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0000320193
20110421
10-Q
135
The weighted-average fair value of stock purchase rights per share was $68.95 and $65.15 during the three- and six-month periods ended March 26, 2011, respectively, and was $46.82 and $39.98 during the three- and six-month periods ended March 27, 2010, respectively.
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The following table summarizes the stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and six-month periods ended March 26, 2011 and March 27, 2010 (in millions): Stock-based compensation expense capitalized as software development costs was not significant a...
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10-Q
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The income tax benefit related to stock-based compensation expense was $140 million and $236 million for the three- and six-month periods ended March 26, 2011, respectively, and $79 million and $161 million for the three- and six-month periods ended March 27, 2010, respectively.
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As of March 26, 2011, the total unrecognized compensation cost related to outstanding stock options and RSUs expected to vest was $2.6 billion, which the Company expects to recognize over a weighted-average period of 2.9 years.
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Employee Benefit Plans Rule 10b5-1 Trading Plans During the second quarter of 2011, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell and Jeffrey E. Williams, and director William V. Campbell had trading plans pursuant to Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934, as amended (the “Ex...
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A trading plan is a written document that pre-establishes the amounts, prices and dates (or a formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including the exercise and sale of employee stock options and shares acquired pursuant to the Company’s employee stock...
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Note 6 - Commitments and Contingencies Accrued Warranty and Indemnifications The following table summarizes changes in the Company’s accrued warranties and related costs for the three- and six-month periods ended March 26, 2011 and March 27, 2010 (in millions): The Company generally does not indemnify end-users of its ...
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Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party.
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However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against it or an indemnified third-party and, in the opinion of management, does not have a potential liability related to unresolved infringement claims subject to indemnification that would m...
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Therefore, the Company did not record a liability for infringement costs related to indemnification as of either March 26, 2011 or September 25, 2010.
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The Company has entered into indemnification agreements with its directors and executive officers.
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Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings.
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It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim.
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However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.
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Concentrations in the Available Sources of Supply of Materials and Product Although most components essential to the Company’s business are generally available from multiple sources, certain key components including but not limited to microprocessors, enclosures, certain liquid crystal displays (“LCDs”), certain optica...
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Many of these and other key components that are available from multiple sources including but not limited to NAND flash memory, dynamic random access memory (“DRAM”) and certain LCDs, are subject at times to industry-wide shortages and significant commodity pricing fluctuations.
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In addition, the Company has entered into certain agreements for the supply of key components including, but not limited to, microprocessors, NAND flash memory, DRAM and LCDs with favorable pricing, but there can be no guarantee that the Company will be able to extend or renew these agreements on similar favorable term...
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Therefore, the Company remains subject to significant risks of supply shortages and/or price increases that can materially adversely affect its financial condition and operating results.
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The Company and other participants in the mobile communication and media device, and personal computer industries also compete for various components with other industries that have experienced increased demand for their products.
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In addition, the Company uses some custom components that are not common to the rest of these industries, and new products introduced by the Company often utilize custom components available from only one source.
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When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased.
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If the Company’s supply of a key single-sourced component for a new or existing product were delayed or constrained, if such components were available only at significantly higher prices, or if a key outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operat...
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The Company’s business and financial performance could also be adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source.
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Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decided to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
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Substantially all of the Company’s iPhones, iPads, Macs, iPods, logic boards and other assembled products are manufactured by outsourcing partners, primarily in various parts of Asia.
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A significant concentration of this outsourced manufacturing is currently performed by only a few outsourcing partners of the Company, often in single locations.
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Certain of these outsourcing partners are the sole-sourced supplier of components and manufacturing outsourcing for many of the Company’s key products including but not limited to final assembly of substantially all of the Company’s hardware 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 ranging from 30 to 150 days.
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Long-Term Supply Agreements The Company has entered into long-term agreements to secure the supply of certain inventory components.
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These agreements generally expire between 2011 and 2022.
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As of March 26, 2011, the Company had a total of $2.4 billion of inventory component prepayments outstanding, of which $179 million is classified as other current assets and $2.2 billion is classified as other assets in the Condensed Consolidated Balance Sheets.
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The Company had a total of $956 million of inventory component prepayments outstanding as of September 25, 2010.
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The Company’s outstanding prepayments will be applied to certain inventory component purchases made during the term of each respective agreement.
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As of March 26, 2011, the Company had off-balance sheet commitments under long-term supply agreements totaling approximately $2.0 billion to make additional inventory component prepayments and to acquire capital equipment in 2011 and beyond.
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Other Off-Balance Sheet Commitments 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 provide renewal options for terms not exceeding five additional years.
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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 September 25, 2010, the Company’s total future minimum lease payments under noncancelable operating leases were $2.1 billion, of which $1.7 billion related to leases for retail space.
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As of March 26, 2011, total future minimum lease payments under noncancelable operating leases related to leases for retail space were $2.0 billion.
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Additionally, as of March 26, 2011, the Company had outstanding off-balance sheet commitments for outsourced manufacturing and component purchases of $11.0 billion.
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Other outstanding obligations were $747 million as of March 26, 2011, and were comprised mainly of commitments to acquire product tooling and manufacturing process equipment and commitments related to advertising, research and development, Internet and telecommunications services and other obligations.
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These commitments exclude the off-balance sheet commitments under the long-term supply agreements described above.
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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 have not been fully adjudicated, which are discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II Item 1A under the heading “Risk Factors.” In...
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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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On March 14, 2008, Mirror Worlds, LLC filed an action against the Company alleging that certain of its products infringed on three patents covering technology used to display files.
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On October 1, 2010, a jury returned a verdict against the Company, and awarded damages of $208 million per patent for each of the three patents asserted.
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On April 4, 2011, the Judge overturned the verdict in the Company’s favor.
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The Company had not recorded a loss contingency for this action.
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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 and certain states and provinces within North America.
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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 can be no assurance that such existing laws or future laws will not materially adversely affect the Company’s financial condition or operating results.
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Note 7 - 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 segments.
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The Company manages its business primarily on a geographic basis.
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Accordingly, the Company determined its operating and reporting segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Japan, Asia-Pacific and Retail operations.
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The Americas, Europe, Japan and Asia-Pacific reportable segment results do not include results of 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 the Middle East and Africa.
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The Asia-Pacific segment includes Australia and Asia, but does not include Japan.
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The Retail segment operates Apple retail stores in 11 countries, including the U.S. Each reportable 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 this Form 10-Q and in the Notes to Consolidated Financial Statements in the Company’s 2010 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 advertising occurs.
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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 gen...
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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, cash equivalents, 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 expenditures for long-lived assets are not reported to management by segment.
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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 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 16 high-profile stores as of March 26, 2011.
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Amounts allocated to corporate expense resulting from the operations of high-profile stores were $25 million and $49 million during the three- and six-month periods ended March 26, 2011, respectively, and $19 million and $36 million during the three- and six-month periods ended March 27, 2010, respectively.
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Summary information by operating segment for the three- and six-month periods ended March 26, 2011 and March 27, 2010 is as follows (in millions): A reconciliation of the Company’s segment operating income to the condensed consolidated financial statements for the three- and six-month periods ended March 26, 2011 and M...
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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 did not recognize any expenses pursuant to the Reimbursement Agreement during the three months ended March 26, 2011 and recognized a total of $15,000 in expenses pursuant to the Reimbursement Agreement during the six-month period ended March 26, 2011.
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The Company recognized a total of $127,000 and $143,000 in expenses pursuant to the Reimbursement Agreement during the three- and six-month periods ended March 27, 2010, respectively.
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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 year ended September 25, 2010 (the “2010 Form 10-K”) filed with the U.S. Securities and Exchange Commission (“SEC”) and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in thi...
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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 (“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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