Financing Arrangements

The following table reflects the carrying values of the Company’s convertible debt (in thousands):



	September 28, 2014			December 29, 2013
1.5% Notes due 2017	$	1,000,000		$	1,000,000
Less: Unamortized bond discount	(138,372		)	(170,208		)
Net carrying amount of 1.5% Notes due 2017	861,628			829,792
0.5% Notes due 2020	1,500,000			1,500,000
Less: Unamortized bond discount	(311,644		)	(344,429		)
Net carrying amount of 0.5% Notes due 2020	1,188,356			1,155,571
Total convertible debt	2,049,984			1,985,363
Less: Convertible short-term debt	(861,628		)	—
Convertible long-term debt	$	1,188,356		$	1,985,363

1% Convertible Senior Notes Due 2013. On May 15, 2013, the maturity date for the 1% Convertible Senior Notes due May 15, 2013 (“1% Notes due 2013”), the Company settled the 1% Notes due 2013 through an all-cash transaction for principal and accrued interest of $928.1 million and $4.6 million, respectively. As of the date of the redemption, the Company had no further obligations related to the 1% Notes due 2013. In connection with the maturity of the 1% Notes due 2013, the associated convertible bond hedge and warrant transactions also terminated, with no shares purchased under the convertible bond hedge agreement and no exercises of the warrants.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the bond discount on the liability component of the 1% Notes due 2013 that was settled in the second quarter of fiscal year 2013 (in thousands):



	Nine months ended
	September 29, 2013
Contractual interest coupon	$	3,481
Amortization of bond issuance costs	1,014
Amortization of bond discount	21,022
Total interest cost recognized	$	25,517

The effective interest rate on the liability component of the 1% Notes due 2013 was 7.4% for the nine months ended September 29, 2013.

1.5% Convertible Senior Notes Due 2017. In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Convertible Senior Notes due August 15, 2017 (“1.5% Notes due 2017”) at par. The 1.5% Notes due 2017 may be converted, under certain circumstances described below, based on an initial conversion rate of 19.0931 shares of common stock per $1,000 principal amount of notes (which represents 19.1 million shares at an initial conversion price of approximately $52.37 per share). The 1.5% Notes due 2017 contain provisions where the conversion rate and conversion price are adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. Accordingly, as of September 28, 2014, the conversion rate was adjusted for dividends paid to date to 19.4071 shares of common stock per $1,000 principal amount of notes (which represents 19.4 million shares at a conversion price of approximately $51.53 per share). The net proceeds to the Company from the sale of the 1.5% Notes due 2017 were $981.0 million.

The Company separately accounts for the liability and equity components of the 1.5% Notes due 2017. The principal amount of the liability component of $706.0 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 6.85%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. As of September 28, 2014, after recognition of $138.4 million in Convertible short-term debt conversion obligation, the carrying value of the equity component was $155.6 million.



	Three months ended				Nine months ended
	September 28, 2014		September 29, 2013		September 28, 2014		September 29, 2013
Contractual interest coupon	$	3,750	$	3,750	$	11,250	$	11,250
Amortization of bond issuance costs	667		667		2,000		2,000
Amortization of bond discount	10,558		9,859		31,248		29,180
Total interest cost recognized	$	14,975	$	14,276	$	44,498	$	42,430

The effective interest rate on the liability component of the 1.5% Notes due 2017 was 6.85% for each of the three and nine months ended September 28, 2014 and September 29, 2013. The remaining unamortized bond discount of $138.4 million as of September 28, 2014 will be amortized over the remaining life of the 1.5% Notes due 2017, which is approximately 2.9 years.

The conversion provision of the 1.5% Notes due 2017 allows the holders the option to convert their notes during a calendar quarter if the Company’s stock price exceeds 130% of the conversion price of the 1.5% Notes due 2017 for at least 20 trading days during the last 30 consecutive trading days of the previous calendar quarter. As of the calendar quarter ended September 30, 2014, the 1.5% Notes due 2017 were convertible at the holders’ option beginning on October 1, 2014 and ending December 31, 2014. Accordingly, the carrying value of the 1.5% Notes due 2017 was classified as a current liability and the difference between the principal amount payable in cash upon conversion and the carrying value of the 1.5% Notes due 2017 was reclassified from Stockholders’ equity to Convertible short-term debt conversion obligation on the Company’s Condensed Consolidated Balance Sheet as of September 28, 2014, and will remain so while the notes are convertible. The determination of whether or not the 1.5% Notes due 2017 are convertible must continue to be performed on a calendar-quarter basis. Consequently, the 1.5% Notes due 2017 may be reclassified as long-term debt if the conversion threshold is not met in future quarters. Upon conversion of any of the 1.5% Notes due 2017, the Company will deliver cash up to the principal amount of the 1.5% Notes due 2017 and shares of the Company’s common stock with respect to any conversion value greater than the principal amount of the 1.5% Notes due 2017. Based on the last closing price of the quarter ended September 28, 2014 of $99.21 for the Company’s common stock, if all of the 1.5% Notes due 2017 were converted, 9.3 million shares would be distributed to the holders. As of September 28, 2014, the Company had received conversion notices for a total of $3.1 million aggregate principal amount of the 1.5% Notes due 2017, for which conversion is expected to be completed in the fourth quarter of fiscal year 2014; however, as of September 28, 2014, no conversions had taken place yet.

Concurrent with the issuance of the 1.5% Notes due 2017, the Company entered into a convertible bond hedge transaction in which counterparties initially agreed to sell to the Company up to approximately 19.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 per share. The convertible bond hedge agreement contains provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. After adjusting for dividends paid through September 28, 2014, the counterparties may acquire up to approximately 19.4 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $51.53 per share. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1.5% Notes due 2017 or the first day that none of the 1.5% Notes due 2017 remain outstanding due to conversion or otherwise. As of September 28, 2014, the Company had not received any shares under this convertible bond hedge agreement; however, in connection with the conversion of the 1.5% Notes due 2017, the Company will exercise an equivalent number of shares under the bond hedge. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 1.5% Notes due 2017, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 1.5% Notes due 2017.

In addition, concurrent with the issuance of the 1.5% Notes due 2017, the Company sold warrants to acquire up to approximately 19.1 million shares of its common stock at an exercise price of $73.3250 per share. The warrant agreement contains provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. After adjusting for dividends paid through September 28, 2014, holders of the warrants may acquire up to approximately 19.4 million shares of the Company’s common stock at a strike price of $72.1386 per share. The warrants mature on 40 different dates from November 13, 2017 through January 10, 2018 and are exercisable at the maturity date. At each maturity date, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 28, 2014, the warrants had not been exercised and remain outstanding.

0.5% Convertible Senior Notes Due 2020. In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Convertible Senior Notes due October 15, 2020 (the “0.5% Notes due 2020”) at par. The 0.5% Notes due 2020 may be converted, under certain circumstances described below, based on an initial conversion rate of 10.8470 shares of common stock per $1,000 principal amount of notes (which represents 16.3 million shares at an initial conversion price of approximately $92.19 per share). The 0.5% Notes due 2020 contain provisions where the conversion rate and conversion price are adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. Accordingly, as of September 28, 2014, the conversion rate was adjusted for dividends in excess of $0.225 per share paid to date to 10.8557 shares of common stock per $1,000 principal amount of notes (which represents 16.3 million shares at a conversion price of approximately $92.12 per share). The net proceeds to the Company from the sale of the 0.5% Notes due 2020 were approximately $1.48 billion.

The Company separately accounts for the liability and equity components of the 0.5% Notes due 2020. The principal amount of the liability component of $1.15 billion as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 4.43%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. As of September 28, 2014, the carrying value of the equity component of $352.0 million was unchanged from the date of issuance.



	Three months ended		Nine months ended
	September 28, 2014		September 28, 2014
Contractual interest coupon	$	1,875	$	5,625
Amortization of bond issuance costs	627		1,924
Amortization of bond discount	10,936		32,334
Total interest cost recognized	$	13,438	$	39,883

The effective interest rate on the liability component of the 0.5% Notes due 2020 was 4.43% for the three and nine months ended September 28, 2014. The remaining unamortized bond discount of $311.6 million as of September 28, 2014 will be amortized over the remaining life of the 0.5% Notes due 2020, which is approximately 6.1 years.

The conversion provision of the 0.5% Notes due 2020 allows the holders the option to convert their notes during a calendar quarter if the Company’s stock price exceeds 130% of the conversion price of the 0.5% Notes due 2020 for at least 20 trading days during the last 30 consecutive trading days of the previous calendar quarter. Based on the last closing price of the quarter ended September 28, 2014 of $99.21 for the Company’s common stock, if all of the 0.5% Notes due 2020 were converted, 1.2 million shares would be distributed to the holders. As of September 28, 2014, the 0.5% Notes due 2020 were not convertible.

Concurrent with the issuance of the 0.5% Notes due 2020, the Company entered into a convertible bond hedge transaction in which counterparties agreed to sell to the Company up to approximately 16.3 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.19 per share. The convertible bond hedge agreement contains provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. After adjusting for dividends in excess of $0.225 per share paid through September 28, 2014, the counterparties may acquire up to approximately 16.3 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.12 per share. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 0.5% Notes due 2020 or the first day that none of the 0.5% Notes due 2020 remain outstanding due to conversion or otherwise. As of September 28, 2014, the Company had not purchased any shares under this convertible bond hedge agreement. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 0.5% Notes due 2020, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 0.5% Notes due 2020.

In addition, concurrent with the issuance of the 0.5% Notes due 2020, the Company sold warrants to acquire up to approximately 16.3 million shares of its common stock at an exercise price of $122.9220 per share. The warrant agreement contains provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. After adjusting for dividends in excess of $0.225 per share paid through September 28, 2014, holders of the warrants may acquire up to approximately 16.3 million shares of the Company’s common stock at a strike price of $122.8232 per share. The warrants mature on 40 different dates from January 13, 2021 through March 11, 2021 and are exercisable at the maturity date. At each maturity date, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 28, 2014, the warrants had not been exercised and remain outstanding.