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 April 1, 2017 and September 24, 2016 (in millions):



	April 1, 2017
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	7,600	$	—	$	—		$	7,600	$	7,600	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	2,742		—		—			2,742		2,742		—		—
Mutual funds	997		—		(120		)	877		—		877		—
Subtotal	3,739		—		(120		)	3,619		2,742		877		—

Level 2 ⁽²⁾:
U.S. Treasury securities	53,365		65		(300		)	53,130		2,280		16,067		34,783
U.S. agency securities	5,680		3		(10		)	5,673		687		3,687		1,299
Non-U.S. government securities	7,151		135		(67		)	7,219		—		193		7,026
Certificates of deposit and time deposits	6,386		—		—			6,386		921		4,665		800
Commercial paper	3,233		—		—			3,233		877		2,356		—
Corporate securities	147,939		643		(449		)	148,133		50		23,992		124,091
Municipal securities	950		3		(3		)	950		—		77		873
Mortgage- and asset-backed securities	21,086		31		(219		)	20,898		—		30		20,868
Subtotal	245,790		880		(1,048		)	245,622		4,815		51,067		189,740

Total	$	257,129	$	880	$	(1,168	)	$	256,841	$	15,157	$	51,944	$	189,740



	September 24, 2016
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Marketable Securities		Long-Term Marketable Securities
Cash	$	8,601	$	—	$	—		$	8,601	$	8,601	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	3,666		—		—			3,666		3,666		—		—
Mutual funds	1,407		—		(146		)	1,261		—		1,261		—
Subtotal	5,073		—		(146		)	4,927		3,666		1,261		—

Level 2 ⁽²⁾:
U.S. Treasury securities	41,697		319		(4		)	42,012		1,527		13,492		26,993
U.S. agency securities	7,543		16		—			7,559		2,762		2,441		2,356
Non-U.S. government securities	7,609		259		(27		)	7,841		110		818		6,913
Certificates of deposit and time deposits	6,598		—		—			6,598		1,108		3,897		1,593
Commercial paper	7,433		—		—			7,433		2,468		4,965		—
Corporate securities	131,166		1,409		(206		)	132,369		242		19,599		112,528
Municipal securities	956		5		—			961		—		167		794
Mortgage- and asset-backed securities	19,134		178		(28		)	19,284		—		31		19,253
Subtotal	222,136		2,186		(265		)	224,057		8,217		45,410		170,430

Total	$	235,810	$	2,186	$	(411	)	$	237,585	$	20,484	$	46,671	$	170,430


(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 Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. 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 April 1, 2017, 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 April 1, 2017 are expected to be recognized within 10 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. As a result, 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 April 1, 2017 and September 24, 2016 (in millions):



	April 1, 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	$	691	$	272	$	963
Interest rate contracts	$	161	$	—	$	161

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	832	$	245	$	1,077
Interest rate contracts	$	354	$	—	$	354



	September 24, 2016
	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	$	518	$	153	$	671
Interest rate contracts	$	728	$	—	$	728

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	935	$	134	$	1,069
Interest rate contracts	$	7	$	—	$	7


(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 in OCI and the Condensed Consolidated Statements of Operations for the three- and six-month periods ended April 1, 2017 and March 26, 2016 (in millions):



	Three Months Ended						Six Months Ended
	April 1, 2017			March 26, 2016			April 1, 2017			March 26, 2016
Gains/(Losses) recognized in OCI – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	(317	)	$	(138	)	$	1,410		$	188
Interest rate contracts	2			(50		)	9			(42		)
Total	$	(315	)	$	(188	)	$	1,419		$	146

Net investment hedges:
Foreign exchange contracts	$	—		$	—		$	—		$	—
Foreign currency debt	(85		)	(87		)	37			(77		)
Total	$	(85	)	$	(87	)	$	37		$	(77	)

Gains/(Losses) reclassified from AOCI into net income – effective portion:
Cash flow hedges:
Foreign exchange contracts	$	1,344		$	668		$	833		$	1,183
Interest rate contracts	(2		)	(3		)	(3		)	(7		)
Total	$	1,342		$	665		$	830		$	1,176

Gains/(Losses) on derivative instruments:
Fair value hedges:
Interest rate contracts	$	(50	)	$	250		$	(922	)	$	139

Gains/(Losses) related to hedged items:
Fair value hedges:
Interest rate contracts	$	50		$	(250	)	$	922		$	(139	)

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 April 1, 2017 and September 24, 2016 (in millions):



	April 1, 2017				September 24, 2016
	Notional Amount		Credit Risk Amount		Notional Amount		Credit Risk Amount
Instruments designated as accounting hedges:
Foreign exchange contracts	$	37,550	$	691	$	44,678	$	518
Interest rate contracts	$	31,000	$	161	$	24,500	$	728

Instruments not designated as accounting hedges:
Foreign exchange contracts	$	50,573	$	272	$	54,305	$	153

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 April 1, 2017, the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $230 million, which was recorded as other current assets in the Condensed Consolidated Balance Sheet. As of September 24, 2016, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $163 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 both April 1, 2017 and September 24, 2016, 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 $1.5 billion, resulting in a net derivative liability of $77 million as of April 1, 2017 and a net derivative asset of $160 million as of September 24, 2016.

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. The Company generally does not require collateral from its customers; however, the Company will require collateral 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 April 1, 2017, the Company had two customers that individually represented 10% or more of total trade receivables, one of which accounted for 12% and the other 10%. As of September 24, 2016, 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 52% and 63% of trade receivables as of April 1, 2017 and September 24, 2016, 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 April 1, 2017, the Company had three vendors that individually accounted for 42%, 17% and 14% of total vendor non-trade receivables. As of September 24, 2016, the Company had two vendors that individually accounted for 47% and 21% of total vendor non-trade receivables.