Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in other comprehensive income/(loss) (“OCI”).

The Company’s investments in mutual funds represent its only marketable equity securities and are classified as short-term based on the nature of the securities and their availability for use in current operations. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income/(expense), net.

The following tables show the Company’s cash and marketable securities by significant investment category as of December 29, 2018 and September 29, 2018 (in millions):



	December 29, 2018
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	9,489	$	—	$	—		$	9,489	$	9,489	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	6,424		—		—			6,424		6,424		—		—
Mutual funds	682		—		—			682		—		682		—
Subtotal	7,106		—		—			7,106		6,424		682		—

Level 2 ⁽²⁾:
U.S. Treasury securities	46,191		6		(729		)	45,468		3,923		6,415		35,130
U.S. agency securities	9,731		—		(31		)	9,700		7,552		597		1,551
Non-U.S. government securities	23,460		48		(289		)	23,219		1,895		4,129		17,195
Certificates of deposit and time deposits	5,349		—		—			5,349		3,705		1,348		296
Commercial paper	11,953		—		—			11,953		11,679		274		—
Corporate debt securities	117,260		32		(2,387		)	114,905		104		27,134		87,667
Municipal securities	953		1		(7		)	947		—		187		760
Mortgage- and asset-backed securities	17,320		7		(428		)	16,899		—		890		16,009
Subtotal	232,217		94		(3,871		)	228,440		28,858		40,974		158,608

Total ⁽³⁾	$	248,812	$	94	$	(3,871	)	$	245,035	$	44,771	$	41,656	$	158,608



	September 29, 2018
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	11,575	$	—	$	—		$	11,575	$	11,575	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	8,083		—		—			8,083		8,083		—		—
Mutual funds	799		—		(116		)	683		—		683		—
Subtotal	8,882		—		(116		)	8,766		8,083		683		—

Level 2 ⁽²⁾:
U.S. Treasury securities	47,296		—		(1,202		)	46,094		1,613		7,606		36,875
U.S. agency securities	4,127		—		(48		)	4,079		1,732		360		1,987
Non-U.S. government securities	21,601		49		(250		)	21,400		—		3,355		18,045
Certificates of deposit and time deposits	3,074		—		—			3,074		1,247		1,330		497
Commercial paper	2,573		—		—			2,573		1,663		910		—
Corporate debt securities	123,001		152		(2,038		)	121,115		—		25,162		95,953
Municipal securities	946		—		(12		)	934		—		178		756
Mortgage- and asset-backed securities	18,105		8		(623		)	17,490		—		804		16,686
Subtotal	220,723		209		(4,173		)	216,759		6,255		39,705		170,799

Total ⁽³⁾	$	241,180	$	209	$	(4,289	)	$	237,100	$	25,913	$	40,388	$	170,799


(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.


(3)	As of December 29, 2018 and September 29, 2018, total cash, cash equivalents and marketable securities included $19.9 billion and $20.3 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.

The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s long-term marketable debt 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 December 29, 2018 and September 29, 2018 (in millions):



	December 29, 2018
	Continuous Unrealized Losses
	Less than 12 Months			12 Months or Greater			Total
Fair value of marketable debt securities	$	53,336		$	127,006		$	180,342
Unrealized losses	$	(1,153	)	$	(2,718	)	$	(3,871	)



	September 29, 2018
	Continuous Unrealized Losses
	Less than 12 Months			12 Months or Greater			Total
Fair value of marketable securities	$	126,238		$	60,599		$	186,837
Unrealized losses	$	(2,400	)	$	(1,889	)	$	(4,289	)

The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating a marketable debt security 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 security before recovery of the security’s cost basis. As of December 29, 2018, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.

Non-Marketable Securities

The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values, and has elected to apply the measurement alternative. As such, the Company’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. Gains and losses on non-marketable equity securities are recognized in other income/(expense), net. As of December 29, 2018, the Company’s non-marketable equity securities had a carrying value of $2.2 billion.

The Company holds a non-marketable debt security that is classified and accounted for as held-to-maturity. As of December 29, 2018, the Company’s non-marketable debt security had an amortized cost basis and carrying value of $1.5 billion.

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, net investments in certain foreign subsidiaries, and 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 or 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 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 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 generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.

To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of 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 hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.

To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of December 29, 2018, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 24 years.

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

To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of December 29, 2018, the Company’s hedged interest rate transactions are expected to be recognized within 9 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. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. 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 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. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.

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 in the same line in the Condensed Consolidated Statements of Operations.

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 months ended December 29, 2018, the Company recognized a gain of $255 million in net sales, a gain of $175 million in cost of sales and a gain of $723 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 December 29, 2018 and September 29, 2018 (in millions):



	December 29, 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	$	1,110	$	419	$	1,529
Interest rate contracts	$	22	$	—	$	22

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	701	$	345	$	1,046
Interest rate contracts	$	821	$	—	$	821



	September 29, 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	$	1,015	$	259	$	1,274

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	543	$	137	$	680
Interest rate contracts	$	1,456	$	—	$	1,456


(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 other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheets.

The Company classifies cash flows related to derivative financial instruments as operating activities in its Condensed Consolidated Statements of Cash Flows.

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 months ended December 29, 2018 and December 30, 2017 (in millions):



	Three Months Ended
	December 29, 2018			December 30, 2017
Gains/(Losses) recognized in OCI – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	(478	)	$	153
Interest rate contracts	—			1
Total	$	(478	)	$	154

Net investment hedges:
Foreign currency debt	$	(16	)	$	2

Gains/(Losses) reclassified from AOCI into net income – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	(118	)	$	(124	)
Interest rate contracts	(1		)	1
Total	$	(119	)	$	(123	)

Gains/(Losses) on derivative instruments:
Fair value hedges:
Foreign exchange contracts	$	402		$	—
Interest rate contracts	657			(274		)
Total	$	1,059		$	(274	)

Gains/(Losses) related to hedged items:
Fair value hedges:
Marketable securities	$	(402	)	$	—
Fixed-rate debt	(657		)	274
Total	$	(1,059	)	$	274

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 December 29, 2018 and September 29, 2018 (in millions):



	December 29, 2018				September 29, 2018
	Notional Amount		Credit Risk Amount		Notional Amount		Credit Risk Amount
Instruments designated as accounting hedges:
Foreign exchange contracts	$	56,000	$	1,110	$	65,368	$	1,015
Interest rate contracts	$	33,250	$	22	$	33,250	$	—

Instruments not designated as accounting hedges:
Foreign exchange contracts	$	82,013	$	419	$	63,062	$	259

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. The net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $56 million and $1.0 billion as of December 29, 2018 and September 29, 2018, respectively, which were recorded as other current assets in the Condensed Consolidated Balance Sheets.

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 December 29, 2018 and September 29, 2018, 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 $1.9 billion and $2.1 billion, respectively, resulting in a net derivative liability of $260 million and a net derivative asset of $138 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.

As of December 29, 2018, the Company had no customers that individually represented 10% or more of total trade receivables. As of September 29, 2018, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 10%. The Company’s cellular network carriers accounted for 45% and 59% of total trade receivables as of December 29, 2018 and September 29, 2018, 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 December 29, 2018, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 56% and 15%. As of September 29, 2018, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 62% and 12%.