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0000320193
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The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
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Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.
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Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia.
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A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations.
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Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company’s products.
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Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments.
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The Company’s purchase commitments typically cover its requirements for periods up to 150 days.
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Other Off-Balance Sheet Commitments Operating Leases The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements.
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The Company does not currently utilize any other off-balance sheet financing arrangements.
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The major facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options.
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As of June 27, 2015, the Company had a total of 456 retail stores.
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Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options.
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As of June 27, 2015, the Company’s total future minimum lease payments under noncancelable operating leases were $5.0 billion, of which $3.4 billion related to leases for retail space.
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Other Commitments The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products.
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These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days.
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The Company also obtains individual components for its products from a wide variety of individual suppliers.
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Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts and open orders based on projected demand information.
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Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier.
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As of June 27, 2015, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $21.7 billion.
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In addition to the commitments mentioned above, the Company had other off-balance sheet obligations of $4.8 billion as of June 27, 2015 that consisted of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to advertising, research and development...
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Subsequent to June 27, 2015, the Company entered into additional other off-balance sheet obligations of $2.1 billion.
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Contingencies The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated, certain of which are discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II, Item 1A of this Form 10-Q u...
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However, the outcome of litigation is inherently uncertain.
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Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be ma...
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Smartflash LLC, et al., v. Apple Inc., et al.
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On May 29, 2013, Smartflash LLC and Smartflash Technologies Limited filed an action against the Company in the United States District Court for the Eastern District of Texas, Tyler Division, alleging that the Company infringed certain patents relating to data storage and access systems.
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On February 24, 2015, a jury returned a verdict against the Company, and awarded damages of approximately $533 million.
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On July 7, 2015, the District Court vacated the award and ordered a new trial for damages.
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Accordingly, the Company has not recorded a loss accrual at this time.
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Apple Inc. v. Samsung Electronics Co., Ltd, et al.
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On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division.
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On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million.
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On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court.
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As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million, with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part.
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Because the ruling remains subject to further proceedings, the Company has not recognized the award in its results of operations.
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Note 11 - Segment Information and Geographic Data The Company reports segment information based on the “management” approach.
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The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable operating segments.
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The Company manages its business primarily on a geographic basis.
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The Company’s reportable operating segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific.
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The Americas segment includes both North and South America.
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The Europe segment includes European countries, as well as India, the Middle East and Africa.
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The Greater China segment includes China, Hong Kong and Taiwan.
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The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the Company’s other operating segments.
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Each operating segment provides similar hardware and software products and similar services.
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The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2014 Form 10-K.
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The Company evaluates the performance of its operating segments based on net sales and operating income.
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Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations.
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Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.
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Advertising expenses are generally included in the geographic segment in which the expenditures are incurred.
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Operating income for each segment excludes other income and expense and certain expenses managed outside the operating segments.
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Costs excluded from segment operating income include various corporate expenses such as R&D, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs.
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The Company does not include intercompany transfers between segments for management reporting purposes.
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The following table shows information by operating segment for the three- and nine-month periods ended June 27, 2015 and June 28, 2014 (in millions): A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 27, 201...
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Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties.
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Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact.
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Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms.
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Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements.
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Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference.
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The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended September 27, 2014 (the “2014 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”), as updated by the Company’s Current Report on Form 8-K dated January 28, 2015, and the con...
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All information presented herein is based on the Company’s fiscal calendar.
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Unless otherwise stated, references in this report to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months, or periods of those fiscal years.
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Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated.
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The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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Available Information The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC.
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The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements, and other information with the SEC.
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Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at investor.apple.com/sec.cfm when such reports are available on the SEC’s website.
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The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.
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The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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The contents of websites are not incorporated into this filing.
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Further, the Company’s references to website URLs are intended to be inactive textual references only.
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Overview and Highlights Company Background The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications.
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The Company’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple Watch™, Apple TV®, a portfolio of consumer and professional software applications, iOS, OS X® and watchOS™ operating systems, iCloud®, Apple Pay™ and a variety of accessory, service and support offerings.
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The Company also sells and delivers digital content and applications through the iTunes Store®, App Store™, Mac App Store, and iBooks Store™ (collectively “iTunes”).
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The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers.
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In addition, the Company sells a variety of third-party Apple compatible products, including application software and various accessories through its online and retail stores.
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The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
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Business Strategy The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services.
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The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration.
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As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through iTunes®, which allows customers to discover and download digital content, iOS, Mac and Apple Watch applications, and books through either a Mac or Windows-based computer or th...
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The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings.
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The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers.
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Therefore, the Company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience.
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The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products and technologies.
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Business Seasonality and Product Introductions The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand.
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Additionally, new product introductions can significantly impact net sales, product costs and operating expenses.
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Product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the next related major product launch approaches.
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Net sales can also be affected when consumers and distributors anticipate a product introduction.
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However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.
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Third Quarter Fiscal 2015 Highlights Net sales rose 33% or $12.2 billion during the third quarter of 2015 compared to the same quarter in 2014.
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Net sales and unit sales increased for iPhone and Mac due to continued strong demand for iPhone 6 and 6 Plus and for Mac portables following the launches of the new MacBook® and updated models of MacBook Pro®.
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Net sales of Other Products increased solely due to the launch of Apple Watch, and net sales of Services increased primarily due to growth from iOS app sales and licensing.
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Net sales growth was partially offset by lower net sales and unit sales of iPad and the effect of weakness in most foreign currencies relative to the U.S. dollar.
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Total net sales increased in each of the Company’s reportable operating segments, with particularly strong growth in Greater China where year-over-year net sales increased 112%.
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During the third quarter of 2015, the Company introduced an updated 15” MacBook Pro and 27” iMac® with Retina® 5K display, and began shipping Apple Watch and the new MacBook.
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Additionally, at its Worldwide Developers Conference in June 2015, the Company announced Apple Music™, which launched at the end of June 2015, and announced its iOS 9, OS X El Capitan and watchOS 2 operating systems, which are expected to be available in the fall of 2015.
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The Company utilized $10.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $3.1 billion during the third quarter of 2015.
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Additionally, the Company issued $8.0 billion of U.S. dollar-denominated and ¥250.0 billion of yen-denominated long-term debt.
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Sales Data The following table shows net sales by operating segment and net sales and unit sales by product during the three- and nine-month periods ended June 27, 2015 and June 28, 2014 (dollars in millions and units in thousands): (1) Includes deferrals and amortization of related non-software services and software u...
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(2) Includes revenue from iTunes, AppleCare®, Apple Pay, licensing and other services.
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