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The total intrinsic value of options at the time of exercise was $332 million and $1.5 billion for the three- and nine-month periods ended June 30, 2012, respectively, and $248 million and $2.1 billion for the three- and nine-month periods ended June 25, 2011, respectively.
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The Company had approximately 38.2 million shares reserved for future issuance under the Company’s stock plans as of June 30, 2012.
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RSUs granted are deducted from the shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs granted.
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Similarly, RSUs cancelled are added back to the shares available for grant under the Company’s stock plans utilizing a factor of two times the number of RSUs cancelled.
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Share-based Compensation Share-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant.
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Share-based compensation cost for stock options and employee stock purchase plan rights (“stock purchase rights”) is estimated at the grant date and offering date, respectively, based on the fair-value as calculated by the Black-Scholes Merton (“BSM”) option-pricing model.
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The BSM option-pricing model incorporates various assumptions including expected volatility, expected life and interest rates.
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The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options and other relevant factors including implied volatility in market traded options on the Company’s common stock.
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The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock awards it grants to employees.
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The Company recognizes share-based compensation cost as expense on a straight-line basis over the requisite service period.
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During the nine-month period ended June 30, 2012, in conjunction with certain business combinations, the Company assumed 41,000 stock options with a weighted-average fair value per share of $400.79.
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The weighted-average fair value per share of stock purchase rights was $114.01 and $102.41 during the three- and nine-month periods ended June 30, 2012, respectively, and was $72.63 and $67.70 during the three- and nine-month periods ended June 25, 2011, respectively.
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The following table provides a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 30, 2012 and June 25, 2011 (in millions): The income tax benefit related to share-based compensation expense was $131 million an...
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As of June 30, 2012, the total unrecognized compensation cost related to outstanding stock options and RSUs expected to vest was $4.3 billion, which the Company expects to recognize over a weighted-average period of 3.4 years.
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Employee Benefit Plans Rule 10b5-1 Trading Plans During the three-month period ended June 30, 2012, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell, Philip W. Schiller, and Jeffrey E. Williams, and directors William V. Campbell and Arthur D. Levinson had equity trading plans adopted in accordance...
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An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee equity plans.
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Dividend and Stock Repurchase Program In March 2012, the Board of Directors of the Company approved a dividend policy pursuant to which it plans to make, subject to subsequent declaration, quarterly dividends of $2.65 per share, beginning in the fourth quarter of 2012.
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Additionally, in March 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in 2013.
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The repurchase program is expected to be executed over a three-year period with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.
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The repurchase program does not obligate the Company to acquire any specific number of shares.
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Note 6 - Commitments and Contingencies Accrued Warranty and Indemnification The following table presents changes in the Company’s accrued warranties and related costs for the three- and nine-month periods ended June 30, 2012 and June 25, 2011 (in millions): The Company generally does not indemnify end-users of its oper...
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Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party.
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However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against it or an indemnified third-party and, in the opinion of management, does not have a potential liability related to unresolved infringement claims subject to indemnification that would m...
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Therefore, the Company did not record a liability for infringement costs as of either June 30, 2012 or September 24, 2011.
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The Company has entered into indemnification agreements with its directors and executive officers.
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Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings.
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It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim.
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However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.
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Concentrations in the Available Sources of Supply of Materials and Product Although most components essential to the Company’s business are generally available from multiple sources, a number of components are currently obtained from single or limited sources, which subjects the Company to significant supply and pricin...
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Many components that are available from multiple sources are at times subject to industry-wide shortages and significant commodity pricing fluctuations.
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In addition, the Company has entered into various agreements for the supply of components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
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Therefore, the Company remains subject to significant risks of supply shortages and price increases that can materially adversely affect its financial condition and operating results.
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The Company and other participants in the mobile communication and media device and personal computer industries also compete for various components with other industries that have experienced increased demand for their products.
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The Company also uses some custom components that are not common to the rest of these industries, and new products introduced by the Company often utilize custom components available from only one source.
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When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased.
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If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected.
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The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source.
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Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrated on the production of common components instead of components customized to meet the Company’s requirements.
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Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are primarily located in Asia.
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A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations.
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Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company’s products.
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Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments.
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The Company’s purchase commitments typically cover its requirements for periods up to 150 days.
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Long-Term Supply Agreements The Company has entered into long-term agreements to secure the supply of certain inventory components.
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Under certain of these agreements, which expire between 2012 and 2022, the Company has made prepayments for the future purchase of inventory components and has agreed to acquire capital equipment to use in the manufacturing of such components.
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As of June 30, 2012, the Company had a total of $4.4 billion of inventory component prepayments outstanding, of which $1.3 billion is classified as other current assets and $3.1 billion is classified as other assets in the Condensed Consolidated Balance Sheets.
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The Company had a total of $2.3 billion of inventory component prepayments outstanding as of September 24, 2011.
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The Company’s outstanding prepayments will be applied to certain inventory component purchases made during the term of each respective agreement.
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During the three- and nine-month periods ended June 30, 2012, the Company utilized $41 million and $634 million of inventory component prepayments, respectively.
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Additionally, as of June 30, 2012, the Company had outstanding off-balance sheet commitments under certain long-term supply agreements to make inventory component prepayments and to acquire capital equipment to use in the manufacturing of such components of $302 million.
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Other Off-Balance Sheet Commitments The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements.
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The Company does not currently utilize any other off-balance sheet financing arrangements.
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The major facility leases are typically for terms not exceeding 10 years and generally provide renewal options for terms not exceeding five additional years.
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Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options.
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As of June 30, 2012, the Company’s total future minimum lease payments under noncancelable operating leases were $4.1 billion, of which $3.0 billion related to leases for retail space.
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The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products.
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These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days.
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The Company also obtains individual components for its products from a wide variety of individual suppliers.
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Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.
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As of June 30, 2012, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $13.6 billion.
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In addition to the off-balance sheet commitments mentioned above, the Company had outstanding obligations of $4.5 billion as of June 30, 2012, which were comprised mainly of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to advertising, rese...
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Contingencies The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated, certain of which are discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II, Item 1A of this Form 10-Q under ...
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However, the outcome of litigation is inherently uncertain.
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Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be ma...
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Note 7 - Segment Information and Geographic Data The Company reports segment information based on the “management” approach.
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The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
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The Company manages its business primarily on a geographic basis.
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Accordingly, the Company determined its reportable operating segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Japan, Asia-Pacific and Retail.
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The results of the Americas, Europe, Japan and Asia-Pacific segments do not include results of the Retail segment.
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The Americas segment includes both North and South America.
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The Europe segment includes European countries, as well as the Middle East and Africa.
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The Asia-Pacific segment includes Australia and Asian countries, other than Japan.
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The Retail segment operates Apple retail stores in 12 countries, including the U.S. Each reportable operating segment provides similar hardware and software products and similar services.
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The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2011 Form 10-K.
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The Company evaluates the performance of its operating segments based on net sales and operating income.
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Net sales for geographic segments are generally based on the location of customers, while Retail segment net sales are based on sales from the Company’s retail stores.
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Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.
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Advertising expenses are generally included in the geographic segment in which the expenditures are incurred.
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Operating income for each segment excludes other income and expense and certain expenses managed outside the operating segments.
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Costs excluded from segment operating income include various corporate expenses such as manufacturing costs and variances not included in standard costs, research and development, corporate marketing expenses, share-based compensation expense, income taxes, various nonrecurring charges, and other separately managed gen...
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Prior to 2012, the Company allocated to corporate expenses certain costs associated with its high-profile retail stores that have been designed and built to promote brand awareness and serve as vehicles for corporate sales and marketing activities.
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Beginning in 2012, the Company no longer allocates these costs to corporate expenses and reclassified $26 million and $75 million of such costs from corporate to Retail segment expenses for the three- and nine-month periods ended June 25, 2011, respectively.
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The Company does not include intercompany transfers between segments for management reporting purposes.
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Segment assets exclude corporate assets, such as cash and cash equivalents, short-term and long-term marketable securities, other long-term investments, manufacturing and corporate facilities, product tooling and manufacturing process equipment, miscellaneous corporate infrastructure, goodwill and other acquired intang...
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Except for the Retail segment, capital asset purchases for long-lived assets are not reported to management by segment.
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The following table shows information by operating segment for the three- and nine-month periods ended June 30, 2012 and June 25, 2011 (in millions): A reconciliation of the Company’s segment operating income to the condensed consolidated financial statements for the three- and nine-month periods ended June 30, 2012 an...
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties.
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Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “will,” “would,” “could,” and similar terms.
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Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements.
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Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors” of this Form 10-Q, 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 24, 2011 (the “2011 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 in this report to particular years or quarters refer to the Company’s fiscal years ended in September and the associated quarters of those fiscal years.
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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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Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.apple.com/investor when such reports are available on the SEC’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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