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0000320193
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10-Q
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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 these websites are not incorporated into this filing.
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Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
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Overview and Highlights Company Background 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 TV®, a portfolio of consumer and professional software applications, the iOS and OS X® operating systems, iCloud®, Apple Pay™ and a variety of accessory, service and support offerings.
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In September 2014, the Company announced Apple Watch™, which began shipping in April 2015.
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The Company also sells and delivers digital content and applications through the iTunes Store®, App Store™, Mac App Store, and iBooks Store™ (collectively “iTunes”).
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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 iPhone, iPad, Mac and iPod compatible products, including application software and various accessories through its online and retail 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 iTunes®, which allows customers to discover and download digital content, iOS and Mac applications, and books through either a Mac or Windows-based computer or through iPhone,...
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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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Second Quarter Fiscal 2015 Highlights Net sales rose 27% or $12.4 billion during the second quarter of 2015 compared to the same quarter in 2014.
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Net sales and unit sales increased for iPhone and Mac following the launches of new iPhone and Mac models in the fourth quarter of 2014 and first quarter of 2015, and net sales of Services increased primarily due to growth from iOS app sales.
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This growth was partially offset by lower net sales and unit sales of iPad and by the effect of weakness in most foreign currencies relative to the U.S. dollar.
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Total net sales increased in each of the Company’s operating segments except Japan, with particularly strong growth in Greater China and Rest of Asia Pacific, where year-over-year net sales increased 71% and 48%, respectively.
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During the second quarter of 2015, the Company introduced updates to MacBook Air® and MacBook Pro® and announced the all-new MacBook®, which began shipping in April 2015.
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The Company utilized $7.0 billion to repurchase shares of its common stock and paid dividends of $2.7 billion or $0.47 per share during the second quarter of 2015.
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Additionally, the Company issued $6.5 billion of U.S. dollar-denominated and SFr1.3 billion of Swiss Franc-denominated long-term debt.
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Sales Data The following table shows net sales by operating segment and net sales and unit sales by product during the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions and units in thousands): (1) Includes deferrals and amortization of related non-software services and software ...
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(2) Includes revenue from iTunes, AppleCare®, Apple Pay, licensing and other services.
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(3) Includes sales of iPod, Apple TV, Beats Electronics 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 three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions and units in thousands): The year-over-year growth in iPhone net sales and unit sales in the second quarter and first six ...
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Overall average selling prices (“ASPs”) for iPhone increased by 10% and 9% in the second quarter and first six months of 2015, respectively, compared to the same periods in 2014, due to a shift in mix to iPhone 6 and 6 Plus and an increased mix of higher storage capacity iPhones, partially offset by the effect of weakn...
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iPad The following table presents iPad net sales and unit sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions and units in thousands): Net sales and unit sales for iPad declined in the second quarter and first six months of 2015 compared to the same period...
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The Company believes the decline in sales is due in part to a longer repurchase cycle for iPads and some level of cannibalization from the Company’s other products.
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iPad ASPs declined by 8% and 6% during the second quarter and first six months of 2015, respectively, compared to the same periods in 2014, primarily as a result of a shift in mix to lower-priced iPads and the effect of weakness in most foreign currencies relative to the U.S. dollar, partially offset by an increased mi...
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Mac The following table presents Mac net sales and unit sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions and units in thousands): The year-over-year growth in Mac net sales and unit sales for the second quarter and first six months of 2015 was driven by...
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Mac ASPs declined by 8% and 6% during the second quarter and first six months of 2015, respectively, compared to the same periods in 2014, primarily as a result of the effect of weakness in most foreign currencies relative to the U.S. dollar, a shift in mix to lower-priced Macs, and price reductions on Mac portables in...
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Services The following table presents Services net sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions): The increase in net sales of Services in the second quarter and first six months of 2015 compared to the same periods in 2014 was primarily due to grow...
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iTunes generated a total of $2.8 billion and $5.4 billion in net sales during the second quarter and first six months of 2015, respectively, compared to $2.6 billion and $5.0 billion during the second quarter and first six months of 2014, respectively.
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Growth from iTunes was driven primarily by increases in revenue from iOS app sales reflecting continued growth in the installed base of iOS devices, the expansion in third-party iOS apps available, and increased volume of in-app purchases.
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This growth was partially offset by year-over-year decreases in combined net sales of digital media, consisting of music, movies, TV shows and books, of 4% and 5% in the second quarter and first six months of 2015, respectively.
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Segment Operating Performance The Company manages its business primarily on a geographic basis.
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Accordingly, the Company determined its reportable operating segments, which are generally based on the location of its customers, to be 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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Further information regarding the Company’s operating segments may 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 three- and six-...
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iPhone channel inventory decreased more in the second quarter and first six months of 2015 than in the prior year periods due to increased customer demand.
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Europe The following table presents Europe net sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions): The year-over-year increase in Europe net sales for the second quarter and first six months of 2015 was driven primarily by growth in net sales and unit sa...
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iPhone channel inventory decreased significantly more in the first six months of 2015 than in the prior year period due to increased customer demand.
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Greater China The following table presents Greater China net sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions): During the second quarter and first six months of 2015, Greater China experienced year-over-year increases in net sales that were significant...
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iPhone net sales and unit sales grew strongly following the launch of new iPhone models in Greater China in the fourth quarter of 2014 and first quarter of 2015. iPhone channel inventory increased more in the second quarter and first six months of 2015 than in the prior year periods in anticipation of increased custome...
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Japan The following table presents Japan net sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions): The year-over-year decrease in Japan net sales for the second quarter and first six months of 2015 was driven primarily by a significant adverse impact from ...
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iPhone channel inventory decreased during the first six months of 2015.
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Rest of Asia Pacific The following table presents Rest of Asia Pacific net sales information for the three- and six-month periods ended March 28, 2015 and March 29, 2014 (dollars in millions): The year-over-year increase in Rest of Asia Pacific net sales for the second quarter and first six months of 2015 primarily ref...
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iPhone channel inventory increased more in the second quarter and first six months of 2015 than in the prior year periods in anticipation of increased customer demand.
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Gross Margin Gross margin for the three- and six-month periods ended March 28, 2015 and March 29, 2014 was as follows (dollars in millions): The increase in the gross margin percentage during the second quarter and first six months of 2015 compared to the same periods in 2014 was driven primarily by a favorable shift i...
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These positive factors were partially offset primarily by higher cost structures on new products and, to a lesser extent, by the effect of weakness in most foreign currencies relative to the U.S. dollar.
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The Company anticipates gross margin during the third quarter of 2015 to be between 38.5% and 39.5%.
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The foregoing statement regarding the Company’s expected gross margin percentage in the third quarter of 2015 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, financial results can be significantly affected by fluctuations in exchange rates.
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Operating Expenses Operating expenses for the three- and six-month periods ended March 28, 2015 and March 29, 2014 were as follows (dollars in millions): Research and Development The growth in R&D expense during the second quarter and first six months of 2015 compared to the same periods in 2014 was driven primarily by...
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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 are directly related to timely development of new and enhanced products that are central to the Company’s core business strategy.
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Selling, General and Administrative The growth in selling, general and administrative expense during the second quarter and first six months of 2015 compared to the same periods in 2014 was primarily due to increased headcount and related expenses, including share-based compensation costs, and higher spending on market...
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Other Income/(Expense), Net Other income/(expense), net for the three- and six-month periods ended March 28, 2015 and March 29, 2014 was as follows (dollars in millions): The increase in other income/(expense), net during the second quarter of 2015 compared to the same period in 2014 was due primarily to higher interes...
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The decrease in other income/(expense), net during the first six months of 2015 compared to the same period in 2014 was due primarily to higher premium expense on foreign exchange contracts, higher expenses associated with foreign exchange movements and higher interest expense on debt, partially offset by higher intere...
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The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.43% and 1.04% in the second quarter of 2015 and 2014, respectively, and 1.42% and 1.03% in the first six months of 2015 and 2014, respectively.
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Provision for Income Taxes Provision for income taxes and effective tax rates for the three- and six-month periods ended March 28, 2015 and March 29, 2014 were as follows (dollars in millions): The Company’s effective tax rates for the second quarter and first six months of 2015 and 2014 differ from the statutory feder...
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The higher effective tax rate during the second quarter and first six months of 2015 as compared to the same periods in 2014 is due primarily to a different geographic mix of earnings.
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The U.S. Internal Revenue Service is currently examining the years 2010 through 2012.
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In addition, the Company is subject to audits by 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 June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company.
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The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company.
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The Company believes the European Commission’s assertions are without merit.
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If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid.
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While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact.
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Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 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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ASU 2014-09 will be effective for the Company beginning in its first quarter of 2018.
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Early adoption is not permitted.
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The new revenue standard 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 is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.
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