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0000320193 | 20060203 | 10-Q | 423 | These increases were offset by a 9% decrease in desktop net sales on a year-over-year basis. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 424 | Japan
Japan’s net sales increased $170 million or 92% during the first quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 425 | Japan experienced increased net sales in iPod, portable products, and other music related products and services. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 426 | iPod net sales increased by 277% and portable net sales increased by 27% on a year-over-year basis during the first quarter of 2006 compared to the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 427 | The increases in net sales of iPod and other music related products and services are believed to be partly attributable to the introduction of the iTunes Music Store in Japan in the fourth quarter of 2005 and an increase in marketing and advertising activities during the first quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 428 | Retail
During the first quarter of 2006, the Company opened 11 new retail stores. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 429 | The Company had 135 retail stores open at the end of the first quarter of 2006 compared to 101 stores at the end of the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 430 | During the first quarter of 2006, the Retail segment’s net sales grew to $1.1 billion as compared to $561 million in the first quarter of 2005, a 91% increase. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 431 | With an average of 129 stores open during the quarter, average quarterly revenue per store increased 41% to $8.3 million in the first quarter of 2006, up from $5.9 million in the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 432 | The increase in average revenue per store was primarily due to strong sales of iPods, other music related products and services, and Macintosh portable products. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 433 | As measured by the Company’s operating segment reporting, the Retail segment reported a profit of $90 million during the first quarter of 2006 compared to a profit of $45 million during the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 434 | This improvement in profitability is primarily attributable to the segment’s year-over-year increase in average quarterly revenue per store, the impact of opening 34 new stores, and the segment’s year-over-year increase in net sales, which resulted in higher leverage on occupancy, depreciation, and other fixed costs. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 435 | Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 436 | Capital expenditures associated with the Retail segment since its inception totaled $569 million through the end of the first quarter of 2006, of which $40 million was incurred during the first quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 437 | As of December 31, 2005, the Retail segment had approximately 4,739 full-time equivalent employees and had outstanding lease commitments associated with retail store space and related facilities of $705 million. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 438 | Gross Margin
Gross margin for the three months ended December 31, 2005 and December 25, 2004 was as follows (in millions, except gross margin percentages):
Gross margin percentage for the first quarter of 2006 was 27.2% compared to 28.5% for the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 439 | The year-over-year decrease in gross margin percentage during the first quarter of 2006 was primarily due to a relative increase in lower margin products, particularly the iPod product family and music-related services. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 440 | Additionally, gross margins on Macintosh net sales were lower on a year-over-year basis primarily due to reductions in average selling prices from the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 441 | The Company anticipates that its gross margin and the gross margin of the overall personal computer and consumer electronics industries will remain under pressure in light of price competition, especially for the iPod product line. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 442 | The Company expects its gross margin percentage to increase slightly in the second quarter of 2006 primarily as a result of favorable costs of certain commodity components including LCD flat-panel displays, as well as a shift in the mix of revenue toward higher margin products. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 443 | The foregoing statements regarding the Company’s expected gross margin and forecasted revenue for the second quarter of 2006 are forward-looking. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 444 | Gross margin could differ from anticipated levels because of several factors, including certain of those set forth below in the subsection entitled “Factors That May Affect Future Results and Financial Condition.” There can be no assurance that current gross margins will be maintained, targeted gross margin levels will... | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 445 | Operating Expenses
Operating expenses for the three months ended December 31, 2005 and December 25, 2004 was as follows (in millions, except for percentages):
Research and Development (R&D)
Expenditures for R&D increased 48% or $59 million to $182 million in the first quarter of 2006 compared to $123 million in the fir... | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 446 | 123R, and higher overall expenses due to the 14th week added to the first fiscal quarter of 2006 to realign the Company’s fiscal quarters with calendar quarters. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 447 | In addition, during the first quarter of 2005, the Company capitalized approximately $14.8 million of costs associated with the development of Mac OS X Tiger. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 448 | No software development costs were capitalized during the first quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 449 | The decrease in R&D as a percentage of net sales to 3% in the first quarter of 2006 from 4% in the first quarter of 2005 is due to the significant increase of 65% in total net sales for the Company in the first quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 450 | The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company’s core business strategy. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 451 | As such, the Company expects to make further investments in R&D to remain competitive. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 452 | Selling, General, and Administrative Expense (SG&A)
SG&A increased 34% or $162 million to $632 million in the first quarter of 2006 compared to $470 million in the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 453 | This increase is primarily due to higher direct and channel variable selling expenses resulting from the significant year-over-year increase in total net sales for the first quarter, the Company’s continued expansion of its Retail segment in both domestic and international markets, a $16 million increase in stock-based... | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 454 | 123R, a current year increase in discretionary spending on marketing and advertising, and the associated expenses with the 14th week added to the first fiscal quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 455 | Other Income and Expense
Other income and expense for the three months ended December 31, 2005 and December 25, 2004 was as follows (in millions):
Total other income and expense increased $55 million to $81 million during the first quarter of 2006 compared to $26 million in the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 456 | This increase is attributable primarily to higher cash and short-term investment balances and increasing investment yields resulting from higher market interest rates, and the 14th week added to the first fiscal quarter of 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 457 | The weighted-average interest rate earned by the Company on its cash, cash equivalents and short-term investments increased to 3.89% in the first quarter of 2006 from 1.93% in the first quarter of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 458 | Provision for Income Taxes
The Company’s effective tax rate for the three months ended December 31, 2005 was approximately 32% compared with approximately 31% for the same period of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 459 | The Company’s effective rate for both periods differs from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 460 | The higher tax rate in the first three months of 2006 versus 2005 is primarily due to an overall increase in earnings as well as a greater mix of earnings in the U.S. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 461 | The Internal Revenue Service (IRS) has completed its field audit of the Company’s federal income tax returns for all years prior to 2002 and proposed certain adjustments. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 462 | Certain of these adjustments are being contested through the IRS Appeals Office. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 463 | Substantially all IRS audit issues for these years have been resolved. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 464 | In addition, the Company is subject to audits by state, local, and foreign tax authorities. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 465 | Management believes that adequate provision has been made for any adjustments that may result from tax examinations. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 466 | However, the outcome of tax audits cannot be predicted with certainty. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 467 | Should any issues addressed in the Company’s tax audits be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 468 | On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 469 | The AJCA includes a provision for the deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 470 | The Company may elect to apply this provision to repatriations of qualifying earnings in fiscal year 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 471 | The Company is continuing to evaluate the effects of the repatriation provision and expects to complete the evaluation in fiscal year 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 472 | A maximum of $755 million may be eligible for repatriation under the reduced tax rate provided by AJCA. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 473 | However, given the uncertainties and complexities of the repatriation provision and the Company’s continuing evaluation, the Company has not yet determined the amount that may be repatriated or the related potential income tax effects of such repatriation. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 474 | Recent Accounting Pronouncements
In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Nos. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 475 | FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 476 | FSP Nos. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 477 | FAS 115-1 and FAS 124-1 amend SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 478 | 115, Accounting for Certain Investments in
Debt and Equity Securities, SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 479 | 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, as well as APB Opinion No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 480 | 18, The Equity Method of Accounting for Investments in Common Stock. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 481 | This guidance nullifies certain requirements of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 482 | FSP Nos. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 483 | FAS 115-1 and FAS 124-1 include guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to not be other-than-temporarily impaired. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 484 | FSP Nos. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 485 | FAS 115-1 and FAS 124-1 also require other-than-temporary impaired debt securities to be written down to its impaired value, which becomes the new cost basis. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 486 | FSP Nos. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 487 | FAS 115-1 and FAS 124-1 are effective for fiscal periods beginning after December 15, 2005 and are required to be adopted by the Company in the second quarter of fiscal 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 488 | Although the Company will continue to evaluate the application of FSP Nos. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 489 | FAS 115-1 and FAS 124-1, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 490 | In December 2004, the FASB issued FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 491 | FSP 109-2 provides additional time to companies beyond the financial reporting period of enactment to evaluate the effects of the AJCA on their plans for repatriation of foreign earnings for purposes of applying SFAS 109, Accounting for Income Taxes. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 492 | The Company is continuing to evaluate the repatriation provisions of AJCA, which if implemented by the Company would affect the Company’s tax provision and deferred tax assets and liabilities. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 493 | However, given the uncertainties and complexities of the repatriation provision and the Company’s continuing evaluation, the Company has not yet determined the amount, if any, that will be repatriated or the related potential income tax effects of such repatriation. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 494 | The Company expects to complete the evaluation in fiscal 2006. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 495 | In May 2005, the FASB issued SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 496 | 154, Accounting Changes and Error Corrections which replaces APB Opinion No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 497 | 20 Accounting Changes and SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 498 | 3, Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 499 | 28. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 500 | SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 501 | 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principal unless it is not practicable. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 502 | SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 503 | 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2007. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 504 | Although the Company will continue to evaluate the application of SFAS No. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 505 | 154, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 506 | Liquidity and Capital Resources
The following table presents selected financial information and statistics for each of the fiscal quarters ended on the dates indicated (dollars in millions):
(a) DSO is based on ending net trade receivables and most recent quarterly net sales for each period. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 507 | (b) Days supply of inventory is based on ending inventory and most recent quarterly cost of sales for each period. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 508 | (c) DPO is based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 509 | As of December 31, 2005, the Company had $8.7 billion in cash, cash equivalents, and short-term investments, an increase of $446 million over the same balances at the end of 2005. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 510 | The principal components of this net increase were cash generated by operating activities of $283 million that includes a $750 million prepayment made to certain vendors for the future supply of NAND flash memory components, proceeds from the issuance of common stock under stock plans of $134 million, and tax benefits ... | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 511 | The Company’s short-term investment portfolio is primarily invested in high credit quality, liquid investments. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 512 | Approximately $4.8 billion of this cash, cash equivalents, and short-term investments is held by the Company’s foreign subsidiaries and
would be subject to U.S. income taxation on repatriation to the U.S. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 513 | The Company is currently assessing the impact of the one-time favorable foreign dividend provisions recently enacted as part of the AJCA, and may decide to repatriate earnings from some of its foreign subsidiaries. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 514 | In the second quarter of 2006, the Company made an additional prepayment of $500 million for the future supply of NAND flash memory components. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 515 | In addition, during the second quarter of 2006, 10 million shares of restricted stock and 2.4 million restricted stock units (RSUs) previously granted to certain Company executives are scheduled to vest. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 516 | The majority of these are expected to be net-share settled, thus the Company will withhold from the executives sufficient shares to satisfy the executives’ obligation for their applicable income and other employment taxes, and will remit an equivalent amount of cash to the appropriate taxing authorities. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 517 | The number of shares withheld will be based on the value of the restricted stock and RSUs on their respective vesting dates. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 518 | The remaining shares net of those withheld will be delivered to the Company executives. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 519 | The amounts of these tax withholdings and remittances in cash to the taxing authorities will be a function of the Company’s stock price on the respective vesting dates, but using the closing price of the Company’s stock on January 27, 2006 of $72.03 as a proxy, the total payments for the employees’ tax obligations to t... | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 520 | These transactions will not represent expenses to the Company but will be accounted for as reductions to cash with corresponding reductions to shareholders’ equity. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 521 | These net-share settlements will have the effect of share repurchases by the Company as they will reduce and retire the number of shares that would have otherwise been issued as a result of the vesting. | 0001104659-06-005910/full-submission.txt |
0000320193 | 20060203 | 10-Q | 522 | The Company believes its existing balances of cash, cash equivalents, and short-term investments will be sufficient to satisfy its working capital needs, capital expenditures, stock repurchase activity, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 mo... | 0001104659-06-005910/full-submission.txt |
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