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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 that have not been fully adjudicated, as further 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 the h...
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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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Apple Inc. v. Samsung Electronics Co., Ltd., et al.
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On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd. and affiliated parties in the United States District Court, Northern District of California, San Jose Division.
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On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million.
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On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court.
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As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million, with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part.
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Samsung paid $548 million to the Company in December 2015, which was included in net sales in the Condensed Consolidated Statement of Operations.
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On December 6, 2016, the U.S. Supreme Court remanded the case to the U.S. Court of Appeals for the Federal Circuit for further proceedings related to the $548 million in damages.
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Because the case remains subject to further proceedings, the Company has not recognized any further amounts in its results of operations.
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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 operating segments.
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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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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 2016 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 months ended December 31, 2016 and December 26, 2015 (in millions): A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three months ended December 31, 2016 and Decem...
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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 24, 2016 (the “2016 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 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 “Digital Content and 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 retail and online 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 Digital Content and Services, which allows customers to discover and download digital content, iOS, Mac, Apple Watch and Apple TV applications, and books through either a ...
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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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Fiscal Period The Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of September.
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The Company’s fiscal year 2017 will include 53 weeks and will end on September 30, 2017.
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A 14th week has been included in the first quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters.
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First Quarter Fiscal 2017 Highlights Net sales grew 3% or $2.5 billion during the first quarter of 2017 compared to the first quarter of 2016, primarily driven by strong growth in iPhone and Services, partially offset by lower iPad sales.
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The positive impact of having an additional week in the first quarter of 2017 was primarily offset by lower year-over-year channel inventory growth, an earlier launch of iPhone 7 and 7 Plus as compared to the prior year and the effect of weakness in foreign currencies relative to the U.S. dollar.
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During the first quarter of 2017, the Company introduced a new MacBook Pro® with Touch Bar™, an interface that replaces the traditional row of function keys, and released AirPods™, which are new wireless headphones.
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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 months ended December 31, 2016 and December 26, 2015 (dollars in millions and units in thousands): (1) Includes deferrals and amortization of related software upgrade rights and non-software service...
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(2) Includes revenue from Digital Content and 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 first quarter of 2017 and 2016 (dollars in millions and units in thousands): iPhone net sales increased during the first quarter of 2017 compared to the same quarter in 2016, driven by strong growth in each of th...
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iPad The following table presents iPad net sales and unit sales information for the first quarter of 2017 and 2016 (dollars in millions and units in thousands): iPad net sales decreased in the first quarter of 2017 compared to the same quarter in 2016 due to lower iPad unit sales and lower average selling prices for iP...
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Mac The following table presents Mac net sales and unit sales information for the first quarter of 2017 and 2016 (dollars in millions and units in thousands): Mac net sales increased during the first quarter of 2017 compared to the same quarter in 2016 due primarily to a different mix of Macs, including the new MacBook...
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Services The following table presents Services net sales information for the first quarter of 2017 and 2016 (dollars in millions): The year-over-year increase in Services net sales in the first quarter of 2017 compared to the same quarter in 2016 was due primarily to growth from the App Store and AppleCare sales, parti...
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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 firs...
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Europe The following table presents Europe net sales information for the first quarter of 2017 and 2016 (dollars in millions): Europe net sales increased during the first quarter of 2017 compared to the same quarter in 2016 due primarily to higher net sales of iPhone, partially offset by the effect of weakness in forei...
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Greater China The following table presents Greater China net sales information for the first quarter of 2017 and 2016 (dollars in millions): Greater China net sales decreased during the first quarter of 2017 compared to the same quarter in 2016 due primarily to lower net sales of iPhone and the effect of weakness in fo...
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Japan The following table presents Japan net sales information for the first quarter of 2017 and 2016 (dollars in millions): Japan net sales increased during the first quarter of 2017 compared to the same quarter in 2016 due primarily to higher net sales of iPhone and Services, and the effect of strength in the Japanes...
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Rest of Asia Pacific The following table presents Rest of Asia Pacific net sales information for the first quarter of 2017 and 2016 (dollars in millions): Rest of Asia Pacific net sales increased during the first quarter of 2017 compared to the same quarter in 2016 due primarily to higher net sales of iPhone and the ef...
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Gross Margin Gross margin for the first quarter of 2017 and 2016 was as follows (dollars in millions): Gross margin decreased during the first quarter of 2017 compared to the same quarter in 2016 due primarily to higher product cost structures and the effect of weakness in foreign currencies relative to the U.S. dollar...
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The Company anticipates gross margin during the second quarter of 2017 to be between 38% and 39%.
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The foregoing statement regarding the Company’s expected gross margin percentage in the second quarter of 2017 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 first quarter of 2017 and 2016 were as follows (dollars in millions): Research and Development The growth in R&D expense during the first quarter of 2017 compared to the same quarter in 2016 was driven primarily by an increase in headcount and related expenses, and material...
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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 that are central to the Company’s core business strategy.
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