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0000320193 | 20070202 | 10-Q | 365 | The decrease in gross margin percentage is expected mainly from reduced leverage on fixed production costs due to lower expected revenue, a shift in product mix to lower margin products including the updated iPod shuffle that only shipped for a portion of the first quarter of 2007, and an increase in iTunes Store sales... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 366 | The foregoing statements regarding the Company’s expected gross margin, forecasted revenue, product mix shift, and iTunes Store sales and gift card redemptions for the second quarter of 2007 are forward-looking. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 367 | Gross margin could differ from anticipated levels because of several factors, including certain of those set forth below in Part II, Item 1A., “Risk Factors.” There can be no assurance that current gross margins will be maintained, targeted gross margin levels will be achieved, or current margins on existing individual... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 368 | Operating Expenses
Operating expenses for the three months ended December 30, 2006 and December 31, 2005 were as follows (in millions, except for percentages):
Research and Development (R&D)
Expenditures for R&D increased 1% or $2 million to $184 million in the first quarter of 2007 compared to $182 million in the firs... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 369 | The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company’s core business strategy. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 370 | As such, the Company expects to make further investments in R&D to remain competitive. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 371 | Selling, General, and Administrative Expense (SG&A)
SG&A increased 13% or $82 million to $714 million in the first quarter of 2007 compared to $632 million in the first quarter of 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 372 | This increase is primarily due to higher direct and indirect channel variable selling expenses resulting from the significant year-over-year increase in total net sales for the first quarter, the Company’s continued expansion of its Retail segment in both domestic and international markets, and a current year increase ... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 373 | Other Income and Expense
Other income and expense for the three months ended December 30, 2006 and December 31, 2005 was as follows (in millions):
Interest income increased $45 million or 51% to $133 million during the first quarter of 2007 compared to $88 million in the first quarter of 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 374 | This increase is attributable primarily to higher cash and short-term investment balances and increased investment yields resulting from higher market interest rates. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 375 | The weighted-average interest rate earned by the Company on its cash, cash equivalents and short-term investments increased to 5.25% in the first quarter of 2007 from 3.89% in the first quarter of 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 376 | Provision for Income Taxes
The Company’s effective tax rate for the three months ended December 30, 2006 was approximately 31% compared with approximately 32% for the quarter ended December 31, 2005. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 377 | The Company’s effective rate for both periods differs from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 378 | The lower tax rate in the first three months of 2007 versus 2006 is primarily due to the Company recording a tax benefit as a result of legislation enacted on December 20, 2006, retroactively reinstating the research and development tax credit. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 379 | The Internal Revenue Service (“IRS”) has substantially completed its field audit of the Company’s federal income tax returns for the years 2002 through 2003 and proposed certain adjustments. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 380 | The Company intends to contest certain of these adjustments through the IRS Appeals Office. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 381 | Substantially all IRS audit issues for years prior to 2002 have been resolved. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 382 | In addition, the Company is subject to audits by state, local, and foreign tax authorities. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 383 | Management believes that adequate provision has been made for any adjustments that may result from tax examinations. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 384 | However, the outcome of tax audits cannot be predicted with certainty. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 385 | Should any issues addressed in the Company’s tax audits be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 386 | Recent Accounting Pronouncements
In September 2006, the SEC issued SAB No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 387 | 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 388 | SAB No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 389 | 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 390 | SAB No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 391 | 108 is effective for fiscal years ending after November 15, 2006 and is required to be adopted by the Company in the fourth quarter of fiscal 2007. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 392 | Although the Company will continue to evaluate the application of SAB No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 393 | 108, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 394 | In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 395 | 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 396 | SFAS No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 397 | 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 398 | SFAS No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 399 | 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the first quarter of fiscal 2009. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 400 | Although the Company will continue to evaluate the application of SFAS No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 401 | 157, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 402 | In June 2006, the FASB issued FASB Interpretation No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 403 | (“FIN”) 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 404 | 109. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 405 | FIN 48 clarifies the accounting for uncertainty in income taxes by creating a framework for how companies should recognize, measure, present, and disclose in their financial
statements uncertain tax positions that they have taken or expect to take in a tax return. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 406 | FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company beginning in the first quarter of fiscal 2008. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 407 | Although the Company will continue to evaluate the application of FIN 48, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 408 | Liquidity and Capital Resources
The following table presents selected financial information and statistics for each of the fiscal quarters ended on the dates indicated (dollars in millions):
(a) DSO is based on ending net trade receivables and most recent quarterly net sales for each period. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 409 | (b) Days supply of inventory is based on ending inventory and most recent quarterly cost of sales for each period. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 410 | (c) DPO is based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 411 | As of December 30, 2006, the Company had $11.9 billion in cash, cash equivalents, and short-term investments, an increase of $1.8 billion over the same balance at the end of September 30, 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 412 | The principal components of this net increase were cash generated by operating activities of $1.8 billion, proceeds from the issuance of common stock under stock plans of $101 million, and excess tax benefits from stock-based compensation of $87 million. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 413 | This increase in cash, cash equivalents, and short-term investments was partially offset by cash used to purchase property, plant, and equipment of $142 million and intangible assets of $115 million. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 414 | The Company’s short-term investment portfolio is primarily invested in high credit quality, liquid investments. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 415 | The Company believes its existing balances of cash, cash equivalents, and short-term investments will be sufficient to satisfy its working capital needs, capital expenditures, stock repurchase activity, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 mo... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 416 | Capital Expenditures
The Company’s total capital expenditures were $142 million during the first quarter of fiscal 2007, consisting of $36 million for retail store facilities and $106 million for real estate acquisitions and corporate infrastructure including information systems enhancements. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 417 | The Company currently anticipates it will utilize approximately $675 million for capital expenditures during 2007, including approximately $360 million for expansion of the Company’s Retail segment. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 418 | The remainder of approximately $315 million is projected to be used for real estate acquisitions including the Company’s second corporate campus and to support normal replacement of existing capital assets and enhancements to general information technology infrastructure. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 419 | Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing ... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 420 | Lease Commitments
As of September 30, 2006, the Company had total outstanding commitments on noncancelable operating leases of approximately $1.2 billion, $887 million of which related to the lease of retail space and related facilities. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 421 | The major facility leases are for terms of 5 to 15 years and generally provide renewal options for terms of 3 to 5 additional years. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 422 | Leases for retail space are for terms of 5 to 20 years, the majority of which are for 10 years, and often contain
multi-year renewal options. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 423 | Total outstanding commitments on noncancelable operating leases related to the lease of retail space increased to $906 million as of December 30, 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 424 | Purchase Commitments with Contract Manufacturers and Component Suppliers
The Company utilizes several contract manufacturers to manufacture sub-assemblies for the Company’s products and to perform final assembly and test of finished products. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 425 | These contract manufacturers acquire components and build product based on demand information supplied by the Company, which typically covers periods ranging from 30 to 150 days. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 426 | The Company also obtains individual components for its products from a wide variety of individual suppliers. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 427 | Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 428 | Such purchase commitments typically cover the Company’s forecasted component and manufacturing requirements for periods ranging from 30 to 150 days. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 429 | As of December 30, 2006, the Company had outstanding third-party manufacturing commitments and component purchase commitments of approximately $1.6 billion. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 430 | During the first quarter of 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc., Intel Corporation, Micron Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to secure supply of NAND flash memory through calendar year 2010. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 431 | As part of these agreements, the Company prepaid $1.25 billion for flash memory components during 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 432 | None of the prepayment had been utilized by the Company as of December 30, 2006. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 433 | These prepayments will be applied to certain inventory purchases made over the life of each respective agreement. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 434 | Asset Retirement Obligations
The Company’s asset retirement obligations are associated with commitments to return property subject to operating leases to original condition upon lease termination. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 435 | As of December 30, 2006, the Company estimated that gross expected future cash flows of approximately $21 million would be required to fulfill these obligations. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 436 | Other Obligations
Other obligations were approximately $35 million as of December 30, 2006, primarily related to Internet and telecommunications services. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 437 | Indemnifications
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes third-party intellectual property rights. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 438 | 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. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 439 | However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against itself or an indemnified third-party and, in the opinion of management, does not have a liability related to unresolved infringement claims subject to indemnification that would have a ... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 440 | Item 3. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 441 | Quantitative and Qualitative Disclosures About Market Risk
The Company’s market risk profile has not changed significantly during the first three months of 2007. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 442 | Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 443 | However, given the effective horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 444 | In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s operating results and financial po... | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 445 | Interest Rate Risk
While the Company is exposed to interest rate fluctuations in many of the world’s leading industrialized countries, the Company’s interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 446 | In this regard, changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents, and short-term investments as well as costs associated with foreign currency hedges. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 447 | The Company’s short-term investment policy and strategy is to ensure the preservation of capital, meet liquidity requirements, and optimize return in light of the current credit and interest rate environment. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 448 | A portion of the Company’s cash is managed by external managers within the guidelines of the Company’s investment policy and to an objective market benchmark. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 449 | The Company’s internal portfolio is benchmarked against external manager performance, allowing for differences in liquidity needs. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 450 | The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 451 | The Company places its short-term investments in highly liquid securities issued by high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 452 | The Company’s general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 453 | All highly liquid investments with initial maturities of three months or less are classified as cash equivalents; highly liquid investments with initial maturities greater than three months are classified as short-term investments. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 454 | As of December 30, 2006, approximately $1.2 billion of the Company’s short-term investments had underlying maturities ranging from 1 to 5 years. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 455 | The remainder all had underlying maturities of less than 12 months. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 456 | The Company may sell its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 457 | The Company recognized no material net gains or losses during the first quarter of 2007 or 2006 related to such sales. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 458 | Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 459 | Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 460 | There is also a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 461 | The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 462 | Generally, the Company’s practice is to hedge a majority of its existing material foreign exchange transaction exposures in the future. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 463 | However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and limited availability of appropriate hedging instruments. | 0001104659-07-006648/full-submission.txt |
0000320193 | 20070202 | 10-Q | 464 | Item 4. | 0001104659-07-006648/full-submission.txt |
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