Note 2 – Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The following tables show the Company’s cash and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of December 29, 2012 and September 29, 2012 (in millions):


	December 29, 2012
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities

Cash	$	7,080	$	0	$	0		$	7,080	$	7,080	$	0	$	0

Level 1 (a):
Money market funds		3,666		0		0			3,666		3,666		0		0
Mutual funds		3,682		27		(45	)		3,664		0		3,664		0

Subtotal		7,348		27		(45	)		7,330		3,666		3,664		0


Level 2 (b):
U.S. Treasury securities		22,890		21		(2	)		22,909		1,335		6,427		15,147
U.S. agency securities		20,658		45		(3	)		20,700		1,592		3,478		15,630
Non-U.S. government securities		4,684		186		(3	)		4,867		63		741		4,063
Certificates of deposit and time deposits		2,370		1		0			2,371		1,384		224		763
Commercial paper		2,079		0		0			2,079		906		1,029		144
Corporate securities		49,390		554		(15	)		49,929		117		7,407		42,405
Municipal securities		6,053		58		(7	)		6,104		11		695		5,398
Mortgage- and asset-backed securities		13,696		59		(12	)		13,743		0		1		13,742

Subtotal		121,820		924		(42	)		122,702		5,408		20,002		97,292


Total	$	136,248	$	951	$	(87	)	$	137,112	$	16,154	$	23,666	$	97,292


	September 29, 2012
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities

Cash	$	3,109	$	0	$	0		$	3,109	$	3,109	$	0	$	0

Level 1 (a):
Money market funds		1,460		0		0			1,460		1,460		0		0
Mutual funds		2,385		79		(2	)		2,462		0		2,462		0

Subtotal		3,845		79		(2	)		3,922		1,460		2,462		0


Level 2 (b):
U.S. Treasury securities		20,088		21		(1	)		20,108		2,608		3,525		13,975
U.S. agency securities		19,540		58		(1	)		19,597		1,460		1,884		16,253
Non-U.S. government securities		5,483		183		(2	)		5,664		84		1,034		4,546
Certificates of deposit and time deposits		2,189		2		0			2,191		1,106		202		883
Commercial paper		2,112		0		0			2,112		909		1,203		0
Corporate securities		46,261		568		(8	)		46,821		10		7,455		39,356
Municipal securities		5,645		74		0			5,719		0		618		5,101
Mortgage- and asset-backed securities		11,948		66		(6	)		12,008		0		0		12,008

Subtotal		113,266		972		(18	)		114,220		6,177		15,921		92,122


Total	$	120,220	$	1,051	$	(20	)	$	121,251	$	10,746	$	18,383	$	92,122

(a)	The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities.

(b)

The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

The net unrealized gains as of December 29, 2012 and September 29, 2012 are related primarily to long-term marketable securities. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The net realized gains or losses recognized by the Company related to such sales were not significant during the three months ended December 29, 2012 and December 31, 2011. The maturities of the Company’s long-term marketable securities generally range from one to five years.

As of December 29, 2012 and September 29, 2012, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.

As of December 29, 2012, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. During the three months ended December 29, 2012 and December 31, 2011, the Company did not recognize any significant impairment charges.

Derivative Financial Instruments

The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk. The Company may enter into foreign currency forward and option contracts to offset some of the foreign exchange risk on expected future cash flows on certain forecasted revenue and cost of sales, on net investments in certain foreign subsidiaries, and on certain existing assets and liabilities.

To help protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar hedge a portion of forecasted foreign currency revenue. The Company’s subsidiaries whose functional currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases generally up to six 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.

The Company may also enter into foreign currency forward and option contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. However, the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.

The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment of these instruments is based on whether the instruments are designated as hedge or non-hedge instruments. The effective portions of cash flow hedges are recorded in accumulated other comprehensive income (“AOCI”) until the hedged item is recognized in earnings. The effective portions of net investment hedges are recorded in OCI as a part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and net investment hedges are recorded in other income and expense. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.

The Company’s net deferred gain associated with cash flow hedges was not significant as of December 29, 2012. The Company had a net deferred loss associated with cash flow hedges of $240 million, net of taxes, recorded in AOCI as of September 29, 2012. 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. The majority of the Company’s hedged transactions as of December 29, 2012 are expected to occur within six months.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified immediately into other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any significant net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three months ended December 29, 2012 and December 31, 2011.

The Company’s unrealized net gains and losses on net investment hedges, included in the cumulative translation adjustment account of AOCI, were not significant as of December 29, 2012 and September 29, 2012, respectively. The ineffective portions of and amounts excluded from the effectiveness test of net investment hedges are recorded in other income and expense.

The gain/loss recognized in other income and expense for foreign currency forward and option contracts not designated as hedging instruments was not significant during the three months ended December 29, 2012 and December 31, 2011, respectively. These amounts represent the net gain or loss on the derivative contracts and do not include changes in the related exposures, which generally offset a portion of the gain or loss on the derivative contracts.

The following table shows the notional principal amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of December 29, 2012 and September 29, 2012 (in millions):


	December 29, 2012				September 29, 2012
	Notional Principal		Credit Risk Amounts		Notional Principal		Credit Risk Amounts
Instruments designated as accounting hedges:
Foreign exchange contracts	$	33,012	$	455	$	41,970	$	140

Instruments not designated as accounting hedges:
Foreign exchange contracts	$	31,241	$	184	$	13,403	$	12

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency exchange rates at each respective date. The Company’s gross exposure on these transactions may be further mitigated by collateral received from certain counterparties. The Company’s exposure to credit loss and market risk will vary over time as a function of currency exchange rates. Although the table above reflects the notional principal and credit risk amounts of the Company’s foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange 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 reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values. As of December 29, 2012, the Company posted $78 million of cash collateral and received $222 million of cash collateral related to the derivative instruments under its collateral security arrangements, which were recorded as other current assets and accrued expenses in the Condensed Consolidated Balance Sheet, respectively. As of September 29, 2012, the Company posted cash collateral related to the derivative instruments under its collateral security arrangements of $278 million, which it recorded as other current assets in the Condensed Consolidated Balance Sheet. The Company did not have any derivative instruments with credit-risk related contingent features that would require it to post additional collateral as of December 29, 2012 or September 29, 2012.

The following tables show the Company’s derivative instruments at gross fair value as reflected in the Condensed Consolidated Balance Sheets as of December 29, 2012 and September 29, 2012 (in millions):


	December 29, 2012
	Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments		Total Fair Value
Derivative assets (a):
Foreign exchange contracts	$	449	$	184	$	633

Derivative liabilities (b):
Foreign exchange contracts	$	275	$	232	$	507


	September 29, 2012
	Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments		Total Fair Value
Derivative assets (a):
Foreign exchange contracts	$	138	$	12	$	150

Derivative liabilities (b):
Foreign exchange contracts	$	516	$	41	$	557

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

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

The following table shows the pre-tax effect of the Company’s derivative instruments designated as cash flow and net investment hedges in the Condensed Consolidated Statements of Operations for the three months ended December 29, 2012 and December 31, 2011 (in millions):


	Three Months Ended
	Gains/(Losses) Recognized in OCI - Effective Portion				Gains/(Losses) Reclassified from AOCI into Net Income - Effective Portion					Gains/(Losses) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing
	December 29, 2012		December 31, 2011		December 29, 2012 (a)			December 31, 2011 (b)		Location	December 29, 2012		December 31, 2011
Cash flow hedges:
Foreign exchange contracts	$	205	$	135	$	(159	)	$	238	Other income and expense	$	9	$	(69	)
Net investment hedges:
Foreign exchange contracts		36		7		0			0	Other income and expense		0		1

Total	$	241	$	142	$	(159	)	$	238		$	9	$	(68	)

(a)

Includes gains/(losses) reclassified from AOCI into net income for the effective portion of cash flow hedges, of which $(9) million and $(150) million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for the three months ended December 29, 2012. There were no amounts reclassified from AOCI into net income for the effective portion of net investment hedges for the three months ended December 29, 2012.

(b)

Includes gains/(losses) reclassified from AOCI into net income for the effective portion of cash flow hedges, of which $187 million and $51 million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for the three months ended December 31, 2011. There were no amounts reclassified from AOCI into net income for the effective portion of net investment hedges for the three months ended December 31, 2011.

Accounts Receivable

The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses, and education, enterprise and government customers that are not covered by collateral, third-party financing arrangements or credit insurance. There were no customers that accounted for 10% or more of the Company’s trade receivables as of December 29, 2012. As of September 29, 2012, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 14% and the other 10%. The Company’s cellular network carriers accounted for 58% and 66% of trade receivables as of December 29, 2012 and September 29, 2012, respectively.

Additionally, the Company has non-trade receivables from certain of its manufacturing vendors. Vendor non-trade receivables from three of the Company’s vendors accounted for 43%, 17% and 16% of total non-trade receivables as of December 29, 2012 and three of the Company’s vendors accounted for 45%, 21% and 12% of total non-trade receivables as of September 29, 2012.