UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 201728, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36743
Apple Inc.
(Exact name of Registrant as specified in its charter)
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| California | | 94-2404110 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1 Infinite Loop
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| One Apple Park Way | | |
| Cupertino | | California | | 95014 |
| (Address of principal executive offices) | | (Zip Code) |
(408) (408) 996-1010
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.00001 par value per share 1.000% Notes due 2022
1.375% Notes due 2024
0.875% Notes due 2025
1.625% Notes due 2026
2.000% Notes due 2027
1.375% Notes due 2029
3.050% Notes due 2029
3.600% Notes due 2042
| AAPL | The Nasdaq Stock Market LLC New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
|
(Title of each class)1.000% Notes due 2022 | — | (Name of each exchange on which registered)The Nasdaq Stock Market LLC |
| 1.375% Notes due 2024 | — | The Nasdaq Stock Market LLC |
| 0.875% Notes due 2025 | — | The Nasdaq Stock Market LLC |
| 1.625% Notes due 2026 | — | The Nasdaq Stock Market LLC |
| 2.000% Notes due 2027 | — | The Nasdaq Stock Market LLC |
| 1.375% Notes due 2029 | — | The Nasdaq Stock Market LLC |
| 3.050% Notes due 2029 | — | The Nasdaq Stock Market LLC |
| 3.600% Notes due 2042 | — | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐No☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| Non-accelerated filer | | ☐(Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
| | | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 31, 2017,29, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $747,509,000,000.$874,698,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.
5,134,312,0004,443,265,000 shares of common stock were issued and outstanding as of October 20, 2017.18, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 20182020 annual meeting of shareholders (the “2018“2020 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 20182020 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Apple Inc.
Form 10-K
For the Fiscal Year Ended September 30, 201728, 2019
TABLE OF CONTENTS
This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. AllUnless otherwise stated, all information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated,calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-ownedwholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
PART I
Company Background
The Company designs, manufactures and markets mobile communicationsmartphones, personal computers, tablets, wearables and media devices and personal computers,accessories, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company’s products and services include iPhone®, iPad®, Mac®, Apple Watch®, Apple TV®, a portfolio of consumer and professional software applications, iOS, macOS®, watchOS® and tvOS™ operating systems, iCloud®, Apple Pay® and a variety of accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store®, App Store®, Mac App Store, TV App Store, iBooks Store® and Apple Music® (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.services. The Company’s fiscal year is the 5252- or 53-week period that ends on the last Saturday of September. The Company is a California corporation established in 1977.
Business Strategy
The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Digital Content and Services, which allows customers to discover and download digital content, iOS, Mac, Apple Watch and Apple TV applications, and books through either a Mac or Windows personal computer or through iPhone, iPad and iPod touch® devices (“iOS devices”), Apple TV and Apple Watch. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience. The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products, services and technologies.
Business Organization
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable 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. Further information regarding the Company’s reportable segments may be found in Part II, Item 7 of this Form 10-K under the subheading “Segment Operating Performance,” and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.”
Products
iPhone
iPhone® is the Company’s line of smartphones based on its iOS operating system. iPhone includes Siri®, a voice-activated intelligent assistant, and Apple Pay and Touch ID® on qualifying devices. In September 2017,2019, the Company introduced three new iPhones: iPhone 8 and 8 Plus, featuring a new glass and aluminum design, enhanced cameras and speakers, wireless charging and augmented reality optimization. Additionally, in September 2017, the Company announced11, iPhone X, featuring an all-glass design with a Super Retina™ OLED display and facial recognition. iPhone 8 and 8 Plus were available starting in September 2017,11 Pro and iPhone X is expected to be available in November 2017. The Company’s line of smartphones also includes iPhone 7, 7 Plus, 6s, 6s Plus and SE models. iPhone works with the iTunes Store, App Store, iBooks Store and Apple Music for purchasing, organizing and playing digital content and apps.11 Pro Max.
iPadMac
iPadMac® is the Company’s line of multi-purpose tabletspersonal computers based on its iOSmacOS® operating system, which includes iPad Pro®, iPad and iPad mini™. iPad includes Siri, Apple Pay and Touch ID. In June 2017,system. During 2019, the Company released a new 10.5-inch iPad Proversion of MacBook Air® and a new Mac mini®, and introduced an updated 12.9-inch iPadMac Pro with more advanced displays and enhanced performance. iPad works with the iTunes Store, App Store, iBooks Store and Apple Music for purchasing, organizing and playing digital content and apps.
Mac
Mac is the Company’s line of desktop and portable personal computers based on its macOS operating system. Mac includes Siri and Apple Pay and also includes Touch ID on qualifying devices. The Company’s desktop computers include iMac®, 21.5” iMac with Retina® 4K display, 27” iMac with Retina 5K display, Mac Pro® and Mac mini®. In June 2017, the Company announced the new iMac Pro™, which is expected to be available in December 2017. The Company’s portable computers include MacBookthe fall of 2019.
iPad
iPad®, MacBook Air®, MacBook Pro® and MacBook Pro with Touch Bar™.
Operating Systems
iOS
iOS is the Company’s mobile operating system that serves as the foundation for iOS devices. Devices running iOS are compatible with both Mac and Windows personal computers and Apple’s iCloud services. In September 2017, the Company released iOS 11, which includes newline of multi-purpose tablets. iPad features, new capabilities to improve images in Photos and Camera, enhanced Siri functionality and a redesigned App Store. iOS 11 also introduces ARKit, an augmented reality framework for developers.
macOS
macOS is the Company’s desktop operating system and is built on an open-source UNIX-based foundation and provides an intuitive and integrated computer experience. Support for iCloud is built into macOS so users can access content and information from Mac, iOS devices and other supported devices and access downloaded content and apps from the iTunes Store. macOS High Sierra, released in September 2017, is the 14th major release of macOS and incorporates new storage, video and graphics technologies, and includes improvements to Photos, Safari® and Mail.
watchOS
watchOS is the Company’s operating system for Apple Watch. In September 2017, the Company released watchOS 4, which adds a proactive Siri watch face that displays the information users need most throughout the day, personalized activity coaching and a new music experience. watchOS 4 also includes an enhanced Workout app and introduces GymKit™, a technology platform that offers users connected workouts with cardio equipment.
tvOS
tvOS is the Company’s operating system for Apple TV. The tvOS operating system is based on the Company’s iOS platformiPadOS™ operating system, which was introduced during 2019. Also during 2019, the Company released two new versions of iPad Pro®, an iPad Air®, an updated iPad mini® and enables developers to createa new apps10.2-inch iPad.
Wearables, Home and gamesAccessories
Wearables, Home and Accessories includes AirPods®, Apple TV®, Apple Watch®, Beats® products, HomePod™, iPod touch® and other Apple-branded and third-party accessories. AirPods are the Company’s wireless headphones that interact with Siri. In October 2019, the Company introduced AirPods Pro™. Apple Watch is a personal electronic device that combines the watchOS® user interface and other technologies created specifically for a smaller device. In September 2019, the Company introduced Apple TV and deliver them to customers through the Apple TV App Store. tvOS incorporates Siri capabilities that allow searching across apps and services.
Application Software
The Company’s application software includes iWork® and various other software, including Final Cut Pro®, Logic Pro® X and FileMaker® Pro. iWork is the Company’s integrated productivity suite included with all Mac computers and is designed to help users create, present and publish documents through Pages®, presentations through Keynote® and spreadsheets through Numbers®. The Company also has Multi-Touch™ versions of iWork applications designed specifically for use on iOS devices, which are available as free downloads for all new iOS devices.Watch Series 5.
Services
Digital Content Stores and Streaming Services
The iTunes Store, available for iOS devices, Mac and Windows personal computers and Apple TV, allows customers to purchase and download music and TV shows, rent or purchase movies and download free podcasts. The App Store, available for iOS devices, allowsCompany operates various platforms that allow customers to discover and download appsapplications and purchase in-app content. Thedigital content, such as books, music, video, games and podcasts. These platforms include the App Store®, available for iPhone and iPad, the Mac App Store, available for Mac computers, allows customers to discover, download and install Mac applications. Thethe TV App Store allows customers access to apps and games specifically for Apple TV. the Watch App Store.
The iBooks Store, available for iOS devices and Mac computers, features e-books from major and independent publishers.Company also offers subscription-based digital content streaming services, including Apple Music®, which offers users a curated listening experience with on-demand radio stations, and Apple TV+, which offers exclusive original content, and is expected to be available in November 2019.
AppleCare
AppleCare® includes AppleCare+ (“AC+”) and the AppleCare Protection Plan, which are fee-based services that evolve based on a user’s play or download activityextend the coverage of phone support eligibility and a subscription-based internet streaming service that also provides unlimited access tohardware repairs. AC+ offers additional coverage for instances of accidental damage and is available in certain countries for certain products. Additionally, AC+ with theft and loss protection is available for iPhone in the Apple Music library.U.S.
iCloud
iCloud® is the Company’s cloud service, which stores music, photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available across multiple iOSApple devices Mac and Windows personal computers and Apple TV. iCloud services include iCloud Drive®, iCloud Photo Library, Family Sharing, Find My iPhone, iPad or Mac, Find My Friends, Notes, iCloud Keychain® and iCloud Backup for iOS devices.computers.
AppleCareLicensing
The Company offerslicenses the use of certain of its intellectual property, and provides other related services.
Other Services
The Company delivers a rangevariety of support options for its customers. These include assistance that is built into software products, electronic product manuals, online support including comprehensive product information as well as technical assistance, the AppleCare® Protection Plan (“APP”) and AppleCare+ (“AC+”). APP and AC+ are fee-basedother services that extend the coverage of phone support eligibility and hardware warranty repairs. APP and AC+ offer additional coverage under some circumstances for instances of accidental damage and are available in certain countries, for certain products.
including Apple Pay
Arcade™, a game subscription service; Apple Card™, a co-branded credit card; Apple News+, a subscription news and magazine service; and Apple Pay, is the Company’sa cashless payment service available in certain countries that offers an easy, secure and private way to pay. Apple Pay allows users to pay for purchases in participating stores accepting contactless payments and to pay for purchases within participating apps on qualifying devices. Apple Pay accepts credit and debit cards across major card networks and also supports reward programs and store-issued credit and debit cards. The Company expects to release an update to iOS 11 and watchOS 4 in fall 2017 that will allow peer-to-peer payments using Apple Pay.
Other Products
Accessories
The Company sells a variety of Apple-branded and third-party accessories, including Beats® products, headphones, displays, storage devices, and various other connectivity and computing products and supplies. In December 2016, the Company released AirPods®, new wireless headphones that interact with Siri. Additionally, in June 2017, the Company announced the HomePod™ wireless speaker and in September 2017, announced AirPower™, a new wireless charging accessory, which are expected to be available in December 2017 and calendar year 2018, respectively.
Apple TV
Apple TV connects to consumers’ TVs and enables them to access digital content directly for streaming video, playing music and games, and viewing photos. Content from Apple Music and other media services is also available on Apple TV. Apple TV allows streaming digital content from Mac and Windows personal computers through Home Share and from compatible Mac and iOS devices through AirPlay®. Apple TV runs on the Company’s tvOS operating system and is based on apps built for the television. Additionally, the Apple TV remote features Siri, allowing users to search and access content with their voice. In September 2017, the Company introduced Apple TV 4K, which supports 4K and High Dynamic Range content, providing customers with enhanced picture quality.
Apple Watch
Apple Watch is a personal electronic device that combines the watchOS user interface and technologies created specifically for a smaller device, including the Digital Crown™, a unique navigation tool that allows users to seamlessly scroll, zoom and navigate, and Force Touch, a technology that senses the difference between a tap and a press and allows users to access controls within apps. Apple Watch enables users to communicate in new ways from their wrist, track their health and fitness through activity and workout apps, and includes Siri and Apple Pay. In September 2017, the Company introduced Apple Watch Series 3, featuring health and fitness enhancements and built-in cellular capability on qualifying devices.
iPod touch
iPod touch, based on the Company’s iOS operating system, is a flash memory-based digital music and media player that works with the iTunes Store, App Store, iBooks Store and Apple Music for purchasing and playing digital content and apps.
Developer Programs
The Company’s developer programs support app developers with building, testing and distributing apps for iOS, macOS, watchOS and tvOS. Developer program membership provides access to beta software and advanced app capabilities (e.g., CloudKit®, HealthKit™ and Apple Pay), the ability to test apps using TestFlight®, distribution on the App Store, access to App Analytics and code-level technical support. Developer programs also exist for businesses creating apps for internal use (the Apple Developer Enterprise Program) and developers creating accessories for Apple devices (the MFi Program). All developers, even those who are not developer program members, can sign in with their Apple ID to post on the Apple Developer Forums and use Xcode®, the Company’s integrated development environment for creating apps for Apple platforms. Xcode includes project management tools; analysis tools to collect, display and compare app performance data; simulation tools to locally run, test and debug apps; and tools to simplify the design and development of user interfaces. All developers also have access to extensive technical documentation and sample code.service.
Markets and Distribution
The Company’s customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its products and resells third-party products in most of its major markets directly to consumers, and small and mid-sized businesses, and education, enterprise and government customers through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers and value-added resellers. During 2017,2019, the Company’s net sales through its direct and indirect distribution channels accounted for 28%31% and 72%69%, respectively, of total net sales.
The Company believes that sales of its innovative and differentiated products and services are enhanced by knowledgeable salespersons who can convey the value of the hardware and software integration and demonstrate the unique solutions that are available on its products. The Company further believes providing direct contact with its targeted customers is an effective way to demonstrate the advantages of its products over those of its competitors and providing a high-quality sales and after-sales support experience is critical to attracting new and retaining existing customers.
To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to build and improve its distribution capabilities by expanding the number of its own retail stores worldwide. The Company’s retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations the Company is better positioned to ensure a high-quality customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation and marketing of the Company’s products and related solutions. The retail stores employ experienced and knowledgeable personnel who provide product advice, service and training, and offer a wide selection of third-party hardware, software and other accessories that complement the Company’s products.
The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high level of product expertise, integration and support services.
The Company is committed to delivering solutions to help educators teach and students learn. The Company believes effective integration of technology into classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of education customers. The Company also supports mobile learning and real-time distribution of, and access to, education-related materials through iTunes U®, a platform that allows students and teachers to share and distribute educational media online. The Company sells its products to the education market through its direct sales force, select third-party resellers and its retail and online stores.
The Company also sells its hardware and software products to enterprise and government customers in each of its reportable segments. The Company’s products are deployed in these markets because of their performance, productivity, ease-of-use and seamless integration into information technology environments. The Company’s products are compatible with thousands of third-party business applications and services, and its tools enable the development and secure deployment of custom applications as well as remote device administration.
No single customer accounted for more than 10% of net sales in 2017, 20162019, 2018 and 2015.2017.
Competition
The markets for the Company’s products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of mobile communication and media devices,smartphones, personal computers, tablets and other digital electronic devices. Many of the Company’s competitors that sell mobile devices and personal computers based on other operating systems seek to compete primarily through aggressive pricing and very low cost structures. The Company’s financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price, product and service features (including security features), relative price and performance, product and service quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support, and corporate reputation.
The Company is focused on expanding its market opportunities related to smartphones, personal computers, tablets and mobile communication and mediaother electronic devices. These markets are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify significantly as competitors attempt to imitate some of the features of the Company’s products and applications within their own products, or alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive price competition, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers and businesses.
The Company’s services also face substantial competition, including from companies that have significant resources and experience and have established service offerings with large customer bases. The Company competes with business models that provide content to users for free. The Company also competes with illegitimate means to obtain third-party digital content services have faced significant competition from other companies promoting their own digital music and content products and services, including those offering free peer-to-peer music and video services.applications.
The Company’s future financial condition and operating results depend on the Company’s ability to continue to develop and offer new innovative products and services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution, including the hardware, (iOS devices, Mac, Apple Watchsoftware and Apple TV), software (iOS, macOS, watchOS and tvOS), online services and distribution of digital content and applications (Digital Content and Services).services. Some of the Company’s current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit, or even at a loss, to compete with the Company’s offerings.
Supply of Components
Although most components essential to the Company’s business are generally available from multiple sources, a fewcertain components are currently obtained from single or limited sources. In addition, theThe Company also competes for various components with other participants in the markets for mobile communicationsmartphones, personal computers, tablets and media devices and personal computers.other electronic devices. 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 commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.fluctuations.
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. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacity hascapacities have increased. 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. 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. Continuedcontinued 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.
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. 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.
Substantially all of the Company’s hardware products are currently manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company’s products. 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. The Company’s manufacturing purchase obligations typically cover its requirements for periods up to 150 days.
Research and Development
Because the industries in which the Company competes are characterized by rapid technological advances, the Company’s ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company continues to develop new technologies to enhance existing products and services, and to expand the range of its offerings through research and development (“R&D,&D”), licensing of intellectual property and acquisition of third-party businesses and technology. Total R&D expense was $11.6 billion, $10.0 billion and $8.1 billion in 2017, 2016 and 2015, respectively.
Intellectual Property
The Company currently holds a broad collection of intellectual property rights relating to certain aspects of its hardware devices, accessories, software and services. This includes patents, copyrights, trademarks, service marks, trade dress and other forms of intellectual property rights in the U.S. and a number ofvarious foreign countries. Although the Company believes the ownership of such intellectual property rights is an important factor in its business and that its success does depend in part on such ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.
The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents, including utility patents, design patents and others. The Company also holds copyrights relating to certain aspects of its products and services. No single intellectual property right is solely responsible for protecting the Company’s products. The Company believes the duration of its intellectual property rights is adequate relative to the expected lives of its products.
ManyIn addition to Company-owned intellectual property, many of the Company’s products and services are designed to include intellectual property obtained fromowned by third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of itsthe Company’s products, processes and services. While the Company has generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain components of the Company’s products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.
Foreign and Domestic Operations and Geographic Data
During 2017, the Company’s domestic and international net sales accounted for 37% and 63%, respectively, of total net sales. Information regarding financial data by geographic segment is set forth in Part II, Item 7 of this Form 10-K under the subheading “Segment Operating Performance,” and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.”
Substantially all of the Company’s hardware products are currently manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. The supply and manufacture of a number of components is performed by sole-sourced outsourcing partners in the U.S., Asia and Europe. Margins on sales of the Company’s products in foreign countries and on sales of products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs and antidumping penalties. Information regarding concentration in the available sources of supply of materials and products is set forth in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies.”
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, product costscost of sales and operating expenses. ProductThe timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction,launch, and often, channel inventory of a particularan older product often declines as the next related majorlaunch of a newer product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.
Warranty
The Company offers a limited parts and labor warranty on its hardware products. The basic warranty period is typically one year from the date of purchase by the original end-user. The Company also offers a 90-day limited warranty on the service parts used to repair the Company’s hardware products. In certain jurisdictions, local law requires that manufacturers guarantee their products for a period prescribed by statute, typically at least two years. In addition, where available, consumers may purchase APP or AC+, which extends service coverage on many of the Company’s hardware products.
Backlog
In the Company’s experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases immediately following new product introductions as customers anticipate shortages. Backlog is often reduced once customers believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Company’s ability to achieve any particular level of revenue or financial performance.
Employees
As of September 30, 2017,28, 2019, the Company had approximately 123,000137,000 full-time equivalent employees.
AvailableInformation Information
The Company’s Annual ReportReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at investor.apple.com/sec.cfminvestor-relations/sec-filings/default.aspx when such reports are available on the SEC’s website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internetInternet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company periodically provides other information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
Apple Inc. | 2019 Form 10-K | 4
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-K. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and relatedaccompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Global and regional economic conditions could materially adversely affect the Company.Company’s business, results of operations, financial condition and growth.
The Company has international operations with sales outside the U.S. representing a majority of the Company’s total net sales. In addition, a majority of the Company’s supply chain, and its manufacturing and assembly activities, are located outside the U.S. As a result, the Company’s operations and performance depend significantly on global and regional economic conditions. Uncertainty about global
Adverse macroeconomic conditions, including inflation, slower growth or recession, new or increased tariffs, changes to fiscal and regional economic conditions poses a risk as consumers and businesses may postpone spending in response tomonetary policy, tighter credit, higher interest rates, high unemployment financial market volatility, government austerity programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economic conditions could have a material adverse effect on demand for the Company’s products and services. Demand also could differ materially from the Company’s expectations as a result of currency fluctuations because the Company generally raises prices on goods and services sold outside the U.S. to correspond with the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or regional demand include changes in fuel and other energy costs, conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could materially adversely affect demand for the Company’s products and services. In addition, consumer confidence and spending could be adversely affected in response to financial market volatility, negative financial news, conditions in the real estate and mortgage markets, declines in income or asset values, changes to fuel and other energy costs, labor and healthcare costs and other economic factors.
In addition to an adverse impact on demand for the event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry,Company’s products, uncertainty about, or significant financial service institution failures, there could be tighteninga decline in, the credit markets, low liquidity and extreme volatility in fixed income, credit, currency and equity markets. Thisglobal or regional economic conditions could have a number of effectssignificant impact on the Company’s business, including the insolvency orsuppliers, contract manufacturers, logistics providers, distributors, cellular network carriers and other channel partners. Potential effects include financial instability of outsourcing partners or suppliers or theirinstability; inability to obtain credit to finance development and/or manufacture products, resulting in product delays; inability of customers, including channel partners, to obtain credit to financeoperations and purchases of the Company’s products; and insolvency.
A downturn in the economic environment could also lead to increased credit and collectibility risk on the Company’s trade receivables; the failure of derivative counterparties and other financial institutions; and restrictionslimitations on the Company’s ability to issue new debt. Other incomedebt; reduced liquidity; and expense also could vary materially from expectations depending on gains or losses realized ondeclines in the sale or exchange of financial instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; changes in interest rates; increases or decreases in cash balances; volatility in foreign exchange rates; and changes in fair value of derivative instruments. Increased volatility in the financial markets and overall economic uncertainty would increase the risk of the actual amounts realized in the future on the Company’s financial instruments differing significantly frominstruments. These and other economic factors could materially adversely affect the fair values currently assigned to them.Company’s business, results of operations, financial condition and growth.
Global markets for the Company’s products and services are highly competitive and subject to rapid technological change, and the Company may be unable to compete effectively in these markets.
The Company’s products and services competeare offered in highly competitive global markets characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers.consumers and businesses.
The Company’s ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. There can be no assurance that these investments will achieve expected returns, and the Company may not be able to develop and market new products and services successfully.
The Company currently holds a significant number of patents, trademarks and copyrights and has registered, and/or hasand applied to register, numerous patents, trademarks and service marks.copyrights. In contrast, many of the Company’s competitors seek to compete primarily through aggressive pricing and very low cost structures, and emulating the Company’s products and infringing on its intellectual property. If the Company is unable to continue to develop and sell innovative new products with attractive margins or if competitors infringe on the Company’s intellectual property, the Company’s ability to maintain a competitive advantage could be adversely affected.
The Company markets certain mobile communicationhas a minority market share in the global smartphone, personal computer and media devices based on the iOS mobile operating system and also markets related services, including third-party digital content and applications.tablet markets. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier relationships;relationships. In addition, some of the Company’s competitors have broader product lines, lower-priced products and a larger installed base of active devices. Competition has been particularly intense as competitors have aggressively cut prices and lowered product margins. Certain competitors may have the Company hasresources, experience or cost structures to provide products at little or no profit or even at a minority market share in the global smartphone market. loss.
Additionally, the Company faces significant competition as competitors reduce their selling prices and attempt to imitate the Company’s product features and applications within their own products or alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. The Company also expects competition to intensify as competitors imitate the Company’s approach to providing components seamlessly within their offerings or work collaboratively to offer integrated solutions.
Some of the markets in which the Company competes have from time to time experienced little to no growth or contracted. In addition, an increasing number of Internet-enabled devices that include software applications and are smaller, simpler and cheaper than traditional personal computers compete with some of the Company’s existing products.
The Company’s services also face substantial competition, including from companies that have significant resources and experience and have established service offerings with large customer bases. The Company competes with business models that provide content to users for free. The Company also competes with illegitimate means to obtain third-party digital content and applications. Some of the Company’s competitors have greater experience, product breadth and distribution channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost structure, they may be able to provide products and services at little or no profit or even at a loss. The Company also expects competition to intensify as competitors attempt to imitate the Company’s approach to providing components seamlessly within their individual offerings or work collaboratively to offer integrated solutions.
The Company’s financial condition and operating results depend substantially on the Company’s ability to continually improve iOSits products and iOS devices in orderservices to maintain their functional and design advantages.
The Company is the only authorized maker of hardware using macOS, which has a minority market share in the personal computer market. This market has been contracting and is dominated by computer makers using competing operating systems, most notably Windows. In the market for personal computers and accessories, the Company faces a significant number of competitors, many of which have broader product lines, lower-priced products and a larger installed customer base. Historically, consolidation in this market has resulted in larger competitors. Competition has been particularly intense as competitors have aggressively cut prices and lowered product margins. An increasing number of internet-enabled devices that include software applications and are smaller and simpler than traditional personal computers compete for market share with the Company’s existing products. The Company’s financial condition and operating results also depend on its ability to continually improve the Mac platform to maintain its functional and design advantages.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.transitions of products and services.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new products, services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and services, and successfully manage the transition to these new and upgraded products.products and services. The success of new product and service introductions depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, the Company’s ability to manage the risks associated with new product production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand, and the risk that new products and services may have quality or other defects or deficiencies in the early stages of introduction.deficiencies. Accordingly, the Company cannot determine in advance the ultimate effect of new product and service introductions and transitions.
The Company depends on the performance of distributors, carriers, wholesalers, retailers and other resellers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and value-added resellers, many of whom distribute products from competing manufacturers. The Company also sells its products and resells third-party products in most of its major markets directly to consumers, small and mid-sized businesses, and education, enterprise and government customers and consumers and small and mid-sized businesses through its retail and online stores.stores and its direct sales force.
Some carriers providing cellular network service for iPhone subsidizeoffer financing, installment payment plans or subsidies for users’ purchases of the device. There is no assurance that such subsidiesoffers will be continued at all or in the same amounts upon renewal of the Company’s agreements with these carriers or in agreements the Company enters into with new carriers.
The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers’ stores with Company employees and contractors, and improving product placement displays. These programs couldcan require a substantial investment while providing no assurance ofnot assuring return or incremental revenue.sales. The financial condition of these resellers could weaken, these resellers could stop distributing the Company’s products, or uncertainty regarding demand for some or all of the Company’s products could cause resellers to reduce their ordering and marketing of the Company’s products.
The Company faces substantialis exposed to the risk of write-downs on the value of its inventory and other asset riskassets, in addition to purchase commitment cancellation risk.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand, or for which cost exceeds net realizable value andvalue. The Company also accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its long-lived assets, including capital assets held at its suppliers’ facilities and inventory prepayments, for impairment whenever events or circumstances indicate the carrying amount of an assetassets may not be recoverable. If the Company determines that an impairment has occurred, it records a write-down equal to the amount by which the carrying value of the asset exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and other assets and purchase commitments are currently adequate,recoverable, no assurance can be given that the Company will not incur additional relatedwrite-downs, fees, impairments and other charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.
The Company must orderorders components for its products and buildbuilds inventory in advance of product announcements and shipments. Manufacturing purchase obligations typically cover the Company’s forecasted component and manufacturing requirements, typically for periods up to 150 days. Because the Company’s markets are volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments.
Future operating results depend upon the Company’s ability to obtain components in sufficient quantities on commercially reasonable terms.
Because the Company currently obtains certain components from single or limited sources, the Company is subject to significant supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations.fluctuations that could materially adversely affect the Company’s financial condition and operating results. While the Company has entered into agreements for the supply of many components, there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at all. A number ofComponent suppliers of components may suffer from poor financial conditions, which can lead to business failure for the supplier or consolidation within a particular industry, further limiting the Company’s ability to obtain sufficient quantities of components on commercially reasonable terms. The effects of global or regional economic conditions on the Company’s suppliers, described in “Global and regional economic conditions could materially adversely affect the Company”Company’s business, results of operations, financial condition and growth,” above, also could affect the Company’s ability to obtain components. Therefore, the Company remains subject to significant risks of supply shortages and price increases.increases that could materially adversely affect its financial condition and operating results.
The Company’s new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacity hascapacities have increased. ContinuedThe continued availability of these components at acceptable prices, or at all, maycan be affected for any number of reasons, including if those suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements. TheIf the Company’s supply of components for a new or existing product could bewere delayed or constrained, or a key manufacturing vendor could delayif an outsourcing partner delayed shipments of completed products to the Company.Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the source, or to identify and obtain sufficient quantities from an alternative source.
The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.
Substantially all of the Company’s manufacturing is performed in whole or in part by a few outsourcing partners located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. The Company has also outsourced much of its transportation and logistics management. While these arrangements maycan lower operating costs, they also reduce the Company’s direct control over production and distribution. It is uncertain what effect suchSuch diminished control willmay have an adverse effect on the quality or quantity of products or services, or the Company’s flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for warrantyproduct defect expense reimbursement, the Company may remaingenerally remains responsible to the consumer for warranty and out-of-warranty service in the event of product defects and could experience an unanticipated product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the supplier code of conduct could occur.
The Company relies on sole-sourcedsingle-source outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company’s hardware products. Any failure of these partners to perform maycan have a negative impact on the Company’s cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations maycan be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology system failures, commercial disputes, military actions, or economic, business, labor, environmental, public health or political issues.issues, or international trade disputes.
The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply couldcan be reduced or terminated and the net realizable valuerecoverability of these assets couldmanufacturing process equipment or prepayments can be negatively impacted.
The Company’s products and services may experience quality problemsbe affected from time to time by design and manufacturing defects that cancould materially adversely affect the Company’s business and result in decreased sales and operating margin and harm to the Company’s reputation.
The Company sellsoffers complex hardware and software products and services that can containbe affected by design and manufacturing defects. Sophisticated operating system software and applications, such as those soldoffered by the Company, often contain “bugs”have issues that can unexpectedly interfere with the software’s intended operation. Theoperation of hardware or software products. Defects can also exist in components and products the Company purchases from third parties. Component defects could make the Company’s online servicesproducts unsafe and create a risk of environmental or property damage and personal injury. These risks may increase as the Company’s products are introduced into specialized applications, including healthcare. In addition, the Company’s service offerings may have quality issues and from time to time experience outages, service slowdowns or errors. DefectsAs a result, the Company’s services may also occur in componentsnot perform as anticipated and products the Company purchases from third parties.may not meet customer expectations. There can be no assurance the Company will be able to detect and fix all issues and defects in the hardware, software and services it sells.offers. Failure to do so could result in lost revenue,widespread technical and performance issues affecting the Company’s products and services. In addition, the Company can be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, and/or intangible assets, and significant warranty and other expenses, including litigation costs and regulatory fines. Quality problems can also adversely affect the experience for users of the Company’s products and services, and result in harm to the Company’s reputation.reputation, loss of competitive advantage, poor market acceptance, reduced demand for products and services, delay in new product and service introductions and lost sales.
The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.
The Company contracts with numerous third parties to offer their digital content to customers. This includes the right to sell currently available music, movies, TV shows and books.content. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or renewal of these arrangements on commercially reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and couldcan take actionactions to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other content owners, providers or distributors may seek to limit the Company’s access to, or increase the cost of, such content. The Company may be unable to continue to offer a wide variety of content at commercially reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make third-party digital content available, or to make such content available on commercially reasonable terms, could have a material adverse impact on the Company’s financial condition and operating results.
Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect arrangements with the Company’s content providers.
The Company’s future performance depends in part on support from third-party software developers.
The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party software applications and services. There is no assurance that third-party developers will continue to develop and maintain software applications and services for the Company’s products. If third-party software applications and services cease to be developed and maintained for the Company’s products, customers may choose not to buy the Company’s products.
With respect to its Mac products, theThe Company believes the availability of third-party software applications and services for its products depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services for the Company’s products compared to Windows-based products.competitors’ platforms, such as Android for smartphones and tablets and Windows for personal computers. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected future growth of Macproduct sales, and the costs of developing such applications and services. If the
The Company’s minority market share ofin the global smartphone, personal computer market causesand tablet markets could make developers to question the Mac’s prospects, developers could be less inclined to develop or upgrade software for the Company’s Mac products and more inclined to devote their resources to developing and upgrading software for competitors’ products with larger market share. If developers focus their efforts on these competing platforms, the larger Windows market.availability and quality of applications for the Company’s devices may suffer.
With respect to iOS devices, theThe Company relies on the continued availability and development of compelling and innovative software applications including applications distributed through the App Store. iOS devicesfor its products. The Company’s products and operating systems are subject to rapid technological change, and if third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might not successfullytake advantage of these changes to deliver improved customer experiences or might not operate correctly and may result in dissatisfied customers. As with
The Company sells and delivers third-party applications for its products through the Company’sApp Store, Mac products, the availabilityApp Store, TV App Store and developmentWatch App Store. The Company retains a commission from sales through these platforms. If developers reduce their use of these platforms to distribute their applications also dependand offer in-app purchases to customers, then the volume of sales, and the commission that the Company earns on developers’ perceptions and analysis of the relative benefits of developing, maintaining or upgrading software for the Company’s iOS devices rather than its competitors’ platforms, such as Android. If developers focus their efforts on these competing platforms, the availability and quality of applications for the Company’s iOS devices may suffer.
those sales, would decrease.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms or at all.
Many of the Company’s products and services are designed to include third-party intellectual property owned by third parties, which requires licenses from those third parties. In addition, because of technological changes in the industries in which the Company currently competes or in the future may compete, current extensive patent coverage and the rapid rate of issuance of new patents, the Company’s products and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties. Based on past experience and industry practice, the Company believes licenses to such licensesthird-party intellectual property can generally can be obtained on commercially reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on acceptablecommercially reasonable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the Company from selling certain products or services, or otherwise have a material adverse impact on the Company’s financial condition and operating results.
The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights.
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and have not yet been fully resolved, and new claims may arise in the future. In addition, agreements entered into by the Company sometimes include indemnification provisions which maycan subject the Company to costs and damages in the event of a claim against an indemnified third party.
Claims against the Company based on allegations of patent infringement or other violations of intellectual property rights have generally increased over time and may continue to increase. In particular, the Company has historically faced a significant number of patent claims relating to its cellular-enabled products, and new claims may arise in the future. For example, technology and other patent-holding companies frequently assert their patents and seek royalties and often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. The Company is vigorously defending infringement actions in courts in a number ofseveral U.S. jurisdictions, and before the U.S. International Trade Commission, as well as internationally in various countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the merit of particular claims, litigation maycan be expensive, time-consuming, disruptive to the Company’s operations and distracting to management. In recognition of these considerations, the Company may enter into licensing agreements or other arrangements to settle litigation and resolve such disputes. No assurance can be given that such agreements can be obtained on acceptable terms or that litigation will not occur. These agreements may also significantly increase the Company’s cost of sales and operating expenses.
In management’sExcept as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there iswas not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess ofgreater than a recorded accrual, with respect toconcerning loss contingencies for asserted legal and other claims, including matters related to infringement of intellectual property rights. However, the
The outcome of litigation is inherently uncertain.
Although management considers the likelihood of such an outcome to be remote, if If one or more legal matters were resolved against the Company or an indemnified third party in a reporting period for amounts in excess ofabove management’s expectations, the Company’s consolidated financial statementscondition and operating results for that reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its financial condition and operating results.
While the Company maintains insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
The Company is subject to laws and regulations worldwide, changes to which could increase the Company’s costs and individually or in the aggregate adversely affect the Company’s business.
The Company is subject to complex and changing laws and regulations affecting its domesticworldwide, which exposes the Company to potential liabilities, increased costs and internationalother adverse effects on the Company’s business.
The Company’s global operations in a number of areas. These U.S.are subject to complex and foreignchanging laws and regulations affect the Company’s activitieson subjects including, but not limited to, in areas of labor,to: antitrust; privacy, data security and data localization; consumer protection; advertising, digital content, consumer protection, real estate,sales, billing e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television,e-commerce; product liability; intellectual property ownership and infringement, tax,infringement; digital platforms; Internet, telecommunications, and mobile communications; media, television, film and digital content; availability of third-party software applications and services; labor and employment; anti-corruption; import, export and export requirements, anti-corruption,trade; foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition,restrictions; anti–money laundering; foreign ownership and investment; tax; and environmental, health and safety.
By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices, locking devices to a carrier’s network, or mandating the use of devices on more than one carrier’s network. These devices are also subject to certification and regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications, or delays in product shipment dates, or could preclude the Company from selling certain products.
Compliance with these laws regulations and similar requirementsregulations may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise inconducting the future as a result of changes in theseCompany’s global operations. Changes to laws and regulations can adversely affect the Company’s business by increasing the Company’s costs, limiting the Company’s ability to offer a product or in their interpretation, could individuallyservice to customers, requiring changes to the Company’s business practices or in the aggregate makeotherwise making the Company’s products and services less attractive to the Company’s customers, delay the introduction of new products in one or more regions, or cause the Company to change or limit its business practices.customers. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees, contractors or agents will not violate such laws and regulations or the Company’s policies and procedures.
The Company’s business If the Company is subjectfound to the risks of international operations.
The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with applicable U.S. and foreignhave violated laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Company’s employees, contractors or agents could nevertheless occur. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. Violations of these laws and regulationsit could materially adversely affect the Company’s brand, international growth effortsreputation, financial condition and business.operating results.
The technology industry, including, in some instances, the Company, alsois subject to intense media, political and regulatory scrutiny, which exposes the Company to government investigations, legal actions and penalties. For example, the Company is subject to antitrust investigations in various jurisdictions around the world, which can result in legal proceedings and claims against the Company that could, be significantly affected by other risks associated with international activities including, but not limited to, economic and labor conditions, increased duties, taxes and other costs and political instability. Marginsindividually or in the aggregate, have a material impact on sales of the Company’s products in foreign countries,financial condition and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. The Company is also exposed to credit and collectability risk on its trade receivables with customers in certain international markets.operating results. There can be no assurance that the Company can effectively limit its credit riskCompany’s business will not be materially adversely affected, individually or in the aggregate, by the outcomes of such investigations or changes to laws and avoid losses.regulations in the future.
The Company’s retail stores have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties.
The Company’s retail stores have required substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities.awareness. Because of their unique design elements, locations and size, these stores require substantially more investment than the Company’s more typical retail stores. Due to the high cost structure associated with the Company’s retail stores, a decline in sales or the closure or poor performance of an individual store or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and severance costs.
Many factors unique toThe Company’s retail operations some of which are beyond the Company’s control,subject to many factors that pose risks and uncertainties. These risksuncertainties and uncertainties include, but are not limited to,could adversely impact the Company’s financial condition and operating results, including macro-economic factors that could have an adverse effect on general retail activity, as well asactivity. Other factors include, but are not limited to, the Company’s inability toability to: manage costs associated with retail store construction and operation, the Company’s failure tooperation; manage relationships with its existing retail partners, more challenging environments in managing retail operations outside the U.S.,partners; manage costs associated with unanticipated fluctuations in the value of retail inventory,inventory; and the Company’s inability to obtain and renew leases in quality retail locations at a reasonable cost.
Investment in new business strategies and acquisitions could disrupt the Company’s ongoing business and present risks not originally contemplated.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater than expectedgreater-than-expected liabilities and expenses, inadequate return ofon capital, and unidentified issues not discovered in the Company’s due diligence. These new ventures are inherently risky and may not be successful.
The Company’s business and reputation may be impacted by information technology system failures or network disruptions.
The Company may be subjectis exposed to information technology system failures or network disruptions caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. System redundancy and other continuity measures may be ineffective or inadequate, and the Company’s business continuity and disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions couldcan adversely impact the Company’s business by, among other things, preventing access to the Company’s online services, interfering with customer transactions or impeding the manufacturing and shipping of the Company’s products. These events could materially adversely affect the Company’s reputation, financial condition and operating results.
There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the Company to significant reputational, financial, legal and operational consequences.
The Company’s business requires it to use and store confidential information including, among other things, personally identifiable information (“PII”) with respect to the Company’s customers and employees. The Company devotes significant resources to network and data security, including through the use of encryption and other security measures intended to protect its systems and data. But these measures cannot provide absolute security, and losses or unauthorized access to or releases of confidential information may still occur whichand could materially adversely affect the Company’s reputation, financial condition and operating results.
The Company’s business also requires it to share confidential information with suppliers and other third parties. Although the Company takes steps to secure confidential information that is provided to third parties, such measures mayare not bealways effective and losses or unauthorized access to or releases of confidential information may still occur whichand could materially adversely affect the Company’s reputation, financial condition and operating results.
For example, the Company may experience a security breach impacting the Company’s information technology systems that compromises the confidentiality, integrity or availability of confidential information. Such an incident could, among other things, impair the Company’s ability to attract and retain customers for its products and services, impact the Company’s stock price, materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result in penalties, fines or judgments against the Company.
Although malicious attacks perpetrated to gain access to confidential information, including PII, affect many companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the value of the confidential information it creates, owns, manages, stores and processes.
The Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access to or loss of sensitive data, including through the use of encryption and authentication technologies. As with all companies, these security measures may not be sufficient for all eventualities and may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may, in turn, be used to access the Company’s information technology systems. To help protect customers and the Company, the Company monitors its services and systems for unusual activity and may freeze accounts under suspicious circumstances, which, among other things, may result in the delay or loss of customer orders or impede customer access to the Company’s products and services.
In addition to the risks relating to general confidential information described above, the Company mayis also be subject to specific obligations relating to health data and payment card data. Health data may beis subject to additional privacy, security and breach notification requirements, and the Company maycan be subject to audit by governmental authorities regarding the Company’s compliance with these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data is handled in a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be subject to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant fees or fines.
Under payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated investigatory expenses and could also incur significant fees or fines if the Company fails to follow payment card industry data security standards. The Company could also experience a significant increase in payment card transaction costs or lose the ability to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely affect the Company’s reputation, financial condition and operating results.
While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
The Company’s business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also may restrict transfers of PII among the Company and its international subsidiaries. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices. Noncompliance could result in significant penalties or legal liability.
The Company makes statements about its use and disclosure of PII through its privacy policy, information provided on its website and press statements. Any failure by the Company to comply with these public statements or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or others. In addition to reputational impacts, penalties could include ongoing audit requirements and significant legal liability.
The Company’s success depends largely on the continued service and availability of key personnel.
Much of the Company’s future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley, where most of the Company’s key personnel are located.
The Company’s business maycan be impacted by political events, international trade disputes, war, terrorism, natural disasters, public health issues, natural disastersindustrial accidents and other business interruptions.
War,Political events, international trade disputes, war, terrorism, geopolitical uncertainties,natural disasters, public health issues, industrial accidents and other business interruptions have caused and could cause damageharm or disruption todisrupt international commerce and the global economy, and thus could have a material adverse effect on the Company and its customers, suppliers, contract manufacturers, logistics providers, manufacturing vendorsdistributors, cellular network carriers and customers, includingother channel partners. The
International trade disputes can result in tariffs and other measures that can adversely affect the Company’s business. For example, trade tensions have led to a series of tariffs imposed by the U.S. on imports from China. Tariffs increase the cost of the Company’s products and the components and raw materials that go into making them. These increased costs adversely impact the gross margin that the Company earns on its products. Tariffs can also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand. Countries may also adopt other measures that could limit the Company’s ability to offer its products and services. Political uncertainty surrounding international trade disputes and measures could also have a negative effect on consumer confidence and spending, which could adversely affect the Company’s business.
Many of the Company’s operations and facilities, as well as critical business operations of the Company’s suppliers and contract manufacturers, are in locations that are prone to earthquakes and other natural disasters. In addition, such operations and facilities are subject to the risk of interruption by among others, natural disasters, whether as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond itsthe Company’s control. Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Such events could decrease demand for the Company’s products, make it difficult or impossible for the Company to makemanufacture and deliver products to its customers, including channel partners, or to receive components from its suppliers, and create delays and inefficiencies in the Company’s supply chain.and manufacturing chain, and result in slowdowns and outages to the Company’s service offerings. Following an interruption to its business, the Company could require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales. Because the Company relies on single or limited sources for the supply and manufacture of many critical components, a business interruption affecting such sources would exacerbate any negative consequences to the Company.
The Company’s operations are also subject to the risks of industrial accidents at its suppliers and contract manufacturers. While the Company’s suppliers are required to maintain safe working environments and operations, an industrial accident could occur and could result in disruption to the Company’s business and harm to the Company’s reputation. Should major public health issues, including pandemics, arise, the Company could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of the Company’s manufacturing vendors and component suppliers. The majority of the Company’s R&D activities, its corporate headquarters, information technology systems and other critical business operations, including certain component suppliers and manufacturing vendors, are in locations that could be affected by natural disasters. In the event of a natural disaster,contract manufacturers.
While the Company could incur significantmaintains insurance coverage for certain types of losses, require substantial recovery time and experience significant expenditures in ordersuch insurance coverage may be insufficient to resume operations.cover all losses that may arise.
The Company expects its quarterly revenuenet sales and operating results to fluctuate.
The Company’s profit margins vary across its products, services, geographic segments and distribution channels. The Company’s software, accessories, and service and support contracts generally have higherFor example, gross margins than certain of the Company’s other products. Gross margins on the Company’s hardware products vary across product lines and can change over time as a result of product transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations.time. The Company’s direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition,are subject to volatility and downward pressure due to a variety of factors, including: continued industry-wide global product pricing pressures and product pricing actions that the Company may take in response to such pressures; increased competition; the Company’s gross marginability to effectively stimulate demand for certain of its products and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a resultservices; compressed product life cycles; potential increases in the cost of a shiftcomponents, outside manufacturing services, and acquiring and delivering content for the Company’s services; the Company’s ability to manage product quality and warranty costs effectively; shifts in product,the mix of products and services, or in the geographic, currency or channel mix, component cost increases, the strengthening U.S. dollar, price competition, ormix; fluctuations in foreign exchange rates; and the introduction of new products or services, including those that havenew products or services with higher cost structures with flat or reduced pricing.structures. These and other factors could have a materially adverse impact on the Company’s financial condition and operating results.
The Company has typicallyhistorically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, product costscost of sales and operating expenses. Further, the Company generates a majoritysignificant portion of its net sales from a single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected developments, late in a quarter, such as lower-than-anticipated demand for the Company’s products or services, issues with new product or service introductions, an internal systems failure,information technology system failures or network disruptions, or failure of one of the Company’s logistics, components supply, or manufacturing partners.
The Company’s stock price is subject to volatility.
The Company’s stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its own stock to exceed the stock’s price at a given point in time. The Company believes its stock price should reflect expectations of future growth and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow, and that its current share repurchase program will be fully consummated. Future dividends are subject to declaration by the Company’s Board of Directors, and the Company’s share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future growth, profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.
The Company’s financial performance is subject to risks associated with changes in the value of the U.S. dollar versusrelative to local currencies.
The Company’s primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominatednon–U.S. dollar–denominated sales, cost of sales and operating expenses worldwide. WeakeningGross margins on the Company’s products in foreign countries and on products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations.
The weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company’s foreign currency-denominatedcurrency–denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company’s products. Margins on sales of the Company’s products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local pricesinternational pricing to fully offset the U.S. dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of the Company’sgross margins the Company earns on foreign currency-denominated sales and earnings. currency–denominated sales.
Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company’s foreign currency-denominatedcurrency–denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally, strengthening of foreign currencies may increase the Company’s cost of product components denominated in those currencies, thus adversely affecting gross margins.
The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not be effective to offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.
The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Given the global nature of its business, the Company has both domestic and international investments. Credit ratings and pricing of theThe Company’s investments can be negatively affected by liquidity, credit deterioration, financial results, market and economic risk,conditions, political risk, sovereign risk, interest rate fluctuations or other factors. As a result, the value and liquidity of the Company’s cash, cash equivalents, and marketable and non-marketable securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash equivalents, and marketable and non-marketable securities, future fluctuations in their value could result in significant realized losses.losses and could have a material adverse impact on the Company’s financial condition and operating results.
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and value-added resellers. The Company also sells its products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral, third-party bank support or financing arrangements, or credit insurance. The Company’s exposure to credit and collectabilitycollectibility risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory components. As of September 30, 2017,28, 2019, a significant portion of the Company’s trade receivables was concentrated within cellular network carriers, and its vendor non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland.
The Company is also subject to the examination of its tax returns and other tax matters by the U.S. Internal Revenue Service (the “IRS”) and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition and operating results and cash flows could be materially adversely affected.
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| Item 1B. | Unresolved Staff Comments |
None.
The Company’s headquarters are located in Cupertino, California. As of September 30, 2017,28, 2019, the Company owned 13.4 million square feet andor leased 23.0 million square feet of building space, primarily in the U.S. Additionally, the Company owned a total of 4,928 acres of land, primarily in the U.S.
As of September 30, 2017, the Company owned facilities and land for corporate functions, R&D, and data centers, retail and other purposes at various locations throughout the U.S. Outsideand in various places outside the U.S., the Company owned additional facilities and land for various purposes.
The Company believes its existing facilities and equipment, which are used by all operatingreportable segments, are in good operating condition and are suitable for the conduct of its business. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors and continues to make investments in capital equipment as needed to meet anticipated demand for its products.
The Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. InExcept as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies,” 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 ofgreater than a recorded accrual, with respect toconcerning loss contingencies for asserted legal and other claims. However, the
The outcome of legal proceedings and claims brought against the Companylitigation is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, ifinherently uncertain. If one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess ofabove management’s expectations, the Company’s consolidated financial statementscondition and operating results for that reporting period could be materially adversely affected. SeeRefer to the risk factor “The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights” in Part I, Item 1A of this Form 10-K under the heading “Risk Factors.” The Company settled certain matters during the fourth quarter of 20172019 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.
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| Item 4. | Mine Safety Disclosures |
Not applicable.
Apple Inc. | 2019 Form 10-K | 14
PART II
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is traded on theThe Nasdaq Stock Market LLC (“Nasdaq”) under the symbol AAPL.
Price Range of Common Stock
The price range per share of common stock presented below represents the highest and lowest intraday sales prices for the Company’s common stock on the Nasdaq during each quarter of the two most recent years.
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| | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
2017 price range per share | $164.94 – $142.41 | | $156.65 – $140.06 | | $144.50 – $114.76 | | $118.69 – $104.08 |
2016 price range per share | $116.18 – $91.50 | | $112.39 – $89.47 | | $109.43 – $92.39 | | $123.82 – $105.57 |
Holders
As of October 20, 2017,18, 2019, there were 25,33323,233 shareholders of record.
Dividends
The Company paid a total of $12.6 billion and $12.0 billion in dividends during 2017 and 2016, respectively, and expects to pay quarterly dividends of $0.63 per common share each quarter, subject to declaration by the Board of Directors. The Company also plans to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended September 30, 201728, 2019 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):
| | | Periods | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) | | Total Number of Shares Purchased | | Average Price
Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) |
| July 2, 2017 to August 5, 2017: | | | | | | | | | |
| June 30, 2019 to August 3, 2019: | | | | | | | | | |
| Open market and privately negotiated purchases | | 10,076 |
| | $ | 148.87 |
| | 10,076 |
| | | | 23,860 |
| | $ | 205.36 |
| | 23,860 |
| | |
| | | | | | | | | | | | | | | | | |
| August 6, 2017 to September 2, 2017: | | | | | | | | | |
| May 2017 ASR | | 4,510 |
| | (2) |
| | 4,510 |
| | | |
| August 2017 ASR | | 15,069 |
| (3) | (3) |
| | 15,069 |
| (3) | | |
| August 4, 2019 to August 31, 2019: | | | | | | | | | |
| February 2019 ASR | | | 6,886 |
| | (2) |
| | 6,886 |
| | |
| Open market and privately negotiated purchases | | 9,684 |
| | $ | 160.06 |
| | 9,684 |
| | | | 34,705 |
| | $ | 204.59 |
| | 34,705 |
| | |
| | | | | | | | | | | | | | | | | |
| September 3, 2017 to September 30, 2017: | | | | | | | | | |
| September 1, 2019 to September 28, 2019: | | | | | | | | | |
| Open market and privately negotiated purchases | | 9,313 |
| | $ | 155.69 |
| | 9,313 |
| | | | 27,178 |
| | $ | 217.17 |
| | 27,178 |
| | |
| Total | | 48,652 |
| | | | | | $ | 44,023 |
| | 92,629 |
| | | | | | $ | 78,869 |
|
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| (1) | In May 2017,On April 30, 2019, the Company’sCompany announced the Board of Directors increased the Company’scurrent share repurchase program authorization from $175$100 billion to $210175 billion of the Company’s common stock, of which $16696.1 billion had been utilized as of September 30, 201728, 2019. The remaining $4478.9 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 30, 201728, 2019. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under thethis program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
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| (2) | In May 2017,February 2019, the Company entered into an accelerated share repurchase arrangement (“ASR”) to purchase up to $3.012.0 billion of the Company’s common stock. In August 2017,2019, the purchase period for this ASR ended and an additional 4.56.9 million shares were delivered and retired. In total, 20.162.0 million shares were delivered under this ASR at an average repurchase price of $149.20193.69. |
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(3) | In August 2017, the Company entered into a new ASR to purchase up to $3.0 billion of the Company’s common stock. In exchange for an up-front payment of $3.0 billion, the financial institution party to the arrangement committed to deliver shares to the Company during the ASR’s purchase period, which will end in November 2017. The total number of shares ultimately delivered, and therefore the average price paid per share, will be determined at the end of the applicable purchase period based on the volume-weighted average price of the Company’s common stock during that period.
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Company Stock Performance
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvesteddividend-reinvested basis, for the Company, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 30, 2017.28, 2019. The graph assumes $100 was invested in each of the Company’s common stock, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index as of the market close on September 28, 2012.26, 2014. Note that historic stock price performance is not necessarily indicative of future stock price performance.
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| * | $100 invested on 9/28/12September 26, 2014 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company’s common stock and September 30th for indexes. |
Copyright© 2017 S&P, 2019 Standard & Poor’s, a division of McGraw Hill Financial.S&P Global. All rights reserved.
Copyright© 2017 2019 S&P Dow Jones & Co.Indices LLC, a division of S&P Global. All rights reserved.
| | | | | September 2012 | | September 2013 | | September 2014 | | September 2015 | | September 2016 | | September 2017 | | September 2014 | | September 2015 | | September 2016 | | September 2017 | | September 2018 | | September 2019 |
| Apple Inc. | | $ | 100 |
| | $ | 74 |
| | $ | 111 |
| | $ | 128 |
| | $ | 129 |
| | $ | 179 |
| | $ | 100 |
| | $ | 116 |
| | $ | 116 |
| | $ | 162 |
| | $ | 240 |
| | $ | 237 |
|
| S&P 500 Index | | $ | 100 |
| | $ | 119 |
| | $ | 143 |
| | $ | 142 |
| | $ | 164 |
| | $ | 194 |
| | $ | 100 |
| | $ | 99 |
| | $ | 115 |
| | $ | 136 |
| | $ | 160 |
| | $ | 167 |
|
| S&P Information Technology Index | | $ | 100 |
| | $ | 107 |
| | $ | 138 |
| | $ | 141 |
| | $ | 173 |
| | $ | 223 |
| | $ | 100 |
| | $ | 102 |
| | $ | 125 |
| | $ | 162 |
| | $ | 213 |
| | $ | 231 |
|
| Dow Jones U.S. Technology Supersector Index | | $ | 100 |
| | $ | 105 |
| | $ | 137 |
| | $ | 137 |
| | $ | 167 |
| | $ | 214 |
| | $ | 100 |
| | $ | 100 |
| | $ | 122 |
| | $ | 156 |
| | $ | 205 |
| | $ | 218 |
|
Apple Inc. | 2019 Form 10-K | 16
| |
| Item 6. | Selected Financial Data |
The information set forth below for the five years ended September 30, 2017,28, 2019, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and relatedaccompanying notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts).
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Net sales | $ | 229,234 |
| | $ | 215,639 |
| | $ | 233,715 |
| | $ | 182,795 |
| | $ | 170,910 |
|
| Net income | $ | 48,351 |
| | $ | 45,687 |
| | $ | 53,394 |
| | $ | 39,510 |
| | $ | 37,037 |
|
| | | | | | | | | | |
| Earnings per share: | | | | | | | | | |
| Basic | $ | 9.27 |
| | $ | 8.35 |
| | $ | 9.28 |
| | $ | 6.49 |
| | $ | 5.72 |
|
| Diluted | $ | 9.21 |
| | $ | 8.31 |
| | $ | 9.22 |
| | $ | 6.45 |
| | $ | 5.68 |
|
| | | | | | | | | | |
| Cash dividends declared per share | $ | 2.40 |
| | $ | 2.18 |
| | $ | 1.98 |
| | $ | 1.82 |
| | $ | 1.64 |
|
| | | | | | | | | | |
| Shares used in computing earnings per share: | | | | | | | | | |
| Basic | 5,217,242 |
| | 5,470,820 |
| | 5,753,421 |
| | 6,085,572 |
| | 6,477,320 |
|
| Diluted | 5,251,692 |
| | 5,500,281 |
| | 5,793,069 |
| | 6,122,663 |
| | 6,521,634 |
|
| | | | | | | | | | |
| Total cash, cash equivalents and marketable securities | $ | 268,895 |
| | $ | 237,585 |
| | $ | 205,666 |
| | $ | 155,239 |
| | $ | 146,761 |
|
| Total assets | $ | 375,319 |
| | $ | 321,686 |
| | $ | 290,345 |
| | $ | 231,839 |
| | $ | 207,000 |
|
| Commercial paper | $ | 11,977 |
| | $ | 8,105 |
| | $ | 8,499 |
| | $ | 6,308 |
| | $ | — |
|
Total term debt (1) | $ | 103,703 |
| | $ | 78,927 |
| | $ | 55,829 |
| | $ | 28,987 |
| | $ | 16,960 |
|
Other long-term obligations (2) | $ | 40,415 |
| | $ | 36,074 |
| | $ | 33,427 |
| | $ | 24,826 |
| | $ | 20,208 |
|
| Total liabilities | $ | 241,272 |
| | $ | 193,437 |
| | $ | 170,990 |
| | $ | 120,292 |
| | $ | 83,451 |
|
| Total shareholders’ equity | $ | 134,047 |
| | $ | 128,249 |
| | $ | 119,355 |
| | $ | 111,547 |
| | $ | 123,549 |
|
| |
(1) | Includes current and long-term portion of term debt. |
| |
(2) | Excludes non-current deferred revenue. |
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Total net sales | $ | 260,174 |
| | $ | 265,595 |
| | $ | 229,234 |
| | $ | 215,639 |
| | $ | 233,715 |
|
| Net income | $ | 55,256 |
| | $ | 59,531 |
| | $ | 48,351 |
| | $ | 45,687 |
| | $ | 53,394 |
|
| | | | | | | | | | |
| Earnings per share: | | | | | | | | | |
| Basic | $ | 11.97 |
| | $ | 12.01 |
| | $ | 9.27 |
| | $ | 8.35 |
| | $ | 9.28 |
|
| Diluted | $ | 11.89 |
| | $ | 11.91 |
| | $ | 9.21 |
| | $ | 8.31 |
| | $ | 9.22 |
|
| | | | | | | | | | |
| Cash dividends declared per share | $ | 3.00 |
| | $ | 2.72 |
| | $ | 2.40 |
| | $ | 2.18 |
| | $ | 1.98 |
|
| | | | | | | | | | |
| Shares used in computing earnings per share: | | | | | | | | | |
| Basic | 4,617,834 |
| | 4,955,377 |
| | 5,217,242 |
| | 5,470,820 |
| | 5,753,421 |
|
| Diluted | 4,648,913 |
| | 5,000,109 |
| | 5,251,692 |
| | 5,500,281 |
| | 5,793,069 |
|
| | | | | | | | | | |
| Total cash, cash equivalents and marketable securities | $ | 205,898 |
| | $ | 237,100 |
| | $ | 268,895 |
| | $ | 237,585 |
| | $ | 205,666 |
|
| Total assets | $ | 338,516 |
| | $ | 365,725 |
| | $ | 375,319 |
| | $ | 321,686 |
| | $ | 290,345 |
|
| Non-current portion of term debt | $ | 91,807 |
| | $ | 93,735 |
| | $ | 97,207 |
| | $ | 75,427 |
| | $ | 53,329 |
|
| Other non-current liabilities | $ | 50,503 |
| | $ | 48,914 |
| | $ | 44,212 |
| | $ | 39,986 |
| | $ | 38,104 |
|
Apple Inc. | 2019 Form 10-K | 17
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Part II, Item 8 of this Form 10-K. AllUnless otherwise stated, all information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated,calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-ownedwholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
OverviewThis section of this Form 10-K generally discusses 2019 and Highlights
The Company designs, manufactures2018 items and markets mobile communicationyear-to-year comparisons between 2019 and media devices2018. Discussions of 2017 items and personal computers,year-to-year comparisons between 2018 and sells a variety2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of related software, services, accessories, networking solutionsFinancial Condition and third-party digital content and applications. TheResults of Operations” in Part II, Item 7 of the Company’s products and services include iPhone, iPad, Mac, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of accessory, service and support offerings. The Company sells and delivers digital content and applications throughAnnual Report on Form 10-K for the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store and Apple Music (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.fiscal year ended September 29, 2018.
Fiscal Period
The Company’s fiscal year is the 5252- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2019 and 2018 spanned 52 weeks each, whereas fiscal year 2017 included 53 weeks and ended on September 30, 2017.weeks. A 14th week was included in the first quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters. The Company’s fiscal years 2016 and 2015 ended on September 24, 2016 and September 26, 2015, respectively, and spanned 52 weeks each.
Fiscal 20172019 Highlights
NetTotal net sales increased 6%decreased 2% or $13.6$5.4 billion during 20172019 compared to 2016, primarily2018, driven by growth in Services, iPhone and Mac. The year-over-year increase inlower net sales reflected growthof iPhone, partially offset by higher net sales of Wearables, Home and Accessories and Services in each of theall geographic operating segments, with the exception of Greater China.segments. The weakness in foreign currencies relative to the U.S. dollar had ana significant unfavorable impact on net sales during 2017 compared to 2016. 2019.
In May 2017,April 2019, the Company announced an increase to its capital returncurrent share repurchase program by raising the expected total size of the programauthorization from $250$100 billion to $300 billion through March 2019. This included increasing its share repurchase authorization from $175 billion to $210 billion and raisingraised its quarterly dividend from $0.57$0.73 to $0.63$0.77 per share beginning in May 2017.2019. During 2017,2019, the Company spent $33.0repurchased $67.1 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $12.8$14.1 billion. Additionally,
Apple Inc. | 2019 Form 10-K | 18
Products and Services Performance
Beginning in the first quarter of 2019, the Company issued $24.0 billionclassified the amortization of U.S. dollar-denominated term debt, €2.5 billionthe deferred value of euro-denominated term debtMaps, Siri and C$2.5 billionfree iCloud services, which are bundled in the sales price of Canadian dollar-denominated term debt during 2017.
Fiscal 2016 Highlights
Net sales declined 8% or $18.1 billion during 2016 compared to 2015, primarily driven by a year-over-year decreaseiPhone, Mac, iPad and certain other products, in iPhoneServices net sales. Historically, the Company classified the amortization of these amounts in Products net sales consistent with its management reporting framework. As a result, Products and the effect of weakness in most foreign currencies relativeServices net sales for 2018 and 2017 were reclassified to conform to the U.S. dollar, partially offset by an increase in Services. In April 2016, the Company announced an increase to its capital return program by raising the expected total size of the program from $200 billion to $250 billion through March 2018. This included increasing its share repurchase authorization from $140 billion to $175 billion and raising its quarterly dividend from $0.52 to $0.57 per share beginning in May 2016. During 2016, the Company spent $29.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $12.2 billion. Additionally, the Company issued $23.9 billion of U.S. dollar-denominated term debt and A$1.4 billion of Australian dollar-denominated term debt during 2016.
Sales Data2019 presentation.
The following table shows net sales by operating segmentcategory for 2019, 2018 and net sales and unit sales by product for 2017 2016 and 2015 (dollars in millions and units in thousands)millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net Sales by Operating Segment: | | | | | | | | | |
| Americas | $ | 96,600 |
| | 12 | % | | $ | 86,613 |
| | (8 | )% | | $ | 93,864 |
|
| Europe | 54,938 |
| | 10 | % | | 49,952 |
| | (1 | )% | | 50,337 |
|
| Greater China | 44,764 |
| | (8 | )% | | 48,492 |
| | (17 | )% | | 58,715 |
|
| Japan | 17,733 |
| | 5 | % | | 16,928 |
| | 8 | % | | 15,706 |
|
| Rest of Asia Pacific | 15,199 |
| | 11 | % | | 13,654 |
| | (10 | )% | | 15,093 |
|
| Total net sales | $ | 229,234 |
| | 6 | % | | $ | 215,639 |
| | (8 | )% | | $ | 233,715 |
|
| | | | | | | | | | |
| Net Sales by Product: | | | | | | | | | |
iPhone (1) | $ | 141,319 |
| | 3 | % | | $ | 136,700 |
| | (12 | )% | | $ | 155,041 |
|
iPad (1) | 19,222 |
| | (7 | )% | | 20,628 |
| | (11 | )% | | 23,227 |
|
Mac (1) | 25,850 |
| | 13 | % | | 22,831 |
| | (10 | )% | | 25,471 |
|
Services (2) | 29,980 |
| | 23 | % | | 24,348 |
| | 22 | % | | 19,909 |
|
Other Products (1)(3) | 12,863 |
| | 16 | % | | 11,132 |
| | 11 | % | | 10,067 |
|
| Total net sales | $ | 229,234 |
| | 6 | % | | $ | 215,639 |
| | (8 | )% | | $ | 233,715 |
|
| | | | | | | | | | |
| Unit Sales by Product: | | | | | | | | | |
| iPhone | 216,756 |
| | 2 | % | | 211,884 |
| | (8 | )% | | 231,218 |
|
| iPad | 43,753 |
| | (4 | )% | | 45,590 |
| | (17 | )% | | 54,856 |
|
| Mac | 19,251 |
| | 4 | % | | 18,484 |
| | (10 | )% | | 20,587 |
|
|
| | | | | | | | | | | | | | | | | |
| | 2019 | | Change | | 2018 | | Change | | 2017 |
| Net sales by category: | | | | | | | | | |
iPhone (1) | $ | 142,381 |
| | (14 | )% | | $ | 164,888 |
| | 18 | % | | $ | 139,337 |
|
Mac (1) | 25,740 |
| | 2 | % | | 25,198 |
| | (1 | )% | | 25,569 |
|
iPad (1) | 21,280 |
| | 16 | % | | 18,380 |
| | (2 | )% | | 18,802 |
|
Wearables, Home and Accessories (1)(2) | 24,482 |
| | 41 | % | | 17,381 |
| | 36 | % | | 12,826 |
|
Services (3) | 46,291 |
| | 16 | % | | 39,748 |
| | 22 | % | | 32,700 |
|
| Total net sales | $ | 260,174 |
| | (2 | )% | | $ | 265,595 |
| | 16 | % | | $ | 229,234 |
|
| |
| (1) | Includes deferrals andProducts net sales include amortization of relatedthe deferred value of unspecified software upgrade rights, and non-software services.which are bundled in the sales price of the respective product. |
| |
| (2) | Includes revenue from Digital ContentWearables, Home and Services, AppleCare, Apple Pay, licensing and other services. ServicesAccessories net sales in the fourth quarterinclude sales of 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information. |
| |
(3) | Includes sales ofAirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories. |
Product Performance
| |
| (3) | Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare, licensing and other services. Services net sales also include amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price of certain products. |
iPhone
The following table presents iPhone net sales and unit sales information for 2017, 2016 and 2015 (dollars in millions and units in thousands):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 141,319 |
| | 3 | % | | $ | 136,700 |
| | (12 | )% | | $ | 155,041 |
|
| Percentage of total net sales | 62 | % | |
|
| | 63 | % | | | | 66 | % |
| Unit sales | 216,756 |
| | 2 | % | | 211,884 |
| | (8 | )% | | 231,218 |
|
iPhone net sales increased during 2017 compared to 2016 due to higher iPhone unit sales and a different mix of iPhones with higher average selling prices. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on iPhone net sales during 2017 compared to 2016.
iPhone net sales decreased during 20162019 compared to 2015. The Company believes the sales decline was2018 due primarily to a lower rate of iPhone upgrades during 2016 compared to 2015 and challenging macroeconomic conditions in a number of major markets in 2016. Average selling prices for iPhone were lower year-over-year during 2016 due primarily to a different mix of iPhones, including the iPhone SE introduced in 2016, and the effect of weakness in most foreign currencies relative to the U.S. dollar.
iPad
The following table presents iPad net sales and unit sales information for 2017, 2016 and 2015 (dollars in millions and units in thousands):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 19,222 |
| | (7 | )% | | $ | 20,628 |
| | (11 | )% | | $ | 23,227 |
|
| Percentage of total net sales | 8 | % | | | | 10 | % | | | | 10 | % |
| Unit sales | 43,753 |
| | (4 | )% | | 45,590 |
| | (17 | )% | | 54,856 |
|
iPad net sales decreased during 2017 compared to 2016 due to lower iPad unit sales and a different mix of iPads with lower average selling prices. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on iPad net sales during 2017 compared to 2016.
iPad net sales decreased during 2016 compared to 2015 primarily due to lower unit sales and the effect of weakness in most foreign currencies relative to the U.S. dollar, partially offset by higher average selling price due to a shift in mix to higher-priced iPads.sales.
Mac
The following table presents Mac net sales and unit sales information for 2017, 2016 and 2015 (dollars in millions and units in thousands):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 25,850 |
| | 13 | % | | $ | 22,831 |
| | (10 | )% | | $ | 25,471 |
|
| Percentage of total net sales | 11 | % | | | | 11 | % | | | | 11 | % |
| Unit sales | 19,251 |
| | 4 | % | | 18,484 |
| | (10 | )% | | 20,587 |
|
Mac net sales increased during 20172019 compared to 20162018 due primarily to a different mix of Macs with higher average selling prices and higher Mac unit sales. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Mac net sales of MacBook Air, partially offset by lower net sales of MacBook® and MacBook Pro®.
iPad
iPad net sales increased during 20172019 compared to 2016.
Mac2018 due primarily to higher net sales decreasedof iPad Pro.
Wearables, Home and Accessories
Wearables, Home and Accessories net sales increased during 20162019 compared to 20152018 due primarily due to lower year-over-year Mac unithigher net sales which declined at rates similar to the overall market. The effect of weakness in most foreign currencies relative to the U.S. dollar also negatively impacted Mac net sales.
AirPods and Apple Watch.
Services
The following table presents Services net sales information for 2017, 2016 and 2015 (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 29,980 |
| | 23 | % | | $ | 24,348 |
| | 22 | % | | $ | 19,909 |
|
| Percentage of total net sales | 13 | % | | | | 11 | % | | | | 9 | % |
The year-over-year growth in Services net sales in 2017 wasincreased during 2019 compared to 2018 due primarily to increases in App Store and licensing sales. Serviceshigher net sales in the fourth quarter of 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
The year-over-year increase in Services net sales in 2016 was due primarily to growth from the App Store, licensing and AppleCare sales, partially offset by the effect of weakness in most foreign currencies relative to the U.S. dollar. During the first quarter of 2016, the Company received $548 million from Samsung Electronics Co., Ltd. related to its patent infringement lawsuit, which was recorded as licensing net sales within Services.AppleCare.
Apple Inc. | 2019 Form 10-K | 19
Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable 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. Further information regarding the Company’s reportable segments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.”
Americas
The following table presents Americasshows net sales informationby reportable segment for 2017, 20162019, 2018 and 20152017 (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 96,600 |
| | 12 | % | | $ | 86,613 |
| | (8 | )% | | $ | 93,864 |
|
| Percentage of total net sales | 42 | % | | | | 40 | % | | | | 40 | % |
|
| | | | | | | | | | | | | | | | | |
| | 2019 | | Change | | 2018 | | Change | | 2017 |
| Net sales by reportable segment: | | | | | | | | | |
| Americas | $ | 116,914 |
| | 4 | % | | $ | 112,093 |
| | 16 | % | | $ | 96,600 |
|
| Europe | 60,288 |
| | (3 | )% | | 62,420 |
| | 14 | % | | 54,938 |
|
| Greater China | 43,678 |
| | (16 | )% | | 51,942 |
| | 16 | % | | 44,764 |
|
| Japan | 21,506 |
| | (1 | )% | | 21,733 |
| | 23 | % | | 17,733 |
|
| Rest of Asia Pacific | 17,788 |
| | 2 | % | | 17,407 |
| | 15 | % | | 15,199 |
|
| Total net sales | $ | 260,174 |
| | (2 | )% | | $ | 265,595 |
| | 16 | % | | $ | 229,234 |
|
Americas
Americas net sales increased during 20172019 compared to 20162018 due primarily to higher Services and Wearables, Home and Accessories net sales, ofpartially offset by lower iPhone Services and Mac.
Americas net sales decreased during 2016 compared to 2015 due primarily to lower net sales of iPhone.
Europe
The following table presents Europe net sales information for 2017, 2016 and 2015 (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 54,938 |
| | 10 | % | | $ | 49,952 |
| | (1 | )% | | $ | 50,337 |
|
| Percentage of total net sales | 24 | % | | | | 23 | % | | | | 22 | % |
Europe net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone and Services.sales. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on EuropeAmericas net sales during 2017 compared to 2016.2019.
Europe
Europe net sales decreased during 20162019 compared to 2015 driven primarily2018 due to lower iPhone net sales, partially offset by the effect ofhigher Wearables, Home and Accessories and Services net sales. The weakness in foreign currencies relative to the U.S. dollar andhad a decrease insignificant unfavorable impact on Europe net sales of Mac, largely offset by an increase in iPhone unit sales and Services.
during 2019.
Greater China
The following table presents Greater China net sales information for 2017, 2016 and 2015 (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 44,764 |
| | (8 | )% | | $ | 48,492 |
| | (17 | )% | | $ | 58,715 |
|
| Percentage of total net sales | 20 | % | | | | 22 | % | | | | 25 | % |
Greater China net sales decreased during 20172019 compared to 20162018 due primarily to lower iPhone net sales, of iPhone, partially offset by higher Wearables, Home and Accessories and Services net sales of Services.sales. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during 2017 compared to 2016.2019.
Greater ChinaJapan
Japan net sales decreased during 20162019 compared to 20152018 due primarily to lower iPhone net sales, of iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar.
Japan
The following table presents Japan net sales information for 2017, 2016 and 2015 (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 17,733 |
| | 5 | % | | $ | 16,928 |
| | 8 | % | | $ | 15,706 |
|
| Percentage of total net sales | 8 | % | | | | 8 | % | | | | 7 | % |
The year-over-year increase in Japan net sales in 2017 and 2016 was due primarily topartially offset by higher net sales of Services and the strength inWearables, Home and Accessories net sales. The value of the Japanese yen relative to the U.S. dollar.
Rest of Asia Pacific
The following table presents Rest of Asia Pacific net sales information for 2017, 2016 and 2015 (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Net sales | $ | 15,199 |
| | 11 | % | | $ | 13,654 |
| | (10 | )% | | $ | 15,093 |
|
| Percentage of total net sales | 7 | % | | | | 6 | % | | | | 6 | % |
Rest of Asia Pacific net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone, Services and Mac. The strength in foreign currenciesYen relative to the U.S. dollar had a favorable impact on Japan net sales during 2019.
Rest of Asia Pacific net sales during 2017 compared to 2016.
Rest of Asia Pacific net sales decreasedincreased during 20162019 compared to 2015 due primarily to lower net sales of iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar.
Gross Margin
Gross margin for 2017, 2016 and 2015 was as follows (dollars in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net sales | $ | 229,234 |
| | $ | 215,639 |
| | $ | 233,715 |
|
| Cost of sales | 141,048 |
| | 131,376 |
| | 140,089 |
|
| Gross margin | $ | 88,186 |
| | $ | 84,263 |
| | $ | 93,626 |
|
| Gross margin percentage | 38.5 | % | | 39.1 | % | | 40.1 | % |
Gross margin percentage decreased in 2017 compared to 20162018 due primarily to higher product costs,Wearables, Home and Accessories and Services net sales, partially offset by a favorable shift in mix to services. Year-over-year gross margin increased due primarily to a shift in mix to services and an overall increase in product volumes.lower iPhone net sales. The weakness in foreign currencies relative to the U.S. dollar had ana significant unfavorable impact on Rest of Asia Pacific net sales during 2019.
Apple Inc. | 2019 Form 10-K | 20
Gross Margin
Products and Services gross margin and gross margin percentage for 2019, 2018 and 2017 were as follows (dollars in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Gross margin: | | | | | |
| Products | $ | 68,887 |
| | $ | 77,683 |
| | $ | 70,197 |
|
| Services | 29,505 |
| | 24,156 |
| | 17,989 |
|
| Total gross margin | $ | 98,392 |
| | $ | 101,839 |
| | $ | 88,186 |
|
| | | | | | |
| Gross margin percentage: | | | | | |
| Products | 32.2 | % | | 34.4 | % | | 35.7 | % |
| Services | 63.7 | % | | 60.8 | % | | 55.0 | % |
| Total gross margin percentage | 37.8 | % | | 38.3 | % | | 38.5 | % |
Products Gross Margin
Products gross margin during 2017 compared to 2016.
Grossand Products gross margin percentage decreased in 2016during 2019 compared to 20152018 due primarily to lower iPhone unit sales and the effect of weakness in mostforeign currencies relative to the U.S. dollar.
Products gross margin increased during 2018 compared to 2017 due primarily to a favorable shift in mix of iPhones and the strength in foreign currencies relative to the U.S. dollar, and, to a lesser extent, unfavorable leverage on fixed costs from lower net sales, partially offset by a favorable shift in mix to services.
The Company anticipateshigher product cost structures. Year-over-year Products gross margin percentage decreased during 2018 due primarily to higher product cost structures, partially offset by the first quarter ofstrength in foreign currencies relative to the U.S. dollar.
Services Gross Margin
Year-over-year Services gross margin increased during 2019 and 2018 due primarily to be between 38.0%higher Services net sales and 38.5%. The foregoing statement regarding the Company’s expecteda different services mix. Year-over-year Services gross margin percentage inincreased during 2019 and 2018 due primarily to a different services mix and leverage of the first quarter of 2018 is forward-looking and could differCompany’s services fixed cost structure from actual results. higher Services net sales.
The Company’s future gross margins can be impacted by multiplea variety of factors, including, but not limited to, thoseas set forth in Part I, Item 1A of this Form 10-K under the heading “Risk Factors” and those described in this paragraph. In general,. As a result, the Company believes, in general, gross margins will be subject to volatility and remain under downward pressure due to a variety of factors, including continued industry-wide global product pricing pressures, increased competition, compressed product life cycles, product transitions, potential increases in the cost of components, and potential strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products. Due to the Company’s significant international operations, its financial condition and operating results, including gross margins, could be significantly affected by fluctuations in exchange rates.pressure.
Operating Expenses
Operating expenses for 2017, 20162019, 2018 and 20152017 were as follows (dollars in millions):
| | | | 2017 | | Change | | 2016 | | Change | | 2015 | 2019 | | Change | | 2018 | | Change | | 2017 |
| Research and development | $ | 11,581 |
| | 15 | % | | $ | 10,045 |
| | 25 | % | | $ | 8,067 |
| $ | 16,217 |
| | 14 | % | | $ | 14,236 |
| | 23 | % | | $ | 11,581 |
|
| Percentage of total net sales | 5 | % | | | | 5 | % | | | | 3 | % | 6 | % | | | | 5 | % | | | | 5 | % |
| Selling, general and administrative | $ | 15,261 |
| | 8 | % | | $ | 14,194 |
| | (1 | )% | | $ | 14,329 |
| $ | 18,245 |
| | 9 | % | | $ | 16,705 |
| | 9 | % | | $ | 15,261 |
|
| Percentage of total net sales | 7 | % | | | | 7 | % | | | | 6 | % | 7 | % | | | | 6 | % | | | | 7 | % |
| Total operating expenses | $ | 26,842 |
| | 11 | % | | $ | 24,239 |
| | 8 | % | | $ | 22,396 |
| $ | 34,462 |
| | 11 | % | | $ | 30,941 |
| | 15 | % | | $ | 26,842 |
|
| Percentage of total net sales | 12 | % | | | | 11 | % | | | | 10 | % | 13 | % | | | | 12 | % | | | | 12 | % |
Research and Development
The year-over-year growth in R&D expense in 2017 and 20162019 was driven primarily by increases in headcount-related expenses and material costs to support expanded R&D activities.expenses. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy.
Selling, General and Administrative
The year-over-year growth in selling, general and administrative expense in 2017 compared to 20162019 was driven primarily by an increaseincreases in headcount-related expenses variable selling expensesand higher spending on marketing and advertising and infrastructure-related costs. The decrease in selling, general and administrative expense in 2016 compared to 2015 was due primarily to lower discretionary expenditures and advertising costs, partially offset by an increase in headcount-related expenses.
Apple Inc. | 2019 Form 10-K | 21
Other Income/(Expense), Net
Other income/(expense), net (“OI&E”) for 2017, 20162019, 2018 and 20152017 was as follows (dollars in millions):
| | | | 2017 | | Change | | 2016 | | Change | | 2015 | 2019 | | Change | | 2018 | | Change | | 2017 |
| Interest and dividend income | $ | 5,201 |
| | | | $ | 3,999 |
| | | | $ | 2,921 |
| $ | 4,961 |
| | | | $ | 5,686 |
| | | | $ | 5,201 |
|
| Interest expense | (2,323 | ) | | | | (1,456 | ) | | | | (733 | ) | (3,576 | ) | | | | (3,240 | ) | | | | (2,323 | ) |
| Other expense, net | (133 | ) | | | | (1,195 | ) | | | | (903 | ) | |
| Other income/(expense), net | | 422 |
| | | | (441 | ) | | | | (133 | ) |
| Total other income/(expense), net | $ | 2,745 |
| | 104 | % | | $ | 1,348 |
| | 5 | % | | $ | 1,285 |
| $ | 1,807 |
| | (10 | )% | | $ | 2,005 |
| | (27 | )% | | $ | 2,745 |
|
The year-over-year increasedecrease in other income/(expense), netOI&E during 20172019 was due primarily to higherlower interest income and higher interest expense, partially offset by the favorable impact of foreign exchange-related items, partially offset by higher interest expense on debt. The year-over-year increase in other income/(expense), net during 2016 was due primarily to higher interest income, partially offset by higher interest expense on debt and the unfavorable impact of foreign exchange-relatedexchange–related items. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.99%, 1.73%2.19% and 1.49%2.16% in 2017, 20162019 and 2015,2018, respectively.
Provision for Income Taxes
Provision for income taxes, and effective tax ratesrate and statutory federal income tax rate for 2017, 20162019, 2018 and 20152017 were as follows (dollars in millions):
| | | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Provision for income taxes | $ | 15,738 |
| | $ | 15,685 |
| | $ | 19,121 |
| $ | 10,481 |
| | $ | 13,372 |
| | $ | 15,738 |
|
| Effective tax rate | 24.6 | % | | 25.6 | % | | 26.4 | % | 15.9 | % | | 18.3 | % | | 24.6 | % |
| Statutory federal income tax rate | | 21.0 | % | | 24.5 | % | | 35.0 | % |
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. By operation of law, the Company applied a blended U.S. statutory federal income tax rate of 24.5% for 2018 (the “2018 blended U.S. tax rate”). The Act also created a new minimum tax on certain foreign earnings.
The Company’s effective tax ratesrate for 2017, 2016 and 2015 differ from2019 was lower than the statutory federal income tax rate of 35% due primarily to certain undistributedthe lower tax rate on foreign earnings a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided when such earnings are intended to be indefinitely reinvested outside the U.S.and tax benefits from share-based compensation. The lowerCompany’s effective tax rate in 2017 comparedfor 2018 was lower than the 2018 blended U.S. tax rate due primarily to 2016 was due tothe lower tax rate on foreign earnings, partially offset by the remeasurement of deferred tax assets and liabilities as a different geographic mixresult of earnings and higher U.S. R&D tax credits. the Act.
The lowerCompany’s effective tax rate in 2016for 2019 was lower compared to 2015 was2018 due primarily to greater R&Da lower statutory federal income tax credits.rate in 2019 and the impact of the Act in 2018, partially offset by higher taxes on foreign earnings in 2019.
As of September 30, 2017,28, 2019, the Company had net deferred tax assets arising from deductible temporary differences tax losses and tax credits of $3.9$14.3 billion and deferred tax liabilities of $31.5$6.2 billion. 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 future reversals of existing taxable temporary differences, will be sufficient to fully recover the net deferred tax assets. The Company will continue to evaluate the amount of the valuation allowance, if any, by assessing the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation allowance.
The IRS concluded its review of the years 2010 through 2012 during the third quarter of 2017. All years prior to 2013 are closed, and the IRS is currently examining the years 2013 through 2015. The Company is also subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities. Management believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision orders Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still computing the recovery amount, the Company expects the amount to be in line with the European Commission’s announced recovery amount of €13 billion, plus interest of €1 billion. Once the recovery amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These amounts are expected to be placed into escrow in 2018, where they will remain pending conclusion of all appeals. 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.assets.
Recent Accounting Pronouncements
Hedging
In August 2017, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The Company will adopt ASU 2017-12 in its first quarter of 2020 utilizing the modified retrospective transition method and is currently evaluating the impact of adoption on its consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. The Company will adopt ASU 2016-18 in its first quarter of 2019 utilizing the retrospective transition method. Currently, the Company’s restricted cash balance is not significant.
Income Taxes
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company will adopt ASU 2016-16 in its first quarter of 2019 utilizing the modified retrospective transition method. Currently, the Company anticipates recording up to $9 billion of net deferred tax assets on its Consolidated Balance Sheets upon adoption. However, the ultimate impact of adopting ASU 2016-16 will depend on the balance of intellectual property transferred between its subsidiaries as of the adoption date. The Company will recognize incremental deferred income tax expense thereafter as these deferred tax assets are utilized.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows. The Company will adopt ASU 2016-09 in its first quarter of 2018. Currently, excess tax benefits or deficiencies from the Company’s equity awards are recorded as additional paid-in capital in its Consolidated Balance Sheets. Upon adoption, the Company will record any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting periods in which vesting occurs. As a result, subsequent to adoption the Company’s income tax expense and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company will adopt ASU 2016-02 in its first quarter of 2020 utilizing the modified retrospective transition method. While the Company is currently evaluating the timing and impact of adopting ASU 2016-02, currently the Company anticipates recording lease assets and liabilities in excess of $9.5 billion on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company will adopt ASU 2016-01 in its first quarter of 2019 utilizing the modified retrospective transition method. Based on the composition of the Company’s investmentderivative portfolio and hedging strategies, the adoption of ASU 2016-012017-12 is not expected to have a material impact on its consolidated financial statements.
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses ofon certain financial instruments. The Company will adopt ASU 2016-13 in its first quarter of 2021 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.
Revenue Recognition
Leases
In May 2014,February 2016, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606)842) (“ASU 2014-09”2016-02”), which amends the existingmodifies lease accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expectslessees to be entitled when products are transferred to customers.
Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligationsincrease transparency and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvementscomparability by recording lease assets and Practical Expedients (“ASU 2016-12”);liabilities for operating leases and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”).
The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.disclosing key information about leasing arrangements. The Company will adopt ASU 2016-02 utilizing the new revenue standards inmodified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2019 utilizing2020. Upon adoption, the full retrospective transition method. The new revenue standards are not expected to have aCompany anticipates recording lease-related assets and liabilities of approximately $8 billion on its Condensed Consolidated Balance Sheet, with no material impact on the amount and timingto its Condensed Consolidated Statements of revenue recognized in the Company’s consolidated financial statements.Operations.
Liquidity and Capital Resources
The following table presents selected financial information and statistics as of and for the years ended September 30, 2017,28, 2019, September 24, 201629, 2018 and September 26, 201530, 2017 (in millions):
| | | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
Cash, cash equivalents and marketable securities | $ | 268,895 |
| | $ | 237,585 |
| | $ | 205,666 |
| $ | 205,898 |
| | $ | 237,100 |
| | $ | 268,895 |
|
| Property, plant and equipment, net | $ | 33,783 |
| | $ | 27,010 |
| | $ | 22,471 |
| $ | 37,378 |
| | $ | 41,304 |
| | $ | 33,783 |
|
| Commercial paper | $ | 11,977 |
| | $ | 8,105 |
| | $ | 8,499 |
| $ | 5,980 |
| | $ | 11,964 |
| | $ | 11,977 |
|
| Total term debt | $ | 103,703 |
| | $ | 78,927 |
| | $ | 55,829 |
| $ | 102,067 |
| | $ | 102,519 |
| | $ | 103,703 |
|
| Working capital | $ | 27,831 |
| | $ | 27,863 |
| | $ | 8,768 |
| $ | 57,101 |
| | $ | 15,410 |
| | $ | 28,792 |
|
| Cash generated by operating activities | $ | 63,598 |
| | $ | 65,824 |
| | $ | 81,266 |
| $ | 69,391 |
| | $ | 77,434 |
| | $ | 64,225 |
|
| Cash used in investing activities | $ | (46,446 | ) | | $ | (45,977 | ) | | $ | (56,274 | ) | |
| Cash generated by/(used in) investing activities | | $ | 45,896 |
| | $ | 16,066 |
| | $ | (46,446 | ) |
| Cash used in financing activities | $ | (17,347 | ) | | $ | (20,483 | ) | | $ | (17,716 | ) | $ | (90,976 | ) | | $ | (87,876 | ) | | $ | (17,974 | ) |
| |
| (1) | As of September 28, 2019 and September 29, 2018, total cash, cash equivalents and marketable securities included $18.9 billion and $20.3 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K) and other agreements. |
The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitmentsdividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations over the next 12 months. The Company currently anticipates the cash used for future dividends, the share repurchase program and debt repayments will come from its current domestic cash, cash generated from ongoing U.S. operating activities and from borrowings.
As of September 30, 2017 and September 24, 2016, the Company’s cash, cash equivalents and marketable securities held by foreign subsidiaries were $252.3 billion and $216.0 billion, respectively, and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. In connection with the State Aid Decision, Ireland is still computingas of September 28, 2019, the recovery amount. The Company expects the amount to be in line with the European Commission’s announcedentire adjusted recovery amount of €13€12.9 billion plus interest of €1 billion. Once the recovery amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These amounts are expected to be placed€1.2 billion was funded into escrow, in 2018, where theyit will remain restricted from general use pending the conclusion of all appeals. Further information regarding the State Aid Decision can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 5, “Income Taxes.”
The Company’s marketable securities investment portfolio is primarily invested in highly-ratedhighly rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
During 2017,2019, cash generated by operating activities of $63.6$69.4 billion was a result of $48.4$55.3 billion of net income and non-cash adjustments to net income of $20.8$17.6 billion, andpartially offset by a decrease in the net change in operating assets and liabilities of $5.6 billion, which included a one-time payment of $1.9 billion related to a multi-year license agreement.$3.5 billion. Cash used ingenerated by investing activities of $46.4$45.9 billion during 20172019 consisted primarily of cash used for purchasesproceeds from sales and maturities of marketable securities, net of sales and maturities,purchases, of $33.1$57.5 billion, andpartially offset by cash used to acquire property, plant and equipment of $12.5$10.5 billion. Cash used in financing activities of $17.3$91.0 billion during 20172019 consisted primarily of cash used to repurchase common stock of $32.9$66.9 billion, cash used to pay dividends and dividend equivalents of $12.8$14.1 billion, and cash used to repay term debt of $3.5$8.8 billion and net repayments of commercial paper of $6.0 billion, partially offset by net proceeds from the issuance of term debt net of $28.7 billion and proceeds from commercial paper, net of $3.9$7.0 billion.
During 2016,2018, cash generated by operating activities of $65.8$77.4 billion was a result of $45.7$59.5 billion of net income and an increase in the net change in operating assets and liabilities of $34.7 billion, partially offset by non-cash adjustments to net income of $20.1$16.8 billion. Cash used ingenerated by investing activities of $46.0$16.1 billion during 20162018 consisted primarily of cash used for purchasesproceeds from maturities and sales of marketable securities, net of sales and maturities,purchases, of $30.6$32.4 billion, andpartially offset by cash used to acquire property, plant and equipment of $12.7$13.3 billion. Cash used in financing activities of $20.5$87.9 billion during 20162018 consisted primarily of cash used to repurchase common stock of $29.7$72.7 billion, cash used to pay dividends and dividend equivalents of $12.2$13.7 billion and cash used to repay term debt of $2.5$6.5 billion, partially offset by net proceeds from the issuance of term debt net of $25.0$7.0 billion.
Capital Assets
The Company’s capital expenditures were $14.9$7.6 billion during 2017. The Company anticipates utilizing approximately $16.0 billion for capital expenditures during 2018,2019, which includesincluded product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
Debt
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses the net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 30, 2017,28, 2019, the Company had $12.0$6.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 1.20%2.24% and maturities generally less than nine months.
As of September 30, 2017,28, 2019, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.0$101.7 billion (collectively the “Notes”). During 2017,2019, the Company issued $7.0 billion and repaid $3.5$8.8 billion of its Notes upon maturity.Notes. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into foreign currency swaps to manage foreign currency risk on the Notes. The future principal payments for the Company’s Notes as of September 30, 2017 are as follows (in millions):
|
| | | |
| 2018 | $ | 6,500 |
|
| 2019 | 8,863 |
|
| 2020 | 9,220 |
|
| 2021 | 7,750 |
|
| 2022 | 10,297 |
|
| Thereafter | 61,391 |
|
| Total term debt | $ | 104,021 |
|
Further information regarding the Company’s debt issuances and related hedging activity can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 2,3, “Financial Instruments” and Note 6, “Debt.”
Capital Return Program
In May 2017,On April 30, 2019, the Company’sCompany announced the Board of Directors increased the total capital returncurrent share repurchase program authorization from $250$100 billion to $300 billion, which included an increase in the share repurchase authorization from $175 billion to $210 billion of the Company’s common stock. Additionally,stock, of which $96.1 billion had been utilized as of September 28, 2019. During 2019, the Company repurchased 345.2 million shares of its common stock for $67.1 billion, including 62.0 million shares delivered under a $12.0 billion ASR dated February 2019, which settled in August 2019. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
On April 30, 2019, the Company also announced that the Board of Directors raised the Company’s quarterly cash dividend from $0.57$0.73 to $0.63$0.77 per share, beginning with the dividend paid during the third quarter of 2017.2019. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
As of September 30, 2017, $166 billion of the share repurchase program had been utilized. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
The following table presents the Company’s dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital return program in August 2012 through September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Dividends and Dividend Equivalents Paid | | Accelerated Share Repurchases | | Open Market Share Repurchases | | Taxes Related to Settlement of Equity Awards | | Total |
| 2017 | $ | 12,769 |
| | $ | 15,000 |
| | $ | 18,001 |
| | $ | 1,874 |
| | $ | 47,644 |
|
| 2016 | 12,150 |
| | 12,000 |
| | 17,000 |
| | 1,570 |
| | 42,720 |
|
| 2015 | 11,561 |
| | 6,000 |
| | 30,026 |
| | 1,499 |
| | 49,086 |
|
| 2014 | 11,126 |
| | 21,000 |
| | 24,000 |
| | 1,158 |
| | 57,284 |
|
| 2013 | 10,564 |
| | 13,950 |
| | 9,000 |
| | 1,082 |
| | 34,596 |
|
| 2012 | 2,488 |
| | — |
| | — |
| | 56 |
| | 2,544 |
|
| Total | $ | 60,658 |
| | $ | 67,950 |
| | $ | 98,027 |
| | $ | 7,239 |
| | $ | 233,874 |
|
The Company expects to execute its capital return program by the end of March 2019 by paying dividends and dividend equivalents, repurchasing shares and remitting withheld taxes related to net share settlement of restricted stock units. The Company plans to continue to access the domestic and international debt markets to assist in funding its capital return program.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or R&D services with the Company.
The following table presents certain payments due by the Company as of September 30, 2017,28, 2019, and excludes amounts already recorded on the Consolidated Balance Sheet, except for term debt and the deemed repatriation tax payable (in millions):
| | | | Payments Due in Less Than 1 Year | | Payments Due in 1-3 Years | | Payments Due in 4-5 Years | | Payments Due in More Than 5 Years | | Total | Payments due in 2020 | | Payments due in 2021–2022 | | Payments due in 2023–2024 | | Payments due after 2024 | | Total |
| Term debt | $ | 6,500 |
| | $ | 18,083 |
| | $ | 18,047 |
| | $ | 61,391 |
| | $ | 104,021 |
| $ | 10,270 |
| | $ | 18,278 |
| | $ | 19,329 |
| | $ | 53,802 |
| | $ | 101,679 |
|
| Operating leases | 1,223 |
| | 2,295 |
| | 1,904 |
| | 4,123 |
| | 9,545 |
| 1,306 |
| | 2,413 |
| | 1,746 |
| | 5,373 |
| | 10,838 |
|
Manufacturing purchase obligations (1) | 32,787 |
| | 2,632 |
| | 2,147 |
| | — |
| | 37,566 |
| 40,076 |
| | 1,974 |
| | 808 |
| | 69 |
| | 42,927 |
|
| Other purchase obligations | 4,019 |
| | 1,669 |
| | 417 |
| | 14 |
| | 6,119 |
| 3,744 |
| | 2,271 |
| | 572 |
| | 41 |
| | 6,628 |
|
| Deemed repatriation tax payable | | — |
| | 4,350 |
| | 8,501 |
| | 16,655 |
| | 29,506 |
|
| Total | $ | 44,529 |
| | $ | 24,679 |
| | $ | 22,515 |
| | $ | 65,528 |
| | $ | 157,251 |
| $ | 55,396 |
| | $ | 29,286 |
| | $ | 30,956 |
| | $ | 75,940 |
| | $ | 191,578 |
|
| |
| (1) | Represents amount expected to be paid under manufacturing-related supplier arrangements, substantially all of which isare primarily noncancelable. |
Operating Leases
As of September 30, 2017, the Company’s total future minimum lease payments under noncancelable operating leases were $9.5 billion. The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Manufacturing Purchase Obligations
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. As of September 30, 2017, the Company expects to pay $37.6 billion under manufacturing-related supplier arrangements, substantially all of which is noncancelable.
Other Purchase Obligations
The Company’s other purchase obligations consistedconsist of noncancelable obligations to acquire capital assets, including product tooling and manufacturing process equipment, and noncancelable obligations related to advertising, licensing, R&D, internetInternet and telecommunications services, content creation and other obligations. activities.
Deemed Repatriation Tax Payable
As of September 30, 2017,28, 2019, a significant portion of the Company had other purchase obligations of $6.1 billion.
The Company’s other non-current liabilities in the Company’s Consolidated Balance SheetsSheet consisted of the deemed repatriation tax payable imposed by the Act. The Company plans to pay the deemed repatriation tax payable in installments in accordance with the Act.
Other Non-Current Liabilities
The Company’s remaining other non-current liabilities primarily consist primarily of deferred tax liabilities, gross unrecognized tax benefits and the related gross interest and penalties. As of September 30, 2017, the Company had deferred tax liabilities of $31.5 billion, gross unrecognized tax benefits of $8.4 billion and an additional $1.2 billionitems for gross interest and penalties. At this time,which the Company is unable to make a reasonably reliable estimate of the timing or amount of payments due to uncertainties in the timing of tax audit outcomes;payments; therefore, such amounts are not included in the above contractual obligation table.
Indemnification
Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an indemnified third party. 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.
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. 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. 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.
The Company has entered into indemnification agreements with its directors and executive officers. 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. 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. 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.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes.reported. Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions 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. Actual results may differ from these estimates, and such differences may be material.
Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, valuation and impairment of marketable securities, inventory valuation, valuation of manufacturing-related assets and estimation of inventory purchase commitment cancellation fees, warranty costs, income taxes, and legal and other contingencies. Management considers these policies critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors.
Revenue Recognition
Net sales consist primarily of revenue fromThe Company has identified up to three performance obligations regularly included in arrangements involving the sale of hardware, software, digital contentiPhone, Mac, iPad and applications, accessories, and service and support contracts.certain other products. The Company recognizes revenue when persuasive evidencefirst performance obligation, which represents the substantial portion of an arrangement exists, delivery has occurred, the allocated sales price, is fixed or determinablethe hardware and collection is probable. Product is consideredbundled software delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria are met at the time of sale. The second performance obligation is the productright to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is shipped. For online salesthe right to individuals, for some salesreceive, on a when-and-if-available basis, future unspecified software upgrades relating to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Company’s standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance.each device. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software and/or undelivered non-software services, the Company allocates revenue and any related discounts to all deliverablesthese performance obligations based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what thestand-alone selling prices of elements would be if they were sold regularly on a stand-alone basis.
For sales of qualifying versions of iOS devices, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future unspecified software upgrades to the device’s essential software and/or non-software services free of charge.(“SSPs”). Because the Company has neither VSOE nor TPElacks observable prices for the unspecified software upgrade rights orundelivered performance obligations, the non-software services,allocation of revenue is allocated to these rights and services based on the Company’s ESPs.estimated SSPs. Revenue allocated to the product-related bundled services and unspecified software upgrade rights and non-software services based on the Company’s ESPs is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software servicesthey are expected to be provided.
The Company’s process for determining ESPsestimated SSPs involves management’s judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. Should future facts and circumstances change, the Company’s ESPsSSPs and the future rate of related amortization for product-related bundled services and unspecified software upgrades and non-software servicesupgrade rights related to future sales of these devices could change. Factors subject to change include the nature of the product-related bundled services and unspecified software upgrade rights and non-software services offered, thetheir estimated value of unspecified software upgrade rights and non-software services and the estimated period unspecified software upgrades and non-software servicesthey are expected to be provided.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. The Company’s policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. For the Company’s other customer incentive programs, the estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. Future market conditions and product transitions may require the Company to increase customer incentive programs that could result in reductions to future revenue. Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management’s estimates are based on historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeems such incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact on the Company’s operating results.
Valuation and Impairment of Marketable Securities
The Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of securities are recognized in accumulated other comprehensive income, net of tax, in the Company’s Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities impact the Company’s net income only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. The Company regularly reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this determination, the Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. The Company’s assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on the Company’s financial condition and operating results.
Inventory Valuation, Valuation of Manufacturing-Related Assets and Estimation of Inventory Purchase Commitment Cancellation Fees
The Company must purchase components and build inventory in advance of product shipments and has investedinvests in manufacturing-related assets, including capital assets held at its suppliers’ facilities. In addition, the Company has madefacilities and prepayments provided to certain of its suppliers associated with long-term supply agreements to secure the supply of inventory components. 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. The Company performs a regular review of inventory that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component cost trends.inventory. The Company also reviews its manufacturing-related capital assets and inventory prepayments for impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss equal to the amount by which the carrying value of such an asset exceeds its fair value.
The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. In certain circumstances the Company may be required to record additional write-downs of inventory and/or impairments of manufacturing-related assets or inventory prepayments. These circumstances include future demand or market conditions for the Company’s products being less favorable than forecasted, unforeseen technological changes or changes to the Company’s product development plans that negatively impact the utility of any of these assets, or significant deterioration in the financial condition of one or more of the Company’s suppliers that hold any of the Company’s manufacturing-related assets or to whom the Company has made an inventory prepayment. Such write-downs would adversely affect the Company’s financial condition and operating results in the period when the additional write-downs were recorded.
The Company accrues for estimated purchase commitment cancellation fees related to inventory orders that have been canceled or are expected to be canceled. ManufacturingThe Company’s estimates of future product development plans and demand for its products are the key inputs in the determination of the recoverability of manufacturing-related assets and the assessment of the adequacy of any purchase obligations typically cover the Company’s forecasted component and manufacturing requirements for periods up to 150 days.commitment cancellation fee accruals. If there is an abrupt and substantial decline in estimated demand for one or more of the Company’s products, a change in the Company’s product development plans, or an unanticipated change in technological requirements for any of the Company’s products, the Company may be required to record additional accruals forwrite-downs or impairments of manufacturing-related assets or accrue purchase commitment cancellation fees that would adversely affect its results of operations in the period when the cancellation fees were identified and recorded.
fees.
Warranty Costs
The Company offers limited warranties on its new hardware products and on parts used to repair its hardware products, and customers may purchase extended service coverage, where available, on many of the Company’s hardware products. The Company accrues for the estimated cost of warranties in the period the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost per claim and knowledge of specific product failures that are outside of the Company’s typical experience. The Company regularly reviews these estimates and the current installed base of products subject to warranty protection to assess the appropriateness of its recorded warranty liabilities and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities couldwould be required and could materially affect the Company’s financial condition and operating results.required.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of its reported operating results. 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 for operating losses and tax credit carryforwards. 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 and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50%greater-than-50% likelihood of being realized upon ultimate settlement.
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 future reversals of existing taxable temporary differences, will be sufficient to fully recover the Company’s deferred tax assets. In the event that the Company determines all or part of its net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.
Legal and Other Contingencies
As discussed in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings” and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies,” the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. InExcept as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies,” 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 ofgreater than a recorded accrual, with respect toconcerning loss contingencies for asserted legal and other claims. However, the
The outcome of legal proceedings and claims brought against the Companylitigation is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, ifinherently uncertain. If one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess ofabove management’s expectations, the Company’s consolidated financial statementscondition and operating results for that reporting period could be materially adversely affected.
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate exposures. Given the effective horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. Further, the recognition of the gains and losses related to these instruments may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s financial condition and operating results.
Interest Rate Risk
The Company’s exposure to changes in interest rates relates primarily to the Company’s investment portfolio and outstanding debt. While the Company is exposed to global interest rate fluctuations, the Company’s interest income and expense are most sensitive to fluctuations in U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and marketable securities and the fair value of those securities, as well as costs associated with hedging and interest paid on the Company’s debt.
The Company’s investment policy and strategy are focused on the preservation of capital and supporting the Company’s liquidity requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its investment objectives. The Company typically invests in highly-ratedhighly rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. To provide a meaningful assessment of the interest rate risk associated with the Company’s investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 30, 201728, 2019 and September 24, 2016,29, 2018, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $6.0$2.8 billion and $4.9 billion incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.
As of September 30, 201728, 2019 and September 24, 2016,29, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate carrying amount of $103.7$102.1 billion and $78.9$102.5 billion, respectively. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. Gains and losses on term debt are generally offset by the corresponding losses and gains on the related hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Company’s debt as of September 30, 201728, 2019 and September 24, 201629, 2018 to increase by $376$325 million and $271$399 million on an annualized basis, respectively.
Further details regarding the Company’s debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, “Debt.”
Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition, the Company has entered, and in the future may enter, into foreign currency contracts to partially offset the foreign currency exchange gains and losses on its foreign-denominatedforeign currency–denominated debt issuances. The Company typicallygenerally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations andor the prohibitive economic cost of hedging particular exposures.
To provide a meaningfulan assessment of the foreign currency risk associated with certain of the Company’s foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk (“VAR”) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of using a Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Company’s foreign currency derivative positions due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. Forecasted transactions, firm commitments and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence, a maximum one-day loss in fair value of $485$452 million as of September 30, 201728, 2019, compared to a maximum one-day loss in fair value of $434$592 million as of September 24, 2016.29, 2018. Because the Company uses foreign currency instruments for hedging purposes, the losslosses in fair value incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.
Actual future gains and losses associated with the Company’s investment portfolio, debt and derivative positions may differ materially from the sensitivity analyses performed as of September 30, 201728, 2019 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign currency exchange rates and the Company’s actual exposures and positions.
Apple Inc. | 2019 Form 10-K | 27
| |
| Item 8. | Financial Statements and Supplementary Data |
|
| | |
| Index to Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.accompanying notes.
Apple Inc. | 2019 Form 10-K | 28
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
| | | | Years ended | Years ended |
| | September 30,
2017 | | September 24,
2016 | | September 26,
2015 | September 28,
2019 | | September 29,
2018 | | September 30,
2017 |
| Net sales | $ | 229,234 |
| | $ | 215,639 |
| | $ | 233,715 |
| |
| Cost of sales | 141,048 |
| | 131,376 |
| | 140,089 |
| |
| Net sales: | | | | | | |
| Products | | $ | 213,883 |
| | $ | 225,847 |
| | $ | 196,534 |
|
| Services | | 46,291 |
| | 39,748 |
| | 32,700 |
|
| Total net sales | | 260,174 |
| | 265,595 |
| | 229,234 |
|
| | | | | | | |
| Cost of sales: | | | | | | |
| Products | | 144,996 |
| | 148,164 |
| | 126,337 |
|
| Services | | 16,786 |
| | 15,592 |
| | 14,711 |
|
| Total cost of sales | | 161,782 |
| | 163,756 |
| | 141,048 |
|
| Gross margin | 88,186 |
|
| 84,263 |
|
| 93,626 |
| 98,392 |
|
| 101,839 |
|
| 88,186 |
|
| | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | |
| Research and development | 11,581 |
| | 10,045 |
| | 8,067 |
| 16,217 |
| | 14,236 |
| | 11,581 |
|
| Selling, general and administrative | 15,261 |
| | 14,194 |
| | 14,329 |
| 18,245 |
| | 16,705 |
| | 15,261 |
|
| Total operating expenses | 26,842 |
|
| 24,239 |
|
| 22,396 |
| 34,462 |
|
| 30,941 |
|
| 26,842 |
|
| | | | | | | | | | | |
| Operating income | 61,344 |
| | 60,024 |
| | 71,230 |
| 63,930 |
| | 70,898 |
| | 61,344 |
|
| Other income/(expense), net | 2,745 |
| | 1,348 |
| | 1,285 |
| 1,807 |
| | 2,005 |
| | 2,745 |
|
| Income before provision for income taxes | 64,089 |
|
| 61,372 |
|
| 72,515 |
| 65,737 |
|
| 72,903 |
|
| 64,089 |
|
| Provision for income taxes | 15,738 |
| | 15,685 |
| | 19,121 |
| 10,481 |
| | 13,372 |
| | 15,738 |
|
| Net income | $ | 48,351 |
|
| $ | 45,687 |
|
| $ | 53,394 |
| $ | 55,256 |
|
| $ | 59,531 |
|
| $ | 48,351 |
|
| | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | |
| Basic | $ | 9.27 |
| | $ | 8.35 |
| | $ | 9.28 |
| $ | 11.97 |
| | $ | 12.01 |
| | $ | 9.27 |
|
| Diluted | $ | 9.21 |
| | $ | 8.31 |
| | $ | 9.22 |
| $ | 11.89 |
| | $ | 11.91 |
| | $ | 9.21 |
|
| | | | | | | | | | | |
| Shares used in computing earnings per share: | | | | | | | | | | |
| Basic | 5,217,242 |
| | 5,470,820 |
| | 5,753,421 |
| 4,617,834 |
| | 4,955,377 |
| | 5,217,242 |
|
| Diluted | 5,251,692 |
| | 5,500,281 |
| | 5,793,069 |
| 4,648,913 |
| | 5,000,109 |
| | 5,251,692 |
|
| | | | | | | |
| Cash dividends declared per share | $ | 2.40 |
| | $ | 2.18 |
| | $ | 1.98 |
| |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 29
Apple Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
| | | | | | | | | | | |
| | Years ended |
| | September 30,
2017 | | September 24,
2016 | | September 26,
2015 |
| Net income | $ | 48,351 |
| | $ | 45,687 |
| | $ | 53,394 |
|
| Other comprehensive income/(loss): | | | | | |
| Change in foreign currency translation, net of tax effects of $(77), $8 and $201, respectively | 224 |
| | 75 |
| | (411 | ) |
| | | | | | |
| Change in unrealized gains/losses on derivative instruments: | | | | | |
| Change in fair value of derivatives, net of tax benefit/(expense) of $(478), $(7) and $(441), respectively | 1,315 |
| | 7 |
| | 2,905 |
|
| Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $475, $131 and $630, respectively | (1,477 | ) | | (741 | ) | | (3,497 | ) |
| Total change in unrealized gains/losses on derivative instruments, net of tax | (162 | ) |
| (734 | ) |
| (592 | ) |
| | | | | | |
| Change in unrealized gains/losses on marketable securities: | | | | | |
| Change in fair value of marketable securities, net of tax benefit/(expense) of $425, $(863) and $264, respectively | (782 | ) | | 1,582 |
| | (483 | ) |
| Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $35, $(31) and $(32), respectively | (64 | ) | | 56 |
| | 59 |
|
| Total change in unrealized gains/losses on marketable securities, net of tax | (846 | ) |
| 1,638 |
|
| (424 | ) |
| | | | | | |
| Total other comprehensive income/(loss) | (784 | ) |
| 979 |
|
| (1,427 | ) |
| Total comprehensive income | $ | 47,567 |
|
| $ | 46,666 |
|
| $ | 51,967 |
|
|
| | | | | | | | | | | |
| | Years ended |
| | September 28,
2019 | | September 29,
2018 | | September 30,
2017 |
| Net income | $ | 55,256 |
| | $ | 59,531 |
| | $ | 48,351 |
|
| Other comprehensive income/(loss): | | | | | |
| Change in foreign currency translation, net of tax | (408 | ) | | (525 | ) | | 224 |
|
| | | | | | |
| Change in unrealized gains/losses on derivative instruments, net of tax: | | | | | |
| Change in fair value of derivatives | (661 | ) | | 523 |
| | 1,315 |
|
| Adjustment for net (gains)/losses realized and included in net income | 23 |
| | 382 |
| | (1,477 | ) |
| Total change in unrealized gains/losses on derivative instruments | (638 | ) |
| 905 |
|
| (162 | ) |
| | | | | | |
| Change in unrealized gains/losses on marketable securities, net of tax: | | | | | |
| Change in fair value of marketable securities | 3,802 |
| | (3,407 | ) | | (782 | ) |
| Adjustment for net (gains)/losses realized and included in net income | 25 |
| | 1 |
| | (64 | ) |
| Total change in unrealized gains/losses on marketable securities | 3,827 |
|
| (3,406 | ) |
| (846 | ) |
| | | | | | |
| Total other comprehensive income/(loss) | 2,781 |
|
| (3,026 | ) |
| (784 | ) |
| Total comprehensive income | $ | 58,037 |
|
| $ | 56,505 |
|
| $ | 47,567 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 30
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
| | | | September 30,
2017 | | September 24,
2016 | September 28,
2019 | | September 29,
2018 |
ASSETS: | | Current assets: | | | | | | |
| Cash and cash equivalents | $ | 20,289 |
| | $ | 20,484 |
| $ | 48,844 |
| | $ | 25,913 |
|
| Short-term marketable securities | 53,892 |
| | 46,671 |
| |
| Accounts receivable, less allowances of $58 and $53, respectively | 17,874 |
| | 15,754 |
| |
| Marketable securities | | 51,713 |
| | 40,388 |
|
| Accounts receivable, net | | 22,926 |
| | 23,186 |
|
| Inventories | 4,855 |
| | 2,132 |
| 4,106 |
| | 3,956 |
|
| Vendor non-trade receivables | 17,799 |
| | 13,545 |
| 22,878 |
| | 25,809 |
|
| Other current assets | 13,936 |
| | 8,283 |
| 12,352 |
| | 12,087 |
|
| Total current assets | 128,645 |
| | 106,869 |
| 162,819 |
| | 131,339 |
|
| | | | | | | |
| Long-term marketable securities | 194,714 |
| | 170,430 |
| |
| Non-current assets: | | | | |
| Marketable securities | | 105,341 |
| | 170,799 |
|
| Property, plant and equipment, net | 33,783 |
| | 27,010 |
| 37,378 |
| | 41,304 |
|
| Goodwill | 5,717 |
| | 5,414 |
| |
| Acquired intangible assets, net | 2,298 |
| | 3,206 |
| |
| Other non-current assets | 10,162 |
| | 8,757 |
| 32,978 |
| | 22,283 |
|
| Total non-current assets | | 175,697 |
| | 234,386 |
|
| Total assets | $ | 375,319 |
| | $ | 321,686 |
| $ | 338,516 |
| | $ | 365,725 |
|
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY: | | Current liabilities: | | | | | | |
| Accounts payable | $ | 49,049 |
| | $ | 37,294 |
| $ | 46,236 |
| | $ | 55,888 |
|
| Accrued expenses | 25,744 |
| | 22,027 |
| |
| Other current liabilities | | 37,720 |
| | 33,327 |
|
| Deferred revenue | 7,548 |
| | 8,080 |
| 5,522 |
| | 5,966 |
|
| Commercial paper | 11,977 |
| | 8,105 |
| 5,980 |
| | 11,964 |
|
| Current portion of long-term debt | 6,496 |
| | 3,500 |
| |
| Term debt | | 10,260 |
| | 8,784 |
|
| Total current liabilities | 100,814 |
| | 79,006 |
| 105,718 |
| | 115,929 |
|
| | | | | | | |
| Deferred revenue, non-current | 2,836 |
| | 2,930 |
| |
| Long-term debt | 97,207 |
| | 75,427 |
| |
| Non-current liabilities: | | | | |
| Term debt | | 91,807 |
| | 93,735 |
|
| Other non-current liabilities | 40,415 |
| | 36,074 |
| 50,503 |
| | 48,914 |
|
| Total non-current liabilities | | 142,310 |
| | 142,649 |
|
| Total liabilities | 241,272 |
| | 193,437 |
| 248,028 |
| | 258,578 |
|
| | | | | | | |
| Commitments and contingencies |
| |
|
| |
|
| | | | | | | |
| Shareholders’ equity: | | | | | | |
| Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 5,126,201 and 5,336,166 shares issued and outstanding, respectively | 35,867 |
| | 31,251 |
| |
| Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,443,236 and 4,754,986 shares issued and outstanding, respectively | | 45,174 |
| | 40,201 |
|
| Retained earnings | 98,330 |
| | 96,364 |
| 45,898 |
| | 70,400 |
|
| Accumulated other comprehensive income/(loss) | (150 | ) | | 634 |
| (584 | ) | | (3,454 | ) |
| Total shareholders’ equity | 134,047 |
| | 128,249 |
| 90,488 |
| | 107,147 |
|
| Total liabilities and shareholders’ equity | $ | 375,319 |
|
| $ | 321,686 |
| $ | 338,516 |
|
| $ | 365,725 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 31
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except number of shares which are reflected in thousands)per share amounts)
| | | | Common Stock and Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Total Shareholders’ Equity | Years ended |
| | Shares | | Amount | | September 28,
2019 | | September 29,
2018 | | September 30,
2017 |
| Balances as of September 27, 2014 | 5,866,161 |
| | $ | 23,313 |
| | $ | 87,152 |
| | $ | 1,082 |
| | $ | 111,547 |
| |
| Total shareholders’ equity, beginning balances | | $ | 107,147 |
| | $ | 134,047 |
| | $ | 128,249 |
|
| | | | | | | |
| Common stock and additional paid-in capital: | | | | | | |
| Beginning balances | | 40,201 |
| | 35,867 |
| | 31,251 |
|
| Common stock issued | | 781 |
| | 669 |
| | 555 |
|
| Common stock withheld related to net share settlement of equity awards | | (2,002 | ) | | (1,778 | ) | | (1,468 | ) |
| Share-based compensation | | 6,194 |
| | 5,443 |
| | 4,909 |
|
| Tax benefit from equity awards, including transfer pricing adjustments | | — |
| | — |
| | 620 |
|
| Ending balances | | 45,174 |
| | 40,201 |
| | 35,867 |
|
| | | | | | | |
| Retained earnings: | | | | | | |
| Beginning balances | | 70,400 |
| | 98,330 |
| | 96,364 |
|
| Net income | — |
| | — |
| | 53,394 |
| | — |
| | 53,394 |
| 55,256 |
| | 59,531 |
| | 48,351 |
|
| Dividends and dividend equivalents declared | | (14,129 | ) | | (13,735 | ) | | (12,803 | ) |
| Common stock withheld related to net share settlement of equity awards | | (1,029 | ) | | (948 | ) | | (581 | ) |
| Common stock repurchased | | (67,101 | ) | | (73,056 | ) | | (33,001 | ) |
| Cumulative effects of changes in accounting principles | | 2,501 |
| | 278 |
| | — |
|
| Ending balances | | 45,898 |
| | 70,400 |
| | 98,330 |
|
| | | | | | | |
| Accumulated other comprehensive income/(loss): | | | | | | |
| Beginning balances | | (3,454 | ) | | (150 | ) | | 634 |
|
| Other comprehensive income/(loss) | — |
| | — |
| | — |
| | (1,427 | ) | | (1,427 | ) | 2,781 |
| | (3,026 | ) | | (784 | ) |
| Dividends and dividend equivalents declared | — |
| | — |
| | (11,627 | ) | | — |
| | (11,627 | ) | |
| Repurchase of common stock | (325,032 | ) | | — |
| | (36,026 | ) | | — |
| | (36,026 | ) | |
| Share-based compensation | — |
| | 3,586 |
| | — |
| | — |
| | 3,586 |
| |
| Common stock issued, net of shares withheld for employee taxes | 37,624 |
| | (231 | ) | | (609 | ) | | — |
| | (840 | ) | |
| Tax benefit from equity awards, including transfer pricing adjustments | — |
| | 748 |
| | — |
| | — |
| | 748 |
| |
| Balances as of September 26, 2015 | 5,578,753 |
| | 27,416 |
| | 92,284 |
| | (345 | ) | | 119,355 |
| |
| Net income | — |
| | — |
| | 45,687 |
| | — |
| | 45,687 |
| |
| Other comprehensive income/(loss) | — |
| | — |
| | — |
| | 979 |
| | 979 |
| |
| Dividends and dividend equivalents declared | — |
| | — |
| | (12,188 | ) | | — |
| | (12,188 | ) | |
| Repurchase of common stock | (279,609 | ) | | — |
| | (29,000 | ) | | — |
| | (29,000 | ) | |
| Share-based compensation | — |
| | 4,262 |
| | — |
| | — |
| | 4,262 |
| |
| Common stock issued, net of shares withheld for employee taxes | 37,022 |
| | (806 | ) | | (419 | ) | | — |
| | (1,225 | ) | |
| Tax benefit from equity awards, including transfer pricing adjustments | — |
| | 379 |
| | — |
| | — |
| | 379 |
| |
| Balances as of September 24, 2016 | 5,336,166 |
| | 31,251 |
| | 96,364 |
| | 634 |
| | 128,249 |
| |
| Net income | — |
| | — |
| | 48,351 |
| | — |
| | 48,351 |
| |
| Other comprehensive income/(loss) | — |
| | — |
| | — |
| | (784 | ) | | (784 | ) | |
| Dividends and dividend equivalents declared | — |
| | — |
| | (12,803 | ) | | — |
| | (12,803 | ) | |
| Repurchase of common stock | (246,496 | ) | | — |
| | (33,001 | ) | | — |
| | (33,001 | ) | |
| Share-based compensation | — |
| | 4,909 |
| | — |
| | — |
| | 4,909 |
| |
| Common stock issued, net of shares withheld for employee taxes | 36,531 |
| | (913 | ) | | (581 | ) | | — |
| | (1,494 | ) | |
| Tax benefit from equity awards, including transfer pricing adjustments | — |
| | 620 |
| | — |
| | — |
| | 620 |
| |
| Balances as of September 30, 2017 | 5,126,201 |
| | $ | 35,867 |
| | $ | 98,330 |
| | $ | (150 | ) | | $ | 134,047 |
| |
| Cumulative effects of changes in accounting principles | | 89 |
| | (278 | ) | | — |
|
| Ending balances | | (584 | ) | | (3,454 | ) | | (150 | ) |
| | | | | | | |
| Total shareholders’ equity, ending balances | | $ | 90,488 |
| | $ | 107,147 |
| | $ | 134,047 |
|
| | | | | | | |
| Dividends and dividend equivalents declared per share or RSU | | $ | 3.00 |
| | $ | 2.72 |
| | $ | 2.40 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 32
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | Years ended | Years ended |
| | September 30,
2017 | | September 24,
2016 | | September 26,
2015 | September 28,
2019 | | September 29,
2018 | | September 30,
2017 |
| Cash and cash equivalents, beginning of the year | $ | 20,484 |
| | $ | 21,120 |
| | $ | 13,844 |
| |
| Cash, cash equivalents and restricted cash, beginning balances | | $ | 25,913 |
| | $ | 20,289 |
| | $ | 20,484 |
|
| Operating activities: | | | | | | | | | | |
| Net income | 48,351 |
| | 45,687 |
| | 53,394 |
| 55,256 |
| | 59,531 |
| | 48,351 |
|
| Adjustments to reconcile net income to cash generated by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 10,157 |
| | 10,505 |
| | 11,257 |
| 12,547 |
| | 10,903 |
| | 10,157 |
|
| Share-based compensation expense | 4,840 |
| | 4,210 |
| | 3,586 |
| 6,068 |
| | 5,340 |
| | 4,840 |
|
| Deferred income tax expense | 5,966 |
| | 4,938 |
| | 1,382 |
| |
| Deferred income tax expense/(benefit) | | (340 | ) | | (32,590 | ) | | 5,966 |
|
| Other | (166 | ) | | 486 |
| | 385 |
| (652 | ) | | (444 | ) | | (166 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable, net | (2,093 | ) | | 527 |
| | 417 |
| 245 |
| | (5,322 | ) | | (2,093 | ) |
| Inventories | (2,723 | ) | | 217 |
| | (238 | ) | (289 | ) | | 828 |
| | (2,723 | ) |
| Vendor non-trade receivables | (4,254 | ) | | (51 | ) | | (3,735 | ) | 2,931 |
| | (8,010 | ) | | (4,254 | ) |
| Other current and non-current assets | (5,318 | ) | | 1,055 |
| | (283 | ) | 873 |
| | (423 | ) | | (5,318 | ) |
| Accounts payable | 9,618 |
| | 1,837 |
| | 5,001 |
| (1,923 | ) | | 9,175 |
| | 8,966 |
|
| Deferred revenue | (626 | ) | | (1,554 | ) | | 1,042 |
| (625 | ) | | (3 | ) | | (593 | ) |
| Other current and non-current liabilities | (154 | ) | | (2,033 | ) | | 9,058 |
| (4,700 | ) | | 38,449 |
| | 1,092 |
|
| Cash generated by operating activities | 63,598 |
|
| 65,824 |
|
| 81,266 |
| 69,391 |
|
| 77,434 |
|
| 64,225 |
|
| Investing activities: | | | | | | | | | | |
| Purchases of marketable securities | (159,486 | ) | | (142,428 | ) | | (166,402 | ) | (39,630 | ) | | (71,356 | ) | | (159,486 | ) |
| Proceeds from maturities of marketable securities | 31,775 |
| | 21,258 |
| | 14,538 |
| 40,102 |
| | 55,881 |
| | 31,775 |
|
| Proceeds from sales of marketable securities | 94,564 |
| | 90,536 |
| | 107,447 |
| 56,988 |
| | 47,838 |
| | 94,564 |
|
| Payments for acquisition of property, plant and equipment | | (10,495 | ) | | (13,313 | ) | | (12,451 | ) |
| Payments made in connection with business acquisitions, net | (329 | ) | | (297 | ) | | (343 | ) | (624 | ) | | (721 | ) | | (329 | ) |
| Payments for acquisition of property, plant and equipment | (12,451 | ) | | (12,734 | ) | | (11,247 | ) | |
| Payments for acquisition of intangible assets | (344 | ) | | (814 | ) | | (241 | ) | |
| Payments for strategic investments, net | (395 | ) | | (1,388 | ) | | — |
| |
| Purchases of non-marketable securities | | (1,001 | ) | | (1,871 | ) | | (521 | ) |
| Proceeds from non-marketable securities | | 1,634 |
| | 353 |
| | 126 |
|
| Other | 220 |
| | (110 | ) | | (26 | ) | (1,078 | ) | | (745 | ) | | (124 | ) |
| Cash used in investing activities | (46,446 | ) |
| (45,977 | ) |
| (56,274 | ) | |
| Cash generated by/(used in) investing activities | | 45,896 |
|
| 16,066 |
|
| (46,446 | ) |
| Financing activities: | | | | | | | | | | |
| Proceeds from issuance of common stock | 555 |
| | 495 |
| | 543 |
| 781 |
| | 669 |
| | 555 |
|
| Excess tax benefits from equity awards | 627 |
| | 407 |
| | 749 |
| |
| Payments for taxes related to net share settlement of equity awards | (1,874 | ) | | (1,570 | ) | | (1,499 | ) | (2,817 | ) | | (2,527 | ) | | (1,874 | ) |
| Payments for dividends and dividend equivalents | (12,769 | ) | | (12,150 | ) | | (11,561 | ) | (14,119 | ) | | (13,712 | ) | | (12,769 | ) |
| Repurchases of common stock | (32,900 | ) | | (29,722 | ) | | (35,253 | ) | (66,897 | ) | | (72,738 | ) | | (32,900 | ) |
| Proceeds from issuance of term debt, net | 28,662 |
| | 24,954 |
| | 27,114 |
| 6,963 |
| | 6,969 |
| | 28,662 |
|
| Repayments of term debt | (3,500 | ) | | (2,500 | ) | | — |
| (8,805 | ) | | (6,500 | ) | | (3,500 | ) |
| Change in commercial paper, net | 3,852 |
| | (397 | ) | | 2,191 |
| |
| Proceeds from/(Repayments of) commercial paper, net | | (5,977 | ) | | (37 | ) | | 3,852 |
|
| Other | | (105 | ) | | — |
| | — |
|
| Cash used in financing activities | (17,347 | ) |
| (20,483 | ) |
| (17,716 | ) | (90,976 | ) |
| (87,876 | ) |
| (17,974 | ) |
| Increase/(Decrease) in cash and cash equivalents | (195 | ) | | (636 | ) | | 7,276 |
| |
| Cash and cash equivalents, end of the year | $ | 20,289 |
|
| $ | 20,484 |
|
| $ | 21,120 |
| |
| Increase/(Decrease) in cash, cash equivalents and restricted cash | | 24,311 |
| | 5,624 |
| | (195 | ) |
| Cash, cash equivalents and restricted cash, ending balances | | $ | 50,224 |
|
| $ | 25,913 |
|
| $ | 20,289 |
|
| Supplemental cash flow disclosure: | | | | | | | | | | |
| Cash paid for income taxes, net | $ | 11,591 |
| | $ | 10,444 |
| | $ | 13,252 |
| $ | 15,263 |
| | $ | 10,417 |
| | $ | 11,591 |
|
| Cash paid for interest | $ | 2,092 |
| | $ | 1,316 |
| | $ | 514 |
| $ | 3,423 |
| | $ | 3,022 |
| | $ | 2,092 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 33
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile communication and media devices and personal computers, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store and Apple Music (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the Company.“Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes.reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.
The Company’s fiscal year is the 5252- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2019 and 2018 spanned 52 weeks each, whereas fiscal year 2017 included 53 weeks and ended on September 30, 2017.weeks. A 14th week was included in the first fiscal quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters. The Company’s fiscal years 2016 and 2015 ended on September 24, 2016 and September 26, 2015, respectively, and spanned 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Recently Adopted Accounting Pronouncements
Revenue Recognition
Net sales consist primarilyIn the first quarter of 2019, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), and additional ASUs issued to clarify the guidance in ASU 2014-09 (collectively the “new revenue fromstandard”), which amends the sale of hardware, software, digital content and applications, accessories, and service and support contracts.existing accounting standards for revenue recognition. The Company recognizesadopted the new revenue when persuasive evidencestandard utilizing the full retrospective transition method. The Company did not restate total net sales in the prior periods presented, as the adoption of an arrangement exists, delivery has occurred,the new revenue standard did not have a material impact on previously reported amounts.
Additionally, beginning in the first quarter of 2019, the Company classified the amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price is fixed or determinableof iPhone, Mac, iPad and collection is probable. Product is considered deliveredcertain other products, in Services net sales. Historically, the Company classified the amortization of these amounts in Products net sales consistent with its management reporting framework. As a result, Products and Services net sales for 2018 and 2017 were reclassified to conform to the customer once it has been shipped2019 presentation.
Financial Instruments
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and title, riskMeasurement of lossFinancial Assets and rewards of ownership have been transferred. For mostFinancial Liabilities (“ASU 2016-01”), which updates certain aspects of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S.,recognition, measurement, presentation and for certain other sales, the Company defers revenue until the customer receives the product because the Company retainsdisclosure of financial instruments. The adoption of ASU 2016-01 did not have a portion of the risk of loss on these sales during transit. For payment terms in excess of the Company’s standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by the Company to third-party app developers and certain digital content owners is not reflected in the Company’s Consolidated Statements of Operations.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products. The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store, TV App Store and iBooks Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered under the Company’s standard limited warranty.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company’s other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns basedmaterial impact on the Company’s historical experience. Revenue is recorded netconsolidated financial statements.
Income Taxes
In the first quarter of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services,2019, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances,adopted FASB ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted ASU 2016-16 utilizing the modified retrospective transition method. Upon adoption, the Company uses a hierarchy to determinerecorded $2.7 billion of net deferred tax assets, reduced other non-current assets by $128 million, and increased retained earnings by $2.6 billion on its Consolidated Balance Sheet. The Company will recognize incremental deferred income tax expense as these net deferred tax assets are utilized.
Restricted Cash
In the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidencefirst quarter of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when2019, the Company sellsadopted FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry-specific software accounting guidance the Company allocates revenue to all deliverables based on the VSOEclassification and presentation of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of qualifying versions of iPhone, iPad, iPod touch, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future unspecified software upgrades to the device’s essential software and/or non-software services free of charge. The Company has identified up to three deliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with qualifying devices to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the product’s essential software. The third deliverable is the non-software services to be provided to qualifying devices. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on the Company’s ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale, provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trendsrestricted cash in the pricing for similar offerings, product-specific business objectives, estimated cost to provide the non-software servicesstatement of cash flows and the relative ESP of the upgrade rights and non-software services as compared to the total selling price of the product.
Shipping Costs
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are classified as cost of sales.
Warranty Costs
The Company generally provides for the estimated cost of hardware and software warranties in the period the related revenue is recognized. The Company assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
Software Development Costs
Research and development (“R&D”) costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established and as a result software development costs were expensed as incurred.requires additional disclosures about restricted cash balances.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Share-based
Share-Based Compensation
The Company recognizes expense related togenerally measures share-based payment transactions in which it receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. Share-based compensation expense for restricted stock units (“RSUs”) and restricted stock is measured based on the closing fair market valueprice of the Company’s common stock on the date of grant. The Company estimates forfeitures expected to occurgrant, and recognizes share-based compensation expense for those equity awards expected to vest. The Company recognizes share-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUsits estimate of equity awards that are contingent on the achievement of performance conditions. The Company recognizes a benefit from share-based compensation in the Consolidated Statements of Shareholders’ Equity if an excess tax benefit is realized. In addition, the Company recognizes the indirect effects of share-based compensation on R&D tax credits, foreign tax credits and domestic manufacturing deductions in the Consolidated Statements of Operations.will ultimately vest. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”
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 for operating losses and tax credit carryforwards. 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 and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 5, “Income Taxes” for additional information.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include unvested RSUs, unvested restricted stock, outstanding stock options and shares to be purchased by employees under the Company’s employee stock purchase plan. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
The following table shows the computation of basic and diluted earnings per share for 2017, 20162019, 2018 and 20152017 (net income in millions and shares in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net income | $ | 55,256 |
| | $ | 59,531 |
| | $ | 48,351 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted-average basic shares outstanding | 4,617,834 |
| | 4,955,377 |
| | 5,217,242 |
|
| Effect of dilutive securities | 31,079 |
| | 44,732 |
| | 34,450 |
|
| Weighted-average diluted shares | 4,648,913 |
| | 5,000,109 |
|
| 5,251,692 |
|
| | | | | | |
| Basic earnings per share | $ | 11.97 |
| | $ | 12.01 |
| | $ | 9.27 |
|
| Diluted earnings per share | $ | 11.89 |
| | $ | 11.91 |
| | $ | 9.21 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | |
| Net income | $ | 48,351 |
| | $ | 45,687 |
| | $ | 53,394 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted-average shares outstanding | 5,217,242 |
| | 5,470,820 |
| | 5,753,421 |
|
| Effect of dilutive securities | 34,450 |
| | 29,461 |
| | 39,648 |
|
| Weighted-average diluted shares | 5,251,692 |
| | 5,500,281 |
|
| 5,793,069 |
|
| | | | | | |
| Basic earnings per share | $ | 9.27 |
| | $ | 8.35 |
| | $ | 9.28 |
|
| Diluted earnings per share | $ | 9.21 |
| | $ | 8.31 |
| | $ | 9.22 |
|
The Company applies the treasury stock method to determine the dilutive effect of potentially dilutive securities. Potentially dilutive securities whose effect would have been antidilutive arerepresenting 15.5 million shares of common stock were excluded from the computation of diluted earnings per share.
Financial Instrumentsshare for 2019 because their effect would have been antidilutive.
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
The Company’s investments in marketable debt and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-termUnrealized gains and losses on marketable debt securities with maturities greater than 12 months are classified as long-term. Marketableavailable-for-sale are recognized in other comprehensive income/(loss) (“OCI”).
The Company’s investments in marketable equity securities including mutual funds, are classified as either short-term or long-term based on the nature of each securitythe securities and itstheir availability for use in current operations. The Company’s marketable debt and equity securities are carriedmeasured at fair value with unrealized gains and losses recognized in other income/(expense), net of taxes, reported as a component of accumulated other comprehensive income/(loss) (“AOCI”OI&E”) in shareholders’ equity, with the exception of unrealized losses believed to be other-than-temporary which are reported in earnings in the current period. .
The cost of securities sold is based upondetermined using the specific identification method.
Derivative Financial Instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI in shareholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings in the current period. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.
For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings in the current period.
For derivative instruments and foreign currency debt that hedge the exposure to changes in foreign currency exchange rates used for translation of the net investment in a foreign operation and that are designated as a net investment hedge, the net gain or loss on the effective portion of the derivative instrument is reported in the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.
Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period.
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect the customers’ abilities to pay.
Inventories
Inventories are stated at the lower of cost, computedmeasured using the first-in, first-out method, and net realizable value. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.method.
Property, Plant and Equipment
Property,Depreciation on property, plant and equipment are stated at cost. Depreciation is computed by use of therecognized on a straight-line methodbasis over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software are amortized using theon a straight-line methodbasis over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $11.3 billion, $9.3 billion and $8.2 billion $8.3 billionduring 2019, 2018 and $9.2 billion during 2017, 2016 and 2015, respectively.
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
The Company reviewsNon-cash investing activities involving property, plant and equipment inventory component prepaymentsresulted in a net increase/(decrease) to accounts payable and identifiable intangibles, excluding goodwillother current liabilities of $(2.9) billion and intangible assets with indefinite useful lives, for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property, plant$3.4 billion during 2019 and equipment, inventory component prepayments and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value.2018, respectively.
Non-Marketable Securities
The Company does not amortize goodwillhas elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Company’s non-marketable equity securities are measured at cost, less any impairment, and intangible assets with indefinite useful lives; rather, such assets are required to be testedadjusted for impairment at least annually or sooner if events or changes in circumstances indicate thatfair value resulting from observable transactions for identical or similar investments of the assets may be impaired. The Company performs its goodwillsame issuer. Gains and intangible asset impairment testslosses on non-marketable equity securities are recognized in the fourth quarter of each year. The Company did not recognize any impairment charges related to goodwill or indefinite lived intangible assets during 2017, 2016OI&E.
Restricted Cash and 2015. For purposes of testing goodwill for impairment, the Company established reporting units based on its current reporting structure. Goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. In 2017 and 2016, the Company’s goodwill was primarily allocated to the Americas and Europe reporting units.Restricted Marketable Securities
The Company amortizes its intangible assets with definite useful lives over their estimated useful livesconsiders cash and reviews these assets for impairment.marketable securities to be restricted when withdrawal or general use is legally restricted. The Company typically amortizes its acquired intangiblerecords restricted cash as other assets with definite useful lives over periods from three to seven years.in the Consolidated Balance Sheets, and determines current or non-current classification based on the expected duration of the restriction. The Company records restricted marketable securities as current or non-current marketable securities in the Consolidated Balance Sheets based on the classification of the underlying securities.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use to price the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full termvalues of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived fromare based on quoted prices in active markets for identical assets or liabilities.assets. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, all of which generally have counterparties with high credit ratings, were valuedare based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone, Mac, iPad, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, the fair value accounting requirements, companiesCompany allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may choosevary depending upon the unique facts and circumstances related to measure eligible financial instrumentseach performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to 3 performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other itemsproducts. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at fair value.the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
For the fair value optionsale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for any eligible financial instruments.
Foreign Currency Translationtangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store, Mac App Store, TV App Store and RemeasurementWatch App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company translateshas elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the assetscollected taxes recorded within other current liabilities until remitted to the relevant government authority.
Deferred Revenue
As of September 28, 2019 and liabilitiesSeptember 29, 2018, the Company had total deferred revenue of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates$8.1 billion and $8.8 billion, respectively. As of September 28, 2019, the Company expects 68% of total deferred revenue to be realized in effect at the end of each period.less than a year, 25% within one-to-two years, 6% within two-to-three years and 1% in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and expensesservices for these subsidiaries are translated using rates that approximate those in effect during the period. Gains2019, 2018 and losses from these translations are recognized in foreign currency translation included in AOCI in shareholders’ equity. 2017 were as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
iPhone (1) | $ | 142,381 |
| | $ | 164,888 |
| | $ | 139,337 |
|
Mac (1) | 25,740 |
| | 25,198 |
| | 25,569 |
|
iPad (1) | 21,280 |
| | 18,380 |
| | 18,802 |
|
Wearables, Home and Accessories (1)(2) | 24,482 |
| | 17,381 |
| | 12,826 |
|
Services (3) | 46,291 |
| | 39,748 |
| | 32,700 |
|
Total net sales (4) | $ | 260,174 |
| | $ | 265,595 |
| | $ | 229,234 |
|
| |
| (1) | Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product. |
| |
| (2) | Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories. |
| |
| (3) | Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare, licensing and other services. Services net sales also include amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price of certain products. |
| |
| (4) | Includes $5.9 billion of revenue recognized in 2019 that was included in deferred revenue as of September 29, 2018, $5.8 billion of revenue recognized in 2018 that was included in deferred revenue as of September 30, 2017, and $6.3 billion of revenue recognized in 2017 that was included in deferred revenue as of September 24, 2016. |
The Company’s subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assetsproportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and liabilities at exchange rates in effect at the end of each period,Geographic Data” for 2019, 2018 and inventories, property and nonmonetary assets and liabilities at historical rates.2017.
Apple Inc. | 2019 Form 10-K | 37
Note 23 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and available-for-salemarketable securities by significant investment category as of September 30, 201728, 2019 and September 24, 201629, 2018 (in millions):
| | | | 2017 | 2019 |
| | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
| Cash | $ | 7,982 |
| | $ | — |
| | $ | — |
| | $ | 7,982 |
| | $ | 7,982 |
| | $ | — |
| | $ | — |
| $ | 12,204 |
| | $ | — |
| | $ | — |
| | $ | 12,204 |
| | $ | 12,204 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | | | | |
Level 1 (1): | | | | | | | | | | | | | | |
| Money market funds | 6,534 |
| | — |
| | — |
| | 6,534 |
| | 6,534 |
| | — |
| | — |
| 15,897 |
| | — |
| | — |
| | 15,897 |
| | 15,897 |
| | — |
| | — |
|
| Mutual funds | 799 |
| | — |
| | (88 | ) | | 711 |
| | — |
| | 711 |
| | — |
| |
| Subtotal | 7,333 |
| | — |
| | (88 | ) | | 7,245 |
| | 6,534 |
| | 711 |
| | — |
| 15,897 |
| | — |
| | — |
| | 15,897 |
| | 15,897 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | | | | |
Level 2 (2): | | | | | | | | | | | | | | |
| U.S. Treasury securities | 55,254 |
| | 58 |
| | (230 | ) | | 55,082 |
| | 865 |
| | 17,228 |
| | 36,989 |
| 30,293 |
| | 33 |
| | (62 | ) | | 30,264 |
| | 6,165 |
| | 9,817 |
| | 14,282 |
|
| U.S. agency securities | 5,162 |
| | 2 |
| | (9 | ) | | 5,155 |
| | 1,439 |
| | 2,057 |
| | 1,659 |
| 9,767 |
| | 1 |
| | (3 | ) | | 9,765 |
| | 6,489 |
| | 2,249 |
| | 1,027 |
|
| Non-U.S. government securities | 7,827 |
| | 210 |
| | (37 | ) | | 8,000 |
| | 9 |
| | 123 |
| | 7,868 |
| 19,821 |
| | 337 |
| | (50 | ) | | 20,108 |
| | 749 |
| | 3,168 |
| | 16,191 |
|
| Certificates of deposit and time deposits | 5,832 |
| | — |
| | — |
| | 5,832 |
| | 1,142 |
| | 3,918 |
| | 772 |
| 4,041 |
| | — |
| | — |
| | 4,041 |
| | 2,024 |
| | 1,922 |
| | 95 |
|
| Commercial paper | 3,640 |
| | — |
| | — |
| | 3,640 |
| | 2,146 |
| | 1,494 |
| | — |
| 12,433 |
| | — |
| | — |
| | 12,433 |
| | 5,193 |
| | 7,240 |
| | — |
|
| Corporate securities | 152,724 |
| | 969 |
| | (242 | ) | | 153,451 |
| | 172 |
| | 27,591 |
| | 125,688 |
| |
| Corporate debt securities | | 85,383 |
| | 756 |
| | (92 | ) | | 86,047 |
| | 123 |
| | 26,127 |
| | 59,797 |
|
| Municipal securities | 961 |
| | 4 |
| | (1 | ) | | 964 |
| | — |
| | 114 |
| | 850 |
| 958 |
| | 8 |
| | (1 | ) | | 965 |
| | — |
| | 68 |
| | 897 |
|
| Mortgage- and asset-backed securities | 21,684 |
| | 35 |
| | (175 | ) | | 21,544 |
| | — |
| | 656 |
| | 20,888 |
| 14,180 |
| | 67 |
| | (73 | ) | | 14,174 |
| | — |
| | 1,122 |
| | 13,052 |
|
| Subtotal | 253,084 |
| | 1,278 |
| | (694 | ) | | 253,668 |
| | 5,773 |
| | 53,181 |
| | 194,714 |
| 176,876 |
| | 1,202 |
| | (281 | ) | | 177,797 |
| | 20,743 |
| | 51,713 |
| | 105,341 |
|
| | | | | | | | | | | | | | | |
| Total | $ | 268,399 |
| | $ | 1,278 |
| | $ | (782 | ) | | $ | 268,895 |
| | $ | 20,289 |
| | $ | 53,892 |
| | $ | 194,714 |
| |
Total (3) | | $ | 204,977 |
| | $ | 1,202 |
| | $ | (281 | ) | | $ | 205,898 |
| | $ | 48,844 |
| | $ | 51,713 |
| | $ | 105,341 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 |
| | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
| Cash | $ | 11,575 |
| | $ | — |
| | $ | — |
| | $ | 11,575 |
| | $ | 11,575 |
| | $ | — |
| | $ | — |
|
Level 1 (1): | | | | | | | | | | | | | |
| Money market funds | 8,083 |
| | — |
| | — |
| | 8,083 |
| | 8,083 |
| | — |
| | — |
|
| Mutual funds | 799 |
| | — |
| | (116 | ) | | 683 |
| | — |
| | 683 |
| | — |
|
| Subtotal | 8,882 |
| | — |
| | (116 | ) | | 8,766 |
| | 8,083 |
| | 683 |
| | — |
|
Level 2 (2): | | | | | | | | | | | | | |
| U.S. Treasury securities | 47,296 |
| | — |
| | (1,202 | ) | | 46,094 |
| | 1,613 |
| | 7,606 |
| | 36,875 |
|
| U.S. agency securities | 4,127 |
| | — |
| | (48 | ) | | 4,079 |
| | 1,732 |
| | 360 |
| | 1,987 |
|
| Non-U.S. government securities | 21,601 |
| | 49 |
| | (250 | ) | | 21,400 |
| | — |
| | 3,355 |
| | 18,045 |
|
| Certificates of deposit and time deposits | 3,074 |
| | — |
| | — |
| | 3,074 |
| | 1,247 |
| | 1,330 |
| | 497 |
|
| Commercial paper | 2,573 |
| | — |
| | — |
| | 2,573 |
| | 1,663 |
| | 910 |
| | — |
|
| Corporate debt securities | 123,001 |
| | 152 |
| | (2,038 | ) | | 121,115 |
| | — |
| | 25,162 |
| | 95,953 |
|
| Municipal securities | 946 |
| | — |
| | (12 | ) | | 934 |
| | — |
| | 178 |
| | 756 |
|
| Mortgage- and asset-backed securities | 18,105 |
| | 8 |
| | (623 | ) | | 17,490 |
| | — |
| | 804 |
| | 16,686 |
|
| Subtotal | 220,723 |
| | 209 |
| | (4,173 | ) | | 216,759 |
| | 6,255 |
| | 39,705 |
| | 170,799 |
|
Total (3) | $ | 241,180 |
| | $ | 209 |
| | $ | (4,289 | ) | | $ | 237,100 |
| | $ | 25,913 |
| | $ | 40,388 |
| | $ | 170,799 |
|
| |
| (1) | Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities. |
| |
| (2) | Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
| (3) | As of September 28, 2019 and September 29, 2018, total cash, cash equivalents and marketable securities included $18.9 billion and $20.3 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 |
| | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
| Cash | $ | 8,601 |
| | $ | — |
| | $ | — |
| | $ | 8,601 |
| | $ | 8,601 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | | | |
| Money market funds | 3,666 |
| | — |
| | — |
| | 3,666 |
| | 3,666 |
| | — |
| | — |
|
| Mutual funds | 1,407 |
| | — |
| | (146 | ) | | 1,261 |
| | — |
| | 1,261 |
| | — |
|
| Subtotal | 5,073 |
| | — |
| | (146 | ) | | 4,927 |
| | 3,666 |
| | 1,261 |
| | — |
|
| | | | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | | | |
| U.S. Treasury securities | 41,697 |
| | 319 |
| | (4 | ) | | 42,012 |
| | 1,527 |
| | 13,492 |
| | 26,993 |
|
| U.S. agency securities | 7,543 |
| | 16 |
| | — |
| | 7,559 |
| | 2,762 |
| | 2,441 |
| | 2,356 |
|
| Non-U.S. government securities | 7,609 |
| | 259 |
| | (27 | ) | | 7,841 |
| | 110 |
| | 818 |
| | 6,913 |
|
| Certificates of deposit and time deposits | 6,598 |
| | — |
| | — |
| | 6,598 |
| | 1,108 |
| | 3,897 |
| | 1,593 |
|
| Commercial paper | 7,433 |
| | — |
| | — |
| | 7,433 |
| | 2,468 |
| | 4,965 |
| | — |
|
| Corporate securities | 131,166 |
| | 1,409 |
| | (206 | ) | | 132,369 |
| | 242 |
| | 19,599 |
| | 112,528 |
|
| Municipal securities | 956 |
| | 5 |
| | — |
| | 961 |
| | — |
| | 167 |
| | 794 |
|
| Mortgage- and asset-backed securities | 19,134 |
| | 178 |
| | (28 | ) | | 19,284 |
| | — |
| | 31 |
| | 19,253 |
|
| Subtotal | 222,136 |
| | 2,186 |
| | (265 | ) | | 224,057 |
| | 8,217 |
| | 45,410 |
| | 170,430 |
|
| | | | | | | | | | | | | | |
| Total | $ | 235,810 |
| | $ | 2,186 |
| | $ | (411 | ) | | $ | 237,585 |
| | $ | 20,484 |
| | $ | 46,671 |
| | $ | 170,430 |
|
The Company may sell certain of its marketable debt securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation ofmanaging liquidity, credit deteriorationrisk, duration and duration management.asset allocation. The maturities of the Company’s long-term marketable debt securities generally range from one to five years.
The Company considersfollowing tables show information about the declines in market value of itsCompany’s marketable securities investment portfolio to be temporarythat had been in nature. a continuous unrealized loss position for less than 12 months and for 12 months or greater as of September 28, 2019 and September 29, 2018 (in millions):
|
| | | | | | | | | | | |
| | 2019 |
| | Continuous Unrealized Losses |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| Fair value of marketable debt securities | $ | 28,151 |
| | $ | 28,167 |
| | $ | 56,318 |
|
| Unrealized losses | $ | (138 | ) | | $ | (143 | ) | | $ | (281 | ) |
|
| | | | | | | | | | | |
| | 2018 |
| | Continuous Unrealized Losses |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| Fair value of marketable securities | $ | 126,238 |
| | $ | 60,599 |
| | $ | 186,837 |
|
| Unrealized losses | $ | (2,400 | ) | | $ | (1,889 | ) | | $ | (4,289 | ) |
The Company typically invests in highly-ratedhighly rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating an investmenta marketable debt security for other-than-temporary impairment, the Company reviews factors such as the length of timeduration and extent to which the fair value has been belowof the security is less than its cost, basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it iswill more likely than not it will be required to sell, the investmentsecurity before recovery of the investment’sits amortized cost basis. As of September 30, 2017,28, 2019, the Company does not consider any of its investmentsmarketable debt securities to be other-than-temporarily impaired.
Non-Marketable Securities
The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values. As of September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.9 billion.
Restricted Cash
A reconciliation of the Company’s cash and cash equivalents in the Consolidated Balance Sheet to cash, cash equivalents and restricted cash in the Consolidated Statement of Cash Flows as of September 28, 2019 is as follows (in millions):
|
| | | |
| | 2019 |
| Cash and cash equivalents | $ | 48,844 |
|
| Restricted cash included in other current assets | 23 |
|
| Restricted cash included in other non-current assets | 1,357 |
|
| Cash, cash equivalents and restricted cash | $ | 50,224 |
|
The Company’s restricted cash primarily consisted of cash required to be on deposit under a contractual agreement with a bank to support the Company’s iPhone Upgrade Program.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investments in certain foreign subsidiaries, and on certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations andor the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To help protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company typicallygenerally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To help protect the net investment in a foreign operation from adverse changesfluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency-denominatedcurrency–denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of September 28, 2019, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 23 years.
The Company may also enter into non-designated foreign currency contracts to partially offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
TheTo protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments to manage interest rate risk.instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value of the Company’s term debt or investments.value. The Company designates these instruments as either cash flow or fair value hedges. TheAs of September 28, 2019, the Company’s hedged interest rate transactions as of September 30, 2017 are expected to be recognized within 10 years.
The Company may enter into foreign currency swaps to manage currency risk on its foreign currency-denominated term debt. These instruments may offset a portion of the foreign currency remeasurement gains or losses on the Company’s term debt and related interest payments. The Company designates these instruments as cash flow hedges. The Company’s hedged term debt-related foreign currency transactions as of September 30, 2017 are expected to be recognized within 258 years.
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in AOCIaccumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other income/(expense), netOI&E in the same period as the related income or expense is recognized. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.OI&E.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into other income/(expense), netOI&E in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), netOI&E unless they are re-designated as hedges of other transactions.
Net Investment Hedges
The effective portions of net investment hedges are recorded in other comprehensive income/(loss) (“OCI”)OCI as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other income/(expense), net.OI&E. For foreign exchange forward contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its assessment of hedge effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.
Fair Value Hedges
Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item.item in the same line in the Consolidated Statements of Operations. For foreign exchange forward contracts designated as fair value hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its assessment of hedge effectiveness. The amount excluded from the effectiveness testing of fair value hedges was a gain of $777 million for 2019, and was recognized in OI&E.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. As a result, the Company recognized a gain of $20 million in net sales, a loss of $40 million in cost of sales and a gain of $606 million in other income/(expense), net for 2017.
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of September 30, 201728, 2019 and September 24, 201629, 2018 (in millions):
| | | | 2017 | 2019 |
| | Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value | Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | | | | | | |
| Foreign exchange contracts | $ | 1,049 |
| | $ | 363 |
| | $ | 1,412 |
| $ | 1,798 |
| | $ | 323 |
| | $ | 2,121 |
|
| Interest rate contracts | $ | 218 |
| | $ | — |
| | $ | 218 |
| $ | 685 |
| | $ | — |
| | $ | 685 |
|
| | | | | | | | | | | |
Derivative liabilities (2): | | | | | | | | | | |
| Foreign exchange contracts | $ | 759 |
| | $ | 501 |
| | $ | 1,260 |
| $ | 1,341 |
| | $ | 160 |
| | $ | 1,501 |
|
| Interest rate contracts | $ | 303 |
| | $ | — |
| | $ | 303 |
| $ | 105 |
| | $ | — |
| | $ | 105 |
|
| | | | 2016 | 2018 |
| | Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value | Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | | | | | | |
| Foreign exchange contracts | $ | 518 |
| | $ | 153 |
| | $ | 671 |
| $ | 1,015 |
| | $ | 259 |
| | $ | 1,274 |
|
| Interest rate contracts | $ | 728 |
| | $ | — |
| | $ | 728 |
| |
| | | | | | | | | | | |
Derivative liabilities (2): | | | | | | | | | | |
| Foreign exchange contracts | $ | 935 |
| | $ | 134 |
| | $ | 1,069 |
| $ | 543 |
| | $ | 137 |
| | $ | 680 |
|
| Interest rate contracts | $ | 7 |
| | $ | — |
| | $ | 7 |
| $ | 1,456 |
| | $ | — |
| | $ | 1,456 |
|
| |
| (1) | The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Consolidated Balance Sheets. |
| |
| (2) | The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expensesother current liabilities and other non-current liabilities in the Consolidated Balance Sheets. |
The Company classifies cash flows related to derivative financial instruments as operating activities in its Consolidated Statements of Cash Flows.
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges in OCI and the Consolidated Statements of Operations for 2017, 20162019, 2018 and 20152017 (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Gains/(Losses) recognized in OCI – effective portion: | | | | | |
| Cash flow hedges: | | | | | |
| Foreign exchange contracts | $ | (959 | ) | | $ | 682 |
| | $ | 1,797 |
|
| Interest rate contracts | — |
| | 1 |
| | 7 |
|
| Total | $ | (959 | ) |
| $ | 683 |
|
| $ | 1,804 |
|
| | | | | | |
| Net investment hedges: | | | | | |
| Foreign currency debt | $ | (58 | ) | | $ | 4 |
| | $ | 67 |
|
| | | | | | |
| Gains/(Losses) reclassified from AOCI into net income – effective portion: | | | | | |
| Cash flow hedges: | | | | | |
| Foreign exchange contracts | $ | (116 | ) | | $ | (482 | ) | | $ | 1,958 |
|
| Interest rate contracts | (7 | ) | | 1 |
| | (2 | ) |
| Total | $ | (123 | ) |
| $ | (481 | ) |
| $ | 1,956 |
|
| | | | | | |
| Gains/(Losses) on derivative instruments: | | | | | |
| Fair value hedges: | | | | | |
| Foreign exchange contracts | $ | 1,020 |
| | $ | (168 | ) | | $ | — |
|
| Interest rate contracts | 2,068 |
| | (1,363 | ) | | (810 | ) |
| Total | $ | 3,088 |
| | $ | (1,531 | ) | | $ | (810 | ) |
| | | | | | |
| Gains/(Losses) related to hedged items: | | | | | |
| Fair value hedges: | | | | | |
| Marketable securities | $ | (1,018 | ) | | $ | 167 |
| | $ | — |
|
| Fixed-rate debt | (2,068 | ) | | 1,363 |
| | 810 |
|
| Total | $ | (3,086 | ) | | $ | 1,530 |
| | $ | 810 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Gains/(Losses) recognized in OCI – effective portion: | | | | | |
| Cash flow hedges: | | | | | |
| Foreign exchange contracts | $ | 1,797 |
| | $ | 109 |
| | $ | 3,592 |
|
| Interest rate contracts | 7 |
| | (57 | ) | | (111 | ) |
| Total | $ | 1,804 |
|
| $ | 52 |
|
| $ | 3,481 |
|
| | | | | | |
| Net investment hedges: | | | | | |
| Foreign exchange contracts | $ | — |
| | $ | — |
| | $ | 167 |
|
| Foreign currency debt | 67 |
| | (258 | ) | | (71 | ) |
| Total | $ | 67 |
|
| $ | (258 | ) |
| $ | 96 |
|
| | | | | | |
| Gains/(Losses) reclassified from AOCI into net income – effective portion: | | | | | |
| Cash flow hedges: | | | | | |
| Foreign exchange contracts | $ | 1,958 |
| | $ | 885 |
| | $ | 4,092 |
|
| Interest rate contracts | (2 | ) | | (11 | ) | | (17 | ) |
| Total | $ | 1,956 |
|
| $ | 874 |
|
| $ | 4,075 |
|
| | | | | | |
| Gains/(Losses) on derivative instruments: | | | | | |
| Fair value hedges: | | | | | |
| Interest rate contracts | $ | (810 | ) | | $ | 341 |
| | $ | 337 |
|
| | | | | | |
| Gains/(Losses) related to hedged items: | | | | | |
| Fair value hedges: | | | | | |
| Fixed-rate debt | $ | 810 |
| | $ | (341 | ) | | $ | (337 | ) |
The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 30, 201728, 2019 and September 24, 201629, 2018 (in millions):
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | Notional Amount | | Credit Risk Amount | | Notional Amount | | Credit Risk Amount |
| Instruments designated as accounting hedges: | | | | | | | |
| Foreign exchange contracts | $ | 61,795 |
| | $ | 1,798 |
| | $ | 65,368 |
| | $ | 1,015 |
|
| Interest rate contracts | $ | 31,250 |
| | $ | 685 |
| | $ | 33,250 |
| | $ | — |
|
| | | | | | | | |
| Instruments not designated as accounting hedges: | | | | | | | |
| Foreign exchange contracts | $ | 76,868 |
| | $ | 323 |
| | $ | 63,062 |
| | $ | 259 |
|
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Notional Amount | | Credit Risk Amount | | Notional Amount | | Credit Risk Amount |
| Instruments designated as accounting hedges: | | | | | | | |
| Foreign exchange contracts | $ | 56,156 |
| | $ | 1,049 |
| | $ | 44,678 |
| | $ | 518 |
|
| Interest rate contracts | $ | 33,000 |
| | $ | 218 |
| | $ | 24,500 |
| | $ | 728 |
|
| | | | | | | | |
| Instruments not designated as accounting hedges: | | | | | | | |
| Foreign exchange contracts | $ | 69,774 |
| | $ | 363 |
| | $ | 54,305 |
| | $ | 153 |
|
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. TheAs of September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $35 million and $163 million as of September 30, 2017 and September 24, 2016, respectively,$1.6 billion, which werewas recorded as accrued expensesother current liabilities in the Consolidated Balance Sheets.Sheet. As of September 29, 2018, the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion, which was recorded as other current assets in the Consolidated Balance Sheet.
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 30, 201728, 2019 and September 24, 2016,29, 2018, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $1.4$2.7 billion and $1.5$2.1 billion, respectively, resulting in a net derivative assetsliability of $32$407 million and $160a net derivative asset of $138 million, respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 30, 2017,28, 2019, the Company had two0 customers that individually represented 10% or more of total trade receivables, each of which accounted for 10%.receivables. As of September 24, 2016,29, 2018, the Company had one1 customer that represented 10% or more of total trade receivables, which accounted for 10%. The Company’s cellular network carriers accounted for 51% and 59% and 63% of total trade receivables as of September 30, 201728, 2019 and September 24, 2016,29, 2018, respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 30, 2017,28, 2019, the Company had three2 vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42%, 19%59% and 10%14%. As of September 24, 2016,29, 2018, the Company had two2 vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 47%62% and 21%12%.
Note 34 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated financial statement details as of September 30, 201728, 2019 and September 24, 201629, 2018 (in millions):
Property, Plant and Equipment, Net
|
| | | | | | | |
| | 2019 | | 2018 |
| Land and buildings | $ | 17,085 |
| | $ | 16,216 |
|
| Machinery, equipment and internal-use software | 69,797 |
| | 65,982 |
|
| Leasehold improvements | 9,075 |
| | 8,205 |
|
| Gross property, plant and equipment | 95,957 |
| | 90,403 |
|
| Accumulated depreciation and amortization | (58,579 | ) | | (49,099 | ) |
| Total property, plant and equipment, net | $ | 37,378 |
| | $ | 41,304 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Land and buildings | $ | 13,587 |
| | $ | 10,185 |
|
| Machinery, equipment and internal-use software | 54,210 |
| | 44,543 |
|
| Leasehold improvements | 7,279 |
| | 6,517 |
|
| Gross property, plant and equipment | 75,076 |
| | 61,245 |
|
| Accumulated depreciation and amortization | (41,293 | ) | | (34,235 | ) |
| Total property, plant and equipment, net | $ | 33,783 |
| | $ | 27,010 |
|
Other Non-Current Liabilities
|
| | | | | | | |
| | 2019 | | 2018 |
| Long-term taxes payable | $ | 29,545 |
| | $ | 33,589 |
|
| Other non-current liabilities | 20,958 |
| | 15,325 |
|
| Total other non-current liabilities | $ | 50,503 |
| | $ | 48,914 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax liabilities | $ | 31,504 |
| | $ | 26,019 |
|
| Other non-current liabilities | 8,911 |
| | 10,055 |
|
| Total other non-current liabilities | $ | 40,415 |
| | $ | 36,074 |
|
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), netOI&E for 2017, 20162019, 2018 and 20152017 (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Interest and dividend income | $ | 4,961 |
| | $ | 5,686 |
| | $ | 5,201 |
|
| Interest expense | (3,576 | ) | | (3,240 | ) | | (2,323 | ) |
| Other income/(expense), net | 422 |
| | (441 | ) | | (133 | ) |
| Total other income/(expense), net | $ | 1,807 |
| | $ | 2,005 |
| | $ | 2,745 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Interest and dividend income | $ | 5,201 |
| | $ | 3,999 |
| | $ | 2,921 |
|
| Interest expense | (2,323 | ) | | (1,456 | ) | | (733 | ) |
| Other expense, net | (133 | ) | | (1,195 | ) | | (903 | ) |
| Total other income/(expense), net | $ | 2,745 |
| | $ | 1,348 |
| | $ | 1,285 |
|
Note 4 – Acquired Intangible Assets
The Company’s acquired intangible assets with definite useful lives primarily consist of patents and licenses. The following table summarizes the components of acquired intangible asset balances as of September 30, 2017 and September 24, 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Definite-lived and amortizable acquired intangible assets | $ | 7,507 |
| | $ | (5,309 | ) | | $ | 2,198 |
| | $ | 8,912 |
| | $ | (5,806 | ) | | $ | 3,106 |
|
| Indefinite-lived and non-amortizable acquired intangible assets | 100 |
| | — |
| | 100 |
| | 100 |
| | — |
| | 100 |
|
| Total acquired intangible assets | $ | 7,607 |
|
| $ | (5,309 | ) |
| $ | 2,298 |
|
| $ | 9,012 |
|
| $ | (5,806 | ) |
| $ | 3,206 |
|
Amortization expense related to acquired intangible assets was $1.2 billion, $1.5 billion and $1.3 billion in 2017, 2016 and 2015, respectively. As of September 30, 2017, the remaining weighted-average amortization period for acquired intangible assets is 3.4 years. The expected annual amortization expense related to acquired intangible assets as of September 30, 2017, is as follows (in millions):
|
| | | |
| 2018 | $ | 948 |
|
| 2019 | 505 |
|
| 2020 | 323 |
|
| 2021 | 222 |
|
| 2022 | 131 |
|
| Thereafter | 69 |
|
| Total | $ | 2,198 |
|
Note 5 – Income Taxes
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain foreign earnings, for which the Company has elected to record certain deferred tax assets and liabilities. The Company completed its accounting for the income tax effects of the Act during 2019, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2017, 20162019, 2018 and 2015,2017, consisted of the following (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Federal: | | | | | |
| Current | $ | 6,384 |
| | $ | 41,425 |
| | $ | 7,842 |
|
| Deferred | (2,939 | ) | | (33,819 | ) | | 5,980 |
|
| Total | 3,445 |
|
| 7,606 |
|
| 13,822 |
|
| State: | | | | | |
| Current | 475 |
| | 551 |
| | 259 |
|
| Deferred | (67 | ) | | 48 |
| | 2 |
|
| Total | 408 |
|
| 599 |
|
| 261 |
|
| Foreign: | | | | | |
| Current | 3,962 |
| | 3,986 |
| | 1,671 |
|
| Deferred | 2,666 |
| | 1,181 |
| | (16 | ) |
| Total | 6,628 |
|
| 5,167 |
|
| 1,655 |
|
| Provision for income taxes | $ | 10,481 |
|
| $ | 13,372 |
|
| $ | 15,738 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Federal: | | | | | |
| Current | $ | 7,842 |
| | $ | 7,652 |
| | $ | 11,730 |
|
| Deferred | 5,980 |
| | 5,043 |
| | 3,408 |
|
Total (1) | 13,822 |
|
| 12,695 |
|
| 15,138 |
|
| State: | | | | | |
| Current | 259 |
| | 990 |
| | 1,265 |
|
| Deferred | 2 |
| | (138 | ) | | (220 | ) |
| Total | 261 |
|
| 852 |
|
| 1,045 |
|
| Foreign: | | | | | |
| Current | 1,671 |
| | 2,105 |
| | 4,744 |
|
| Deferred | (16 | ) | | 33 |
| | (1,806 | ) |
| Total | 1,655 |
|
| 2,138 |
|
| 2,938 |
|
| Provision for income taxes | $ | 15,738 |
|
| $ | 15,685 |
|
| $ | 19,121 |
|
| |
(1) | Includes taxes of $7.9 billion, $6.7 billion and $7.3 billion provided on foreign pre-tax earnings in 2017, 2016 and 2015, respectively.
|
The foreign provision for income taxes is based on foreign pre-tax earnings of $44.3 billion, $48.0 billion and $44.7 billion $41.1 billionin 2019, 2018 and $47.6 billion in 2017, 2016 and 2015, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 30, 2017, U.S. income taxes have not been provided on a cumulative total of $128.7 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $42.2 billion.
As of September 30, 2017 and September 24, 2016, $252.3 billion and $216.0 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35%(21% in 2017, 2016 and 2015)2019; 24.5% in 2018; 35% in 2017) to income before provision for income taxes for 2017, 20162019, 2018 and 2015,2017, is as follows (dollars in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Computed expected tax | $ | 13,805 |
| | $ | 17,890 |
| | $ | 22,431 |
|
| State taxes, net of federal effect | 423 |
| | 271 |
| | 185 |
|
| Impacts of the Act | — |
| | 1,515 |
| | — |
|
| Earnings of foreign subsidiaries | (2,625 | ) | | (5,606 | ) | | (6,135 | ) |
| Research and development credit, net | (548 | ) | | (560 | ) | | (678 | ) |
| Excess tax benefits from equity awards | (639 | ) | | (675 | ) | | — |
|
| Other | 65 |
| | 537 |
| | (65 | ) |
| Provision for income taxes | $ | 10,481 |
|
| $ | 13,372 |
|
| $ | 15,738 |
|
| Effective tax rate | 15.9 | % | | 18.3 | % | | 24.6 | % |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Computed expected tax | $ | 22,431 |
| | $ | 21,480 |
| | $ | 25,380 |
|
| State taxes, net of federal effect | 185 |
| | 553 |
| | 680 |
|
| Indefinitely invested earnings of foreign subsidiaries | (6,135 | ) | | (5,582 | ) | | (6,470 | ) |
| Domestic production activities deduction | (209 | ) | | (382 | ) | | (426 | ) |
| Research and development credit, net | (678 | ) | | (371 | ) | | (171 | ) |
| Other | 144 |
| | (13 | ) | | 128 |
|
| Provision for income taxes | $ | 15,738 |
|
| $ | 15,685 |
|
| $ | 19,121 |
|
| Effective tax rate | 24.6 | % | | 25.6 | % | | 26.4 | % |
The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For RSUs,restricted stock units (“RSUs”), the Company receives an income tax benefit upon the award’s vesting equal to the tax effect of the underlying stock’s fair market value. ThePrior to 2018, the Company hadreflected net excess tax benefits from equity awards of $620 million, $379 million and $748 million in 2017, 2016 and 2015, respectively, which were reflected as increases to common stock.additional paid-in capital, which amounted to $620 million in 2017.
Deferred Tax Assets and Liabilities
As of September 30, 201728, 2019 and September 24, 2016,29, 2018, the significant components of the Company’s deferred tax assets and liabilities were (in millions):
|
| | | | | | | |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Amortization and depreciation | $ | 11,433 |
| | $ | 137 |
|
| Accrued liabilities and other reserves | 5,389 |
| | 3,151 |
|
| Deferred revenue | 1,372 |
| | 1,141 |
|
| Share-based compensation | 749 |
| | 513 |
|
| Unrealized losses | — |
| | 871 |
|
| Other | 697 |
| | 797 |
|
| Total deferred tax assets, net | 19,640 |
| | 6,610 |
|
| Deferred tax liabilities: | | | |
| Minimum tax on foreign earnings | 10,809 |
| | — |
|
| Earnings of foreign subsidiaries | 330 |
| | 275 |
|
| Other | 456 |
| | 501 |
|
| Total deferred tax liabilities | 11,595 |
| | 776 |
|
| Net deferred tax assets/(liabilities) | $ | 8,045 |
|
| $ | 5,834 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Accrued liabilities and other reserves | $ | 4,019 |
| | $ | 4,135 |
|
| Basis of capital assets | 1,230 |
| | 2,107 |
|
| Deferred revenue | 1,521 |
| | 1,717 |
|
| Deferred cost sharing | 667 |
| | 667 |
|
| Share-based compensation | 703 |
| | 601 |
|
| Other | 834 |
| | 788 |
|
| Total deferred tax assets, net of valuation allowance of $0 | 8,974 |
| | 10,015 |
|
| Deferred tax liabilities: | | | |
| Unremitted earnings of foreign subsidiaries | 36,355 |
| | 31,436 |
|
| Other | 207 |
| | 485 |
|
| Total deferred tax liabilities | 36,562 |
| | 31,921 |
|
| Net deferred tax liabilities | $ | (27,588 | ) |
| $ | (21,906 | ) |
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Uncertain Tax Positions
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the Consolidated Balance Sheets.
As of September 30, 2017,28, 2019, the total amount of gross unrecognized tax benefits was $8.4$15.6 billion, of which $2.5$8.6 billion, if recognized, would affectimpact the Company’s effective tax rate. As of September 24, 2016,29, 2018, the total amount of gross unrecognized tax benefits was $7.7$9.7 billion, of which $2.8$7.4 billion, if recognized, would have affectedimpacted the Company’s effective tax rate.
The aggregate changeschange in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2017, 20162019, 2018 and 2015,2017, is as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Beginning balances | $ | 9,694 |
| | $ | 8,407 |
| | $ | 7,724 |
|
| Increases related to tax positions taken during a prior year | 5,845 |
| | 2,431 |
| | 333 |
|
| Decreases related to tax positions taken during a prior year | (686 | ) | | (2,212 | ) | | (952 | ) |
| Increases related to tax positions taken during the current year | 1,697 |
| | 1,824 |
| | 1,880 |
|
| Decreases related to settlements with taxing authorities | (852 | ) | | (756 | ) | | (539 | ) |
| Decreases related to expiration of the statute of limitations | (79 | ) | | — |
| | (39 | ) |
| Ending balances | $ | 15,619 |
| | $ | 9,694 |
| | $ | 8,407 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Beginning balances | $ | 7,724 |
| | $ | 6,900 |
| | $ | 4,033 |
|
| Increases related to tax positions taken during a prior year | 333 |
| | 1,121 |
| | 2,056 |
|
| Decreases related to tax positions taken during a prior year | (952 | ) | | (257 | ) | | (345 | ) |
| Increases related to tax positions taken during the current year | 1,880 |
| | 1,578 |
| | 1,278 |
|
| Decreases related to settlements with taxing authorities | (539 | ) | | (1,618 | ) | | (109 | ) |
| Decreases related to expiration of statute of limitations | (39 | ) | | — |
| | (13 | ) |
| Ending balances | $ | 8,407 |
| | $ | 7,724 |
| | $ | 6,900 |
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 30, 2017 and September 24, 2016, the total amount of gross interest and penalties accrued was $1.2 billion and $1.0 billion, respectively, which is classified as non-current liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2017, 2016 and 2015 of $165 million, $295 million and $709 million, respectively.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2010 through 2012 during the third quarter of 2017. All years prior to 2013 are closed, and the IRS is currently examining the years 2013 through 2015. The Company is also subject to audits by state, local2015 in 2018, and foreign tax authorities. In major states andall years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions the years subsequent to 2003 generally remain open and could beare subject to examination by the taxing authorities.
The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistentinconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although the timing of the resolution and/or closure of audits is not certain, the Company does not believebelieves it is reasonably possible that its gross unrecognized tax benefits would materially changecould decrease in the next 12 months.months by as much as $2.0 billion.
Interest and Penalties
The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 28, 2019 and September 29, 2018, the total amount of gross interest and penalties accrued was $1.3 billion and $1.4 billion, respectively. The Company recognized interest and penalty expense in 2019, 2018 and 2017 of $73 million, $489 million and $238 million, respectively.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two2 subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordersordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. During the fourth quarter of 2019, the Irish Minister for Finance approved the Company’s request to reduce the recovery amount by €190 million due to taxes paid to other countries, resulting in an adjusted recovery amount of €12.9 billion as of September 28, 2019. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still computing the recovery amount, the Company expects the amount to be in line with the European Commission’s announced recovery amount of €13 billion, plus interest of €1 billion. Once the recovery amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These amounts are expected to be placed into escrow in 2018, where they will remain pending conclusion of all appeals. 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.taxes, subject to any foreign tax credit limitations in the Act. As of September 28, 2019, the entire adjusted recovery amount plus interest was funded into escrow, where it will remain restricted from general use pending the conclusion of all appeals. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
Apple Inc. | 2019 Form 10-K | 46
Note 6 – Debt
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 30, 201728, 2019 and September 24, 2016,29, 2018, the Company had $12.0$6.0 billion and $8.1$12.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 1.20%2.24% and 2.18% as of September 30, 201728, 2019 and 0.45% as of September 24, 2016.
29, 2018, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 20172019, 2018 and 20162017 (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Maturities 90 days or less: | | | | | |
| Proceeds from/(Repayments of) commercial paper, net | $ | (3,248 | ) | | $ | 1,044 |
| | $ | (1,782 | ) |
| | | | | | |
| Maturities greater than 90 days: | | | | | |
| Proceeds from commercial paper | 13,874 |
| | 14,555 |
| | 17,932 |
|
| Repayments of commercial paper | (16,603 | ) | | (15,636 | ) | | (12,298 | ) |
| Proceeds from/(Repayments of) commercial paper, net | (2,729 | ) |
| (1,081 | ) | | 5,634 |
|
| | | | | | |
| Total proceeds from/(repayments of) commercial paper, net | $ | (5,977 | ) |
| $ | (37 | ) | | $ | 3,852 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Maturities less than 90 days: | | | |
| Proceeds from/(Repayments of) commercial paper, net | $ | (1,782 | ) | | $ | (869 | ) |
| | | | |
| Maturities greater than 90 days: | | | |
| Proceeds from commercial paper | 17,932 |
| | 3,632 |
|
| Repayments of commercial paper | (12,298 | ) | | (3,160 | ) |
| Proceeds from/(Repayments of) commercial paper, net | 5,634 |
|
| 472 |
|
| | | | |
| Total change in commercial paper, net | $ | 3,852 |
|
| $ | (397 | ) |
Term Debt
As of September 30, 2017,28, 2019, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.0$101.7 billion (collectively the “Notes”). 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, Japanese yen-denominated and Canadian dollar-denominated fixed-rate notes and annually for the euro-denominated and Swiss franc-denominated fixed-rate notes.arrears. The following table provides a summary of the Company’s term debt as of September 30, 201728, 2019 and September 24, 2016:29, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Maturities (calendar year) | | 2019 | | 2018 |
| | Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
| 2013–2018 debt issuances: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | 2020 | – | 2022 | | $ | 4,250 |
| | | 2.25% | – | 3.28 | % | | $ | 7,107 |
| | | 1.87% | – | 3.44 | % |
| Fixed-rate 0.350% – 4.650% notes | 2019 | – | 2047 | | 90,429 |
| | | 0.28% | – | 4.78 | % | | 97,086 |
| | | 0.28% | – | 4.78 | % |
| | | | | | | | | | | | | | | | | | |
| 2019 debt issuance: | | | | | | | | | | | | | | | | | |
| Fixed-rate 1.700% – 2.950% notes | 2022 | – | 2049 | | 7,000 |
| | | 1.71% | – | 2.99 | % | | — |
| | | | | — | % |
| Total term debt | | | | | 101,679 |
| | | | | | | 104,193 |
| | | | | |
| | | | | | | | | | | | | | | | | | |
| Unamortized premium/(discount) and issuance costs, net | | | | | (224 | ) | | | | | | | (218 | ) | | | | | |
| Hedge accounting fair value adjustments | | | | | 612 |
| | | | | | | (1,456 | ) | | | | | |
| Less: Current portion of term debt | | | | | (10,260 | ) | | | | | | | (8,784 | ) | | | | | |
| Total non-current portion of term debt | | | | | $ | 91,807 |
| | | | | | | $ | 93,735 |
| | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Maturities | | 2017 | | 2016 |
| | Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
| 2013 debt issuance of $17.0 billion: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | 2018 | | 2018 | | $ | 2,000 |
| | | 1.10% | | 1.10 | % | | $ | 2,000 |
| | | 1.10% | | 1.10 | % |
| Fixed-rate 1.000% – 3.850% notes | 2018 | – | 2043 | | 12,500 |
| | | 1.08% | – | 3.91 | % | | 12,500 |
| | | 1.08% | – | 3.91 | % |
| | | | | | | | | | | | | | | | | | |
| 2014 debt issuance of $12.0 billion: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | 2019 | | 2019 | | 1,000 |
| | | 1.61% | | 1.61 | % | | 2,000 |
| | | 0.86% | – | 1.09 | % |
| Fixed-rate 2.100% – 4.450% notes | 2019 | – | 2044 | | 8,500 |
| | | 1.61% | – | 4.48 | % | | 10,000 |
| | | 0.85% | – | 4.48 | % |
| | | | | | | | | | | | | | | | | | |
| 2015 debt issuances of $27.3 billion: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | 2019 | – | 2020 | | 1,549 |
| | | 1.56% | – | 1.87 | % | | 1,781 |
| | | 0.87% | – | 1.87 | % |
| Fixed-rate 0.350% – 4.375% notes | 2019 | – | 2045 | | 24,522 |
| | | 0.28% | – | 4.51 | % | | 25,144 |
| | | 0.28% | – | 4.51 | % |
| | | | | | | | | | | | | | | | | | |
| 2016 debt issuances of $24.9 billion: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | 2019 | – | 2021 | | 1,350 |
| | | 1.45% | – | 2.44 | % | | 1,350 |
| | | 0.91% | – | 1.95 | % |
| Fixed-rate 1.100% – 4.650% notes | 2018 | – | 2046 | | 23,645 |
| | | 1.13% | – | 4.78 | % | | 23,609 |
| | | 1.13% | – | 4.58 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Maturities | | 2017 | | 2016 |
| (Continued) | Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
| Second quarter 2017 debt issuance of $10.0 billion: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | | | 2019 | | 500 |
| | | | | 1.39 | % | | — |
| | | | | — | % |
| Floating-rate notes | | | 2020 | | 500 |
| | | | | 1.51 | % | | — |
| | | | | — | % |
| Floating-rate notes | | | 2022 | | 1,000 |
| | | | | 1.81 | % | | — |
| | | | | — | % |
| Fixed-rate 1.550% notes | | | 2019 | | 500 |
| | | | | 1.59 | % | | — |
| | | | | — | % |
| Fixed-rate 1.900% notes | | | 2020 | | 1,000 |
| | | | | 1.51 | % | | — |
| | | | | — | % |
| Fixed-rate 2.500% notes | | | 2022 | | 1,500 |
| | | | | 1.80 | % | | — |
| | | | | — | % |
| Fixed-rate 3.000% notes | | | 2024 | | 1,750 |
| | | | | 2.11 | % | | — |
| | | | | — | % |
| Fixed-rate 3.350% notes | | | 2027 | | 2,250 |
| | | | | 2.25 | % | | — |
| | | | | — | % |
| Fixed-rate 4.250% notes | | | 2047 | | 1,000 |
| | | | | 4.26 | % | | — |
| | | | | — | % |
| | | | | | | | | | | | | | | | | | |
| Second quarter 2017 debt issuance of $1.0 billion: | | | | | | | | | | | | | | | | | |
| Fixed-rate 4.300% notes | | | 2047 | | 1,000 |
| | | | | 4.30 | % | | — |
| | | | | — | % |
| | | | | | | | | | | | | | | | | | |
| Third quarter 2017 debt issuance of $7.0 billion: | | | | | | | | | | | | | | | | | |
| Floating-rate notes | | | 2020 | | 500 |
| | | | | 1.38 | % | | — |
| | | | | — | % |
| Floating-rate notes | | | 2022 | | 750 |
| | | | | 1.66 | % | | — |
| | | | | — | % |
| Fixed-rate 1.800% notes | | | 2020 | | 1,000 |
| | | | | 1.84 | % | | — |
| | | | | — | % |
| Fixed-rate 2.300% notes | | | 2022 | | 1,000 |
| | | | | 2.34 | % | | — |
| | | | | — | % |
| Fixed-rate 2.850% notes | | | 2024 | | 1,750 |
| | | | | 2.25 | % | | — |
| | | | | — | % |
| Fixed-rate 3.200% notes | | | 2027 | | 2,000 |
| | | | | 2.43 | % | | — |
| | | | | — | % |
| | | | | | | | | | | | | | | | | | |
| Third quarter 2017 euro-denominated debt issuance of €2.5 billion: | | | | | | | | | | | | | | | | | |
| Fixed-rate 0.875% notes | | | 2025 | | 1,469 |
| | | | | 3.03 | % | | — |
| | | | | — | % |
| Fixed-rate 1.375% notes | | | 2029 | | 1,469 |
| | | | | 3.37 | % | | — |
| | | | | — | % |
| | | | | | | | | | | | | | | | | | |
| Third quarter 2017 debt issuance of $1.0 billion: | | | | | | | | | | | | | | | | | |
| Fixed-rate 3.000% notes | | | 2027 | | 1,000 |
| | | | | 3.03 | % | | — |
| | | | | — | % |
| | | | | | | | | | | | | | | | | | |
| Fourth quarter 2017 Canadian dollar-denominated debt issuance of C$2.5 billion: | | | | | | | | | | | | | | | | | |
| Fixed-rate 2.513% notes | | | 2024 | | 2,017 |
| | | | | 2.66 | % | | — |
| | | | | — | % |
| | | | | | | | | | | | | | | | | | |
| Fourth quarter 2017 debt issuance of $5.0 billion: | | | | | | | | | | | | | | | | | |
| Fixed-rate 1.500% notes | | | 2019 | | 1,000 |
| | | | | 1.54 | % | | — |
| | | | | — | % |
| Fixed-rate 2.100% notes | | | 2022 | | 1,000 |
| | | | | 1.92 | % | | — |
| | | | | — | % |
| Fixed-rate 2.900% notes | | | 2027 | | 2,000 |
| | | | | 2.55 | % | | — |
| | | | | — | % |
| Fixed-rate 3.750% notes | | | 2047 | | 1,000 |
| | | | | 3.78 | % | | — |
| | | | | — | % |
| Total term debt | | | | | 104,021 |
| | | | | | | 78,384 |
| | | | | |
| | | | | | | | | | | | | | | | | | |
| Unamortized premium/(discount) and issuance costs, net | | | | | (225 | ) | | | | | | | (174 | ) | | | | | |
| Hedge accounting fair value adjustments | | | | | (93 | ) | | | | | | | 717 |
| | | | | |
| Less: Current portion of long-term debt | | | | | (6,496 | ) | | | | | | | (3,500 | ) | | | | | |
| Total long-term debt | | | | | $ | 97,207 |
| | | | | | | $ | 75,427 |
| | | | | |
To manage interest rate risk on certain of its U.S. dollar-denominateddollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency-denominatedcurrency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar-denominateddollar–denominated notes.
A portion of the Company’s Japanese yen-denominatedyen–denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. As of September 30, 201728, 2019 and September 24, 2016,29, 2018, the carrying value of the debt designated as a net investment hedge was $1.6$1.0 billion and $1.9 billion,$811 million, respectively.
For further discussion regarding the Company’s use of derivative instruments, seerefer to the Derivative Financial Instruments section of Note 2,3, “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 to hedging. The Company recognized $3.2 billion, $3.0 billion and $2.2 billion $1.4 billion and $722 million of interest expensecost on its term debt for 2019, 2018 and 2017, 2016 and 2015, respectively.
The future principal payments for the Company’s Notes as of September 30, 201728, 2019 are as follows (in millions):
|
| | | |
| 2020 | $ | 10,270 |
|
| 2021 | 8,750 |
|
| 2022 | 9,528 |
|
| 2023 | 9,290 |
|
| 2024 | 10,039 |
|
| Thereafter | 53,802 |
|
| Total term debt | $ | 101,679 |
|
|
| | | |
| 2018 | $ | 6,500 |
|
| 2019 | 8,863 |
|
| 2020 | 9,220 |
|
| 2021 | 7,750 |
|
| 2022 | 10,297 |
|
| Thereafter | 61,391 |
|
| Total term debt | $ | 104,021 |
|
As of September 30, 201728, 2019 and September 24, 2016,29, 2018, the fair value of the Company’s Notes, based on Level 2 inputs, was $106.1$107.5 billion and $81.7$103.2 billion, respectively.
Note 7 – Shareholders’ Equity
Dividends
The Company declared and paid cash dividends per share during the periods presented as follows:
|
| | | | | | | |
| | Dividends Per Share | | Amount (in millions) |
| 2017: | | | |
| Fourth quarter | $ | 0.63 |
| | $ | 3,252 |
|
| Third quarter | 0.63 |
| | 3,281 |
|
| Second quarter | 0.57 |
| | 2,988 |
|
| First quarter | 0.57 |
| | 3,042 |
|
| Total cash dividends declared and paid | $ | 2.40 |
| | $ | 12,563 |
|
| 2016: | | | |
| Fourth quarter | $ | 0.57 |
| | $ | 3,071 |
|
| Third quarter | 0.57 |
| | 3,117 |
|
| Second quarter | 0.52 |
| | 2,879 |
|
| First quarter | 0.52 |
| | 2,898 |
|
| Total cash dividends declared and paid | $ | 2.18 |
| | $ | 11,965 |
|
Future dividends are subject to declaration by the Board of Directors.
Share Repurchase Program
In May 2017,On April 30, 2019, the Company’sCompany announced the Board of Directors increased the current share repurchase program authorization from $175$100 billion to $210$175 billion of the Company’s common stock, of which $166$96.1 billion had been utilized as of September 30, 2017.28, 2019. During 2019, the Company repurchased 345.2 million shares of its common stock for $67.1 billion, including 62.0 million shares delivered under a $12.0 billion accelerated share repurchase arrangement dated February 2019, which settled in August 2019. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under thethis 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”).
The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (“ASRs”) with financial institutions. In exchange for up-front payments, the financial institutions deliver sharesShares of the Company’s common stock during the purchase periods of each ASR. 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. 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 Consolidated Balance Sheets in the periods the payments are made. 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. The ASRs met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.
Common Stock
The following table shows the Company’s ASR activity and related information during the years ended September 30, 2017 and September 24, 2016:
|
| | | | | | | | | | | | |
| | Purchase Period End Date | | Number of Shares (in thousands) | | Average Repurchase Price Per Share | | ASR Amount (in millions) |
| August 2017 ASR | November 2017 | | 15,069 |
| (1) | (1) |
| | $ | 3,000 |
|
| May 2017 ASR | August 2017 | | 20,108 |
| (2) | $ | 149.20 |
| | $ | 3,000 |
|
| February 2017 ASR | May 2017 | | 20,949 |
| | $ | 143.20 |
| | $ | 3,000 |
|
| November 2016 ASR | February 2017 | | 51,157 |
| | $ | 117.29 |
| | $ | 6,000 |
|
| August 2016 ASR | November 2016 | | 26,850 |
| | $ | 111.73 |
| | $ | 3,000 |
|
| May 2016 ASR | August 2016 | | 60,452 |
| | $ | 99.25 |
| | $ | 6,000 |
|
| November 2015 ASR | April 2016 | | 29,122 |
| | $ | 103.02 |
| | $ | 3,000 |
|
| |
(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 under the ASR. 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. The August 2017 ASR purchase period will endchanges in November 2017. |
| |
(2) | Includes 15.6 million shares delivered and retired at the beginning of the purchase period, which began in the third quarter of 2017, and 4.5 million shares delivered and retired at the end of the purchase period, which concluded in the fourth quarter of 2017.
|
Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during the periods presented as follows:for 2019, 2018 and 2017 (in thousands):
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Common stock outstanding, beginning balances | 4,754,986 |
| | 5,126,201 |
| | 5,336,166 |
|
| Common stock repurchased | (345,205 | ) | | (405,549 | ) | | (246,496 | ) |
| Common stock issued, net of shares withheld for employee taxes | 33,455 |
| | 34,334 |
| | 36,531 |
|
| Common stock outstanding, ending balances | 4,443,236 |
| | 4,754,986 |
| | 5,126,201 |
|
|
| | | | | | | | | | |
| | Number of Shares (in thousands) | | Average Repurchase Price Per Share | | Amount (in millions) |
| 2017: | | | | | |
| Fourth quarter | 29,073 |
| | $ | 154.78 |
| | $ | 4,500 |
|
| Third quarter | 30,356 |
| | $ | 148.24 |
| | 4,500 |
|
| Second quarter | 31,070 |
| | $ | 128.74 |
| | 4,001 |
|
| First quarter | 44,333 |
| | $ | 112.78 |
| | 5,000 |
|
| Total open market common stock repurchases | 134,832 |
| | | | $ | 18,001 |
|
| 2016: | | | | | |
| Fourth quarter | 28,579 |
| | $ | 104.97 |
| | $ | 3,000 |
|
| Third quarter | 41,238 |
| | $ | 97.00 |
| | 4,000 |
|
| Second quarter | 71,766 |
| | $ | 97.54 |
| | 7,000 |
|
| First quarter | 25,984 |
| | $ | 115.45 |
| | 3,000 |
|
| Total open market common stock repurchases | 167,567 |
| | | | $ | 17,000 |
|
Note 8 – Comprehensive Income
Comprehensive income consists of two components, net income and OCI. 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. 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 debt securities classified as available-for-sale.
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line item, for 20172019 and 20162018 (in millions):
|
| | | | | | | | | | |
| Comprehensive Income Components | | Financial Statement Line Item | | 2019 | | 2018 |
| Unrealized (gains)/losses on derivative instruments: | | | | | | |
| Foreign exchange contracts | | Total net sales | | $ | (206 | ) | | $ | 214 |
|
| | | Total cost of sales | | (482 | ) | | (70 | ) |
| | | Other income/(expense), net | | 784 |
| | 344 |
|
| Interest rate contracts | | Other income/(expense), net | | 7 |
| | (2 | ) |
| | | | | 103 |
| | 486 |
|
| Unrealized (gains)/losses on marketable securities | | Other income/(expense), net | | 31 |
| | (20 | ) |
| Total amounts reclassified from AOCI | | | | $ | 134 |
| | $ | 466 |
|
|
| | | | | | | | | | |
| Comprehensive Income Components | | Financial Statement Line Item | | 2017 | | 2016 |
| Unrealized (gains)/losses on derivative instruments: | | | | | | |
| Foreign exchange contracts | | Revenue | | $ | (662 | ) | | $ | (865 | ) |
| | | Cost of sales | | (654 | ) | | (130 | ) |
| | | Other income/(expense), net | | (638 | ) | | 111 |
|
| Interest rate contracts | | Other income/(expense), net | | 2 |
| | 12 |
|
| | | | | (1,952 | ) | | (872 | ) |
| Unrealized (gains)/losses on marketable securities | | Other income/(expense), net | | (99 | ) | | 87 |
|
| Total amounts reclassified from AOCI | | | | $ | (2,051 | ) | | $ | (785 | ) |
The following table shows the changes in AOCI by component for 20172019 and 20162018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Cumulative Foreign Currency Translation | | Unrealized Gains/Losses on Derivative Instruments | | Unrealized Gains/Losses on Marketable Securities | | Total |
| Balances as of September 30, 2017 | $ | (354 | ) | | $ | (124 | ) | | $ | 328 |
| | $ | (150 | ) |
| Other comprehensive income/(loss) before reclassifications | (524 | ) | | 672 |
| | (4,563 | ) | | (4,415 | ) |
| Amounts reclassified from AOCI | — |
| | 486 |
| | (20 | ) | | 466 |
|
| Tax effect | (1 | ) | | (253 | ) | | 1,177 |
| | 923 |
|
| Other comprehensive income/(loss) | (525 | ) |
| 905 |
|
| (3,406 | ) |
| (3,026 | ) |
| Cumulative effect of change in accounting principle | (176 | ) | | 29 |
| | (131 | ) | | (278 | ) |
| Balances as of September 29, 2018 | (1,055 | ) | | 810 |
| | (3,209 | ) | | (3,454 | ) |
| Other comprehensive income/(loss) before reclassifications | (421 | ) | | (949 | ) | | 4,854 |
| | 3,484 |
|
| Amounts reclassified from AOCI | — |
| | 103 |
| | 31 |
| | 134 |
|
| Tax effect | 13 |
| | 208 |
| | (1,058 | ) | | (837 | ) |
| Other comprehensive income/(loss) | (408 | ) |
| (638 | ) |
| 3,827 |
|
| 2,781 |
|
Cumulative effect of change in accounting principle (1) | — |
| | — |
| | 89 |
| | 89 |
|
| Balances as of September 28, 2019 | $ | (1,463 | ) |
| $ | 172 |
|
| $ | 707 |
|
| $ | (584 | ) |
|
| | | | | | | | | | | | | | | |
| | Cumulative Foreign Currency Translation | | Unrealized Gains/Losses on Derivative Instruments | | Unrealized Gains/Losses on Marketable Securities | | Total |
| Balances as of September 26, 2015 | $ | (653 | ) | | $ | 772 |
| | $ | (464 | ) | | $ | (345 | ) |
| Other comprehensive income/(loss) before reclassifications | 67 |
| | 14 |
| | 2,445 |
| | 2,526 |
|
| Amounts reclassified from AOCI | — |
| | (872 | ) | | 87 |
| | (785 | ) |
| Tax effect | 8 |
| | 124 |
| | (894 | ) | | (762 | ) |
| Other comprehensive income/(loss) | 75 |
|
| (734 | ) |
| 1,638 |
|
| 979 |
|
| Balances as of September 24, 2016 | (578 | ) | | 38 |
| | 1,174 |
| | 634 |
|
| Other comprehensive income/(loss) before reclassifications | 301 |
| | 1,793 |
| | (1,207 | ) | | 887 |
|
| Amounts reclassified from AOCI | — |
| | (1,952 | ) | | (99 | ) | | (2,051 | ) |
| Tax effect | (77 | ) | | (3 | ) | | 460 |
| | 380 |
|
| Other comprehensive income/(loss) | 224 |
|
| (162 | ) |
| (846 | ) |
| (784 | ) |
| Balances as of September 30, 2017 | $ | (354 | ) |
| $ | (124 | ) |
| $ | 328 |
|
| $ | (150 | ) |
| |
| (1) | Refer to Note 1, “Summary of Significant Accounting Policies” for more information on the Company’s adoption of ASU 2016-01 in 2019. |
Note 9 – Benefit Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan 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-one1-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reducesreduce the number of shares available for grant under the plan by two shares.a factor of 2 times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two2 times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations with respect tofor RSUs, will also be available for awards under the 2014 Plan. As of September 30, 2017,28, 2019, approximately 327.9246.4 million shares were reserved for future issuance under the 2014 Plan.
2003 Employee Stock Plan
The 2003 Plan is a shareholder approved plan that provided for broad-based equity grants to employees, including executive officers. The 2003 Plan permitted the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights and performance-based awards. Options granted under the 2003 Plan generally expire seven to ten years after the grant date and generally become exercisable over a period of four years, based on continued employment, with either annual, semi-annual or quarterly vesting. RSUs granted under the 2003 Plan generally vest over two to 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. All RSUs, other than RSUs held by the Chief Executive Officer, granted under the 2003 Plan have DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. In the second quarter of 2014, the Company terminated the authority to grant new awards under the 2003 Plan.
1997Apple Inc. Non-Employee Director Stock Plan
The 1997Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder approvedshareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reducesreduce the number of shares available for grant under the plan by two shares.a factor of 2 times the number of RSUs granted. The Director Plan expires on November 9, 2019.12, 2027. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 30, 2017,28, 2019, approximately 1.1 million shares were reserved for future issuance under the Director Plan.
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2017,28, 2019, Section 16 officers Angela Ahrendts, Timothy D. Cook, Chris Kondo, Luca Maestri, Daniel RiccioDeirdre O’Brien and Philip SchillerJeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. 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 tounder the Company’s employee and director equity plans.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder approvedshareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 30, 2017,28, 2019, approximately 41.531.1 million shares were reserved for future issuance under the Purchase Plan.
401(k) Plan
The Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($18,00019,000 for calendar year 2017)2019). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum of 6% of the employee’s eligible earnings.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2017, 20162019, 2018 and 2015,2017, is as follows:
|
| | | | | | | | | | |
| | Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per RSU | | Aggregate Fair Value (in millions) |
| Balance as of September 24, 2016 | 99,089 |
| | $ | 97.54 |
| | |
| RSUs granted | 50,112 |
| | $ | 121.65 |
| | |
| RSUs vested | (45,735 | ) | | $ | 95.48 |
| | |
| RSUs canceled | (5,895 | ) | | $ | 106.87 |
| | |
| Balance as of September 30, 2017 | 97,571 |
| | $ | 110.33 |
| | |
| RSUs granted | 45,351 |
| | $ | 162.86 |
| | |
| RSUs vested | (44,718 | ) | | $ | 111.24 |
| | |
| RSUs canceled | (6,049 | ) | | $ | 127.82 |
| | |
| Balance as of September 29, 2018 | 92,155 |
| | $ | 134.60 |
| | |
| RSUs granted | 36,852 |
| | $ | 215.95 |
| | |
| RSUs vested | (42,088 | ) | | $ | 135.21 |
| | |
| RSUs canceled | (5,402 | ) | | $ | 162.85 |
| | |
| Balance as of September 28, 2019 | 81,517 |
| | $ | 169.18 |
| | $ | 17,838 |
|
|
| | | | | | | | | | |
| | Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per Share | | Aggregate Fair Value (in millions) |
| Balance as of September 27, 2014 | 103,822 |
| | $ | 70.98 |
| | |
| RSUs granted | 45,587 |
| | $ | 105.51 |
| | |
| RSUs vested | (41,684 | ) | | $ | 71.32 |
| | |
| RSUs canceled | (6,258 | ) | | $ | 80.34 |
| | |
| Balance as of September 26, 2015 | 101,467 |
| | $ | 85.77 |
| | |
| RSUs granted | 49,468 |
| | $ | 109.28 |
| | |
| RSUs vested | (46,313 | ) | | $ | 84.44 |
| | |
| RSUs canceled | (5,533 | ) | | $ | 96.48 |
| | |
| Balance as of September 24, 2016 | 99,089 |
| | $ | 97.54 |
| | |
| RSUs granted | 50,112 |
| | $ | 121.65 |
| | |
| RSUs vested | (45,735 | ) | | $ | 95.48 |
| | |
| RSUs canceled | (5,895 | ) | | $ | 106.87 |
| | |
| Balance as of September 30, 2017 | 97,571 |
| | $ | 110.33 |
| | $ | 15,038 |
|
The fair value as of the respective vesting dates of RSUs was $8.6 billion, $7.6 billion and $6.1 billion $5.1 billionfor 2019, 2018 and $4.8 billion for 2017, 2016 and 2015, respectively. The majority of RSUs that vested in 2017, 20162019, 2018 and 20152017 were net share settled such that the Company withheld shares with a value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 14.8 million, 16.0 million and 15.4 million 15.9 millionfor 2019, 2018 and 14.1 million for 2017, 2016 and 2015, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $3.0 billion, $2.7 billion and $2.0 billion $1.7 billionin 2019, 2018 and $1.6 billion in 2017, 2016 and 2015, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows.respectively. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.
Share-based
Share-Based Compensation
The following table shows a summary of the share-based compensation expense and the related income tax benefit included in the Consolidated Statements of Operations for 2017, 20162019, 2018 and 20152017 (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Share-based compensation expense | $ | 6,068 |
| | $ | 5,340 |
| | $ | 4,840 |
|
| Income tax benefit related to share-based compensation expense | $ | (1,967 | ) | | $ | (1,893 | ) | | $ | (1,632 | ) |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cost of sales | $ | 877 |
| | $ | 769 |
| | $ | 575 |
|
| Research and development | 2,299 |
| | 1,889 |
| | 1,536 |
|
| Selling, general and administrative | 1,664 |
| | 1,552 |
| | 1,475 |
|
| Total share-based compensation expense | $ | 4,840 |
|
| $ | 4,210 |
|
| $ | 3,586 |
|
The income tax benefit related to share-based compensation expense was $1.6 billion, $1.4 billion and $1.2 billion for 2017, 2016 and 2015, respectively. As of September 30, 2017,28, 2019, the total unrecognized compensation cost related to outstanding RSUs restricted stock and stock options was $8.1$10.5 billion, which the Company expects to recognize over a weighted-average period of 2.5 years.
Note 10 – Commitments and Contingencies
Accrued Warranty and IndemnificationGuarantees
The following table shows changes in the Company’s accrued warranties and related costs for 2017, 20162019, 2018 and 20152017 (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Beginning accrued warranty and related costs | $ | 3,692 |
| | $ | 3,834 |
| | $ | 3,702 |
|
| Cost of warranty claims | (3,857 | ) | | (4,115 | ) | | (4,322 | ) |
| Accruals for product warranty | 3,735 |
| | 3,973 |
| | 4,454 |
|
| Ending accrued warranty and related costs | $ | 3,570 |
|
| $ | 3,692 |
|
| $ | 3,834 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Beginning accrued warranty and related costs | $ | 3,702 |
| | $ | 4,780 |
| | $ | 4,159 |
|
| Cost of warranty claims | (4,322 | ) | | (4,663 | ) | | (4,401 | ) |
| Accruals for product warranty | 4,454 |
| | 3,585 |
| | 5,022 |
|
| Ending accrued warranty and related costs | $ | 3,834 |
|
| $ | 3,702 |
|
| $ | 4,780 |
|
Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an indemnified third party. 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.
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. 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. 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.
The Company has entered into indemnification agreements with its directors and executive officers. 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. 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. 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.net sales.
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 fewcertain components are currently obtained from single or limited sources. In addition, theThe Company also competes for various components with other participants in the markets for mobile communicationsmartphones, personal computers, tablets and media devices and personal computers.other electronic devices. 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 commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.fluctuations.
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. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacity hascapacities have increased. 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. 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. Continuedcontinued 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.
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. 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.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company’s products. 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. The Company’s manufacturing purchase obligations typically cover its requirements for periods up to 150 days.
Other Off-BalanceOff–Balance Sheet Commitments
Operating Leases
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off-balanceoff–balance sheet financing arrangements. As of September 30, 2017,28, 2019, the Company’s total future minimum lease payments under noncancelable operating leases were $9.5$10.8 billion. The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $1.3 billion, $1.2 billion and $1.1 billion $939 millionin 2019, 2018 and $794 million in 2017, 2016 and 2015, respectively. Future minimum lease payments under noncancelable operating leases having initial or remaining terms in excess of one year as of September 30, 2017,28, 2019, are as follows (in millions):
|
| | | |
| 2020 | $ | 1,306 |
|
| 2021 | 1,276 |
|
| 2022 | 1,137 |
|
| 2023 | 912 |
|
| 2024 | 834 |
|
| Thereafter | 5,373 |
|
| Total | $ | 10,838 |
|
|
| | | |
| 2018 | $ | 1,223 |
|
| 2019 | 1,187 |
|
| 2020 | 1,108 |
|
| 2021 | 1,033 |
|
| 2022 | 871 |
|
| Thereafter | 4,123 |
|
| Total | $ | 9,545 |
|
Unconditional Purchase Obligations
The Company has entered into certain off-balanceoff–balance sheet arrangements whichcommitments that require the future purchase of goods or services (“Unconditional Purchase Obligations”unconditional purchase obligations”). The Company’s Unconditional Purchase Obligationsunconditional purchase obligations primarily consist of payments for supplier arrangements, internetInternet and telecommunication services, and intellectual property licenses.licenses and content creation. Future payments under noncancelable Unconditional Purchase Obligationsunconditional purchase obligations having a remaining term in excess of one year as of September 30, 2017,28, 2019, are as follows (in millions):
|
| | | |
| 2020 | $ | 2,476 |
|
| 2021 | 2,386 |
|
| 2022 | 1,859 |
|
| 2023 | 1,162 |
|
| 2024 | 218 |
|
| Thereafter | 110 |
|
| Total | $ | 8,211 |
|
|
| | | |
| 2018 | $ | 1,798 |
|
| 2019 | 2,675 |
|
| 2020 | 1,626 |
|
| 2021 | 1,296 |
|
| 2022 | 1,268 |
|
| Thereafter | 14 |
|
| Total | $ | 8,677 |
|
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 discussedresolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in Part I, Item 1A of this Form 10-K undera reporting period for amounts above management’s expectations, the heading “Risk Factors”Company’s financial condition and in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings.”operating results for that reporting period could be materially adversely affected. 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 ofgreater than a recorded accrual, with respect toconcerning loss contingencies for asserted legal and other claims. However,claims, except for the outcomefollowing matters:
VirnetX
VirnetX, Inc. (“VirnetX”) filed two lawsuits in the U.S. District Court for the Eastern District of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolvedTexas (the “Eastern Texas District Court”) against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements foralleging that reporting period could be materially adversely affected.
Apple Inc. v. Samsung Electronics Co., Ltd., et al.
certain Company products infringe four patents (the “VirnetX Patents”) relating to network communications technology (“VirnetX I” and “VirnetX II”). On August 24, 2012,September 30, 2016, a jury returned a verdict awardingin VirnetX I against the Company $1.05 billionand awarded damages of $302 million, which later increased to $440 million in its lawsuit against Samsung Electronics Co., Ltd. and affiliated parties inpost-trial proceedings. The Company appealed the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million. 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. 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. Samsung paid $548 million to the Company in December 2015, which was included in net sales in the Consolidated Statement of Operations. On December 6, 2016, the U.S. Supreme Court remanded the caseVirnetX I verdict to the U.S. Court of Appeals for the Federal Circuit for further proceedings related(the “Federal Circuit”). On April 11, 2018, a jury returned a verdict in VirnetX II against the Company and awarded damages of $503 million. VirnetX II is currently on appeal. The Company has challenged the validity of the VirnetX Patents at the U.S. Patent and Trademark Office (the “PTO”). In response, the PTO has declared the VirnetX Patents invalid. VirnetX appealed the invalidity decision of the PTO to the $548 million in damages.Federal Circuit. The Federal Circuit consolidated the Company’s appeal of the Eastern Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings. On February 7, 2017,January 15, 2019, the U.S. Court of Appeals forFederal Circuit affirmed the VirnetX I verdict, which the Company intends to further appeal. On July 8, 2019, the Federal Circuit remanded one of VirnetX’s two appeals of the casePTO’s invalidity decisions back to the PTO for further proceedings. On August 1, 2019, the Federal Circuit affirmed-in-part, vacated-in-part, and remanded back to the PTO portions of VirnetX’s second appeal. The Company has accrued its best estimate for the ultimate resolution of these matters.
Qualcomm
On January 20, 2017, the Company filed a lawsuit against Qualcomm Incorporated and affiliated parties (“Qualcomm”) in the U.S. District Court for the Southern District of California seeking, among other things, to determine what additional proceedings, if any, are needed. On October 22, 2017, on remandenjoin Qualcomm from requiring the Company to pay royalties at the rate demanded by Qualcomm. No Qualcomm-related royalty payments had been remitted by the Company to its contract manufacturers since the beginning of the second quarter of 2017. Following the Company’s lawsuit, Qualcomm filed patent infringement suits against the Company and its affiliates in the U.S. Supreme Court,and various international jurisdictions, some of which sought to enjoin the sale of certain of the Company’s products in particular countries.
On April 16, 2019, the Company and Qualcomm reached a settlement agreement to dismiss all litigation between the two companies worldwide. The companies also reached a multi-year license agreement and a multi-year supply agreement. Under the terms of the settlement agreement, Apple made a payment to Qualcomm to, among other things, resolve disputes over the withheld royalty payments.
iOS Performance Management Cases
Various civil litigation matters have been filed in state and federal courts in the U.S. and in various international jurisdictions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management feature used in its iPhone operating systems, introduced to certain iPhones in iOS updates 10.2.1 and 11.2. The claims seek monetary damages and other non-monetary relief. On April 5, 2018, several U.S. federal actions were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court orderedfor the Northern District of California. In addition to civil litigation, the Company is also responding to governmental investigations and requests for information relating to the performance management feature. The Company believes that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information. The Company has accrued its best estimate for the ultimate resolution of these matters.
French Competition Authority
In June 2019, the French Competition Authority (“FCA”) issued a new trialreport alleging that aspects of the Company’s sales and distribution practices in France violate French competition law. The Company vigorously disagrees with the allegations, and a hearing of arguments was held before the FCA on damages.October 15, 2019. The Company is awaiting the decision of the FCA, which may include a fine.
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable 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. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”
The Company evaluates the performance of its reportable segments based on net sales and operating income. 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. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as R&D,research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by reportable segment for 2017, 20162019, 2018 and 20152017 (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Americas: | | | | | |
| Net sales | $ | 116,914 |
| | $ | 112,093 |
| | $ | 96,600 |
|
| Operating income | $ | 35,099 |
| | $ | 34,864 |
| | $ | 30,684 |
|
| | | | | | |
| Europe: | | | | | |
| Net sales | $ | 60,288 |
| | $ | 62,420 |
| | $ | 54,938 |
|
| Operating income | $ | 19,195 |
| | $ | 19,955 |
| | $ | 16,514 |
|
| | | | | | |
| Greater China: | | | | | |
| Net sales | $ | 43,678 |
| | $ | 51,942 |
| | $ | 44,764 |
|
| Operating income | $ | 16,232 |
| | $ | 19,742 |
| | $ | 17,032 |
|
| | | | | | |
| Japan: | | | | | |
| Net sales | $ | 21,506 |
| | $ | 21,733 |
| | $ | 17,733 |
|
| Operating income | $ | 9,369 |
| | $ | 9,500 |
| | $ | 8,097 |
|
| | | | | | |
| Rest of Asia Pacific: | | | | | |
| Net sales | $ | 17,788 |
| | $ | 17,407 |
| | $ | 15,199 |
|
| Operating income | $ | 6,055 |
| | $ | 6,181 |
| | $ | 5,304 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Americas: | | | | | |
| Net sales | $ | 96,600 |
| | $ | 86,613 |
| | $ | 93,864 |
|
| Operating income | $ | 30,684 |
| | $ | 28,172 |
| | $ | 31,186 |
|
| | | | | | |
| Europe: | | | | | |
| Net sales | $ | 54,938 |
| | $ | 49,952 |
| | $ | 50,337 |
|
| Operating income | $ | 16,514 |
| | $ | 15,348 |
| | $ | 16,527 |
|
| | | | | | |
| Greater China: | | | | | |
| Net sales | $ | 44,764 |
| | $ | 48,492 |
| | $ | 58,715 |
|
| Operating income | $ | 17,032 |
| | $ | 18,835 |
| | $ | 23,002 |
|
| | | | | | |
| Japan: | | | | | |
| Net sales | $ | 17,733 |
| | $ | 16,928 |
| | $ | 15,706 |
|
| Operating income | $ | 8,097 |
| | $ | 7,165 |
| | $ | 7,617 |
|
| | | | | | |
| Rest of Asia Pacific: | | | | | |
| Net sales | $ | 15,199 |
| | $ | 13,654 |
| | $ | 15,093 |
|
| Operating income | $ | 5,304 |
| | $ | 4,781 |
| | $ | 5,518 |
|
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2017, 20162019, 2018 and 20152017 is as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Segment operating income | $ | 85,950 |
| | $ | 90,242 |
| | $ | 77,631 |
|
| Research and development expense | (16,217 | ) | | (14,236 | ) | | (11,581 | ) |
| Other corporate expenses, net | (5,803 | ) | | (5,108 | ) | | (4,706 | ) |
| Total operating income | $ | 63,930 |
| | $ | 70,898 |
| | $ | 61,344 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Segment operating income | $ | 77,631 |
| | $ | 74,301 |
| | $ | 83,850 |
|
| Research and development expense | (11,581 | ) | | (10,045 | ) | | (8,067 | ) |
| Other corporate expenses, net | (4,706 | ) | | (4,232 | ) | | (4,553 | ) |
| Total operating income | $ | 61,344 |
| | $ | 60,024 |
| | $ | 71,230 |
|
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2017, 20162019, 2018 and 2015.2017. There was no single customer that accounted for more than 10% of net sales in 2017, 20162019, 2018 and 2015.2017. Net sales for 2017, 20162019, 2018 and 20152017 and long-lived assets as of September 30, 201728, 2019 and September 24, 201629, 2018 were as follows (in millions):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Net sales: | | | | | |
| U.S. | $ | 102,266 |
| | $ | 98,061 |
| | $ | 84,339 |
|
China (1) | 43,678 |
| | 51,942 |
| | 44,764 |
|
| Other countries | 114,230 |
| | 115,592 |
| | 100,131 |
|
| Total net sales | $ | 260,174 |
|
| $ | 265,595 |
|
| $ | 229,234 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net sales: | | | | | |
| U.S. | $ | 84,339 |
| | $ | 75,667 |
| | $ | 81,732 |
|
China (1) | 44,764 |
| | 48,492 |
| | 58,715 |
|
| Other countries | 100,131 |
| | 91,480 |
| | 93,268 |
|
| Total net sales | $ | 229,234 |
|
| $ | 215,639 |
|
| $ | 233,715 |
|
| | | | 2017 | | 2016 | 2019 | | 2018 |
| Long-lived assets: | | | | | | |
| U.S. | $ | 20,637 |
| | $ | 16,364 |
| $ | 24,711 |
| | $ | 23,963 |
|
China (1) | 10,211 |
| | 7,875 |
| 9,064 |
| | 13,268 |
|
| Other countries | 2,935 |
| | 2,771 |
| 3,603 |
| | 4,073 |
|
| Total long-lived assets | $ | 33,783 |
| | $ | 27,010 |
| $ | 37,378 |
| | $ | 41,304 |
|
| |
| (1) | China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure. |
Net sales by product for 2017, 2016 and 2015 were as follows (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
iPhone (1) | $ | 141,319 |
| | $ | 136,700 |
| | $ | 155,041 |
|
iPad (1) | 19,222 |
| | 20,628 |
| | 23,227 |
|
Mac (1) | 25,850 |
| | 22,831 |
| | 25,471 |
|
Services (2) | 29,980 |
| | 24,348 |
| | 19,909 |
|
Other Products (1)(3) | 12,863 |
| | 11,132 |
| | 10,067 |
|
| Total net sales | $ | 229,234 |
|
| $ | 215,639 |
|
| $ | 233,715 |
|
| |
(1) | Includes deferrals and amortization of related software upgrade rights and non-software services. |
| |
(2) | Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in the fourth quarter of 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
|
| |
(3) | Includes sales of Apple TV, Apple Watch, Beats products, iPod touch and Apple-branded and third-party accessories. |
Note 12 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 20172019 and 20162018 (in millions, except per share amounts):
| | | | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| 2017: | | | | | | | | |
| Net sales | $ | 52,579 |
| | $ | 45,408 |
| | $ | 52,896 |
| | $ | 78,351 |
| |
| 2019: | | | | | | | | |
| Total net sales | | $ | 64,040 |
| | $ | 53,809 |
| | $ | 58,015 |
| | $ | 84,310 |
|
| Gross margin | $ | 19,931 |
| | $ | 17,488 |
| | $ | 20,591 |
| | $ | 30,176 |
| $ | 24,313 |
| | $ | 20,227 |
| | $ | 21,821 |
| | $ | 32,031 |
|
| Net income | $ | 10,714 |
| | $ | 8,717 |
| | $ | 11,029 |
| | $ | 17,891 |
| $ | 13,686 |
| | $ | 10,044 |
| | $ | 11,561 |
| | $ | 19,965 |
|
| | | | | | | | | | | | | | | |
Earnings per share (1): | | | | | | | | | | | | | | |
| Basic | $ | 2.08 |
| | $ | 1.68 |
| | $ | 2.11 |
| | $ | 3.38 |
| $ | 3.05 |
| | $ | 2.20 |
| | $ | 2.47 |
| | $ | 4.22 |
|
| Diluted | $ | 2.07 |
| | $ | 1.67 |
| | $ | 2.10 |
| | $ | 3.36 |
| $ | 3.03 |
| | $ | 2.18 |
| | $ | 2.46 |
| | $ | 4.18 |
|
| | | | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| 2016: | | | | | | | | |
| Net sales | $ | 46,852 |
| | $ | 42,358 |
| | $ | 50,557 |
| | $ | 75,872 |
| |
| 2018: | | | | | | | | |
| Total net sales | | $ | 62,900 |
| | $ | 53,265 |
| | $ | 61,137 |
| | $ | 88,293 |
|
| Gross margin | $ | 17,813 |
| | $ | 16,106 |
| | $ | 19,921 |
| | $ | 30,423 |
| $ | 24,084 |
| | $ | 20,421 |
| | $ | 23,422 |
| | $ | 33,912 |
|
| Net income | $ | 9,014 |
| | $ | 7,796 |
| | $ | 10,516 |
| | $ | 18,361 |
| $ | 14,125 |
| | $ | 11,519 |
| | $ | 13,822 |
| | $ | 20,065 |
|
| | | | | | | | | | | | | | | |
Earnings per share (1): | | | | | | | | | | | | | | |
| Basic | $ | 1.68 |
| | $ | 1.43 |
| | $ | 1.91 |
| | $ | 3.30 |
| $ | 2.94 |
| | $ | 2.36 |
| | $ | 2.75 |
| | $ | 3.92 |
|
| Diluted | $ | 1.67 |
| | $ | 1.42 |
| | $ | 1.90 |
| | $ | 3.28 |
| $ | 2.91 |
| | $ | 2.34 |
| | $ | 2.73 |
| | $ | 3.89 |
|
| |
| (1) | Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share. |
Apple Inc. | 2019 Form 10-K | 55
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of Apple Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 30, 201728, 2019 and September 24, 2016, and29, 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2017. These28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of Apple Inc. at September 28, 2019 and September 29, 2018, and the results of its operations and its cash flows for each of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.three years in the period ended September 28, 2019, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 28, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 30, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
|
| |
| European Commission State Aid Matter Uncertain Tax Position |
| Description of the Matter | As discussed in Note 5 of the financial statements, the European Commission (“EC”) has announced its decision that Ireland granted state aid to Apple Inc. by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of Apple Inc. The decision ordered Ireland to calculate and recover additional taxes from Apple Inc. for the period from June 2003 through December 2014. The adjusted amount indicated by the EC to be recovered is up to €12.9 billion, plus interest. Auditing management’s evaluation of the uncertain tax position stemming from the effects of the EC decision is complex and highly judgmental due to the inherent uncertainty in predicting the ultimate resolution of the matter. |
|
| |
How We Addressed the Matter in Our Audit | We tested controls over the risk of material misstatement relating to the evaluation of the EC state aid matter, including management’s evaluation of the advice of legal counsel, the assessment as to whether Apple Inc.’s position is more likely than not to be sustained and the development of the related disclosure. To evaluate Apple Inc.’s assessment of whether sustainment of its position is a more likely than not outcome, including underlying assumptions, our audit procedures included, among others, reading the EC August 2016 ruling and available correspondence between Apple Inc. and the EC, and the EC and Ireland. We also requested and received internal and external legal counsel confirmation letters, discussed the allegations with internal and external legal counsel and Apple Inc. tax personnel and obtained a representation letter from Apple Inc. We involved our EC and tax subject matter resources in considering the applicable tax laws, the pending appeal, the current status of legal precedent relevant to that appeal and the proceedings at the court hearing in September 2019. In addition, we evaluated Apple Inc.’s disclosure included in Note 5 in relation to this matter. |
/s/ Ernst & Young LLP
We have served as Apple Inc.’s auditor since 2009.
San Jose, California
October 30, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Inc.’s internal control over financial reporting as of September 28, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, the financial statements referred to above present fairly,Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 28, 2019, based on the consolidated financial position of Apple Inc. at September 30, 2017 and September 24, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles.COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc.’s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control – Integrated Framework issued by28, 2019 and September 29, 2018, the Committeerelated consolidated statements of Sponsoring Organizationsoperations, comprehensive income, shareholders’ equity and cash flows for each of the Treadway Commission (2013 framework)three years in the period ended September 28, 2019, and the related notes and our report dated November 3, 2017October 30, 2019 expressed an unqualified opinion thereon.
San Jose, California
November 3, 2017
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Apple Inc.
We have audited Apple Inc.’s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“the COSO criteria”). Apple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’sApple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2017 consolidated financial statements of Apple Inc. and our report dated November 3, 2017 expressed an unqualified opinion thereon.
San Jose, California
November 3, 2017October 30, 2019
Apple Inc. | 2019 Form 10-K | 58
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of September 30, 201728, 2019 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations Overover Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that:
| |
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; |
| |
| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and |
| |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control Overover Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of September 30, 201728, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal control over financial reporting, which appears in Part II, Item 8 of this Form 10-K.
Changes in Internal Control Overover Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2017,2019, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| |
| Item 9B. | Other Information |
Not applicable.None.
Apple Inc. | 2019 Form 10-K | 59
PART III
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item is set forth under the headings “Corporate Governance,” “Directors,” “Executive Officers” and “Other Information—Security Ownership of Certain Beneficial Owners and Management” in the Company’s 20182020 Proxy Statement to be filed with the SEC within 120 days after September 30, 201728, 2019 in connection with the solicitation of proxies for the Company’s 20182020 annual meeting of shareholders, and is incorporated herein by reference.
The Company has a code of ethics, “Business Conduct: The way we do business worldwide,” that applies to all employees, including the Company’s principal executive officer, principal financial officer, and principal accounting officer, as well as to the members of the Board of Directors of the Company. The code is available at investor.apple.com/corporate-governance.cfm. The Company intends to disclose any changes in, or waivers from, this code by posting such information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or Nasdaq.
| |
| Item 11. | Executive Compensation |
The information required by this Item is set forth under the heading “Executive Compensation,” under the subheadings “Board Oversight of Risk Management” and “Compensation Committee Interlocks and Insider Participation” under the heading “Corporate Governance” and under the subheadings “Compensation of Directors” and “Director Compensation—2017”2019” under the heading “Directors” in the Company’s 20182020 Proxy Statement to be filed with the SEC within 120 days after September 30, 201728, 2019, and is incorporated herein by reference.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is set forth under the headings “Other Information—Security Ownership of Certain Beneficial Owners and Management” and “Other Information—Equity Compensation Plan Information” in the Company’s 20182020 Proxy Statement to be filed with the SEC within 120 days after September 30, 201728, 2019, and is incorporated herein by reference.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is set forth under the subheadings “Board Committees”, “Review, Approval, or Ratification of Transactions with Related Persons” and “Transactions with Related Persons” under the heading “Corporate Governance” in the Company’s 20182020 Proxy Statement to be filed with the SEC within 120 days after September 30, 201728, 2019, and is incorporated herein by reference.
| |
| Item 14. | Principal Accounting Fees and Services |
The information required by this Item is set forth under the subheadings “Fees Paid to Auditors” and “Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm” under the proposal “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s 20182020 Proxy Statement to be filed with the SEC within 120 days after September 30, 201728, 2019, and is incorporated herein by reference.
Apple Inc. | 2019 Form 10-K | 60
PART IV
| |
| Item 15. | Exhibits, Financial Statement Schedules |
| |
| (a) | Documents filed as part of this report |
| |
| (1) | All financial statements |
|
| | |
| Index to Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| (2) | Financial Statement Schedules |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes thereto included in this Form 10-K.
| |
| (3) | Exhibits required by Item 601 of Regulation S-K (1) |
|
| | | | | | | | |
| | | Incorporated by Reference |
| Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date/ Period End Date |
| 3.1 | | | | 8-K | | 3.1 | | 6/6/14 |
| 3.2 | | | | 8-K | | 3.2 | | 12/15/16 |
| 4.1 | | | | 10-Q | | 4.1 | | 12/30/06 |
| 4.2 | | | | S-3 | | 4.1 | | 4/29/13 |
| 4.3 | | | | 8-K | | 4.1 | | 5/3/13 |
| 4.4 | | | | 8-K | | 4.1 | | 5/6/14 |
| 4.5 | | | | 8-K | | 4.1 | | 11/10/14 |
| 4.6 | | | | 8-K | | 4.1 | | 2/9/15 |
| 4.7 | | | | 8-K | | 4.1 | | 5/13/15 |
| 4.8 | | | | 8-K | | 4.1 | | 6/10/15 |
|
| | | | | | | | |
| | | Incorporated by Reference |
| Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date/ Period End Date |
| 3.1 | | | | 8-K | | 3.1 | | 6/6/14 |
| 3.2 | | | | 8-K | | 3.2 | | 12/15/16 |
| 4.1** | | | | | | | | |
| 4.2 | | | | S-3 | | 4.1 | | 4/29/13 |
| 4.3 | | | | 8-K | | 4.1 | | 5/3/13 |
| 4.4 | | | | 8-K | | 4.1 | | 5/6/14 |
| 4.5 | | | | 8-K | | 4.1 | | 11/10/14 |
| 4.6 | | | | 8-K | | 4.1 | | 2/9/15 |
| 4.7 | | | | 8-K | | 4.1 | | 5/13/15 |
| 4.8 | | | | 8-K | | 4.1 | | 6/10/15 |
|
| | | | | | | | |
| | | Incorporated by Reference |
| Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date/ Period End Date |
| 4.9 | | | | 8-K | | 4.1 | | 7/31/15 |
| 4.10 | | | | 8-K | | 4.1 | | 9/17/15 |
| 4.11 | | Officer’s Certificate of the Registrant, dated as of February 23, 2016, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2021, 1.300% Notes due 2018, 1.700% Notes due 2019, 2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes due 2026, 4.500% Notes due 2036 and 4.650% Notes due 2046. | | 8-K | | 4.1 | | 2/23/16 |
| 4.12 | | | | 8-K | | 4.1 | | 3/24/16 |
| 4.13 | | | | 8-K | | 4.1 | | 6/22/16 |
| 4.14 | | | | 8-K | | 4.1 | | 8/4/16 |
| 4.15 | | Officer’s Certificate of the Registrant, dated as of February 9, 2017, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.550% Notes due 2019, 1.900% Notes due 2020, 2.500% Notes due 2022, 3.000% Notes due 2024, 3.350% Notes due 2027 and 4.250% Notes due 2047. | | 8-K | | 4.1 | | 2/9/17 |
| 4.16 | | | | 8-K | | 4.1 | | 3/3/17 |
| 4.17 | | | | 8-K | | 4.1 | | 5/11/17 |
| 4.18 | | | | 8-K | | 4.1 | | 5/24/17 |
| 4.19 | | | | 8-K | | 4.1 | | 6/20/17 |
| 4.20 | | | | 8-K | | 4.1 | | 8/18/17 |
| 4.21 | | | | 8-K | | 4.1 | | 9/12/17 |
| 10.1* | | | | 8-K | | 10.1 | | 3/13/15 |
| 10.2* | | | | 10-Q | | 10.2 | | 6/27/09 |
| 10.3* | | | | 10-Q | | 10.3 | | 12/28/13 |
| 10.4* | | | | 8-K | | 10.1 | | 3/1/10 |
| 10.5* | | | | 10-Q | | 10.10 | | 12/25/10 |
| 10.6* | | | | 10-Q | | 10.8 | | 3/31/12 |
| 10.7* | | | | 10-Q | | 10.8 | | 6/30/12 |
| 10.8*, ** | | | | | | | | |
| 10.9* | | | | 8-K | | 10.2 | | 3/5/14 |
| 10.10* | | | | 8-K | | 10.3 | | 3/5/14 |
| 10.11* | | | | 10-K | | 10.11 | | 9/27/14 |
|
| | | | | | | | |
| | | Incorporated by Reference |
| Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date/ Period End Date |
| 4.9 | | | | 8-K | | 4.1 | | 7/31/15 |
| 4.10 | | | | 8-K | | 4.1 | | 9/17/15 |
| 4.11 | | Officer’s Certificate of the Registrant, dated as of February 23, 2016, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2021, 1.300% Notes due 2018, 1.700% Notes due 2019, 2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes due 2026, 4.500% Notes due 2036 and 4.650% Notes due 2046. | | 8-K | | 4.1 | | 2/23/16 |
| 4.12 | | | | 8-K | | 4.1 | | 3/24/16 |
| 4.13 | | | | 8-K | | 4.1 | | 6/22/16 |
| 4.14 | | | | 8-K | | 4.1 | | 8/4/16 |
| 4.15 | | Officer’s Certificate of the Registrant, dated as of February 9, 2017, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.550% Notes due 2019, 1.900% Notes due 2020, 2.500% Notes due 2022, 3.000% Notes due 2024, 3.350% Notes due 2027 and 4.250% Notes due 2047. | | 8-K | | 4.1 | | 2/9/17 |
| 4.16 | | | | 8-K | | 4.1 | | 3/3/17 |
| 4.17 | | | | 8-K | | 4.1 | | 5/11/17 |
| 4.18 | | | | 8-K | | 4.1 | | 5/24/17 |
| 4.19 | | | | 8-K | | 4.1 | | 6/20/17 |
| 4.20 | | | | 8-K | | 4.1 | | 8/18/17 |
| 4.21 | | | | 8-K | | 4.1 | | 9/12/17 |
| 4.22 | | | | 8-K | | 4.1 | | 11/13/17 |
| 4.23 | | | | S-3 | | 4.1 | | 11/5/18 |
| 4.24 | | | | 8-K | | 4.1 | | 9/11/19 |
| 4.25* | | | | S-8 | | 4.1 | | 8/23/18 |
| 10.1* | | | | 8-K | | 10.1 | | 3/13/15 |
| 10.2* | | | | 10-Q | | 10.2 | | 6/27/09 |
| 10.3* | | | | 8-K | | 10.1 | | 2/14/18 |
| 10.4* | | | | 8-K | | 10.1 | | 3/1/10 |
| 10.5* | | | | 10-Q | | 10.10 | | 12/25/10 |
| 10.6* | | | | 10-K | | 10.8 | | 9/30/17 |
|
| | | | | | | | |
| | | Incorporated by Reference |
| Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date/ Period End Date |
10.12*10.7* | | | | 10-K | | 10.12 | | 9/27/14 |
10.13* | | | | 10-K | | 10.13 | | 9/27/14 |
10.14*10.8* | | | | 10-Q | | 10.14 | | 12/27/14 |
10.15* | | | | 10-Q | | 10.15 | | 12/26/15 |
10.16* | | | | 10-Q | | 10.16 | | 3/26/16 |
10.17*10.9* | | | | 10-Q | | 10.17 | | 3/26/16 |
10.18* | | | | 10-K | | 10.18 | | 9/24/16 |
10.19*10.10* | | | | 10-K | | 10.19 | | 9/24/16 |
10.20*, ** | | | | 10-K | | 10.20 | | 9/30/17 |
10.21*, **10.11* | | | | 10-K | | 10.21 | | 9/30/17 |
| 10.12* | | | | 10-Q | | 10.2 | | 3/31/18 |
| 10.13* | | | | 10-K | | 10.17 | | 9/29/18 |
| 10.14* | | | | 10-K | | 10.18 | | 9/29/18 |
| 10.15*, ** | | | | | | | | |
12.1**10.16*, ** | | | | | | | | |
| 21.1** | | | | | | | | |
| 23.1** | | | | | | | | |
| 24.1** | | | | | | | | |
| 31.1** | | | | | | | | |
| 31.2** | | | | | | | | |
| 32.1*** | | | | | | | | |
101.INS*101** | | Inline XBRL Instance Document.Document Set for the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. | | | | | | |
101.SCH*104** | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | |
101.CAL** | | for the cover page of this Annual Report on Form 10-K, included in the Exhibit 101 Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | |
101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | |
101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | |
101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document.Document Set. | | | | | | |
| |
| * | Indicates management contract or compensatory plan or arrangement. |
| |
| (1) | Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments. |
| |
| Item 16. | Form 10-K Summary |
None.
Apple Inc. | 2019 Form 10-K | 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 3, 2017October 30, 2019
|
| | | |
| | Apple Inc. |
| | | | |
| | By: | | /s/ Luca Maestri |
| | | | Luca Maestri |
| | | | Senior Vice President, Chief Financial Officer |
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy D. Cook and Luca Maestri, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
|
| | | | |
| Name | | Title | | Date |
| | | | | |
| /s/ Timothy D. Cook | | Chief Executive Officer and Director (Principal Executive Officer) | | November 3, 2017October 30, 2019 |
| TIMOTHY D. COOK | | | |
| | | | | |
| /s/ Luca Maestri | | Senior Vice President, Chief Financial Officer (Principal Financial Officer) | | November 3, 2017October 30, 2019 |
| LUCA MAESTRI | | | |
| | | | | |
| /s/ Chris Kondo | | Senior Director of Corporate Accounting (Principal Accounting Officer) | | November 3, 2017October 30, 2019 |
| CHRIS KONDO | | | |
| | | | | |
| /s/ James A. Bell | |
Director | | November 3, 2017October 30, 2019 |
| JAMES A. BELL | | | |
| | | | | |
| /s/ Al Gore | |
Director | | November 3, 2017October 30, 2019 |
| AL GORE | | | |
| | | | |
/s/ Robert A. Iger | |
Director
| | November 3, 2017 |
ROBERT A. IGER | | | |
| | | | | |
| /s/ Andrea Jung | |
Director | | November 3, 2017October 30, 2019 |
| ANDREA JUNG | | | |
| | | | | |
| /s/ Arthur D. Levinson | |
Director | | November 3, 2017October 30, 2019 |
| ARTHUR D. LEVINSON | | | |
| | | | | |
| /s/ Ronald D. Sugar | |
Director | | November 3, 2017October 30, 2019 |
| RONALD D. SUGAR | | | |
| | | | | |
| /s/ Susan L. Wagner | |
Director | | November 3, 2017October 30, 2019 |
| SUSAN L. WAGNER | | | |
Apple Inc. | 20172019 Form 10-K | 7764
