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0000320193
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Management believes adequate provision has been made for any adjustments that may result from tax examinations.
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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS SECTION AND OTHER PARTS OF THIS FORM 10-Q CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
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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 THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" BELOW.
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THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 2000 FORM 10-K AND THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q.
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ALL INFORMATION IS BASED ON THE COMPANY'S FISCAL CALENDAR.
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RESULTS OF OPERATIONS Tabular information (dollars in millions, except per share amounts): -------------------------------------- -------------------------------------- FIRST FIRST FIRST FOURTH QUARTER QUARTER CHANGE QUARTER QUARTER CHANGE 2001 2000 2001 2000 -------------------------------------- ---------------------...
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Both the year-over-year and sequential declines in net sales are attributable to several factors including continued deterioration in worldwide demand for personal computers and rebate programs and price cuts instituted by the Company during the quarter that negatively affected the Company's net sales for the quarter b...
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In addition, the Company implemented a plan to reduce substantially the level of inventory in its distribution channels from the amounts at the end of fiscal 2000 to more normal levels by the end of the first quarter of 2001.
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The Company ended fiscal 2000 with substantially more inventory in its distribution channels than planned due to the lower than expected sell-through of the Company's products during the fourth quarter of that year.
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The Company reduced channel inventory during the first quarter by approximately 300,000 units.
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These factors contributed to the 52% year-over-year decline in total Macintosh unit sales that were experienced across the Company's entire product line.
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These factors also reduced the average revenue per Macintosh unit shipped (a function of total net sales generated by hardware shipments and total Macintosh CPU unit sales) during the first quarter of 2001 to $1,476, a decline of approximately 12% from the same period in 2000.
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OUTLOOK For all of 2001, the Company anticipates net sales will decline as compared to 2000 to approximately $6 billion.
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The Company currently expects that it will be profitable, before the effect of any investment gains, during each of the last three quarters of 2001.
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The foregoing statements concerning the Company's anticipated net sales for all of 2001 and profitability for the remainder of fiscal 2001 are forward-looking.
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The Company's actual results could differ.
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The Company's future operating results and financial condition are dependent upon general economic conditions, market conditions within the PC industry, and the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet the dynamic conditions within the highl...
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Some of the potential risks and uncertainties that could affect the Company's future operating results and financial condition are discussed throughout this Item 2, including the discussion under the heading "Factors That May Affect Future Results and Financial Condition."
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SEGMENT OPERATING PERFORMANCE The Company manages its business primarily on a geographic basis.
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The Company's reportable geographic segments include the Americas, Europe, and Japan.
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The Americas segment includes both North and South America.
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The European segment includes European countries as well as the Middle East and Africa.
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The Japan segment includes only Japan.
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Each geographic 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 this Form 10-Q in the Notes to Condensed Consolidated Financial Statements at Note 9, "Segment Information and Geographic Data."
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AMERICAS AND EUROPE The operating results of these two segments reflect the Company's overall results.
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Net sales in the Americas segment during the first quarter of fiscal 2001 decreased $676 million or 57% compared to the same period in 2000.
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Macintosh unit sales in the Americas decreased 54% on a year-over-year basis.
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Net sales in the Europe segment decreased $300 million or 48% during the first quarter of 2001 as compared to the same quarter in 2000, while the segment's Macintosh unit sales decreased 41%.
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These two segments combined represent approximately 83% of the Company's total net sales during the first quarter of 2001 and account for approximately $103 million of the Company's total operating loss for the first quarter of 2001.
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JAPAN Net sales in Japan declined 80% or $328 million and Macintosh unit sales declined 74% during the first quarter of 2001 as compared to the same quarter in 2000.
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The Company's Japan segment was most impacted by the Company's plan to reduce channel inventory during the first quarter of 2001 which is reflected in the 91% decrease in unit sales of iMac in Japan during the first quarter of 2001 compared to the same quarter in 2000.
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GROSS MARGIN Gross margin for the first quarter of 2001 was (2.1)% compared to 25.9% for the same quarter in 2000 and 25.0% for the fourth quarter of 2000.
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In addition to lower than normal net sales, margins were negatively impacted by the rebate programs and price cuts discussed above instituted by the Company during the first quarter that decreased revenue by approximately $138 million.
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Additionally, actual and forecasted declines in net sales caused the Company to recognize during the first quarter approximately $122 million of charges associated with purchase order cancellations and loss commitments for component purchases.
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Without these charges, gross margin for the first quarter of 2001 would have been approximately 21%.
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There can be no assurance that historical or current gross margin will be maintained, targeted gross margin levels will be achieved, or current margins on existing individual products will be maintained.
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In general, gross margin and margins on individual products will remain under significant downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material and...
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In response to these downward pressures, the Company expects it will continue to take pricing actions with respect to its products.
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Gross margin could also be affected by the Company's ability to effectively manage quality problems and warranty costs and to stimulate demand for certain of its products.
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The Company's operating strategy and pricing take into account anticipated changes in foreign currency exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in exchange rates.
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OPERATING EXPENSES Selling, general and administrative expenses, excluding special charges, decreased $22 million or 7% during the first quarter of 2001 as compared to the same period in 2000.
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The decrease in selling, general and administrative expenses during the first quarter of 2001 is the result of lower variable selling and marketing expenses resulting from the year-over-year 57% decrease in net sales and due to lower discretionary spending on marketing and advertising.
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Expenditures for research and development increased 13% between the first quarter of fiscal 2001 and the same quarter in 2000 primarily as a result of increased spending in 2001 to support multiple new product manufacturing ramps and increased research and development headcount of approximately 8%.
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During the first quarter of fiscal 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge.
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This charge was comprised of $3 million for the write-off of various operating assets and $5 million for employee termination benefits associated with consolidation of various domestic and international sales and marketing functions.
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Of the $5 million accrued for severance, $2.5 million had been spent by September 30, 2000, and an additional $1 million was spent in the first quarter of 2001.
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Of the $3 million accrued for the write-off of various assets, substantially all was utilized by the end of the second quarter of 2000.
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In December 1999, the Company's Board of Directors approved a special executive bonus for the Company's Chief Executive Officer for past services in the form of an aircraft with a total cost to the company of approximately $90 million, the majority of which is not tax deductible.
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Approximately half of the total charge is the cost of the aircraft.
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The other half represents all other costs and taxes associated with the purchase.
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INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income and expense (net) increased $27 million or 68% to $67 million during the first quarter of fiscal 2001 compared to the same quarter in 2000.
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This increase is attributable primarily to two factors.
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First, interest income increased approximately $17 million or 36% between the first quarter of 2001 and the same quarter in 2000 as a result of higher cash, cash equivalents, and short-term investment balances and due to an increase in the overall yield earned on the Company's investment portfolio.
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Second, net gains from foreign exchange and net gains classified in other income and expense associated with derivative instruments were approximately $10 million higher in the first quarter of 2001 compared to the same period in 2000.
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For the second half of fiscal 2001, the Company expects a moderate decline in net interest income as a result of declining market interest rates.
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During the first quarter of 2001, the Company sold 3.8 million shares of ARM stock for net proceeds of approximately $35 million and a gain before taxes of $35 million.
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During the first quarter of 2001, the Company also sold 1 million shares of Akamai stock for net proceeds of approximately $39 million and a gain before taxes of $36 million.
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On October 1, 2000, the Company adopted SFAS No.
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133.
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SFAS No.
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133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition.
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Net of the related income tax effect of approximately $5 million, adoption of SFAS No.
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133 resulted in favorable cumulative-effect-type adjustment to net income of approximately $12 million.
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The $17 million gross transition adjustment was comprised of a $23 million favorable adjustment for the restatement to fair value of the derivative component of the Company's investment in Samsung, partially offset by the unfavorable adjustments to certain foreign currency and interest rate derivatives.
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Management does not believe that adoption of SFAS No.
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133 will significantly alter the Company's hedging strategies.
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However, its application may increase the volatility of other income and expense and other comprehensive income.
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SFAS No.
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133 also requires the Company to adjust the carrying value of the derivative component of its investment in Samsung to earnings on a go-forward basis, the before tax effect of which during the first quarter of 2001 was an unrealized loss of approximately $13 million.
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PROVISION FOR INCOME TAXES As of December 30, 2000, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $612 million before being offset against certain deferred tax liabilities for presentation on the Company's balance sheet.
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This asset is generally realizable based on the ability to offset existing deferred tax liabilities.
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As of December 30, 2000, a valuation allowance of $30 million was recorded against the deferred tax asset for the benefits of tax losses that may not be realized.
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The valuation allowance relates principally to the operating loss carryforwards acquired from NeXT, the utilization of which is subject to certain limitations imposed by the Internal Revenue Code.
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The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.
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The Company's effective tax rate for the three months ended December 30, 2000, was approximately 30%.
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This effective rate is less than the statutory federal income tax rate of 35% due primarily to the reversal of a portion of the previously established valuation allowance for tax loss and credit carryforwards and certain undistributed foreign earnings for which no U.S. taxes will be provided.
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The Company's effective tax rate for the first quarter of 2000 was approximately 33% and includes the effect of the special executive bonus of $90 million accrued during that quarter.
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The effective tax rate during the first quarter of 2000 without this charge was approximately 25%.
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THE COMPANY CURRENTLY BELIEVES THAT ITS EFFECTIVE TAX RATE FOR THE REMAINDER OF FISCAL 2001 WILL BE APPROXIMATELY 30%.
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THE FOREGOING-STATEMENTS ARE FORWARD- LOOKING.
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THE COMPANY'S ACTUAL RESULTS COULD DIFFER BECAUSE OF SEVERAL FACTORS, INCLUDING THOSE SET FORTH BELOW IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION."
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ADDITIONALLY, THE ACTUAL FUTURE TAX RATE WILL BE SIGNIFICANTLY IMPACTED BY THE AMOUNT OF AND JURISDICTION IN WHICH THE COMPANY'S FOREIGN PROFITS ARE EARNED.
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LIQUIDITY AND CAPITAL RESOURCES The following table presents selected financial information and statistics for each of the fiscal quarters ending on the dates indicated (dollars in millions): 12/30/00 9/30/00 1/1/00 -------- ------- ------- Cash, cash equivalents, and short-term investments $ 4,065 $ 4,027 $ 3,660 Acco...
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For the first quarter of fiscal 2001, the Company's primary source of cash was $556 million in cash flows from investing activities.
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Cash generated by investing activities consisted primarily of $1 billion in proceeds from the maturities of short-term investments and $74 million in proceeds from the sale of ARM and Akamai shares.
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These sources of cash were partially offset by purchases of short-term investments for $634 million.
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Cash used for operating activities was primarily from a net loss of $195 million and decreases in accounts payable partially offset by a decrease in accounts receivable and an increase in other current liabilities.
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In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock.
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This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time.
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During 2000, the Company repurchased a total of 2.55 million shares of its common stock at a cost of $116 million.
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No shares were repurchased in the first quarter of 2001.
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Since inception of the plan, the Company has repurchased a total of 5.05 million shares of its common stock at a cost of $191 million.
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The Company believes its balances of cash, cash equivalents, and short-term investments will be sufficient to meet its cash requirements over the next twelve months, including any cash utilized by its stock repurchase plan.
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However, given the Company's current non-investment grade debt ratings (Standard and Poor's Rating Agency of BB and Moody's Investor Services of Ba2), if the Company should need to obtain short-term borrowings, there can be no assurance such borrowings could be obtained at favorable rates.
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The inability to obtain such borrowings at favorable rates could materially adversely affect the Company's results of operations, financial condition, and liquidity.
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NON-CURRENT DEBT AND EQUITY INVESTMENTS The Company holds significant investments in ARM Holdings plc (ARM), Samsung Electronics Co., Ltd. (Samsung), Akamai Technologies, Inc. (Akamai) and EarthLink Network, Inc. (EarthLink).
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These investments are carried at fair value in the consolidated balance sheets and are classified as non-current debt and equity investments.
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