Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables show the Company’s cash and available-for-sale securities by significant investment category as of March 31, 2018 and September 30, 2017 (in millions):



	March 31, 2018
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	9,934	$	—	$	—		$	9,934	$	9,934	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	5,742		—		—			5,742		5,742		—		—
Mutual funds	800		—		(105		)	695		—		695		—
Subtotal	6,542		—		(105		)	6,437		5,742		695		—

Level 2 ⁽²⁾:
U.S. Treasury securities	56,737		1		(932		)	55,806		6,379		9,106		40,321
U.S. agency securities	5,539		—		(39		)	5,500		2,837		588		2,075
Non-U.S. government securities	8,247		88		(137		)	8,198		—		477		7,721
Certificates of deposit and time deposits	7,266		—		—			7,266		4,611		2,021		634
Commercial paper	17,417		—		—			17,417		15,455		1,962		—
Corporate securities	138,036		176		(1,975		)	136,237		101		27,431		108,705
Municipal securities	973		—		(11		)	962		—		166		796
Mortgage- and asset-backed securities	19,966		9		(506		)	19,469		—		435		19,034
Subtotal	254,181		274		(3,600		)	250,855		29,383		42,186		179,286

Total	$	270,657	$	274	$	(3,705	)	$	267,226	$	45,059	$	42,881	$	179,286



	September 30, 2017
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	7,982	$	—	$	—		$	7,982	$	7,982	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	6,534		—		—			6,534		6,534		—		—
Mutual funds	799		—		(88		)	711		—		711		—
Subtotal	7,333		—		(88		)	7,245		6,534		711		—

Level 2 ⁽²⁾:
U.S. Treasury securities	55,254		58		(230		)	55,082		865		17,228		36,989
U.S. agency securities	5,162		2		(9		)	5,155		1,439		2,057		1,659
Non-U.S. government securities	7,827		210		(37		)	8,000		9		123		7,868
Certificates of deposit and time deposits	5,832		—		—			5,832		1,142		3,918		772
Commercial paper	3,640		—		—			3,640		2,146		1,494		—
Corporate securities	152,724		969		(242		)	153,451		172		27,591		125,688
Municipal securities	961		4		(1		)	964		—		114		850
Mortgage- and asset-backed securities	21,684		35		(175		)	21,544		—		656		20,888
Subtotal	253,084		1,278		(694		)	253,668		5,773		53,181		194,714

Total	$	268,399	$	1,278	$	(782	)	$	268,895	$	20,289	$	53,892	$	194,714


(1)	Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.


(2)	Level 2 fair value estimates are 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 maturities of the Company’s long-term marketable securities generally range from one to five years.

The following tables show information about the Company’s marketable securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of March 31, 2018 and September 30, 2017 (in millions):



	March 31, 2018
	Continuous Unrealized Losses
	Less than 12 Months			12 Months or Greater			Total
Fair value of marketable securities	$	159,198		$	37,266		$	196,464
Unrealized losses	$	(2,633	)	$	(1,072	)	$	(3,705	)



	September 30, 2017
	Continuous Unrealized Losses
	Less than 12 Months			12 Months or Greater			Total
Fair value of marketable securities	$	101,986		$	8,290		$	110,276
Unrealized losses	$	(596	)	$	(186	)	$	(782	)

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 generally requires investments 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. As of March 31, 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.

Derivative Financial Instruments

The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company may choose not to hedge certain 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 or interest rates.

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 may hedge a portion of forecasted foreign currency revenue, and 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 may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. 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. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.

The Company may also enter into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.

The Company may enter into interest rate swaps, options or other instruments to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Company’s term debt or investments. The Company designates these instruments as either cash flow or fair value hedges. The Company’s hedged interest rate transactions as of March 31, 2018 are expected to be recognized within 10 years.

The Company may enter into foreign currency swaps to manage currency risk on its foreign currency–denominated term debt. These instruments may offset a portion of the foreign currency remeasurement gains or losses on the Company’s term debt and related interest payments. The Company designates these instruments as cash flow hedges. The Company’s hedged term debt–related foreign currency transactions as of March 31, 2018 are expected to be recognized within 24 years.

Cash Flow Hedges

The effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. 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 in other income/(expense), net in the same period as the related income or expense is recognized. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.

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 into other income/(expense), net in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as hedges of other transactions.

Net Investment Hedges

The effective portions of net investment hedges are recorded in other comprehensive income/(loss) (“OCI”) as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other income/(expense), net.

Fair Value Hedges

Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item.

Non-Designated Derivatives

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. As a result, during the three- and six-month periods ended March 31, 2018, respectively, the Company recognized losses of $203 million and $142 million in net sales, losses of $247 million and $212 million in cost of sales and losses of $331 million and $373 million in other income/(expense), net. During the three- and six-month periods ended April 1, 2017, respectively, the Company recognized a loss of $67 million and a gain of $206 million in net sales, a loss of $253 million and a gain of $79 million in cost of sales and a loss of $76 million and a gain of $432 million in other income/(expense), net.

The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of March 31, 2018 and September 30, 2017 (in millions):



	March 31, 2018
	Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments		Total Fair Value
Derivative assets ⁽¹⁾:
Foreign exchange contracts	$	1,361	$	290	$	1,651
Interest rate contracts	$	12	$	—	$	12

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	651	$	514	$	1,165
Interest rate contracts	$	1,052	$	—	$	1,052



	September 30, 2017
	Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments		Total Fair Value
Derivative assets⁽¹⁾:
Foreign exchange contracts	$	1,049	$	363	$	1,412
Interest rate contracts	$	218	$	—	$	218

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	759	$	501	$	1,260
Interest rate contracts	$	303	$	—	$	303


(1)	The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Condensed Consolidated Balance Sheets.


(2)	The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses and other non-current liabilities in the Condensed Consolidated Balance Sheets.

The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges in OCI and the Condensed Consolidated Statements of Operations for the three- and six-month periods ended March 31, 2018 and April 1, 2017 (in millions):



	Three Months Ended						Six Months Ended
	March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Gains/(Losses) recognized in OCI – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	37		$	(317	)	$	190		$	1,410
Interest rate contracts	—			2			1			9
Total	$	37		$	(315	)	$	191		$	1,419

Net investment hedges:
Foreign currency debt	$	(33	)	$	(85	)	$	(31	)	$	37

Gains/(Losses) reclassified from AOCI into net income – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	287		$	1,344		$	163		$	833
Interest rate contracts	2			(2		)	3			(3		)
Total	$	289		$	1,342		$	166		$	830

Gains/(Losses) on derivative instruments:
Fair value hedges:
Interest rate contracts	$	(674	)	$	(50	)	$	(948	)	$	(922	)

Gains/(Losses) related to hedged items:
Fair value hedges:
Fixed-rate debt	$	674		$	50		$	948		$	922

The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of March 31, 2018 and September 30, 2017 (in millions):



	March 31, 2018				September 30, 2017
	Notional Amount		Credit Risk Amount		Notional Amount		Credit Risk Amount
Instruments designated as accounting hedges:
Foreign exchange contracts	$	48,122	$	1,361	$	56,156	$	1,049
Interest rate contracts	$	35,250	$	12	$	33,000	$	218

Instruments not designated as accounting hedges:
Foreign exchange contracts	$	61,179	$	290	$	69,774	$	363

The notional 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 exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional 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 in its Condensed Consolidated Balance Sheets. As of March 31, 2018, the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $241 million, which was recorded as other current assets in the Condensed Consolidated Balance Sheet. As of September 30, 2017, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $35 million, which was recorded as accrued expenses in the Condensed Consolidated Balance Sheet.

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. As of March 31, 2018 and September 30, 2017, 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 $2.1 billion and $1.4 billion, respectively, resulting in a net derivative liability of $313 million and a net derivative asset of $32 million, respectively.

Accounts Receivable

Trade Receivables

The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, 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 or third-party credit support 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.

The Company had no customers that individually represented 10% or more of total trade receivables as of March 31, 2018. As of September 30, 2017, the Company had two customers that individually represented 10% or more of total trade receivables, each of which accounted for 10%. The Company’s cellular network carriers accounted for 48% and 59% of total trade receivables as of March 31, 2018 and September 30, 2017, respectively.

Vendor Non-Trade Receivables

The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of March 31, 2018, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 44%, 20% and 11%. As of September 30, 2017, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42%, 19% and 10%.