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0000320193
20170802
10-Q
128
The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.
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Note 6 - Debt Commercial Paper The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program.
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The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases.
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As of July 1, 2017 and September 24, 2016, the Company had $12.0 billion and $8.1 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months.
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The weighted-average interest rate of the Company’s Commercial Paper was 1.01% as of July 1, 2017 and 0.45% as of September 24, 2016.
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The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the nine months ended July 1, 2017 and June 25, 2016 (in millions): Apple Inc. | Q3 2017 Form 10-Q | 12 Term Debt As of July 1, 2017, the Company had outstanding floating- and fixed-rate notes with v...
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The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar-denominated and Australian dollar-denominated floating-rate notes, semi-annually for the U.S. dollar-denominated, Australian dollar-denominated, British pound-denominated and Japanese yen-denominated fixed-rate...
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The following table provides a summary of the Company’s term debt as of July 1, 2017 and September 24, 2016: Apple Inc. | Q3 2017 Form 10-Q | 13 To manage interest rate risk on certain of its fixed-rate notes issued during the third quarter of 2017 and maturing in 2024 and 2027, the Company entered into interest rate s...
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The Company also hedged its entire third quarter 2017 issuance of €2.5 billion of euro-denominated notes by entering into foreign currency swaps to effectively convert these notes to U.S. dollar-denominated notes.
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To manage interest rate risk on certain of its fixed-rate notes issued during the second quarter of 2017 and maturing in 2020, 2022, 2024 and 2027, the Company entered into interest rate swaps with an aggregate notional amount of $6.5 billion, which effectively converted the fixed interest rates on these notes to float...
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A portion of the Company’s Japanese yen-denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation.
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The foreign currency transaction gain or loss on the Japanese yen-denominated debt designated as a hedge is recorded in OCI as a part of the cumulative translation adjustment.
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As of July 1, 2017 and September 24, 2016, the carrying value of the debt designated as a net investment hedge was $1.5 billion and $1.9 billion, respectively.
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For further discussion regarding the Company’s use of derivative instruments see the Derivative Financial Instruments section of Note 2, “Financial Instruments.” The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related ...
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The Company recognized $574 million and $1.6 billion of interest expense on its term debt for the three- and nine-month periods ended July 1, 2017, respectively.
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The Company recognized $393 million and $975 million of interest expense on its term debt for the three- and nine-month periods ended June 25, 2016, respectively.
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As of July 1, 2017 and September 24, 2016, the fair value of the Company’s Notes, based on Level 2 inputs, was $98.3 billion and $81.7 billion, respectively.
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Note 7 - Shareholders’ Equity Dividends The Company declared and paid cash dividends per share during the periods presented as follows: Future dividends are subject to declaration by the Board of Directors.
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Share Repurchase Program In May 2017, the Company’s Board of Directors increased the share repurchase authorization from $175 billion to $210 billion of the Company’s common stock, of which $158 billion had been utilized as of July 1, 2017.
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The Company’s share repurchase program does not obligate it to acquire any specific number of shares.
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Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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Apple Inc. | Q3 2017 Form 10-Q | 14 The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (“ASRs”) with financial institutions.
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In exchange for up-front payments, the financial institutions deliver shares of the Company’s common stock during the purchase periods of each ASR.
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The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, is determined at the end of the applicable purchase period of each ASR based on the volume-weighted average price of the Company’s common stock during that period.
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The shares received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction to shareholders’ equity in the Company’s Condensed Consolidated Balance Sheets in the periods the payments are made.
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The Company reflects the ASRs as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as forward contracts indexed to its own common stock.
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The ASRs met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.
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The following table shows the Company’s ASR activity and related information during the nine months ended July 1, 2017 and the year ended September 24, 2016: (1) “Number of Shares” represents those shares delivered at the beginning of the purchase period and does not represent the final number of shares to be delivered...
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The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, will be determined at the end of the purchase period based on the volume-weighted average price of the Company’s common stock during that period.
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The May 2017 ASR purchase period will end in August 2017.
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(2) Includes 17.5 million shares delivered and retired at the beginning of the purchase period, which began in the second quarter of 2017 and 3.4 million shares delivered and retired at the end of the purchase period, which concluded in the third quarter of 2017.
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Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during the periods presented as follows: Note 8 - Comprehensive Income Comprehensive income consists of two components, net income and OCI.
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OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income.
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The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable securities classified as ...
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Apple Inc. | Q3 2017 Form 10-Q | 15 The following table shows the pre-tax amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations, and the associated financial statement line item, for the three- and nine-month periods ended July 1, 2017 and June 25, 2016 (in millions): The following tab...
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RSUs granted generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis.
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Each share issued with respect to RSUs granted under the Company’s stock plans reduces the number of shares available for grant under the plan by two shares.
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RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the plans utilizing a factor of two times the number of RSUs canceled or shares withheld.
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Rule 10b5-1 Trading Plans During the three months ended July 1, 2017, Section 16 officers Angela Ahrendts, Timothy D. Cook, Luca Maestri, Daniel Riccio and Philip Schiller had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act.
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An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee and director equity plans.
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Apple Inc. | Q3 2017 Form 10-Q | 16 Restricted Stock Units A summary of the Company’s RSU activity and related information for the nine months ended July 1, 2017 is as follows: RSUs that vested during the three- and nine-month periods ended July 1, 2017 had fair values of $2.8 billion and $5.4 billion, respectively, as...
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RSUs that vested during the three- and nine-month periods ended June 25, 2016 had fair values of $2.0 billion and $4.5 billion, respectively, as of the vesting date.
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Share-Based Compensation The following table shows a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended July 1, 2017 and June 25, 2016 (in millions): The income tax benefit related to share-based compensation expens...
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As of July 1, 2017, the total unrecognized compensation cost related to outstanding RSUs, restricted stock and stock options was $9.0 billion, which the Company expects to recognize over a weighted-average period of 2.6 years.
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Note 10 - Commitments and Contingencies Accrued Warranty and Indemnification The following table shows changes in the Company’s accrued warranties and related costs for the three- and nine-month periods ended July 1, 2017 and June 25, 2016 (in millions): Agreements entered into by the Company sometimes include indemnif...
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In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.
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The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China.
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The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met.
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The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right with subsequent changes to the guarantee liability recognized within revenue.
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Apple Inc. | Q3 2017 Form 10-Q | 17 The Company has entered into indemnification agreements with its directors and executive officers.
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Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers of the Company and to advance expenses incurred by such individuals in connection with related legal proceedings.
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It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim.
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While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
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Concentrations in the Available Sources of Supply of Materials and Product Although most components essential to the Company’s business are generally available from multiple sources, a number of components are currently obtained from single or limited sources.
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In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers.
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Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.
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The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source.
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When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased.
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If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected.
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The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source.
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Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
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The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
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Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.
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Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia.
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A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations.
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Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company’s products.
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Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments.
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The Company’s manufacturing purchase obligations typically cover its requirements for periods up to 150 days.
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Other Off-Balance Sheet Commitments Operating Leases The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements.
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The Company does not currently utilize any other off-balance sheet financing arrangements.
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As of July 1, 2017, the Company’s total future minimum lease payments under noncancelable operating leases were $8.5 billion.
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The Company’s retail store and other facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options.
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Contingencies The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated, as further discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II, Item 1A of this Form 10-Q under the h...
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However, the outcome of litigation is inherently uncertain.
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Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be ma...
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Apple Inc. | Q3 2017 Form 10-Q | 18 Apple Inc. v. Samsung Electronics Co., Ltd., et al.
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On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd. and affiliated parties in the United States District Court, Northern District of California, San Jose Division.
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On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million.
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On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court.
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As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million, with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part.
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Samsung paid $548 million to the Company in December 2015, which was included in net sales in the Condensed Consolidated Statement of Operations.
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On December 6, 2016, the U.S. Supreme Court remanded the case to the U.S. Court of Appeals for the Federal Circuit for further proceedings related to the $548 million in damages.
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On February 7, 2017, the U.S. Court of Appeals for the Federal Circuit remanded the case to the District Court to determine what additional proceedings, if any, are needed.
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Because the case remains subject to further proceedings, the Company has not recognized any further amounts in its results of operations.
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Note 11 - Segment Information and Geographic Data The Company reports segment information based on the “management” approach.
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The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable operating segments.
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The Company manages its business primarily on a geographic basis.
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The Company’s reportable operating segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific.
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The Americas segment includes both North and South America.
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The Europe segment includes European countries, as well as India, the Middle East and Africa.
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The Greater China segment includes China, Hong Kong and Taiwan.
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The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Company’s other reportable operating segments.
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Although the reportable operating segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region.
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The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2016 Form 10-K.
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The Company evaluates the performance of its reportable operating segments based on net sales and operating income.
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Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations.
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Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.
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Advertising expenses are generally included in the geographic segment in which the expenditures are incurred.
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Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable operating segments.
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Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs.
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