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Long-Term Supply Agreements During 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc., Intel Corporation, Micron Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to secure supply of NAND flash memory through calendar year 2010.
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As part of these agreements, the Company prepaid $1.25 billion for flash memory components during 2006, which will be applied to certain inventory purchases made over the life of each respective agreement.
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The Company utilized $457 million of the prepayment as of June 28, 2008.
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Contingencies The Company is subject to certain legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated.
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In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition or operating results.
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However, the results of legal proceedings cannot be predicted with certainty.
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If the Company failed to prevail in any of these legal matters or if several of these legal matters were resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.
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Production and marketing of products in certain states and countries may subject the Company to environmental, product safety and other regulations including, in some instances, the requirement to provide customers the ability to return product at the end of its useful life, and place responsibility for environmentally...
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Such laws and regulations have been passed in several jurisdictions in which the Company operates, including various countries within Europe and Asia, certain Canadian provinces and certain states within the U.S.
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Although the Company does not anticipate any material adverse effects in the future based on the nature of its operations and the thrust of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on the Company’s financial condition or operating results.
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Note 7 - Segment Information and Geographic Data The Company manages its business primarily on a geographic basis.
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Accordingly, the Company determined its operating segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Japan, Asia-Pacific, Retail, and FileMaker operations.
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The Company’s reportable operating segments are comprised of the Americas, Europe, Japan, and Retail operations.
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Other operating segments include Asia Pacific, which encompasses Australia and Asia except for Japan, and the Company’s FileMaker, Inc. subsidiary.
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The Americas, Europe, and Japan reportable segments exclude activities related to the Retail segment.
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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 countries in the Middle East and Africa.
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The Retail segment operates Apple-owned retail stores in the U.S., Canada, Japan, the U.K., Italy, and Australia.
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Each reportable operating segment provides similar hardware and software products and similar services to the same types of customers.
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The accounting policies are the same as those described in Note 1, “Summary of Significant Accounting Policies” of this Form 10-Q and in the Notes to Consolidated Financial Statements in the Company’s 2007 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, while Retail segment net sales are based on sales from the Company’s retail stores.
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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 manufacturing costs and variances not included in standard costs, research and development, corporate marketing expenses, stock-based compensation expense, income taxes, various nonrecurring charges, and other separately managed ge...
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The Company does not include intercompany transfers between segments for management reporting purposes.
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Segment assets exclude corporate assets, such as cash, short-term and long-term investments, manufacturing and corporate facilities, miscellaneous corporate infrastructure, goodwill and other acquired intangible assets.
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Except for the Retail segment, capital asset purchases for long-lived assets are not reported to management by segment.
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Cash payments for capital asset purchases by the Retail segment were $113 million and $88 million during the third quarters of 2008 and 2007, respectively, and $251 million and $164 million during the first nine months of 2008 and 2007, respectively.
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The Company has certain retail stores that have been designed and built to serve as high-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities.
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Because of their unique design elements, locations and size, these stores require substantially more investment than the Company’s more typical retail stores.
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The Company allocates certain operating expenses associated with its high-profile stores to corporate marketing expense to reflect the estimated Company-wide benefit.
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The allocation of these operating costs to corporate expense is based on the amount incurred for a high-profile store in excess of that incurred by a more typical Company retail location.
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The Company had opened a total of 11 high-profile stores as of June 28, 2008.
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Expenses allocated to corporate marketing resulting from the operations of these stores were $13 million and $10 million in the third quarters of 2008 and 2007, respectively, and $37 million and $30 million for the first nine months of 2008 and 2007, respectively.
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Summary information by operating segment for the three and nine-month periods ended June 28, 2008 and June 30, 2007 is as follows (in millions): (a) Other Segments consist of Asia-Pacific and FileMaker.
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A reconciliation of the Company’s segment operating income to the Condensed Consolidated Financial Statements for the three and nine-month periods ended June 28, 2008 and June 30, 2007 is as follows (in millions): (a) Other corporate expenses include research and development, corporate marketing expenses, manufacturing...
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Note 8 - Related Party Transactions and Certain Other Transactions The Company entered into a Reimbursement Agreement with its CEO, Steve Jobs, for the reimbursement of expenses incurred by Mr. Jobs in the operation of his private plane when used for Apple business.
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The Company recognized a total of $102,000 and $682,000 in expenses pursuant to the Reimbursement Agreement during the three and nine-month periods ended June 28, 2008, respectively, and $10,000 and $573,000 in expenses pursuant to the Reimbursement Agreement during the three and nine-month periods ended June 30, 2007,...
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All expenses recognized pursuant to the Reimbursement Agreement have been included in selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations.
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties.
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Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” 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, “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 fiscal year ended September 29, 2007 (the “2007 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the Condensed Consolidated Financial Statements and notes thereto included elsew...
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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 or quarters refer to the Company’s fiscal years ended in September and the associated quarters of those fiscal years.
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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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Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.apple.com/investor when such reports are available on the SEC 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 http://www.sec.gov.
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The contents of these websites are not incorporated into this filing.
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Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
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Executive Overview The Company designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions.
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The Company’s products and services include the Mac® line of desktop and portable computers, the iPod® line of portable digital music players, iPhone™, Apple TV®, Xserve®, a portfolio of consumer and professional software applications, the Mac OS® X operating system, third-party digital content through the iTunes Store...
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The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, retailers, and value-added resellers.
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In addition, the Company sells a variety of third-party Mac, iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores.
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The Company sells to education, consumer, creative professional, business, and government customers.
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The Company is focused on providing innovative products and solutions to professional, consumer, and education customers that greatly enhance their evolving digital lifestyles.
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The product attributes that enable this enhanced functionality include high-quality user interfaces, the ability to run complex applications, access to relatively inexpensive storage, and the ability to connect easily to a wide variety of digital content, digital devices, and the Internet.
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The growing prevalence and complexity of digital content and digital devices such as iPods, iPhone, video and still cameras, televisions, and personal digital assistants require increasingly sophisticated and integrated software applications.
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The Company is the only participant in the personal computer and consumer electronics industries that controls the design and development of the entire personal computer, including the hardware, operating system, and sophisticated software applications, as well as the design and development of portable digital music pl...
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The Company is therefore uniquely positioned to offer superior and well-integrated digital lifestyle products and solutions, which are further enhanced by the Company’s emphasis on ease-of-use and creative industrial designs.
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The Company participates in several highly competitive markets, including personal computers with its Mac line of personal computers, consumer electronics with its iPod product family of portable digital music players, and distribution of third-party digital content through its online iTunes Store.
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With the introduction of iPhone in the third quarter of 2007, the Company has also begun to compete with mobile communication device companies that have substantial experience and technological and financial resources.
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While the Company is widely recognized as a leading innovator in the personal computer and consumer electronics markets as well as a leader in the emerging market for distribution of digital content, these markets are highly competitive and subject to aggressive pricing.
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To remain competitive, the Company believes that increased investment in research and development (“R&D”) and marketing and advertising is necessary to maintain or expand its position in the markets where it competes.
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The Company’s R&D spending is focused on further developing its existing Mac line of personal computers, its operating system, application software, and iPods; developing new digital lifestyle consumer and professional software applications; and investing in new product areas such as iPhone and wireless technologies.
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The Company also believes increased investment in marketing and advertising programs is critical to increasing product and brand awareness.
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The Company utilizes a variety of direct and indirect distribution channels.
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The Company believes that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value of the hardware, software, and peripheral integration, demonstrate the unique digital lifestyle solutions that are available only on Mac computers, and demonstrate the compat...
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The Company further believes providing a high-quality sales and after-sales support experience is critical to attracting new and retaining existing customers.
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To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to expand and improve its distribution capabilities by opening its own retail stores in the U.S. and internationally.
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The Company had 216 stores open as of June 28, 2008.
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The Company also staffs selected third-party stores with the Company’s own employees to improve the buying experience through reseller channels.
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The Company has deployed Apple employees and contractors in reseller locations around the world including the U.S., Canada, Europe, Japan, Asia, Latin America and Australia.
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The Company also sells to customers directly through its online stores around the world, as well to government, education and enterprise customers through the Company’s direct sales force.
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The Company’s iPods are sold through a significant number of distribution points to provide broad access.
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iPods can be purchased in certain department stores, member-only warehouse stores, large retail chains, and specialty retail stores, as well as through the channels for Mac distribution listed above.
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The Company began shipping iPhone in the U.S. during the third quarter of 2007 and in certain European countries during 2008.
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In June 2008, the Company announced its plans to ship iPhone 3G initially in 22 countries beginning on July 11, 2008.
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The Company has signed multi-year agreements with cellular network carriers authorizing them to distribute and provide cellular network services for iPhone in over 70 countries.
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The Company expects to be shipping iPhones in all these countries by the end of the 2008 calendar year.
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These agreements are generally not exclusive with a specific carrier, except in the U.S., U.K., France, Germany, Spain, Ireland, and certain other countries.
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iPhone is distributed through the Company and its cellular network carriers’ distribution channels.
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Products The Company offers a range of personal computing products including desktop and portable personal computers, related devices and peripherals, and various third-party hardware and software products.
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In addition, the Company offers its own software products, including Mac OS X, the Company’s proprietary operating system software for the Mac; server software and related solutions; professional application software; and consumer, education and business oriented application software.
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Mac OS X Leopard is the sixth major release of Mac OS X and became available in October 2007.
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The Company also designs, develops and markets to Mac and Windows users its family of iPod digital music players and its iPhone mobile communication device, along with related accessories and services including the online distribution of third-party digital content through the Company’s iTunes Store.
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In January 2008, the Company announced MacBook® Air, an ultra-slim notebook computer that measures 0.16-inches at its thinnest point and 0.76-inches at its maximum height.
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The MacBook Air includes a 13.3-inch LED-backlit widescreen display, a full-size and backlit keyboard, a built-in iSight® video camera, a trackpad with Multi-TouchTM gesture support, and AirPort Extreme® 802.11n Wi-Fi networking.
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In January 2008, the Company also announced iTunes® Movie Rentals, an online movie rental service that allows customers to rent movies from the iTunes Store.
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Rented movies can be watched on Macs, Windows-based computers, all current generation video-enabled iPods, iPhones and digitally enabled televisions using Apple TV.
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In June 2008, the Company announced iPhone 3G, the second-generation iPhone, a handheld device that combines the features of iPhone with 3G networking, a built-in global positioning system (“GPS”) and iPhone 2.0 software.
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iPhone 2.0 software includes new enterprise features, including support for Microsoft Exchange ActiveSync and Cisco IPsec VPN.
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The Company began shipping iPhone 3G and making iPhone 2.0 software available to all iPhone customers on July 11, 2008.
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