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0000320193
20110421
10-Q
35
Level 2 - 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 asset...
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Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
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Note 2 - Financial Instruments Cash, Cash Equivalents and Marketable Securities The following tables summarize the Company’s 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-term...
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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.
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The Company recognized net realized gains of $41 million and $56 million during the three- and six-month periods ended March 26, 2011, respectively.
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The Company recognized no significant net realized gains or losses during the three- and six-month periods ended March 27, 2010.
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The maturities of the Company’s long-term marketable securities generally range from one year to five years.
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As of March 26, 2011 and September 25, 2010, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.
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The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature.
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The Company typically invests in highly-rated securities, and its policy generally limits the amount of credit exposure to any one issuer.
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The Company’s investment policy requires investments to generally be investment grade, primarily rated single-A or better, with the objective of minimizing the potential risk of principal loss.
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Fair values were determined for each individual security in the investment portfolio.
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When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below 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 ...
0001193125-11-104388/full-submission.txt
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During the three- and six-month periods ended March 26, 2011 and March 27, 2010, the Company did not recognize any significant impairment charges.
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As of March 26, 2011, the Company does not consider any of its investments to be other-than-temporarily impaired.
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Derivative Financial Instruments The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk.
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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.
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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.
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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.
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The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases for three to six months.
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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.
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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.
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However, the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons including, but not limited to, materiality, accounting considerations and the prohibitive economic cost of hedging particular exposures.
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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.
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The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments.
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The Company records all derivatives on the Condensed Consolidated Balance Sheets at fair value.
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The effective portions of cash flow hedges are recorded in other comprehensive income until the hedged item is recognized in earnings.
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The effective portions of net investment hedges are recorded in other comprehensive income as a part of the cumulative translation adjustment.
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The ineffective portions of cash flow hedges and net investment hedges are recorded in other income and expense.
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Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item the derivative relates to.
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The Company had a net deferred loss associated with cash flow hedges of approximately $91 million and $252 million, net of taxes, recorded in other comprehensive income as of March 26, 2011 and September 25, 2010, respectively.
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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 th...
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Substantially all of the Company’s hedged transactions as of March 26, 2011 are expected to occur within six months.
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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.
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Deferred gains and losses in other comprehensive income associated with such derivative instruments are reclassified immediately into earnings through other income and expense.
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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.
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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- and six-month periods ended March 26, 2011 and March 27, 2010.
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The Company’s unrealized net gains and losses on net investment hedges, included in the cumulative translation adjustment account of accumulated other comprehensive income (“AOCI”), were not significant as of March 26, 2011 and September 25, 2010, respectively.
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The ineffective portions and amounts excluded from the effectiveness test of net investment hedges are recorded in other income and expense.
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The Company recognized in earnings a net loss on foreign currency forward and option contracts not designated as hedging instruments of $84 million and $55 million during the three- and six-month periods ended March 26, 2011, respectively, and a net gain on foreign currency forward and option contracts not designated a...
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These amounts recorded in other income and expense 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.
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The following table summarizes the notional principal amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of March 26, 2011 and September 25, 2010 (in millions): The notional principal amounts for outstanding derivative i...
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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.
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The Company’s gross exposure on these transactions may be further mitigated by collateral received from certain counterparties.
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The Company’s exposure to credit loss and market risk will vary over time as a function of currency exchange rates.
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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.
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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.
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The Company generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty.
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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.
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The Company presents its derivative assets and derivative liabilities at their gross fair values.
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As of March 26, 2011, the Company posted cash collateral related to the derivative instruments under its collateral security arrangements of $64 million and recorded the offsetting balance as other current assets in the Condensed Consolidated Balance Sheet.
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As of September 25, 2010, the Company posted cash collateral related to the derivative instruments under its collateral security arrangements of $445 million and recorded the offsetting balance as other current assets in the Condensed Consolidated Balance Sheet.
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The Company did not have any derivative instruments with credit-risk related contingent features that would require it to post additional collateral as of March 26, 2011 or September 25, 2010.
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The following tables summarize the gross fair value of the Company’s derivative instruments as reflected in the Condensed Consolidated Balance Sheets as of March 26, 2011 and September 25, 2010 (in millions): (a) The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other cu...
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(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.
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The following table summarizes 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- and six-month periods ended March 26, 2011 and March 27, 2010 (in millions): (a) Includes gains/(losses) recla...
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There were no amounts reclassified from AOCI into income for the effective portion of net investment hedges for the three months ended March 26, 2011.
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(b) Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $29 million and $4 million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for the three months ended March 27, 2010.
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There were no amounts reclassified from AOCI into income for the effective portion of net investment hedges for the three months ended March 27, 2010.
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(c) Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $(281) million and $(258) million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for the six months ended March 27, 2011.
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There were no amounts reclassified from AOCI into income for the effective portion of net investment hedges for the six months ended March 27, 2011.
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(d) Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $31 million and ($18) million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for the six months ended March 27, 2010.
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There were no amounts reclassified from AOCI into income for the effective portion of net investment hedges for the six months ended March 27, 2010.
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(e) Refer to Note 5, “Shareholders’ Equity and Stock-Based Compensation” of this Form 10-Q, which summarizes the activity in AOCI related to derivatives.
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Accounts Receivable The Company has considerable trade receivables not covered by collateral, third-party financing arrangements or credit insurance outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses, and education, enterprise and go...
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Trade receivables from two of the Company’s customers accounted for 12% and 10% of trade receivables as of March 26, 2011.
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Trade receivables from two of the Company’s customers accounted for 15% and 12% of trade receivables as of September 25, 2010.
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The Company’s cellular network carriers accounted for 64% of trade receivables as of March 26, 2011 and September 25, 2010.
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Additionally, the Company has non-trade receivables from certain of its manufacturing vendors.
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Vendor non-trade receivables from two of the Company’s vendors accounted for 53% and 25% of non-trade receivables as of March 26, 2011 and two of the Company’s vendors accounted for 57% and 24% of non-trade receivables as of September 25, 2010.
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Note 3 - Condensed Consolidated Financial Statement Details The following tables summarize the Company’s condensed consolidated financial statement details as of March 26, 2011 and September 25, 2010 (in millions): Property, Plant and Equipment Accrued Expenses Non-Current Liabilities Note 4 - Income Taxes As of March ...
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As of September 25, 2010, the total amount of gross unrecognized tax benefits was $943 million, of which $404 million, if recognized, would affect the Company’s effective tax rate.
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The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.
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The Company had $260 million and $247 million of gross interest and penalties accrued as of March 26, 2011 and September 25, 2010, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.
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Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.
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However, the outcome of tax audits cannot be predicted with certainty.
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If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
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Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.
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Note 5 - Shareholders’ Equity and Stock-Based Compensation Preferred Stock The Company has five million shares of authorized preferred stock, none of which is issued or outstanding.
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Under the terms of the Company’s Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock.
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Comprehensive Income Comprehensive income consists of two components, net income and other comprehensive income.
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Other comprehensive income refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income.
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The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain derivative in...
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The following table summarizes the components of total comprehensive income, net of taxes, during the three- and six-month periods ended March 26, 2011 and March 27, 2010 (in millions): The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during...
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RSUs that vested during the three- and six-month periods ended March 27, 2010 had a fair value of $345 million and $637 million, respectively, as of the vesting date.
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A summary of the Company’s stock option activity and related information for the six months ended March 26, 2011, is as follows (in thousands, except per share amounts and contractual term in years): Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fisca...
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The aggregate intrinsic value excludes stock options that have a zero or negative intrinsic value.
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The total intrinsic value of options at the time of exercise was $875 million and $1.8 billion for the three- and six-month periods ended March 26, 2011, respectively, and $377 million and $1.1 billion for the three- and six-month periods ended March 27, 2010, respectively.
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The Company had approximately 53.8 million shares and 62.7 million shares reserved for future issuance under the Company’s stock plans as of March 26, 2011 and September 25, 2010, respectively.
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RSUs granted are deducted from the shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs granted.
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Similarly, RSUs cancelled are added back to the shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs cancelled.
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Stock-Based Compensation Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant.
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Stock-based compensation cost for stock options and employee stock purchase plan rights (“stock purchase rights”) is estimated at the grant date and offering date, respectively, based on the fair-value as calculated using the Black-Scholes Merton (“BSM”) option-pricing model.
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The BSM option-pricing model incorporates various assumptions including expected volatility, expected life and interest rates.
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The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the expected life of the Company’s stock options and other relevant factors including implied volatility in market traded options on the Company’s common stock.
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The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock awards it grants to employees.
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The Company recognizes stock-based compensation cost as expense on a straight-line basis over the requisite service period.
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During the three- and six-month periods ended March 26, 2011, the Company granted 1,370 stock options, which had a weighted-average grant date fair value of $181.13 per share.
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During the three- and six-month periods ended March 27, 2010, the Company granted approximately 33,000 stock options, which had a weighted-average grant date fair value of $108.58 per share.
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Additionally, during the three- and six-month periods ended March 27, 2010, the Company assumed 67,000 stock options in conjunction with certain business combinations, which had a weighted-average fair value of $198.22 per share.
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