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0000320193
20110421
10-Q
335
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...
0001193125-11-104388/full-submission.txt
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20110421
10-Q
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The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
0001193125-11-104388/full-submission.txt
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There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.
0001193125-11-104388/full-submission.txt
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10-Q
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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 materially adversely affect its financial condition or operating results.
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10-Q
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However, the outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty.
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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.
0001193125-11-104388/full-submission.txt
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20110421
10-Q
341
Net Sales The following table summarizes net sales by operating segment and net sales and unit sales by product during the three- and six-month periods ended March 26, 2011 and March 27, 2010 (in millions, except unit sales in thousands and per unit amounts): (a) Includes iMac, Mac mini, Mac Pro and Xserve product line...
0001193125-11-104388/full-submission.txt
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(b) Includes MacBook, MacBook Air and MacBook Pro product lines.
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(c) Includes sales from the iTunes Store, App Store, and iBookstore in addition to sales of iPod services and Apple-branded and third-party iPod accessories.
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(d) Includes revenue recognized from iPhone sales, carrier agreements, services, and Apple-branded and third-party iPhone accessories.
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(e) Includes revenue recognized from iPad sales, services, and Apple-branded and third-party iPad accessories.
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(f) Includes sales of displays, wireless connectivity and networking solutions, and other hardware accessories.
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(g) Includes sales from the Mac App Store in addition to sales of other Apple-branded and third-party Mac software and Mac and Internet services.
0001193125-11-104388/full-submission.txt
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10-Q
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NM = Not Meaningful Net sales during the second quarter of 2011 and the first six months of 2011 increased $11.2 billion or 83%, and $22.2 billion or 76%, respectively, compared to the same periods in 2010.
0001193125-11-104388/full-submission.txt
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10-Q
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Several factors contributed positively to this increase, including the following: • Net sales of iPhone and related products and services were $12.3 billion and $22.8 billion in the second quarter of 2011 and first six months of 2011, respectively, representing an increase of 126% and 107%, compared to the same periods...
0001193125-11-104388/full-submission.txt
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10-Q
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Net sales of iPhone and related products and services accounted for 50% and 44% of the Company’s total net sales for the second quarter of 2011 and first six months of 2011, respectively.
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10-Q
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iPhone handset unit sales totaled 18.6 million and 34.9 million during the second quarter of 2011 and first six months of 2011, respectively.
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20110421
10-Q
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iPhone unit sales increased 9.9 million or 113% during the second quarter of 2011 and 17.4 million or 99% during the first six months of 2011 compared to the same periods in 2010. iPhone year-over-year net sales growth reflects strong demand for iPhone 4 in all of the Company’s operating segments and the expanded U.S. ...
0001193125-11-104388/full-submission.txt
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10-Q
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Continued expansion of distribution with other new carriers and resellers also contributed to the year-over-year growth of iPhone.
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10-Q
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As of March 26, 2011, the Company distributed iPhone in 90 countries through 186 carriers.
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• Net sales of iPad and related products and services were $2.8 billion and $7.4 billion in the second quarter of 2011 and first six months of 2011, respectively.
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Unit sales of iPad were 4.7 million and 12.0 million during the second quarter of 2011 and first six months of 2011.
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The iPad 2 was introduced in March 2011.
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Including both the original iPad and iPad 2, the Company had distribution in 59 countries as of March 26, 2011.
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The Company distributes iPad through its direct channels, certain cellular network carriers’ distribution channels and certain third-party resellers.
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10-Q
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Net sales of iPad and related products and services accounted for 11% and 14% of the Company’s total net sales for the second quarter of 2011 and first six months of 2011.
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• Mac net sales increased by $1.2 billion or 32% and $2.2 billion or 27% in the second quarter of 2011 and first six months of 2011, respectively, compared to the same periods in 2010.
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Mac unit sales increased by 817,000 or 28% and 1.6 million or 25% in the second quarter of 2011 and first six months of 2011, respectively, compared to the same periods in 2010.
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The year-over-year growth in Mac net sales and unit sales was due to higher demand for MacBook Pro and MacBook Air, which were updated in February 2011 and October 2010, respectively, and experienced significant growth in all of the Company’s operating segments.
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Net sales per Mac unit sold for the second quarter of 2011 and first six months of 2011 increased 4% and 1%, respectively, compared to the same periods in 2010.
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Net sales of the Company’s Macs accounted for 20% of the Company’s total net sales for both the second quarter of 2011 and first six months of 2011.
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• Net sales of iPod decreased $261 million or 14% during the second quarter of 2011, and decreased $227 million or 4% during the first six months of 2011 compared to the same periods in 2010.
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Similarly, iPod unit sales decreased by 17% and 11% in the second quarter of 2011 and first six months of 2010, respectively, compared to the same periods in 2010.
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However, net sales per iPod unit sold increased from $171 in the second quarter of 2010 to $177 in the second quarter of 2011, and increased from $165 for the first six months of 2010 to $177 for the first six months of 2011.
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The increases in net sales per iPod unit sold resulted from a shift in product mix toward iPod touch.
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Net sales of iPod accounted for 6% and 10% of the Company’s total net sales for the second quarter of 2011 and first six months of 2011, respectively.
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• Net sales of other music related products and services increased $307 million or 23% and $574 million or 23% during the second quarter of 2011 and first six months of 2011, respectively, compared to the same periods in 2010.
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The increases were due primarily to increased net sales from the iTunes Store, which experienced growth in all of the Company’s geographic segments.
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During the second quarter of 2011 and the first six months of 2011, the combined net sales for the iTunes Store, App Store and iBookstore were $1.4 billion and $2.5 billion, respectively.
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The Company believes this continued growth is the result of heightened consumer interest in downloading third-party digital content, continued growth in its customer base of iPhone, iPad and iPod customers, the expansion of third-party audio and video content available for sale and rent via the iTunes Store, and the co...
0001193125-11-104388/full-submission.txt
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20110421
10-Q
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The Company continues to expand its iTunes content and applications offerings around the world.
0001193125-11-104388/full-submission.txt
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10-Q
376
Net sales of other music related products and services accounted for 7% and 6% of the Company’s total net revenue for the second quarter of 2011 and first six months of 2011, respectively.
0001193125-11-104388/full-submission.txt
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Segment Operating Performance The Company manages its business primarily on a geographic basis.
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The Company’s reportable operating and reporting segments consist of 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 the results of the Retail segment.
0001193125-11-104388/full-submission.txt
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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.
0001193125-11-104388/full-submission.txt
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10-Q
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Further information regarding the Company’s operating segments may be found in Note 7, “Segment Information and Geographic Data” in Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
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Americas Net sales in the Americas during the second quarter of 2011 increased $4.3 billion or 87% compared to the same period in 2010.
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The increase in net sales during the second quarter of 2011 was attributable to increased iPhone revenue driven by expanded U.S. distribution to the Verizon Wireless network beginning in February 2011, the introduction of iPad in the second half of 2010, and strong demand for Macs.
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Also contributing to the increase were higher sales of third-party digital content and applications from the iTunes Store and App Store.
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The Americas segment represented 38% and 37% of the Company’s total net sales in the second quarter of 2011 and 2010, respectively.
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During the first six months of 2011, net sales in the Americas segment increased $7.5 billion or 67% compared to the same period in 2010.
0001193125-11-104388/full-submission.txt
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20110421
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The primary contributors to the growth in net sales during the first six months of 2011 were a significant year-over-year increase in iPhone revenue from carrier expansion, the launch of iPad, and increased sales of Macs.
0001193125-11-104388/full-submission.txt
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Higher sales of third-party digital content and applications from the iTunes Store and App Store also drove higher sales during the first six months of 2011.
0001193125-11-104388/full-submission.txt
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10-Q
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The Americas segment represented approximately 36% and 38% of the Company’s total net sales for the first six months of 2011 and 2010, respectively.
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Europe Net sales in Europe increased $2.0 billion or 49% during the second quarter of 2011 compared to the second quarter of 2010.
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The growth in net sales was mainly due to an increase in iPhone revenue attributable to country and carrier expansion, the launch of iPad, and increased sales of Mac portable systems.
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The Europe segment represented 24% and 30% of the Company’s total net sales in the second quarter of 2011 and 2010, respectively.
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For the first six months of 2011, net sales in Europe increased $4.2 billion or 46%, compared to the same period in 2009.
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The increase in net sales during the first six months of 2011 was attributable primarily to the continued year-over-year increase in iPhone revenue, the launch of iPad, and strong demand for Mac portable systems, partially offset by the impact of a stronger U.S. dollar.
0001193125-11-104388/full-submission.txt
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The Europe segment represented 26% and 31% of total net sales for the first six months in 2011 and 2010, respectively.
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Japan Japan’s net sales increased $496 million or 56% during the second quarter of 2011 and increased $1.1 billion or 69% during the first six months of 2011 compared to the same periods in 2010.
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The key contributors to Japan’s net sales growth for both the second quarter and first six months of 2011 were increased iPhone revenue, the launch of iPad, increased sales of Macs, and strength in the Japanese Yen relative to the U.S. dollar.
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The Japan segment represented 6% of total net sales in the second quarter of 2011 compared to 7% in the year ago quarter, and 5% of total net sales in the first six months of 2011 compared to 6% in the first six months of 2010.
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The recent earthquakes and tsunami that struck the northeast coast of Japan has created uncertainty regarding the effect on general economic and market conditions in Japan.
0001193125-11-104388/full-submission.txt
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Any significant impact on consumer demand could negatively impact the Company’s net sales in the Japan segment.
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The Company does not currently believe that such impact will have a material adverse effect on the Company or its results of operations.
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Asia-Pacific Net sales in Asia Pacific increased $2.9 billion or 151% during the second quarter of 2011 and increased $6.0 billion or 163% during the first six months of 2011 compared to the same periods in 2010.
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The Company experienced particularly strong year-over-year net sales growth in China, Hong Kong and Korea during the second quarter of 2011 and first six months of 2011.
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Higher net sales in the Asia Pacific segment were due mainly to the increase in iPhone revenue primarily attributable to new carrier launches, introduction of iPad, and increased sales of Macs.
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The Asia Pacific segment represented 19% and 14% of total net sales in the second quarter of 2011 and 2010, respectively, and 19% and 13% of total net sales in the first six months of 2011 and 2010, respectively.
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Retail Retail net sales increased $1.5 billion or 90% during the second quarter of 2011 compared to the second quarter of 2010.
0001193125-11-104388/full-submission.txt
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The increase in net sales was driven primarily by higher iPhone sales, the launch of iPad, and higher sales of Macs.
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The Company did not open any new retail stores during the second quarter of 2011, ending the quarter with 323 stores open compared to 286 stores at the end of the second quarter of 2010.
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With an average of 323 stores and 284 stores open during the second quarter of 2011 and 2010, respectively, average revenue per store increased 67% to $9.9 million in the second quarter of 2011 compared to the second quarter of 2010.
0001193125-11-104388/full-submission.txt
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The Retail segment represented 13% and 12% of total net sales in the second quarter of 2011 and 2010, respectively.
0001193125-11-104388/full-submission.txt
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Retail net sales grew $3.4 billion or 93% during the first six months of 2011 compared to the same period in 2010 driven primarily by the launch of iPad, a significant year-over-year increase in iPhone sales, and higher sales of Macs.
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Average revenue per store increased 68% to $21.9 million for the first six months of 2011 compared to the same period in 2010.
0001193125-11-104388/full-submission.txt
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The Retail segment represented 14% and 12% of total net sales for the first six months of 2011 and 2010, respectively.
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The Retail segment reported operating income of $807 million during the second quarter of 2011 compared to operating income of $373 million during the second quarter of 2010, and reported operating income of $1.8 billion during the first six months of 2011 compared to $854 million during the first six months of 2010.
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The year-over-year increase in Retail operating income was primarily attributable to higher overall net sales that resulted in significantly higher average revenue per store during the second quarter and first six months of 2011 compared to the same periods in 2010.
0001193125-11-104388/full-submission.txt
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Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses.
0001193125-11-104388/full-submission.txt
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Capital asset purchases associated with the Retail segment since inception totaled $2.3 billion through the second quarter of 2011.
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As of March 26, 2011, the Retail segment had approximately 30,200 full-time equivalent employees and had outstanding lease commitments associated with retail space and related facilities of $2.0 billion.
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The Company would incur substantial costs if it were to close multiple retail stores and such costs could adversely affect the Company’s financial condition and operating results.
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Gross Margin Gross margin for the three- and six-month periods ended March 26, 2011 and March 27, 2010 was as follows (in millions, except gross margin percentages): The gross margin percentage in the second quarter of 2011 was 41.4%, relatively consistent with the 41.7% in the second quarter of 2010.
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The gross margin percentage for the first six months of 2011 was 39.9% compared to 41.2% for the first six months of 2010.
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This year-over-year decline in gross margin is primarily attributable to new and innovative products that have higher cost structures, including iPhone 4 and iPad, that was partially offset by lower other manufacturing costs.
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The Company expects to experience decreases in its gross margin percentage in future periods, as compared to levels achieved during the first half of 2011, largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected and potential futur...
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The foregoing statements regarding the Company’s expected gross margin percentage are forward-looking and could differ from anticipated levels because of several factors including, but not limited to certain of those set forth below in Part II, Item 1A, “Risk Factors” under the subheading “Future operating results depe...
0001193125-11-104388/full-submission.txt
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In general, gross margins and margins on individual products will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions and potential and expected increases in the cost of...
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In response to these competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins.
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Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.
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Due to the Company’s significant international operations, financial results can be significantly affected in the short-term by fluctuations in exchange rates.
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Operating Expenses Operating expenses for the three- and six-month periods ended March 26, 2011 and March 27, 2010, were as follows (in millions, except for percentages): Research and Development Expense (“R&D”) R&D expense increased $155 million or 36% to $581 million during second quarter of 2011 compared to the same...
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These increases were due primarily to an increase in headcount and related expenses to support expanded R&D activities.
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Although total R&D expense increased 36% and 40% during the second quarter and first six months of 2011, compared to the same periods in 2010, respectively, it declined as a percentage of net sales, due to the 83% and 76% year-over-year growth in the Company’s net sales during the second quarter and first six months of...
0001193125-11-104388/full-submission.txt