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0000320193 | 20080723 | 10-Q | 251 | A detailed discussion of the Company’s other products may be found in Part I, Item 1, “Business,” of the Company’s 2007 Form 10-K.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 252 | 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 describes the significant accounting policies and methods used in the preparation of the Company’s Condensed Consolidated Financial Statements. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 253 | Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 254 | Actual results may differ from these estimates and such differences may be material. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 255 | Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, allowance for doubtful accounts, inventory valuation and inventory purchase commitments, warranty costs, stock-based compensation, income taxes, and legal and other contingencies. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 256 | Management considers these critical policies because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 257 | The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 258 | Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, music products, digital content, peripherals, and service and support contracts. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 259 | The Company recognizes revenue for software products (operating system software and applications software), or any product that is considered to be software-related in accordance with the guidance in Emerging Issues Task Force (“EITF”) No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 260 | 03-5, Applicability of AICPA Statement of Position 97-2 to Non-software Deliverables in an Arrangement Containing More-Than-Incidental Software, (e.g., Mac computers, iPod portable digital music players and iPhone) pursuant to American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 261 | 97-2, Software Revenue Recognition, as amended. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 262 | For products that are not software or software-related, (e.g., digital content sold on the iTunes Store and certain Mac, iPod and iPhone supplies and accessories) the Company recognizes revenue pursuant to SEC Staff Accounting Bulletin (“SAB”) No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 263 | 104, Revenue Recognition. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 264 | The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 265 | Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 266 | For most of the Company’s product sales, these criteria are met at the time the product is shipped. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 267 | For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 268 | If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 269 | For both Apple TV and iPhone, the Company indicated it may from time-to-time provide future unspecified features and additional software products free of charge to customers. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 270 | Therefore, sales of Apple TV and iPhone handsets are recognized under subscription accounting in accordance with SOP No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 271 | 97-2. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 272 | The Company recognizes the associated revenue and cost of goods sold on a straight-line basis over the currently estimated 24-month economic lives of these products, with any loss recognized at the time of sale. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 273 | Costs incurred by the Company for engineering, sales, marketing, and warranty are expensed as incurred. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 274 | The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs, including reseller and end-user rebates, and other sales programs and volume-based incentives. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 275 | For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 276 | The Company’s policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 277 | For customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 278 | The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 279 | Future market conditions and product transitions may require the Company to increase customer incentive programs and incur incremental price protection obligations that could result in additional reductions to revenue at the time such programs are offered. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 280 | Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of particular incentive programs. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 281 | If a greater than estimated proportion of customers redeem such incentives, the Company would be required to record additional reductions to revenue, which would have a negative impact on the Company’s results of operations. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 282 | Allowance for Doubtful Accounts
The Company distributes its products through third-party distributors and resellers and directly to certain education, consumer, and enterprise customers. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 283 | The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to limit credit risk. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 284 | In addition, when possible the Company does attempt to limit credit risk on trade receivables with credit insurance for certain customers in Latin America, Europe, Asia, and Australia and by arranging with third-party financing companies to provide flooring arrangements and other loan and lease programs to the Company’... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 285 | These credit-financing arrangements are directly between the third-party financing company and the end customer. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 286 | As such, the Company generally does not assume any recourse or credit-risk-sharing related to any of these arrangements. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 287 | However, considerable trade receivables that are not covered by collateral, third-party flooring arrangements, or credit insurance are outstanding with the Company’s distribution and retail channel partners. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 288 | The allowance for doubtful accounts is based on management’s assessment of the collectibility of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 289 | The Company records an allowance to reduce the specific receivables to the amount that it reasonably believes to be collectible. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 290 | The Company also records an allowance for all other trade receivables based on multiple factors, including historical experience with bad debts, the general economic environment, the financial condition of the Company’s distribution channels, and the aging of such receivables. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 291 | If there is a deterioration of a major customer’s financial condition, if the Company becomes aware of additional information related to the credit-worthiness of a major customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, the Company may have to adjust it... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 292 | Inventory Valuation and Inventory Purchase Commitments
The Company must order components for its products and build inventory in advance of product shipments. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 293 | The Company records a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 294 | The Company performs a detailed review of inventory each fiscal quarter that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 295 | The personal computer, consumer electronics and mobile communications industries are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 296 | If future demand or market conditions for the Company’s products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of component inventory, the Company may be required to record additional write-downs, which would negatively affect gross margins in the period when th... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 297 | The Company accrues reserves for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 298 | Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 299 | These commitments typically cover the Company’s requirements for periods ranging from 30 to 150 days. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 300 | If there is an abrupt and substantial decline in demand for one or more of the Company’s products or an unanticipated change in technological requirements for any of the Company’s products, the Company may be required to record additional reserves for cancellation fees that would negatively affect gross margins in the ... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 301 | Warranty Costs
The Company provides for the estimated cost for hardware and software warranties at the time the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim, and knowledge of specific product failures that are outside of the Company’s typi... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 302 | Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities considering the size of the installed base of products subject to warranty protection and adjusts the amounts as necessary. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 303 | For products accounted for under subscription accounting pursuant to SOP No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 304 | 97-2, the Company recognizes warranty expense as incurred. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 305 | If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liability would be required and could negatively affect the Company’s results of operations. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 306 | The Company periodically provides updates to its applications and operating system software to maintain the software’s compliance with specifications. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 307 | The estimated cost to develop such updates is accounted for as warranty cost that is recognized at the time related software revenue is recognized. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 308 | Factors considered in determining appropriate accruals related to such updates include the number of units delivered, the number of updates expected to occur, and the historical cost and estimated future cost of the resources necessary to develop these updates. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 309 | Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 310 | 123 (revised 2004), Share-Based Payment. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 311 | Under the provisions of SFAS No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 312 | 123R, stock-based compensation cost is estimated at the grant date based on the award’s fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model and is recognized as expense ratably on a straight-line basis over the requisite service period. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 313 | The BSM option-pricing model requires various judgmental assumptions including expected volatility, forfeiture rates, and expected option life. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 314 | Significant changes in any of these assumptions could materially affect the fair value of stock-based awards granted in the future. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 315 | Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 316 | In accordance with SFAS No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 317 | 109, Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 318 | Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 319 | The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 320 | Effective at the beginning of 2008, the Company adopted Financial Interpretation No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 321 | (“FIN”) 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 322 | 109. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 323 | Further information may be found in Note 4, “Income Taxes” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 324 | Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 325 | In the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 326 | In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of FIN 48 and other complex tax laws. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 327 | Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 328 | Legal and Other Contingencies
As discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Note 6, “Commitments and Contingencies” in Notes to Condensed Consolidated Financial Statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course o... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 329 | In accordance with SFAS No. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 330 | 5, Accounting for Contingencies, the Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 331 | There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 332 | In management’s opinion, 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. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 333 | However, the outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 334 | Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 335 | Net Sales
The following table summarizes net sales and Mac unit sales by operating segment and net sales and unit sales by product during the three and nine-month periods ended June 28, 2008 and June 30, 2007 (net sales in millions, except per unit amounts, and unit sales in thousands):
(a) Other Segments include Asia ... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 336 | (b) Includes iMac, Mac mini, Mac Pro, Power Mac, and Xserve product lines. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 337 | (c) Includes MacBook, iBook, MacBook Air, MacBook Pro, and PowerBook product lines. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 338 | (d) Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 339 | (e) Derived from handset sales, carrier agreements, and Apple-branded and third-party iPhone accessories. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 340 | (f) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 341 | (g) Includes sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 342 | (h) Derived by dividing total Mac net sales by total Mac unit sales. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 343 | (i) Derived by dividing total iPod net sales by total iPod unit sales. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 344 | NM = Not Meaningful
Net sales during the third quarter of 2008 increased $2.1 billion or 38% from the same period in 2007, and were up 38% or $6.8 billion for the first nine months of 2008 compared to the same period in 2007. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 345 | Several factors contributed to these increases, including the following:
•
Macintosh net sales increased $1.1 billion or 43% during the third quarter of 2008 and increased $3.4 billion or 48% during the first nine months of 2008 compared to the same periods in 2007. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 346 | Mac unit sales increased by 732,000 units or 41% during the third quarter of 2008 and increased 2.2 million units or 45% during the first nine months of 2008 compared to the same periods in 2007. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 347 | The increases in Mac net sales and unit sales were driven by strong sales of iMac, which experienced strong growth in net sales and unit sales in all of the Company’s segments, as well as higher sales of portable products, especially sales of MacBook, which had double-digit growth in most of the Company’s operating seg... | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 348 | The Mac unit growth rates of 41% in the third quarter of 2008 and 45% in the first nine months of 2008 exceeded the estimated growth rates of the overall personal computer industry during those timeframes and reflected strong customer demand for the Company’s Mac products. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 349 | Net sales and unit sales of the Company’s Mac portable systems increased 42% and 37%, respectively, during the third quarter of 2008, and increased 46% and 45%, respectively, during the first nine months of 2008 compared to the same periods in 2007. | 0001193125-08-156421/full-submission.txt |
0000320193 | 20080723 | 10-Q | 350 | This growth was attributable to increased sales of MacBook and MacBook Pro, as well as the addition of MacBook Air to the product line in January 2008. | 0001193125-08-156421/full-submission.txt |
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