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0000320193
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Selling, General and Administrative The growth in selling, general and administrative 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 higher variable selling costs, partially offset by lower advertising costs.
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Other Income/(Expense), Net Other income/(expense), net for the first quarter of 2017 and 2016 was as follows (dollars in millions): The increase in other income/(expense), net during the first quarter of 2017 compared to the same quarter in 2016 was due primarily to higher interest income and foreign exchange gains, p...
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The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.87% and 1.65% in the first quarter of 2017 and 2016, respectively.
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Provision for Income Taxes Provision for income taxes and effective tax rates for the first quarter of 2017 and 2016 were as follows (dollars in millions): The Company’s effective tax rates during the first quarter of 2017 and 2016 differ from the statutory federal income tax rate of 35% due primarily to certain undist...
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The higher year-over-year effective tax rate during the first quarter of 2017 was due primarily to the retroactive reinstatement of the U.S. federal R&D tax credit during the first quarter of 2016.
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The Company is subject to audits by federal, 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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If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
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On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”).
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The State Aid Decision orders Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014.
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Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward.
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The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union.
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Ireland has also appealed the State Aid Decision.
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While the European Commission announced a recovery amount of up to €13 billion, plus interest, the actual amount of additional taxes subject to recovery is to be calculated by Ireland in accordance with the European Commission's guidance.
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Once the recovery amount is computed by Ireland, the Company anticipates funding it, including interest, out of foreign cash into escrow, where it will remain pending conclusion of all appeals.
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The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.
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Recent Accounting Pronouncements Restricted Cash In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
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2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows.
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The Company will adopt ASU 2016-18 in its first quarter of 2019 utilizing the retrospective adoption method.
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Currently, the Company's restricted cash balance is not significant.
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Income Taxes In October 2016, the FASB issued ASU No.
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2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs.
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The Company will adopt ASU 2016-16 in its first quarter of 2019 utilizing the modified retrospective adoption method.
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Currently, the Company anticipates recording up to $9 billion of net deferred tax assets on its Consolidated Balance Sheets.
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However, the ultimate impact of adopting ASU 2016-16 will depend on the balance of intellectual property transferred between its subsidiaries as of the adoption date.
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The Company will recognize incremental deferred income tax expense thereafter as these deferred tax assets are utilized.
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Stock Compensation In March 2016, the FASB issued ASU No.
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2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows.
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The Company will adopt ASU 2016-09 in its first quarter of 2018.
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Currently, excess tax benefits or deficiencies from the Company's equity awards are recorded as additional paid-in capital in its Consolidated Balance Sheets.
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Upon adoption, the Company will record any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting periods in which vesting occurs.
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As a result, subsequent to adoption the Company's income tax expense and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards.
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Leases In February 2016, the FASB issued ASU No.
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2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements.
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ASU 2016-02 will be effective for the Company beginning in its first quarter of 2020, and early adoption is permitted.
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The Company will use a modified retrospective adoption approach.
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While the Company is currently evaluating the timing and impact of adopting ASU 2016-02, currently the Company anticipates recording lease assets and liabilities in excess of $7.5 billion on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.
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However, the ultimate impact of adopting ASU 2016-02 will depend on the Company's lease portfolio as of the adoption date.
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Financial Instruments In January 2016, the FASB issued ASU No.
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2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
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The Company will adopt ASU 2016-01 in its first quarter of 2019 utilizing the modified retrospective adoption method.
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Based on the composition of the Company's investment portfolio, the adoption of ASU 2016-01 is not expected to have a material impact on its consolidated financial statements.
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In June 2016, the FASB issued ASU No.
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2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments.
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The Company will adopt ASU 2016-13 in its first quarter of 2021 utilizing the modified retrospective adoption method.
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Based on the composition of the Company's investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.
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Revenue Recognition In May 2014, the FASB issued ASU No.
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2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition.
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ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.
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Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No.
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2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No.
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2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No.
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2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No.
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2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”).
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The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”).
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The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.
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The Company currently expects to adopt the new revenue standards in its first quarter of 2018 utilizing the full retrospective adoption method.
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The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized in the Company's consolidated financial statements.
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Liquidity and Capital Resources The following tables present selected financial information and statistics as of December 31, 2016 and September 24, 2016 and for the first three months of 2017 and 2016 (in millions): The Company believes its existing balances of cash, cash equivalents and marketable securities will be ...
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The Company currently anticipates the cash used for future dividends, the share repurchase program and debt repayments will come from its current domestic cash, cash generated from on-going U.S. operating activities and from borrowings.
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As of December 31, 2016 and September 24, 2016, the Company’s cash, cash equivalents and marketable securities held by foreign subsidiaries were $230.2 billion and $216.0 billion, respectively, and are generally based in U.S. dollar-denominated holdings.
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Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.
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In connection with the State Aid Decision, the European Commission announced a recovery amount of up to €13 billion, plus interest.
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The actual amount of additional taxes subject to recovery is to be calculated by Ireland in accordance with the European Commission's guidance.
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Once the recovery amount is computed by Ireland, the Company anticipates funding it, including interest, out of foreign cash into escrow, where it will remain pending conclusion of all appeals.
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The Company’s marketable securities investment portfolio is invested primarily in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer.
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The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss.
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During the three months ended December 31, 2016, cash generated from operating activities of $27.1 billion was a result of $17.9 billion of net income, non-cash adjustments to net income of $5.4 billion and an increase in the net change in operating assets and liabilities of $3.7 billion.
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Cash used in investing activities of $19.1 billion during the three months ended December 31, 2016 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $15.6 billion and cash used to acquire property, plant and equipment of $3.3 billion.
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Cash used in financing activities of $12.0 billion during the three months ended December 31, 2016 consisted primarily of cash used to repurchase common stock of $10.9 billion and cash used to pay dividends and dividend equivalents of $3.1 billion, partially offset by a net increase in commercial paper of $2.4 billion.
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During the three months ended December 26, 2015, cash generated from operating activities of $27.5 billion was a result of $18.4 billion of net income, non-cash adjustments to net income of $5.7 billion and an increase in the net change in operating assets and liabilities of $3.4 billion.
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Cash used in investing activities of $20.5 billion during the three months ended December 26, 2015 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $16.1 billion and cash used to acquire property, plant and equipment of $3.6 billion.
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Cash used in financing activities of $11.4 billion during the three months ended December 26, 2015 consisted primarily of cash used to repurchase common stock of $6.9 billion, and cash used to pay dividends and dividend equivalents of $3.0 billion.
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Capital Assets The Company’s capital expenditures were $2.1 billion during the first quarter of 2017.
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The Company anticipates utilizing approximately $16.0 billion for capital expenditures during 2017, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
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Debt The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program.
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The Company uses the net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases.
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As of December 31, 2016, the Company had $10.5 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.61% and maturities generally less than nine months.
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As of December 31, 2016, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $77.4 billion (collectively the “Notes”).
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The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes.
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In addition, the Company has entered, and in the future may enter, into currency swaps to manage foreign currency risk on the Notes.
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Further information regarding the Company’s debt issuances and related hedging activity can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements, in Note 2, “Financial Instruments” and Note 6, “Debt.” Capital Return Program In April 2016, the Company’s Board of Direct...
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Additionally in April 2016, the Company announced that the Board of Directors raised the rate of the Company's quarterly cash dividend by 10% from $0.52 to $0.57 per share, beginning with the dividend paid during the third quarter of 2016.
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The Company intends to increase its dividend on an annual basis subject to declaration by the Board of Directors.
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As of December 31, 2016, $144 billion of the share repurchase program has been utilized.
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The Company’s share repurchase program does not obligate it to acquire any specific number of shares.
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Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
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The following table presents the Company’s dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital return program in August 2012 through December 31, 2016 (in millions): The Company expects to execute its capital return program by the end of March 2018 by payin...
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The Company plans to continue to access the domestic and international debt markets to assist in funding its capital return program.
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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...
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Operating Leases As of December 31, 2016, the Company’s total future minimum lease payments under noncancelable operating leases were $7.5 billion.
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The Company’s retail store and other facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options.
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Manufacturing Purchase Obligations 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 December 31, 2016, the Company had manufacturing purchase obligations of $24.0 billion.
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Other Purchase Obligations The Company’s other purchase obligations were comprised of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to advertising, licensing, R&D, internet and telecommunications services, energy and other obligations.
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As of December 31, 2016, the Company had other purchase obligations of $6.7 billion.
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