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 26, 2015 and September 26, 2015 (in millions):


	December 26, 2015
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	11,152	$	0	$	0		$	11,152	$	11,152	$	0	$	0

Level 1 ⁽¹⁾:
Money market funds		3,517		0		0			3,517		3,517		0		0
Mutual funds		1,772		0		(206	)		1,566		0		1,566		0

Subtotal		5,289		0		(206	)		5,083		3,517		1,566		0


Level 2 ⁽²⁾:
U.S. Treasury securities		40,739		43		(108	)		40,674		203		1,602		38,869
U.S. agency securities		5,307		2		(10	)		5,299		469		865		3,965
Non-U.S. government securities		6,530		31		(201	)		6,360		0		454		5,906
Certificates of deposit and time deposits		2,986		0		0			2,986		258		1,424		1,304
Commercial paper		2,236		0		0			2,236		1,089		895		252
Corporate securities		125,000		132		(1,684	)		123,448		1		14,463		108,984
Municipal securities		946		3		(1	)		948		0		28		920
Mortgage- and asset-backed securities		17,635		23		(105	)		17,553		0		88		17,465

Subtotal		201,379		234		(2,109	)		199,504		2,020		19,819		177,665


Total	$	217,820	$	234	$	(2,315	)	$	215,739	$	16,689	$	21,385	$	177,665


	September 26, 2015
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	11,389	$	0	$	0		$	11,389	$	11,389	$	0	$	0

Level 1 ⁽¹⁾:
Money market funds		1,798		0		0			1,798		1,798		0		0
Mutual funds		1,772		0		(144	)		1,628		0		1,628		0

Subtotal		3,570		0		(144	)		3,426		1,798		1,628		0


Level 2 ⁽²⁾:
U.S. Treasury securities		34,902		181		(1	)		35,082		0		3,498		31,584
U.S. agency securities		5,864		14		0			5,878		841		767		4,270
Non-U.S. government securities		6,356		45		(167	)		6,234		43		135		6,056
Certificates of deposit and time deposits		4,347		0		0			4,347		2,065		1,405		877
Commercial paper		6,016		0		0			6,016		4,981		1,035		0
Corporate securities		116,908		242		(985	)		116,165		3		11,948		104,214
Municipal securities		947		5		0			952		0		48		904
Mortgage- and asset-backed securities		16,121		87		(31	)		16,177		0		17		16,160

Subtotal		191,461		574		(1,184	)		190,851		7,933		18,853		164,065


Total	$	206,420	$	574	$	(1,328	)	$	205,666	$	21,120	$	20,481	$	164,065

⁽¹⁾

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

⁽²⁾

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

The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term marketable securities generally range from one to five years.

As of December 26, 2015, 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 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.

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 re-measurement 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 December 26, 2015 are expected to be recognized within nine years.

Cash Flow Hedges

The effective portions of cash flow hedges are recorded in accumulated other comprehensive income (“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 immediately into other income/(expense), net. 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 (“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.

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 26, 2015 and September 26, 2015 (in millions):


	December 26, 2015
	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	$	1,021	$	275	$	1,296
Interest rate contracts	$	313	$	0	$	313

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	877	$	157	$	1,034
Interest rate contracts	$	30	$	0	$	30


	September 26, 2015
	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	$	1,442	$	109	$	1,551
Interest rate contracts	$	394	$	0	$	394

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	905	$	94	$	999
Interest rate contracts	$	13	$	0	$	13

⁽¹⁾

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.

⁽²⁾

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 gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges on OCI and the Condensed Consolidated Statements of Operations for the three months ended December 26, 2015 and December 27, 2014 (in millions):


	December 26, 2015			December 27, 2014
Gains/(Losses) recognized in OCI – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	326		$	2,501
Interest rate contracts		8			(4	)

Total	$	334		$	2,497


Net investment hedges:
Foreign exchange contracts	$	0		$	118
Foreign currency debt		10			0

Total	$	10		$	118


Gains/(Losses) reclassified from AOCI into net income – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	515		$	667
Interest rate contracts		(4	)		(4	)

Total	$	511		$	663


Gains/(Losses) on derivative instruments:
Fair value hedges:
Interest rate contracts	$	(111	)	$	117


Gains/(Losses) related to hedged items:
Fair value hedges:
Interest rate contracts	$	111		$	(117	)

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 26, 2015 and September 26, 2015 (in millions):


	December 26, 2015				September 26, 2015
	Notional Amount		Credit Risk Amount		Notional Amount		Credit Risk Amount
Instruments designated as accounting hedges:
Foreign exchange contracts	$	59,305	$	1,021	$	70,054	$	1,385
Interest rate contracts	$	18,750	$	313	$	18,750	$	394

Instruments not designated as accounting hedges:
Foreign exchange contracts	$	48,365	$	275	$	49,190	$	109

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 received by the Company related to derivative instruments under its collateral security arrangements was $660 million as of December 26, 2015 and $1.0 billion as of September 26, 2015.

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 26, 2015 and September 26, 2015, 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 $1.7 billion and $2.2 billion, respectively, resulting in net derivative liabilities of $116 million and $78 million, respectively.

Accounts Receivable

Trade Receivables

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. As of December 26, 2015, there was no single customer that accounted for 10% or more of total trade receivables. As of September 26, 2015, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 12%. The Company’s cellular network carriers accounted for 50% and 71% of trade receivables as of December 26, 2015 and September 26, 2015, 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. Vendor non-trade receivables from three of the Company’s vendors accounted for 51%, 14% and 10% of total vendor non-trade receivables as of December 26, 2015 and three of the Company’s vendors accounted for 38%, 18% and 14% of total vendor non-trade receivables as of September 26, 2015.