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0000320193
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Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (“ASRs”) with financial institutions.
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In exchange for up-front payments, the financial institutions deliver shares of the Company’s common stock during the purchase periods of each ASR.
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The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, is determined at the end of the applicable purchase period of each ASR based on the volume weighted-average price of the Company’s common stock during that period.
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The shares received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction to shareholders’ equity in the Company’s Condensed Consolidated Balance Sheet in the periods the payments are made.
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The Company reflects the ASRs as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as forward contracts indexed to its own common stock.
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The ASRs met all of the applicable criteria for equity classification, and therefore, were not accounted for as derivative instruments.
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The following table shows the Company’s ASR activity and related information during the six months ended March 28, 2015 and the year ended September 27, 2014: (1) Includes 59.9 million shares delivered and retired at the beginning of the purchase period, which began in the fourth quarter of 2014, 8.3 million net shares...
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Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during the periods presented as follows: Note 8 - Comprehensive Income Comprehensive income consists of two components, net income and OCI.
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OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income.
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The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable securities classified as ...
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The following table shows the pre-tax amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations, and the associated financial statement line item, for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (in millions): The following table shows the changes in AOCI by co...
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RSUs granted generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis.
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Each share issued with respect to RSUs granted under the Company’s stock plans reduces the number of shares available for grant under the plan by two shares.
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RSUs cancelled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the plans utilizing a factor of two times the number of RSUs cancelled or shares withheld.
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Stock options count against the number of shares available for grant on a one-for-one basis.
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Rule 10b5-1 Trading Plans During the three months ended March 28, 2015, Section 16 officers Timothy D. Cook, Angela Ahrendts, Luca Maestri and Daniel Riccio had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act.
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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 and director equity plans.
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Restricted Stock Units A summary of the Company’s RSU activity and related information for the six months ended March 28, 2015 is as follows: RSUs that vested during the three- and six-month periods ended March 28, 2015 had fair values of $317 million and $2.0 billion, respectively, as of the vesting date.
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RSUs that vested during the three- and six-month periods ended March 29, 2014 had fair values of $198 million and $1.3 billion, respectively, as of the vesting date.
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Stock Options The Company had 2.3 million stock options outstanding as of March 28, 2015, with a weighted-average exercise price per share of $18.15 and weighted-average remaining contractual term of 2.6 years, substantially all of which are exercisable.
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The aggregate intrinsic value of the stock options outstanding as of March 28, 2015 was $239 million, which represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding.
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The total intrinsic value of options at the time of exercise was $119 million and $367 million for the three- and six-month periods ended March 28, 2015, respectively, and $148 million and $707 million for the three- and six-month periods ended March 29, 2014, respectively.
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Share-Based Compensation The following table shows a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (in millions): The income tax benefit related to share-based compensation expe...
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As of March 28, 2015, the total unrecognized compensation cost related to outstanding stock options and RSUs expected to vest was $8.1 billion, which the Company expects to recognize over a weighted-average period of 2.9 years.
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Note 10 - Commitments and Contingencies Accrued Warranty and Indemnification The following table shows changes in the Company’s accrued warranties and related costs for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (in millions): The Company generally does not indemnify end-users of its opera...
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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.
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In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for infringement of third-party intellectual property rights.
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The Company did not record a liability for infringement costs related to indemnification as of March 28, 2015 or September 27, 2014.
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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.
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In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers.
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Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.
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The Company uses some custom components that are not commonly used by its competitors, 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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The Company has entered into agreements for the supply of many 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 could materially adversely affect its financial condition and operating results.
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Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily 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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Other Off-Balance Sheet Commitments Operating Leases 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 contain multi-year renewal options.
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As of March 28, 2015, the Company had a total of 453 retail stores.
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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 March 28, 2015, the Company’s total future minimum lease payments under noncancelable operating leases were $5.1 billion, of which $3.4 billion related to leases for retail space.
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Other Commitments 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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Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier.
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As of March 28, 2015, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $19.0 billion.
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In addition to the commitments mentioned above, the Company had other off-balance sheet obligations of $4.1 billion as of March 28, 2015, which were comprised of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to advertising, research and dev...
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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, 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 u...
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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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Smartflash LLC, et al., v. Apple Inc., et al.
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On May 29, 2013, Smartflash LLC and Smartflash Technologies Limited filed an action against the Company in the United States District Court for the Eastern District of Texas, Tyler Division, alleging that the Company infringed certain patents relating to data storage and access systems.
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On February 24, 2015, a jury returned a verdict against the Company, and awarded damages of approximately $533 million.
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The Company is challenging the verdict, believes it has valid defenses and has not recorded a loss accrual at this time.
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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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Because the award is now subject to appeal, the Company has not recognized the award 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 Asian countries, other than those countries included in the Company’s other operating segments.
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Each 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 the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2014 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 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 operating segments.
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Costs excluded from segment operating income include various corporate expenses such as R&D, 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 operating segment for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (in millions): A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three- and six-month periods ended March 28, 20...
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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 27, 2014 (the “2014 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”), as updated by the Company’s Current Report on Form 8-K dated January 28, 2015, and the con...
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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, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months, or 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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