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0000320193
20110421
10-Q
435
The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company’s core business strategy.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
436
As such, the Company expects to make further investments in R&D to remain competitive.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
437
Selling, General and Administrative Expense (“SG&A”) SG&A expense increased $543 million or 45% to $1.8 billion during second quarter of 2011 compared to the same period of 2010, and increased $1.2 billion or 46% to $3.7 billion during the first six months of 2011 compared to the same period in 2010.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
438
These increases were due primarily to the Company’s continued expansion of its Retail segment, higher spending on marketing and advertising programs, and increased variable costs associated with the overall growth of the Company’s net sales.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
439
Other Income and Expense Total other income and expense decreased $24 million or 48% to $26 million during second quarter of 2011 compared to the same period of 2010, and increased $79 million or 95% to $162 million during the first six months of 2011 compared to the same period in 2010.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
440
The overall decrease during second quarter of 2011 in other income and expense is primarily attributable to higher premium expenses on foreign exchange option contracts, partially offset by higher interest income on the Company’s higher cash, cash equivalents and marketable securities balances as compared to the second...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
441
The overall increase during the first six months of 2011 in other income and expense is primarily attributable to higher interest income and net realized gains on sales of marketable securities, partially offset by higher premium expenses on foreign exchange option contracts as compared to the first six months of 2010.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
442
The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities increased to 0.76% in the second quarter of 2011 from 0.70% in the second quarter of 2010.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
443
Provision for Income Taxes The Company’s effective tax rates for the three- and six-month periods ended March 26, 2011 were approximately 24% for both periods, compared to approximately 24% and 27% for the three- and six-month periods ended March 27, 2010, respectively.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
444
The Company’s effective rates for both periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
445
The lower effective tax rate during the first six months of 2011 compared to the same period in 2010 is due primarily to a higher proportion of foreign earnings and the recognition of a tax benefit as a result of legislation enacted during the first quarter of 2011 retroactively reinstating the research and development...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
446
The Internal Revenue Service (the “IRS”) has completed its field audit of the Company’s federal income tax returns for the years 2004 through 2006 and proposed certain adjustments.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
447
The Company has contested certain of these adjustments through the IRS Appeals Office.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
448
The IRS is currently examining the years 2007 through 2009.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
449
All IRS audit issues for years prior to 2004 have been resolved.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
450
In addition, the Company is subject to audits by state, local, and foreign tax authorities.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
451
Management believes that adequate provision has been made for any adjustments that may result from tax examinations.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
452
However, the outcome of tax audits cannot be predicted with certainty.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
453
If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
454
Liquidity and Capital Resources The following table summarizes selected financial information and statistics as of March 26, 2011 and September 25, 2010 (in millions): As of March 26, 2011, the Company had $65.8 billion in cash, cash equivalents and marketable securities, an increase of $14.8 billion from September 25,...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
455
The principal component of this net increase was the cash generated by operating activities of $16.0 billion, which was partially offset by payments for acquisition of property, plant and equipment of $1.8 billion.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
456
The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
457
The Company’s marketable securities investment portfolio is invested primarily in highly rated securities, generally with a minimum rating of single-A or equivalent.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
458
As of March 26, 2011 and September 25, 2010, $40.2 billion and $30.8 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
459
Capital Assets The Company’s capital expenditures were $2.2 billion during the first six months of 2011 consisting of approximately $142 million for retail store facilities and $2.1 billion for other capital expenditures, including product tooling and manufacturing process equipment, real estate for the future developm...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
460
The Company’s actual cash payments for capital expenditures during the first six months of 2011 were $1.8 billion, of which $151 million relates to retail store facilities.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
461
The Company anticipates utilizing approximately $5.7 billion for capital expenditures during 2011, including approximately $700 million for retail store facilities and approximately $5.0 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information s...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
462
Historically the Company has opened between 25 and 50 new retail stores per year.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
463
During 2011, the Company expects to open about 40 new retail stores, nearly three-quarters of which are expected to be located outside of the U.S. Off-Balance Sheet Arrangements and Contractual Obligations The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial g...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
464
Lease Commitments As of September 25, 2010, the Company had total outstanding commitments on noncancelable operating leases of $2.1 billion, $1.7 billion of which related to the lease of retail space and related facilities.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
465
The Company’s major facility leases are typically for terms not exceeding 10 years and generally provide renewal options for terms not exceeding five additional years.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
466
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.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
467
Total outstanding commitments on noncancelable operating leases related to the lease of retail space were $2.0 billion as of March 26, 2011.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
468
Purchase Commitments with Outsourcing Partners and Component Suppliers The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and test of finished products.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
469
These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods ranging from 30 to 150 days.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
470
The Company also obtains individual components for its products from a wide variety of individual suppliers.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
471
Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
472
As of March 26, 2011, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $11.0 billion.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
473
The Company has also entered into long-term agreements to secure the supply of certain inventory components.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
474
These agreements generally expire between 2011 and 2022.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
475
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.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
476
Other Obligations 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, in addition to that noted above under long-term supply agreements, and commitments related to advertising, research and develop...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
477
The Company’s other non-current liabilities in the Condensed Consolidated Balance Sheets consist primarily of deferred tax liabilities, gross unrecognized tax benefits and the related gross interest and penalties.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
478
As of March 26, 2011, the Company had non-current deferred tax liabilities of $6.2 billion.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
479
Additionally, as of March 26, 2011, the Company had gross unrecognized tax benefits of $1.1 billion and an additional $260 million for gross interest and penalties classified as non-current liabilities.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
480
At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
481
Indemnifications The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes third-party intellectual property rights.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
482
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.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
483
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 liability related to unresolved infringement claims subject to indemnification that would materially ...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
484
Therefore, the Company did not record a liability for infringement costs related to indemnification as of either March 26, 2011 or September 25, 2010.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
485
The Company has entered into indemnification agreements with its directors and executive officers.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
486
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.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
487
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.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
488
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.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
489
Item 3.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
490
Quantitative and Qualitative Disclosures About Market Risk The Company’s market risk profile has not changed significantly during the first six months of 2011.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
491
Interest Rate and Foreign Currency Risk Management The Company regularly reviews its foreign exchange forward and option positions, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
492
However, given the effective horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
493
In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s financial condition and operating ...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
494
Interest Rate Risk While the Company is exposed to interest rate fluctuations in many of the world’s leading industrialized countries, the Company’s interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
495
As such, changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and marketable securities, the fair value of those investments, as well as costs associated with foreign currency hedges.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
496
The Company’s investment policy and strategy are focused on preservation of capital and supporting the liquidity requirements of the Company.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
497
A portion of the Company’s cash is managed by external managers within the guidelines of the Company’s investment policy and to objective market benchmarks.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
498
The Company’s internal portfolio is benchmarked against external manager performance.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
499
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
500
The Company typically invests in highly rated securities and its policy generally limits the amount of credit exposure to any one issuer.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
501
The Company’s investment policy requires investments to generally be investment grade, primarily rated single-A or better with the objective of minimizing the potential risk of principal loss.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
502
All highly liquid investments with initial maturities of three months or less at the date of purchase are classified as cash equivalents.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
503
The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
504
All short-term marketable securities have maturities less than 12 months, while all long-term marketable securities have maturities greater than 12 months.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
505
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to anticipation of credit deterioration and duration management.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
506
Foreign Currency Risk In general, the Company is a net receiver of currencies other than the U.S. dollar.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
507
Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
508
There is also a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
509
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
510
Generally, the Company’s practice is to hedge a majority of its material foreign exchange exposures, typically for three to six months.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
511
However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
512
Item 4.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
513
Controls and Procedures Evaluation of Disclosure Controls and Procedures Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as ...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
514
Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the second quarter of 2011, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
515
PART II.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
516
OTHER INFORMATION Item 1.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
517
Legal Proceedings As of March 26, 2011, the end of the quarterly period covered by this report, the Company was subject to the various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of busi...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
518
In the opinion of management, the Company does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially adversely affect its financial condition or operating results.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
519
However, the results of legal proceedings cannot be predicted with certainty.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
520
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
0000320193
20110421
10-Q
521
See the risk factors “The Company’s future results could be materially adversely affected if it is found to have infringed on intellectual property rights.” and “Unfavorable results of legal proceedings could materially adversely affect the Company.” in Part II, Item 1A of this Quarterly Report on Form 10-Q under the h...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
522
In re Apple & ATTM Antitrust Litigation (brought on behalf of named plaintiffs Kliegerman, Holman, Rivello, Smith, Lee, Macasaddu, Morikawa, Scotti and Sesso) This is a purported class action filed against the Company and AT&T Mobility in the United States District Court for the Northern District of California.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
523
The Consolidated Complaint alleges that the Company and AT&T Mobility violated the federal antitrust laws by monopolizing and/or attempting to monopolize the “aftermarket for voice and data services” for the iPhone and that the Company monopolized and/or attempted to monopolize the “aftermarket for software application...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
524
On July 8, 2010 the Court granted in part plaintiffs’ motion for class certification.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
525
The case is currently stayed until the Supreme Court rules on the enforceability of the AT&T Mobility arbitration clause in the AT&T Mobility v. Conception case.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
526
The Apple iPod iTunes Antitrust Litigation (formerly Charoensak v. Apple Computer, Inc. and Tucker v. Apple Computer, Inc.); Somers v. Apple Inc.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
527
These related cases have been filed on January 3, 2005, July 21, 2006 and December 31, 2007 in the United States District Court for the Northern District of California on behalf of a purported class of direct and indirect purchasers of iPods and iTunes Store content, alleging various claims including alleged unlawful t...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
528
Plaintiffs are seeking unspecified compensatory and punitive damages for the class, treble damages, injunctive relief, disgorgement of revenues and/or profits and attorneys fees.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
529
Plaintiffs are also seeking digital rights management (“DRM”) free versions of any songs downloaded from iTunes or an order requiring the Company to license its DRM to all competing music players.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
530
The cases are currently pending.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
531
Item 1A.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
532
Risk Factors Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends ...
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
533
Economic conditions could materially adversely affect the Company.
0001193125-11-104388/full-submission.txt
0000320193
20110421
10-Q
534
The Company’s operations and performance depend significantly on worldwide economic conditions.
0001193125-11-104388/full-submission.txt