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0000320193
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Although the reportable operating 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 2015 Form 10-K.
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The Company evaluates the performance of its reportable 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 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 operating 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 operating segment for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (in millions): A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended J...
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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 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 II, Item 1A of this Form 10-Q under the heading “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 26, 2015 (the “2015 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and notes thereto included elsewhere in...
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All information presented herein is based on the Company’s fiscal calendar.
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Unless otherwise stated, 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 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 (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 on the Company’s website at investor.apple.com/sec.cfm when such reports are available on the SEC’s 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 www.sec.gov.
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The contents of websites are not incorporated 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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Overview and Highlights Company Background The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications.
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The Company’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple Watch®, Apple TV®, a portfolio of consumer and professional software applications, iOS, macOS™, watchOS® and tvOS™ operating systems, iCloud®, Apple Pay® and a variety of accessory, service and support offerings.
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The Company sells and delivers digital content and applications through the iTunes Store®, App Store®, Mac App Store, TV App Store, iBooks Store™ and Apple Music® (collectively “Internet Services”).
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The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers.
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In addition, the Company sells a variety of third-party Apple compatible products, including application software and various accessories through its online and retail stores.
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The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
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Business Strategy The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services.
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The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration.
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As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Internet Services, which allows customers to discover and download digital content, iOS, Mac, Apple Watch and Apple TV applications, and books through either a Mac or Wind...
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The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings.
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The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers.
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Therefore, the Company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience.
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The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products and technologies.
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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 introductions can significantly impact net sales, product costs and operating expenses.
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Product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the next related major product launch approaches.
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Net sales can also be affected when consumers and distributors anticipate a product introduction.
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However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.
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Third Quarter Fiscal 2016 Highlights Net sales decreased 15% or $7.2 billion during the third quarter of 2016 compared to the same quarter in 2015, primarily driven by lower unit sales and a reduction in the average selling price ("ASP") for iPhone.
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The Company had strong year-over-year net sales growth in Services.
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During the third quarter of 2016, the Company began shipping iPhone SE and the 9.7-inch iPad ProTM.
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Additionally, at its Worldwide Developers Conference in June 2016, the Company announced updates to its operating systems with iOS 10, macOS Sierra, watchOS 3 and the new tvOS, which are expected to be available in the fall of 2016.
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The Company utilized $10.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $3.2 billion during the third quarter of 2016.
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Additionally, the Company issued $1.4 billion of U.S. dollar-denominated and A$1.4 billion of Australian dollar-denominated long-term debt.
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Sales Data The following table shows net sales by operating segment and net sales and unit sales by product for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions and units in thousands): (1) Includes deferrals and amortization of related software upgrade rights and non-softwar...
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(2) Includes revenue from Internet Services, AppleCare®, Apple Pay, licensing and other services.
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(3) Includes sales of Apple TV, Apple Watch, Beats® products, iPod and Apple-branded and third-party accessories.
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Product Performance iPhone The following table presents iPhone net sales and unit sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions and units in thousands): iPhone net sales and unit sales decreased during the third quarter and first nine months of 2016 c...
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The Company believes the unit sales decline is due primarily to the acceleration of iPhone upgrades in 2015 and challenging market conditions around the world.
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ASPs for iPhone were lower year-over-year during the third quarter and first nine months of 2016 due primarily to a shift in the mix of iPhones.
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iPad The following table presents iPad net sales and unit sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions and units in thousands): iPad net sales increased in the third quarter of 2016 compared to the same period in 2015 primarily due to higher ASPs for...
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iPad net sales decreased during the first nine months of 2016 compared to the same period in 2015 primarily due to lower unit sales and the effect of weakness in most foreign currencies relative to the U.S. dollar, partially offset by higher ASPs for iPad.
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The Company believes the year-over-year decline in unit sales during the third quarter and first nine months of 2016 is due in part to a longer repurchase cycle for iPads and some level of cannibalization from the Company's other products.
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Mac The following table presents Mac net sales and unit sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions and units in thousands): Mac net sales and unit sales decreased during the third quarter and first nine months of 2016 compared to the same periods i...
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Services The following table presents net sales information of Services for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions): The year-over-year increase in net sales of Services in the third quarter and first nine months of 2016 was due primarily to growth from App Store, l...
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During the first quarter of 2016, the Company received $548 million from Samsung Electronics Co., Ltd. related to its patent infringement lawsuit, which was recorded as licensing net sales within Services.
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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 segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific.
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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 India, the Middle East and Africa.
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The Greater China segment includes China, Hong Kong and Taiwan.
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The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Company’s other reportable operating segments.
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Although the reportable operating 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 operating 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.” Americas The following table presents Americas net sales information for the thre...
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Europe The following table presents Europe net sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions): Europe net sales decreased during the third quarter of 2016 compared to the same period in 2015 due primarily to lower net sales of iPhone and the effect of...
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The year-over-year decrease in Europe net sales during the first nine months of 2016 was driven primarily by the effect of weakness in foreign currencies relative to the U.S. dollar, partially offset by an increase in Services.
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Greater China The following table presents Greater China net sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions): Greater China net sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015 due primarily to...
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Japan The following table presents Japan net sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions): The year-over-year increase in Japan net sales during the third quarter of 2016 was due primarily to higher net sales of iPhone and Services, and the effect o...
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Japan net sales increased during the first nine months of 2016 compared to the same period in 2015 due primarily to higher net sales of Services and iPhone, partially offset by the effect of weakness in the Japanese yen relative to the U.S. dollar.
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Rest of Asia Pacific The following table presents Rest of Asia Pacific net sales information for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (dollars in millions): Rest of Asia Pacific net sales decreased during the third quarter and first nine months of 2016 compared to the same periods in ...
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Gross Margin Gross margin for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 was as follows (dollars in millions): Gross margin decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015 due primarily to the effect of weakness in most foreign currencie...
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The Company anticipates gross margin during the fourth quarter of 2016 to be between 37.5% and 38.0%.
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The foregoing statement regarding the Company’s expected gross margin percentage in the third quarter of 2016 is forward-looking and could differ from actual results.
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The Company’s future gross margins can be impacted by multiple factors including, but not limited to, those set forth in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors” and those described in this paragraph.
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In general, the Company believes gross margins 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, potential increases in the cost of components, and potential str...
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In response to 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, its financial condition and operating results, including gross margins, could be significantly affected by fluctuations in exchange rates.
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Operating Expenses Operating expenses for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 were as follows (dollars in millions): Research and Development The growth in R&D expense during the third quarter and first nine months of 2016 compared to the same periods in 2015 was driven primarily by ...
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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 the development of new and updated products that are central to the Company’s core business strategy.
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Selling, General and Administrative The decrease in selling, general and administrative expense during the third quarter of 2016 compared to the same period in 2015 was primarily due to lower spending on marketing and advertising.
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The year-over-year increase in selling, general and administrative expense during the first nine months of 2016 compared to the same period in 2015 was due primarily to increased headcount and related expenses, partially offset primarily by a decrease in discretionary expenditures.
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Other Income/(Expense), Net Other income/(expense), net for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 was as follows (dollars in millions): The decrease in other income/(expense), net during the third quarter of 2016 compared to the same period in 2015 was due primarily to higher interest ...
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The increase in other income/(expense), net during the first nine months of 2016 compared to the same period in 2015 was due primarily to higher interest income, partially offset by higher interest expense on debt.
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The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.77% and 1.51% in the third quarters of 2016 and 2015, respectively, and 1.72% and 1.45% in the first nine months of 2016 and 2015, respectively.
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Provision for Income Taxes Provision for income taxes and effective tax rates for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 were as follows (dollars in millions): The Company’s effective tax rates during the third quarter of 2016 and 2015 differ from the statutory federal income tax rate o...
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The lower effective tax rate during the third quarter and first nine months of 2016 compared to the same periods in 2015 was due primarily to a different geographic mix of earnings.
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Subsequent to the end of the third quarter of 2016, the Company reached a partial settlement with the U.S. Internal Revenue Service on its examination of the years 2010 through 2012.
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In connection with this settlement, the Company expects to recognize a tax benefit in the fourth quarter of 2016, which the Company does not believe will be significant to its consolidated financial statements.
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In addition, the Company is subject to audits by state, local and foreign tax authorities.
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Management believes that adequate provisions have been made for any adjustments that may result from tax examinations.
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However, the outcome of tax audits cannot be predicted with certainty.
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