Apple 2014 Annual Report Download - page 45

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Debt
In April 2014, the Board of Directors authorized the Company to issue Commercial Paper pursuant to a commercial paper
program. As of September 27, 2014, the Company had $6.3 billion of Commercial Paper outstanding, with maturities generally
less than nine months.
In the third quarters of 2014 and 2013, the Company issued $12.0 billion and $17.0 billion of long-term debt, respectively. The
debt issuances included floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $29.0 billion
(collectively the “Notes”). The Company has entered, and may enter in the future, into interest rate swaps to manage interest
rate risk on the Notes. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate
payments or floating-rate payments into fixed-rate payments. In the third quarter of 2014, the Company entered into interest
rate swaps with an aggregate notional amount of $9.0 billion, which effectively converted most of the fixed-rate notes into
floating-rate notes, and in the third quarter of 2013, the Company entered into interest rate swaps with an aggregate notional
amount of $3.0 billion, which effectively converted the floating-rate notes into fixed-rate notes. As of September 27, 2014, a
100 basis point increase in market interest rates would cause interest expense on the Company’s debt to increase by $110
million on an annualized basis.
Further details regarding the Company’s debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated
Financial Statements in Note 6, “Debt.”
Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and
in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in
U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures
when there have been significant volatility in foreign currency exchange rates.
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign
exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future
cash flows and net investments in foreign subsidiaries. The Company’s practice is to hedge a portion of its material foreign
exchange exposures, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange
exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of
hedging particular exposures.
To provide a meaningful assessment of the foreign currency risk associated with certain of the Company’s foreign currency
derivative positions, the Company performed a sensitivity analysis using a value-at-risk (“VAR”) model to assess the potential
impact of fluctuations in exchange rates. The VAR model consisted of using a Monte Carlo simulation to generate thousands of
random market price paths assuming normal market conditions. The VAR is the maximum expected loss in fair value, for a given
confidence interval, to the Company’s foreign currency derivative positions due to adverse movements in rates. The VAR model
is not intended to represent actual losses but is used as a risk estimation and management tool. The model assumes normal
market conditions. Forecasted transactions, firm commitments and assets and liabilities denominated in foreign currencies were
excluded from the model. Based on the results of the model, the Company estimates with 95% confidence a maximum one-day
loss in fair value of $240 million as of September 27, 2014 compared to a maximum one-day loss in fair value of $201 million as
of September 28, 2013. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value
incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.
Actual future gains and losses associated with the Company’s investment portfolio and derivative positions may differ materially
from the sensitivity analyses performed as of September 27, 2014 due to the inherent limitations associated with predicting the
timing and amount of changes in interest rates, foreign currency exchanges rates and the Company’s actual exposures and
positions.
Apple Inc. | 2014 Form 10-K | 43