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0000320193 | 20031219 | 10-K | 452 | Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Factors That May Affect Future Results and Financial Condition" below. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 453 | The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. All information presented herein is based on the Company's fiscal calendar. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 454 | The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 455 | Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company's discussion and analysis of its financial condition and results of operations requires the Company's management to make judgments, assumptions an... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 456 | Note 1 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K describe the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 457 | Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 458 | Actual results may differ from these estimates. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 459 | Management believes the following to be critical accounting policies. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 460 | That is, they are both important to the portrayal of the Company's financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 461 | Revenue Recognition
Net sales consist primarily of revenue from the sale of products (i.e., hardware, software, and peripherals), and extended warranty and support contracts. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 462 | The Company recognizes revenue pursuant to applicable accounting standards, including Statement of Position (SOP) No. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 463 | 97-2, Software Revenue Recognition, as amended, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 464 | 101, Revenue Recognition in Financial Statements. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 465 | The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 466 | Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 467 | For most of the Company's product sales, these criteria are met at the time the product is shipped. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 468 | For online sales to individuals, for some sales to education customers in the United States, and for certain other sales, the Company defers revenue until the customer receives the product because the Company legally retains
a portion of the risk of loss on these sales during transit. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 469 | If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed to not be, fixed and determinable, revenue is deferred and subsequently recognized as amounts become due and payable. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 470 | The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs, including reseller and end-user rebates, and other sales programs and volume-based incentives. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 471 | The estimated cost of these programs is accrued as a reduction to revenue in the period the Company has sold the product and committed to a plan. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 472 | The Company also records reductions to revenue for expected future product returns based on the Company's historical experience. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 473 | Future market conditions and product transitions may require the Company to increase customer incentive programs and incur incremental price protection obligations that could result in additional reductions of revenue at the time such programs are offered. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 474 | Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of particular incentive programs. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 475 | If a greater than estimated proportion of customers redeem such incentives, the Company would be required to record additional reductions to revenue, which could have a material adverse impact on the Company's results of operations. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 476 | Allowance for Doubtful Accounts
The Company distributes its products through third-party resellers and directly to certain education, consumer, and commercial customers. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 477 | The Company generally does not require collateral from its customers. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 478 | However, when possible the Company does attempt to limit credit risk on trade receivables with credit insurance for certain customers in Latin America, Europe and Asia and by arranging with third-party financing companies to provide flooring arrangements and other loan and lease programs to the Company's direct custome... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 479 | These credit-financing arrangements are directly between the third-party financing company and the end customer. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 480 | As such, the Company does not assume any recourse or credit risk sharing related to any of these arrangements. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 481 | However, considerable trade receivables that are not covered by collateral, third-party flooring arrangements, or credit insurance are outstanding with the Company's distribution and retail channel partners. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 482 | The allowance for doubtful accounts is based on management's assessment of the collectibility of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 483 | The Company records an allowance to reduce the specific receivables to the amount that is reasonably believed to be collectible. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 484 | The Company also records an allowance for all other trade receivables based on multiple factors including historical experience with bad debts, the general economic environment, the financial condition of the Company's distribution channels, and the aging of such receivables. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 485 | If there is a deterioration of a major customer's financial condition, if the Company becomes aware of additional information related to the credit worthiness of a major customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, the Company may have to adjust it... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 486 | Inventory Valuation and Inventory Purchase Commitments
The Company must order components for its products and build inventory in advance of product shipments. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 487 | The Company records a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 488 | The Company performs a detailed review of inventory each period that considers multiple factors including demand forecasts, product lifecycle status, product development plans, current sales levels, and component cost trends. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 489 | The personal computer industry is subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 490 | If future demand or market conditions for the Company's products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of component inventory, the Company may be required
to record additional write-downs which would negatively affect gross margins in the period when the... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 491 | The Company accrues necessary reserves for cancellation fees related to component orders that have been cancelled. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 492 | Consistent with industry practice, the Company acquires components through a combination of formal purchase orders, supplier contracts, and open orders based on projected demand information. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 493 | These commitments typically cover the Company's requirements for periods ranging from 30 to 130 days. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 494 | If there is an abrupt and substantial decline in demand for one or more of the Company's products or an unanticipated change in technological requirements for any of the Company's products, the Company may be required to record additional reserves for cancellation fees that would negatively affect gross margins in the ... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 495 | Valuation of Long-Lived Assets Including Acquired Intangibles
The Company reviews property, plant, and equipment and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such an asset may not be recoverable. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 496 | Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 497 | If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair market value. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 498 | Although the Company has recognized no material impairment adjustments related to its property, plant, and equipment or identifiable intangibles during the past three fiscal years, except those made in conjunction with restructuring actions, deterioration in the Company's business in a geographic region or business seg... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 499 | The Company adopted Statement of Financial Accounting Standards (SFAS) No. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 500 | 142, Goodwill and Other Intangible Assets, in the first quarter of fiscal 2002. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 501 | As a result, the Company no longer amortizes goodwill but instead performs a review of goodwill for impairment annually, or earlier if indicators of potential impairment exist. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 502 | The review of goodwill for potential impairment is highly subjective and requires that: (1) goodwill be allocated to various reporting units of the Company's business to which it relates; (2) the Company estimate the fair value of those reporting units to which the goodwill relates; and (3) the Company determine the bo... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 503 | If the estimated fair value of reporting units with allocated goodwill is determined to be less than their book value, the Company is required to estimate the fair value of all identifiable assets and liabilities of those reporting units in a manner similar to a purchase price allocation for an acquired business. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 504 | This requires independent valuation of certain internally developed and unrecognized assets including in-process research and development and developed technology. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 505 | Once this process is complete, the amount of goodwill impairment, if any, can be determined. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 506 | Based on the Company's estimates as of September 27, 2003, there was no impairment of goodwill. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 507 | However, changes in various circumstances including changes in the Company's market capitalization, changes in the Company's forecasts, and changes in the Company's internal business structure could cause one or more of the Company's reporting units to be valued differently thereby causing an impairment of goodwill. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 508 | Additionally, in response to changes in the personal computer industry and changes in global or regional economic conditions, the Company may strategically realign its resources and consider restructuring, disposing, or otherwise exiting businesses, which could result in an impairment of property, plant, and equipment,... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 509 | Warranty Costs
The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized based on historical experience of failure rates. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 510 | Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts
as necessary. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 511 | If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liability would be required and could negatively affect the Company's results of operations. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 512 | Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 513 | In accordance with SFAS No. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 514 | 109, Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 515 | Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 516 | The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 517 | Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 518 | In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 519 | Similarly, if the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 520 | In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 521 | Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on the Company's results of operations and financial position. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 522 | Net Sales
Net sales and Macintosh unit sales by operating segment and net sales and unit sales by product follow (net sales in millions and Macintosh unit sales in thousands):
Notes:
(a)Other segments consists of Asia Pacific and FileMaker. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 523 | Certain net sales in 2002 and 2001 related to recent acquisitions and Internet services have been reclassified from Other segments net sales to Americas segment net sales to conform to the 2003 presentation. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 524 | (b)Power Macintosh figures include server sales. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 525 | (c)Net sales of peripherals and other hardware include sales of iPod, Apple-branded and third-party displays, and other hardware accessories. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 526 | (d)Net sales of software include sales of Apple-branded operating system and application software and sales of third-party software. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 527 | (e)Net sales per Macintosh unit sold is derived by dividing total Macintosh net sales by total Macintosh unit sales. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 528 | Fiscal Year 2003 versus 2002
Net sales increased $465 million or 8% during 2003 compared to 2002 while Macintosh unit sales declined 3% year-over-year to approximately 3 million units in 2003. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 529 | Several factors have contributed favorably to net sales during 2003 including:
•The Retail segment's net sales grew to $621 million during 2003 from $283 million in 2002, an increase of 119%. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 530 | While the Company's customers may elect to purchase product from their local Apple Retail store rather than through other preexisting sales channels in the United States, the Company believes that a substantial portion of the Retail segment's net sales is incremental to total net sales. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 531 | See additional comments below related to the Retail segment under the heading "Segment Operating Performance." | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 532 | •Net sales of peripherals and other hardware rose $384 million or 57% during 2003 compared 2002, which follows a $287 million or 74% increase in 2002 as compared to 2001. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 533 | The current year increase was primarily driven by the $202 million, or 141%, year-over-year increase in iPod net sales to $345 million. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 534 | All of the Company's operating segments experienced substantial increases in iPod net sales and unit sales during 2003. iPod sales during 2003 were favorably affected by the introduction of substantially redesigned new models, which are compatible with both Macintosh and Windows operating systems and by the Company's i... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 535 | The Company's iPod digital music player is sold by a variety of resellers, many of which do not currently market the Company's Macintosh systems. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 536 | The Company has expanded this distribution network during 2003, which has contributed to the current year increase in iPod unit sales of 146%. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 537 | In addition to the iPod, the increase in net sales of peripherals and other hardware during 2003 also reflects an overall increase in net sales of other computer accessories including AirPort cards and base stations, which facilitate wireless connectivity; third party digital cameras and printers; and a number of porta... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 538 | •Although total Macintosh unit sales were down 3% in 2003, unit sales of the Company's portable systems were relatively strong primarily due to the 69% or 247,000 unit increase in PowerBook unit sales, slightly offset by a 4% or 30,000 unit decrease in iBook unit sales. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 539 | The increase in PowerBook net sales of $468 million or 56% is due primarily to the success of the Company's new 12-inch, 15-inch and 17-inch models that were introduced during 2003. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 540 | The decline in iBook consumer portable sales during 2003 is primarily due to a lower average price per unit. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 541 | Portable systems represented 42% of all Macintosh systems sold in 2003 versus 33% in 2002 and 31% in 2001, which reflects an overall industry trend towards portable systems. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 542 | •The Company's average net sales per Macintosh unit sold increased 2% to $1,491 in 2003 as a result of various changes in overall unit mix towards relatively higher-priced PowerBook systems and an increase in direct sales primarily from the Company's retail and online stores, offset by somewhat lower year-over-year pri... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 543 | PowerBook and Power Macintosh systems accounted for 42% of total unit sales in 2003 versus 36% in 2002. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 544 | •Net sales of software increased $55 million or 18% during 2003 compared to the prior year and reflects higher net sales of Apple-branded application and server software and third-party software. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 545 | Net sales of Apple-branded application and server software increased due to the introduction of several new software titles during the year including Final Cut Express, iLife, and Keynote, as well as from higher sales of software related to recent acquisitions including PowerSchool and Emagic. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 546 | Growth in net sales of third-party software during 2003 was particularly strong in the Americas Segment due to strong sales of software by the Company's online store and its Retail segment. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 547 | •Service and other sales rose $69 million or 30% during 2003 and results from significant year-over-year increases in net sales associated with AppleCare Protection Plan (APP) extended maintenance and support services, as well as the Company's Internet related services. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 548 | Increased net sales associated with APP are primarily the result of increasing attach rates over the last several years. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 549 | Increased net sales associated with Internet services are due to net sales from the iTunes Music Store introduced in April 2003 and increased net sales of the Company's .Mac Internet service. | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 550 | Offsetting the favorable factors discussed above, the Company's net sales during 2003 were negatively impacted by the following factors:
•Total unit sales of desktop systems fell 15% during 2003 compared to 2002. iMac systems unit sales declined 16% from 2003 to 2002 resulting from a shift in sales away from desktop sy... | 0001047469-03-041604/full-submission.txt |
0000320193 | 20031219 | 10-K | 551 | Also, the current flat panel iMac form factor was in the eighth quarter of its life cycle by the end of 2003 and did not experience significant enhancements until the release of the 20-inch flat-panel iMac in November 2003. | 0001047469-03-041604/full-submission.txt |
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