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0000320193
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The Company has accrued its best estimate for the ultimate resolution of these matters.
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iOS Performance Management Cases Various civil litigation matters have been filed in state and federal courts in the U.S. and in various international jurisdictions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management featur...
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The claims seek monetary damages and other non-monetary relief.
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On April 5, 2018, several U.S. federal actions were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court for the Northern District of California.
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In addition to civil litigation, the Company is also responding to governmental investigations and requests for information relating to the performance management feature.
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The Company believes that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information.
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The Company has accrued its best estimate for the ultimate resolution of these matters.
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Apple Inc. | Q1 2020 Form 10-Q | 20 French Competition Authority In June 2019, the French Competition Authority (“FCA”) issued a report alleging that aspects of the Company’s sales and distribution practices in France violate French competition law.
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The Company vigorously disagrees with the allegations, and a hearing of arguments was held before the FCA on October 15, 2019.
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The Company is awaiting the decision of the FCA, which may include a fine.
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Note 11 - 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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The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific.
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Americas includes both North and South America.
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Europe includes European countries, as well as India, the Middle East and Africa.
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Greater China includes China, Hong Kong and Taiwan.
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Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments.
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Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region.
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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 the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2019 Form 10-K.
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The Company evaluates the performance of its reportable 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 and sales through the Company’s retail stores located in those geographic locations.
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Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.
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Advertising expenses are generally included in the geographic segment in which the expenditures are incurred.
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Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments.
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Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs.
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The Company does not include intercompany transfers between segments for management reporting purposes.
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The following table shows information by reportable segment for the three months ended December 28, 2019 and December 29, 2018 (in millions): Apple Inc. | Q1 2020 Form 10-Q | 21 A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three months ended D...
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These leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options, some of which are reasonably certain of exercise.
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The Company’s lease arrangements may contain both lease and non-lease components.
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The Company has elected to combine and account for lease and non-lease components as a single lease component for leases of retail, corporate, and data center facilities.
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Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments are primarily based on purchases of output of the underlying leased assets.
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Lease costs associated with fixed payments on the Company’s operating leases were $369 million for the three months ended December 28, 2019.
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Lease costs associated with variable payments on the Company’s leases were $3.0 billion for the three months ended December 28, 2019.
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For the three months ended December 28, 2019, the Company made $349 million of fixed cash payments related to operating leases.
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Non-cash activities involving ROU assets obtained in exchange for lease liabilities were $8.2 billion for the three months ended December 28, 2019, including the impact of adopting the new leases standard.
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The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of December 28, 2019 (in millions): Apple Inc. | Q1 2020 Form 10-Q | 22 Lease liability maturities as of December 28, 2019, are as follows (in millions): The weighted-average remaining lease term and discou...
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The Company’s lease discount rates are generally based on estimates of its incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.
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As of December 28, 2019, the Company had $2.1 billion of future payments under additional leases, primarily for corporate facilities and retail space, that had not yet commenced.
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These leases will commence between 2020 and 2022, with lease terms ranging from less than 1 year to 16 years.
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Apple Inc. | Q1 2020 Form 10-Q | 23 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 Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties.
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Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact.
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Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” 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 I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 28, 2019 (the “2019 Form 10-K”) under the heading “Risk Factors.” The following discussion should be read in conjunction with the 2019 Fo...
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All information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
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Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly owned subsidiaries, unless otherwise stated.
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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 Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC.
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The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC.
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Such reports and other information filed by the Company with the SEC are available free of charge at investor.apple.com/investor-relations/sec-filings/default.aspx when such reports are available on the SEC’s website.
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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 www.sec.gov.
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The Company periodically provides other information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com.
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This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders.
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The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing.
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Further, the Company’s references to website URLs are intended to be inactive textual references only.
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Quarterly Highlights Business Seasonality and Product Introductions The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand.
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Additionally, new product and service introductions can significantly impact net sales, cost of sales and operating expenses.
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The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches.
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Net sales can also be affected when consumers and distributors anticipate a product introduction.
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First Quarter Fiscal 2020 Highlights Total net sales increased 9% or $7.5 billion during the first quarter of 2020 compared to the same quarter in 2019, primarily driven by higher iPhone and Wearables, Home and Accessories net sales.
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The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on net sales during the first quarter of 2020.
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During the first quarter of 2020, the Company began shipping AirPods Pro™, the new 16-inch MacBook Pro® and the updated Mac Pro®.
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Additionally, the Company released Apple TV+ as a new service.
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The Company repurchased $20.0 billion of its common stock and paid dividends and dividend equivalents of $3.5 billion during the first quarter of 2020.
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Apple Inc. | Q1 2020 Form 10-Q | 24 Products and Services Performance The following table shows net sales by category for the three months ended December 28, 2019 and December 29, 2018 (dollars in millions): (1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which ...
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(2) Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories.
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(3) Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare, licensing and other services.
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Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud and Apple TV + services, which are bundled in the sales price of certain products.
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iPhone iPhone net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to the successful launch of the Company’s new iPhone models.
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Mac Mac net sales decreased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to the timing of the MacBook Air® launch in the first quarter of 2019. iPad iPad net sales decreased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to the timing of the iP...
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Wearables, Home and Accessories Wearables, Home and Accessories net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher net sales of Wearables, including AirPods and Apple Watch.
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Services Services net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher net sales from AppleCare, the App Store and licensing.
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Apple Inc. | Q1 2020 Form 10-Q | 25 Segment Operating Performance The Company manages its business primarily on a geographic basis.
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The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific.
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Americas includes both North and South America.
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Europe includes European countries, as well as India, the Middle East and Africa.
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Greater China includes China, Hong Kong and Taiwan.
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Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments.
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Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region.
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Further information regarding the Company’s reportable segments can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.” The following table shows net sales by reportable segment for the three months ended Decembe...
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Europe Europe net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher iPhone and Wearables, Home and Accessories net sales.
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The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Europe net sales during the first quarter of 2020.
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Greater China Greater China net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher Wearables, Home and Accessories net sales.
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The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during the first quarter of 2020.
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Japan Japan net sales decreased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to lower iPhone net sales, partially offset by higher Services net sales.
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The strength of the Japanese Yen relative to the U.S. dollar had a favorable impact on Japan net sales during the first quarter of 2020.
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Rest of Asia Pacific Rest of Asia Pacific net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher Wearables, Home and Accessories and Services net sales.
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The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Rest of Asia Pacific net sales during the first quarter of 2020.
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Apple Inc. | Q1 2020 Form 10-Q | 26 Gross Margin Products and Services gross margin and gross margin percentage for the three months ended December 28, 2019 and December 29, 2018 were as follows (dollars in millions): Products Gross Margin Products gross margin increased during the first quarter of 2020 compared to the...
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Products gross margin percentage during the first quarter of 2020 was relatively flat compared to the same quarter in 2019.
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Services Gross Margin Services gross margin and Services gross margin percentage increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to a favorable Services mix and higher leverage, partially offset by higher Services costs.
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The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2019 Form 10-K under the heading “Risk Factors”.
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As a result, the Company believes, in general, gross margins will be subject to volatility and remain under downward pressure.
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Operating Expenses Operating expenses for the three months ended December 28, 2019 and December 29, 2018 were as follows (dollars in millions): Research and Development The growth in research and development (“R&D”) expense during the first quarter of 2020 compared to the same quarter in 2019 was driven primarily by in...
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The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy.
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Selling, General and Administrative The growth in selling, general and administrative expense during the first quarter of 2020 compared to the same quarter in 2019 was driven primarily by higher spending on marketing and advertising and increases in headcount-related expenses.
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Apple Inc. | Q1 2020 Form 10-Q | 27 Other Income/(Expense), Net Other income/(expense), net (“OI&E”) for the three months ended December 28, 2019 and December 29, 2018 was as follows (dollars in millions): The decrease in OI&E during the first quarter of 2020 compared to the same quarter in 2019 was due primarily to lo...
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The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 2.08% and 2.19% in the first quarter of 2020 and 2019, respectively.
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