unaudited)
Derivatives
 
$
573

 
$
0

 
$
573

 
$
(1
)
(1) 
$
(180
)
 
$
(269
)
 
$
123

Reverse repurchase agreements
 
2,924

 
0

 
2,924

(2) 
0

 
0

 
(2,924
)
 
0

Total
 
$
3,497

 
$
0

 
$
3,497

 
$
(1
)
 
$
(180
)
 
$
(3,193
)
 
$
123

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1) The balances at December 31, 2013 and September 30, 2014 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.

(2) The balances at December 31, 2013 and September 30, 2014 included $1,270 million and $2,099 million recorded in cash and cash equivalents, respectively, and $100 million and $825 million recorded in receivable under reverse repurchase agreements, respectively.



15


Offsetting of Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
 
Description
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
 Cash Collateral Pledged
 
Non-Cash Collateral Pledged
 
Net Liabilities
Derivatives
 
$
4

 
$
0

 
$
4

 
$
(2
)
(3) 
$
0

 
$
0

 
$
2

Securities lending agreements
 
1,374

 
0

 
1,374

 
0

 
0

 
(1,357
)
 
17

Total
 
$
1,378

 
$
0

 
$
1,378

 
$
(2
)
 
$
0

 
$
(1,357
)
 
$
19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2014
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
 
Description
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
 Cash Collateral Pledged
 
Non-Cash Collateral Pledged
 
Net Liabilities
 
 
(unaudited)
Derivatives
 
$
3

 
$
0

 
$
3

 
$
(1
)
(3) 
$
0

 
$
0

 
$
2

Securities lending agreements
 
3,402

 
0

 
3,402

 
0

 
0

 
(3,347
)
 
55

Total
 
$
3,405

 
$
0

 
$
3,405

 
$
(1
)
 
$
0

 
$
(3,347
)
 
$
57


(3) The balances at December 31, 2013 and September 30, 2014 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
Note 3. Debt
Short-Term Debt
We have a debt financing program of up to $3.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. At December 31, 2013 and September 30, 2014, we had $2.0 billion of outstanding commercial paper recorded as short-term debt with weighted-average interest rates of 0.1%. In conjunction with this program, we have a $3.0 billion revolving credit facility expiring in July 2016. The interest rate for the credit facility is determined based on a formula using certain market rates. At December 31, 2013 and September 30, 2014, we were in compliance with the financial covenant in the credit facility, and no amounts were outstanding under the credit facility at December 31, 2013 and September 30, 2014. The estimated fair value of the commercial paper approximated its carrying value at December 31, 2013 and September 30, 2014.
Long-Term Debt
We issued $1.0 billion of unsecured senior notes (the "2014 Notes") in February 2014 and $3.0 billion of unsecured senior notes in three tranches (collectively, the "2011 Notes") in May 2011. On May 19, 2014, we repaid $1.0 billion on the first tranche of our 2011 Notes upon their maturity. Additionally, we entered into a capital lease obligation in August 2013. The details of these financing arrangements are described in the table below (in millions):

16


 
As of December 31, 2013
 
As of September 30, 2014
 
 
 
(unaudited)
Short-Term Portion of Long-Term Debt
 
 
 
1.25% Notes due on May 19, 2014
$
1,000

 
$
0

Capital Lease Obligation
9

 
9

 Total
$
1,009

 
$
9

 
 
 
 
Long-Term Debt
 
 
 
2.125% Notes due on May 19, 2016
$
1,000

 
$
1,000

3.625% Notes due on May 19, 2021
1,000

 
1,000

3.375% Notes due on February 25, 2024
0

 
1,000

Unamortized discount for the Notes above
(10
)
 
(8
)
Subtotal
1,990

 
2,992

Capital Lease Obligation
246

 
238

Total
$
2,236

 
$
3,230


The effective interest yields of the Notes due in 2016, 2021, and 2024 were 2.241%, 3.734% and 3.377%, respectively. Interest on the 2011 and 2014 Notes is payable semi-annually. The 2011 and 2014 Notes rank equally with each other and with all of our other senior unsecured and unsubordinated indebtedness from time to time outstanding. We may redeem the 2011 and 2014 Notes at any time in whole or in part at specified redemption prices. We are not subject to any financial covenants under the 2011 Notes or the 2014 Notes. We used the net proceeds from the issuance of the 2011 Notes to repay a portion of our outstanding commercial paper and for general corporate purposes. We used the net proceeds from the issuance of the 2014 Notes for the repayment of the portion of the principal amount of our 2011 Notes which matured on May 19, 2014 and for general corporate purposes. The total estimated fair value of the 2011 and 2014 Notes was approximately $3.1 billion at both December 31, 2013 and September 30, 2014. The fair value of the outstanding 2011 and 2014 Notes was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.
In August 2013, we entered into a capital lease obligation on certain property expiring in 2028 with an option to purchase the property in 2016. The effective rate of the capital lease obligation approximates the market rate. The estimated fair value of the capital lease obligation approximated its carrying value at December 31, 2013 and September 30, 2014.
Note 4. Balance Sheet Components
Inventories
Inventories consisted of the following (in millions): 
 
As of December 31, 2013
 
As of September 30, 2014
 
 
 
(unaudited)
Raw materials and work in process
$
115

 
$
0

Finished goods
311

 
279

Inventories
$
426

 
$
279


Inventories to be disposed of as a result of the Motorola Mobile disposition were included in "Assets held for sale" on the Consolidated Balance Sheet as of September 30, 2014, and accordingly, are not included in this table.

17


Property and Equipment
Property and equipment consisted of the following (in millions): 
 
As of December 31, 2013
 
As of September 30, 2014
 
 
 
(unaudited)
Information technology assets
$
9,094

 
$
10,177

Land and buildings
7,488

 
11,616

Construction in progress
5,602

 
5,743

Leasehold improvements
1,576

 
1,677

Furniture and fixtures
77

 
79

Total
23,837

 
29,292

Less: accumulated depreciation and amortization
7,313

 
8,311

Property and equipment, net
$
16,524

 
$
20,981

Property under capital lease with a cost basis of $258 million was included in land and buildings and construction in progress as of September 30, 2014. In October 2014, we completed a purchase of land and office buildings, for total cash consideration of $585 million. We are currently in the process of valuing the assets and evaluating the impact of the purchase on our consolidated financial statements.

Property and equipment to be disposed of as a result of the Motorola Mobile disposition were included in "Assets held for sale" on the Consolidated Balance Sheet as of September 30, 2014, and accordingly, are not included in this table.

Accumulated Other Comprehensive Income (Loss)
The components of AOCI, net of tax, were as follows (in millions, unaudited):
 
Foreign Currency Translation Adjustments
 
Unrealized Gains on Available-for-Sale Investments
 
Unrealized Gains on Cash Flow Hedges
 
Total
Balance as of December 31, 2013
$
16

 
$
50

 
$
59

 
$
125

 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(623
)
 
250

 
304

 
(69
)
Amounts reclassified from AOCI
0

 
(122
)
 
(16
)
 
(138
)
Other comprehensive income (loss)
(623
)
 
128

 
288

 
(207
)
Balance as of September 30, 2014
$
(607
)
 
$
178

 
$
347

 
$
(82
)


18


The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):
 
 
 
 
Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 AOCI Components
 
Location
 
2013
 
2014
 
2013
 
2014
Unrealized gains on available-for-sale investments
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income, net
 
$
(26
)
 
$
18

 
$
135

 
$
140

 
 
Net Income (loss) from discontinued operations
 
0

 
0

 
43

 
0

 
 
Benefit from (provision for) income taxes
 
5

 
(3
)
 
(45
)
 
(18
)
 
 
Net of tax
 
$
(21
)
 
$
15

 
$
133

 
$
122

 
 
 
 
 
 
 
 
 
 
 
Unrealized gains on cash flow hedges
 
 
 


 


 


 


   Foreign exchange contracts
 
Revenue
 
$
22

 
$
10

 
$
92

 
$
24

   Interest rate contracts
 
Interest and other income, net
 
0

 
1

 
0

 
2

 
 
Provision for income taxes
 
(8
)
 
(4
)
 
(34
)
 
(10
)
 
 
Net of tax
 
$
14