Note 4 – Income Taxes

U.S. Tax Cuts and Jobs Act and Provisional Estimates

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 future foreign earnings. During the first ~~six months~~quarter of ~~fiscal~~ 2018, the ~~Company recognized~~Company’s income tax expense ~~of $9.3 billion, of which $2.6 billion was~~included a provisional estimate of $2.6 billion in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. ~~118 and was recognized during the first quarter of 2018.~~118. This $2.6 billion provisional estimate included $1.8 billion related to the impact of remeasuring ~~to reduce~~ the Company’s deferred tax balances to reflect the new lower tax rate, and approximately $800 million associated with the net impact of the deemed repatriation tax. During the third quarter of 2018, the Company reduced its estimate of the deemed repatriation tax by $1.0 billion and adjusted the estimated impact of the deemed repatriation tax on unrecognized tax benefits by $700 million, resulting in the reduction of the Company’s provisional estimate from $2.6 billion to $900 million. The adjustments to the provisional estimate for the deemed repatriation tax and unrecognized tax benefits are discussed below and their impact was included in the Company’s income tax expense during the third quarter of 2018.

Deferred Tax Balances

As a result of the Act, the Company remeasured certain deferred tax assets and liabilities based on the revised rates at which they are expected to reverse, including items for which the related income tax effects were originally recognized in OCI. In addition, the Company elected to record certain deferred tax assets and liabilities related to the new minimum tax on certain future foreign earnings. The provisional estimate of $1.8 billion noted above incorporates assumptions based upon the best available interpretation of the Act and may change as the Company receives additional clarification and implementation guidance.

During the second quarter of 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows an entity to elect to reclassify the income tax effects of the Act on items within AOCI to retained earnings. The Company elected to apply the provision of ASU 2018-02 at the beginning of the second quarter of 2018 with a reclassification of net tax benefits related to cumulative foreign currency translation and unrealized gains/losses on derivative instruments and marketable securities, resulting in a $278 million decrease in AOCI and a corresponding increase in retained earnings in the Condensed Consolidated Balance Sheet.

Deemed Repatriation Tax

As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. ~~As a result~~During the first quarter of ~~the deemed repatriation tax, which is based on the Company’s cumulative post-1986 deferred foreign income,~~2018 the Company replaced $36.1 billion of its U.S. deferred tax liability with a provisional deemed repatriation tax payable of $38.0 ~~billion. This~~billion, which was based on the Company’s cumulative post-1986 deferred foreign income. The Company’s estimate of the deemed repatriation tax is based, in part, on the amount of cash and other specified assets anticipated to be held by the Company’s foreign subsidiaries as of September 29, 2018. Therefore, the provisional tax payable ~~may~~is subject to change as the asset amounts are finalized. During the third quarter of 2018, the Company reduced its provisional tax payable by $1.0 billion to $37.0 billion due, in part, to revised estimates of the amount of cash and other specified assets anticipated to be held by the Company’s foreign subsidiaries as of September 29, 2018. The Company plans to pay the tax in installments in accordance with the Act.

Unrecognized Tax Benefits

As of ~~March 31,~~June 30, 2018, the Company had gross unrecognized tax benefits of ~~$9.5~~$9.4 billion. These gross unrecognized tax benefits have been offset by certain tax deposits and ~~a $1.1 billion reduction for~~reduced by the estimated impact of the deemed repatriation tax. As of December 30, 2017, the estimated impact of the deemed repatriation tax ~~with the net~~on unrecognized tax benefits ~~classified as other non-current liabilities~~was $1.1 billion. During the third quarter of 2018, the Company increased the estimated impact of the deemed repatriation tax on unrecognized tax benefits by $700 million, resulting in ~~the Condensed Consolidated Balance Sheet.~~a revised total estimated impact of $1.8 billion. Upon recognition, ~~$8.2~~$7.3 billion of the unrecognized tax benefits would impact the Company’s effective tax rate. The Company had accrued ~~$1.5~~$1.3 billion of gross interest and penalties as of ~~March 31, 2018, which~~June 30, 2018. Both the net unrecognized tax benefits and the interest and penalties are ~~also~~ classified as other non-current liabilities in the Condensed Consolidated Balance Sheet.

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 concluded its review of the years 2013 through 2015 during the third quarter of 2018. All years prior to 2016 are now closed. 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. 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 inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (either by payment, release or a combination of both) in the next 12 months by as much as ~~$3.4 billion.~~$500 million.

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 two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ~~orders~~ordered 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 billion, plus interest of €1 billion. 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. During the third quarter of 2018, the Company expects to begin funding amounts into escrow, 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. During the third quarter of 2018, the Company began funding amounts into escrow, where they will remain pending conclusion of all appeals. As of June 30, 2018, €4.5 billion of the recovery amount was funded into escrow and was restricted from general use. Refer to Note 2, “Financial Instruments” for more information. Subsequent to June 30, 2018, the Company has funded an additional €4.5 billion of the recovery amount into escrow.

Note 5 – 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 both ~~March 31,~~June 30, 2018 and September 30, 2017, the Company had $12.0 billion of Commercial Paper outstanding with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was ~~1.68%~~2.03% as of ~~March 31,~~June 30, 2018 and 1.20% as of September 30, 2017. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the ~~six~~nine months ended ~~March 31,~~June 30, 2018 and ~~April~~July 1, 2017 (in millions):


	Six Months Ended						Nine Months Ended
	March 31, 2018			April 1, 2017			June 30, 2018			July 1, 2017
Maturities 90 days or less:
Proceeds from/(Repayments of) commercial paper, net	$	4,070		$	(1,318	)	$	2,619		$	(143	)

Maturities greater than 90 days:
Proceeds from commercial paper	5,550			7,057			9,782			12,633
Repayments of commercial paper	(9,619		)	(3,860		)	(12,411		)	(8,624		)
Proceeds from/(Repayments of) commercial paper, net	(4,069		)	3,197			(2,629		)	4,009

Total change in commercial paper, net	$	1		$	1,879		$	(10	)	$	3,866

Term Debt

As of ~~March 31,~~June 30, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of ~~$111.1~~$104.1 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.

The following table provides a summary of the Company’s term debt as of ~~March 31,~~June 30, 2018 and September 30, 2017:


	Maturities			March 31, 2018								September 30, 2017								Maturities			June 30, 2018								September 30, 2017
				Amount (in millions)			Effective Interest Rate					Amount (in millions)			Effective Interest Rate								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	%			—	$	—					—	%	$	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	%
Fixed-rate 2.400% – 3.850% notes																				2023	–	2043	8,500				2.44%	–	3.91	%	12,500				1.08%	–	3.91	%

2014 debt issuance of $12.0 billion:
Floating-rate notes	2019		2019	1,000				2.09%		2.09	%	1,000				1.61%		1.61	%	2019		2019	1,000				2.66%		2.66	%	1,000				1.61%		1.61	%
Fixed-rate 2.100% – 4.450% notes	2019	–	2044	8,500				2.09%	–	4.48	%	8,500				1.61%	–	4.48	%	2019	–	2044	8,500				2.66%	–	4.48	%	8,500				1.61%	–	4.48	%

2015 debt issuances of $27.3 billion:
Floating-rate notes	2019	–	2020	1,537				1.87%	–	2.12	%	1,549				1.56%	–	1.87	%	2019	–	2020	1,517				1.87%	–	2.66	%	1,549				1.56%	–	1.87	%
Fixed-rate 0.350% – 4.375% notes	2019	–	2045	25,094				0.28%	–	4.51	%	24,522				0.28%	–	4.51	%	2019	–	2045	24,395				0.28%	–	4.51	%	24,522				0.28%	–	4.51	%

2016 debt issuances of $24.9 billion:
Floating-rate notes	2019	–	2021	1,350				1.93%	–	3.05	%	1,350				1.45%	–	2.44	%	2019	–	2021	1,350				2.50%	–	3.46	%	1,350				1.45%	–	2.44	%
Fixed-rate 1.100% – 4.650% notes	2019	–	2046	23,120				1.13%	–	4.78	%	23,645				1.13%	–	4.78	%	2019	–	2046	23,079				1.13%	–	4.78	%	23,645				1.13%	–	4.78	%

2017 debt issuances of $28.7 billion:
Floating-rate notes	2019	–	2022	3,250				1.88%	–	2.30	%	3,250				1.38%	–	1.81	%	2019	–	2022	3,250				2.43%	–	2.87	%	3,250				1.38%	–	1.81	%
Fixed-rate 0.875% – 4.300% notes	2019	–	2047	25,786				1.54%	–	4.30	%	25,705				1.51%	–	4.30	%	2019	–	2047	25,533				1.54%	–	4.30	%	25,705				1.51%	–	4.30	%

First quarter 2018 debt issuance of $7.0 billion:
Fixed-rate 1.800% notes			2019	1,000						1.83	%	—						—	%			2019	1,000						1.83	%	—						—	%
Fixed-rate 2.000% notes			2020	1,000						2.03	%	—						—	%			2020	1,000						2.03	%	—						—	%
Fixed-rate 2.400% notes			2023	750						2.14	%	—						—	%			2023	750						2.66	%	—						—	%
Fixed-rate 2.750% notes			2025	1,500						2.77	%	—						—	%			2025	1,500						2.77	%	—						—	%
Fixed-rate 3.000% notes			2027	1,500						2.54	%	—						—	%			2027	1,500						3.07	%	—						—	%
Fixed-rate 3.750% notes			2047	1,250						3.80	%	—						—	%			2047	1,250						3.80	%	—						—	%
Total term debt				111,137								104,021											104,124								104,021

Unamortized premium/(discount) and issuance costs, net				(236		)						(225		)									(227		)						(225		)
Hedge accounting fair value adjustments				(1,041		)						(93		)									(1,271		)						(93		)
Less: Current portion of long-term debt				(8,498		)						(6,496		)									(5,498		)						(6,496		)
Total long-term debt				$	101,362							$	97,207										$	97,128							$	97,207

Note 9 – Commitments and Contingencies

Accrued Warranty and Indemnification

The following table shows changes in the Company’s accrued warranties and related costs for the three- and ~~six-month~~nine-month periods ended ~~March 31,~~June 30, 2018 and ~~April~~July 1, 2017 (in millions):


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Beginning accrued warranty and related costs	$	4,323		$	4,698		$	3,834		$	3,702		$	4,030		$	4,735		$	3,834		$	3,702
Cost of warranty claims	(933		)	(1,031		)	(1,915		)	(2,368		)	(1,044		)	(932		)	(2,959		)	(3,300		)
Accruals for product warranty	640			1,068			2,111			3,401			567			496			2,678			3,897
Ending accrued warranty and related costs	$	4,030		$	4,735		$	4,030		$	4,735		$	3,553		$	4,299		$	3,553		$	4,299

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. InExcept as disclosed under the heading “Contingencies” below, 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.

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 few components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. 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.

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 manufacturing capacity has 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. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.

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–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–balance sheet financing arrangements. As of ~~March 31,~~June 30, 2018, the Company’s total future minimum lease payments under noncancelable operating leases were ~~$9.8~~$9.6 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.

Unconditional Purchase Obligations

The Company has entered into certain off–balance sheet arrangements which require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, internet and telecommunication services and intellectual property licenses. As of ~~March 31,~~June 30, 2018, the Company’s total future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year were ~~$8.3~~$8.5 billion.

Contingencies

The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated, as further discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors.” The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be 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 of a recorded accrual, with respect to loss contingencies for asserted legal and other claims, except for the following ~~matter:~~matters:

VirnetX

VirnetX, Inc. filed two lawsuits in the U.S. District Court for the Eastern District of Texas (the “Eastern Texas District Court”) against the Company alleging that certain Company products infringe four patents (the “VirnetX Patents”) relating to network communications technology (“VirnetX I” and “VirnetX II”). On September 30, 2016, a jury returned a verdict in VirnetX I against the Company and awarded damages of $302 million, which later increased to $440 million in post-trial proceedings. VirnetX I is currently on appeal at the U.S. Court of Appeals for the Federal Circuit (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 in post-trial proceedings and is expected to proceed to appeal thereafter. 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 has appealed, and those appeals are currently pending at the Federal Circuit. The Federal Circuit has consolidated the Company’s appeal of the Eastern Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings. The Company believes it will prevail on the merits.

~~The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against~~Qualcomm

On January 20, 2017, the Company filed a lawsuit against Qualcomm Incorporated and affiliated parties (“Qualcomm”) in ~~a reporting period~~the U.S. District Court for ~~amounts~~the Southern District of California seeking, among other things, to enjoin Qualcomm from requiring the Company to pay royalties at the rate demanded by Qualcomm. As the Company does not believe the demanded royalty it has historically paid contract manufacturers for each applicable device is fair, reasonable and non-discriminatory, and believes it to be invalid and/or overstated in ~~excess~~other respects as well, no Qualcomm-related royalty payments have been remitted by the Company to its contract manufacturers since the beginning of ~~management’s expectations,~~ the ~~Company’s consolidated financial statements~~second quarter of 2017. The Company believes it will prevail on the merits of the case and has accrued its best estimate for ~~that reporting period could be materially adversely affected.~~the ultimate resolution of this matter.

Note 10 – 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” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2017 Form 10-K.

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 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 the three- and ~~six-month~~nine-month periods ended ~~March 31,~~June 30, 2018 and ~~April~~July 1, 2017 (in millions):


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	March 31, 2018		April 1, 2017		March 31, 2018		April 1, 2017		June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Americas:
Net sales	$	24,841	$	21,157	$	60,034	$	53,125	$	24,542	$	20,376	$	84,576	$	73,501
Operating income	$	7,768	$	6,668	$	19,084	$	17,162	$	7,496	$	6,420	$	26,580	$	23,582

Europe:
Net sales	$	13,846	$	12,733	$	34,900	$	31,254	$	12,138	$	10,675	$	47,038	$	41,929
Operating income	$	4,259	$	3,851	$	11,152	$	9,587	$	3,892	$	2,984	$	15,044	$	12,571

Greater China:
Net sales	$	13,024	$	10,726	$	30,980	$	26,959	$	9,551	$	8,004	$	40,531	$	34,963
Operating income	$	4,963	$	4,224	$	11,871	$	10,400	$	3,414	$	3,002	$	15,285	$	13,402

Japan:
Net sales	$	5,468	$	4,485	$	12,705	$	10,251	$	3,867	$	3,624	$	16,572	$	13,875
Operating income	$	2,346	$	2,037	$	5,428	$	4,710	$	1,765	$	1,624	$	7,193	$	6,334

Rest of Asia Pacific:
Net sales	$	3,958	$	3,795	$	10,811	$	9,658	$	3,167	$	2,729	$	13,978	$	12,387
Operating income	$	1,278	$	1,309	$	3,853	$	3,538	$	1,127	$	892	$	4,980	$	4,430

A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the three- and ~~six-month~~nine-month periods ended ~~March 31,~~June 30, 2018 and ~~April~~July 1, 2017 is as follows (in millions):


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Segment operating income	$	20,614		$	18,089		$	51,388		$	45,397		$	17,694		$	14,922		$	69,082		$	60,319
Research and development expense	(3,378		)	(2,776		)	(6,785		)	(5,647		)	(3,701		)	(2,937		)	(10,486		)	(8,584		)
Other corporate expenses, net	(1,342		)	(1,216		)	(2,435		)	(2,294		)	(1,381		)	(1,217		)	(3,816		)	(3,511		)
Total operating income	$	15,894		$	14,097		$	42,168		$	37,456		$	12,612		$	10,768		$	54,780		$	48,224


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company’s market risk during the first ~~six~~nine months of 2018. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the 2017 Form 10-K.


Item 4.	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 ~~March 31,~~June 30, 2018 to ensure 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.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the ~~second~~third quarter of 2018, 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.

PART II — OTHER INFORMATION


Item 1.	Legal Proceedings

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. Except as described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 9, “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 of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.

The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. See the risk factor “The Company could be impacted byunfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights” in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors.” The Company settled certain matters during the ~~second~~third quarter of 2018 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.


Item 1A.	Risk Factors

The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with the Company’s business previously disclosed in Part I, Item 1A of the 2017 Form 10-K and in Part II, Item 1A of the ~~Form~~Forms 10-Q for the ~~quarter~~quarters ended December 30, 2017 and March 31, 2018, in each case under the heading “Risk Factors.” 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.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

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 to~~monetary 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 tightening~~a decline in, ~~the credit markets, low liquidity and extreme volatility in fixed income, credit, currency and equity markets. This~~global or regional economic conditions could have a ~~number of effects~~significant impact on the Company’s ~~business, including the insolvency or~~suppliers, contract manufacturers, logistics providers, distributors, cellular network carriers and other channel partners. Potential effects include financial ~~instability of outsourcing partners or suppliers or their~~instability; 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 finance~~operations 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 restrictions~~limitations on the Company’s ability to issue new ~~debt. Other income~~debt; reduced liquidity; and ~~expense also could vary materially from expectations depending on gains or losses realized on~~declines 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 from~~instruments. 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 compete in highly competitive global markets characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products, 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.

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. The Company currently holds a significant number of patents and copyrights and has registered and/or has applied to register numerous patents, trademarks and service marks. 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 communication and media devices based on the iOS mobile operating system and also markets related services, including third-party digital content and applications. 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; and the Company has a minority market share in the global smartphone market. 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 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 iOS and iOS devices in order 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.

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 successfully manage the transition to these new and upgraded products. The success of new product 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 may have quality or other defects or deficiencies in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect of new product introductions and transitions.

The Company depends on the performance of distributors, carriers and other resellers.

The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and resellers, many of whom distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to education, enterprise and government customers and consumers and small and mid-sized businesses through its retail and online stores.

Some carriers providing cellular network service for iPhone subsidize users’ purchases of the device. There is no assurance that such subsidies 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 could require a substantial investment while providing no assurance of return or incremental revenue. 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 substantial inventory and other asset risk 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 net realizable value and 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 asset may not be recoverable. If the Company determines that 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, no assurance can be given that the Company will not incur additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.

The Company must order components for its products and build inventory in advance of product announcements and shipments. Manufacturing purchase obligations typically cover forecasted component and manufacturing requirements 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 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. 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 of 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.

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 manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may 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. The supply of components for a new or existing product could be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.

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. The Company has also outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the Company’s direct control over production and distribution. It is uncertain what effect such diminished control will have 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 warranty expense reimbursement, the Company may remain responsible to the consumer for 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-sourced 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 may 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 may 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 could be reduced or terminated and the net realizable value of these assets could be negatively impacted.

The Company’s products and services may ~~experience quality problems~~be affected from time to time by design and manufacturing defects that ~~can~~could materially adversely affect the Company’s business and result in ~~decreased sales and operating margin and~~ harm to the Company’s reputation.

The Company ~~sells~~offers complex hardware and software products and services that can ~~contain~~be affected by design and manufacturing defects. Sophisticated operating system software and applications, such as those ~~sold~~offered by the Company, often ~~contain “bugs”~~have issues that can unexpectedly interfere with the ~~software’s~~ intended ~~operation. The~~operation of hardware or software products. Defects may also exist in components and products the Company purchases from third parties. Component defects could make the Company’s ~~online services~~products 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. ~~Defects~~As a result, the Company’s services may ~~also occur in components~~not 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 may 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 could 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 services introductions and lost revenue.

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. 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 reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and could take action 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 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, the Company believes the availability of third-party software applications and services depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software for the Company’s products compared to Windows-based products. 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 Mac sales and the costs of developing such applications and services. If the Company’s minority share of the global personal computer market causes 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 the larger Windows market.

With respect to iOS devices, the Company relies on the continued availability and development of compelling and innovative software applications, including applications distributed through the App Store. iOS devices 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 successfully operate and may result in dissatisfied customers. As with applications for the Company’s Mac products, the availability and development of these applications also depend 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.

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 include third-party intellectual property, which requires licenses from those third parties. Based on past experience and industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on acceptable 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 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 may 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 of 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 may 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 operating expenses.

Except as described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 9, “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 of a recorded accrual, with respect to loss contingencies for asserted legal and other claims, including matters related to infringement of intellectual property rights.

The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company or an indemnified third party in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements 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 laws and regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect the Company’s activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate, billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, 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 requirements 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 in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make 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. 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 is subject 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 foreign 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 regulations could materially adversely affect the Company’s brand, international growth efforts and business.

The Company also 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, political instability and ~~political instability.~~international trade disputes. 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 international trade regulations, including duties, tariffs and antidumping penalties. The Company is also exposed to credit and collectibility risk on its trade receivables with customers in certain international markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.

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. 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 individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and severance costs.

Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. These risks and uncertainties include, but are not limited to, macro-economic factors that could have an adverse effect on general retail activity, as well as the Company’s inability to manage costs associated with store construction and operation, the Company’s failure to manage relationships with its existing retail partners, more challenging environments in managing retail operations outside the U.S., costs associated with unanticipated fluctuations in the value of retail 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 expected liabilities and expenses, inadequate return of 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 subject 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 could 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, which 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 may not be effective and losses or unauthorized access to or releases of confidential information may still occur, which 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 may also be subject to specific obligations relating to health data and payment card data. Health data may be subject to additional privacy, security and breach notification requirements, and the Company may 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 may be impacted by political events, international trade disputes, war, terrorism, natural disasters, public health issues, ~~natural disasters~~industrial 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 damage~~harm or ~~disruption to~~disrupt 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 vendors~~distributors, cellular network carriers and ~~customers, including~~other channel partners. ~~The~~

International trade disputes could result in tariffs and other protectionist measures that could adversely affect the Company’s business. Tariffs could increase the cost of the Company’s products and the components and raw materials that go into making them. These increased costs could adversely impact the gross margin that the Company earns on sales of its products. Tariffs could 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 protectionist measures that could limit the Company’s ability to offer its products and services. Political uncertainty surrounding international trade disputes and protectionist 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 ~~its~~the 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 ~~make~~manufacture 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 in order to resume operations, and lose significant revenue. Because the Company relies on sole 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, the Company could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.contract manufacturers.

The Company expects its quarterly revenue and operating results to fluctuate.

The Company’s profit margins vary across its products and distribution channels. The Company’s software, accessories, and service and support contracts generally have higher 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. The Company’s direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition, the Company’s gross margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or channel mix, component cost increases, the strengthening U.S. dollar, price competition, or the introduction of new products, including those that have higher cost structures with flat or reduced pricing.

The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Further, the Company generates a majority 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, issues with new product introductions, an internal systems failure, 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 versus local currencies.

The Company’s primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar–denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company’s foreign currency–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 prices to fully offset the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of the Company’s foreign currency–denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company’s foreign currency–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 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 the Company’s investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors. As a result, the value and liquidity of the Company’s cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value could result in significant realized losses.

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 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 collectibility 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 ~~March 31,~~June 30, 2018, 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~~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, operating results and cash flows could be adversely affected.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share repurchase activity during the three months ended ~~March 31,~~June 30, 2018 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⁾
December 31, 2017 to February 3, 2018:
Open market and privately negotiated purchases 20,323
$ 172.22
20,323

February 4, 2018 to March 3, 2018:
November 2017 ASR 5,667

⁽²⁾

5,667

Open market and privately negotiated purchases 62,421
$ 168.21
62,421

March 4, 2018 to March 31, 2018:
Open market and privately negotiated purchases 54,296
$ 174.97
54,296

Total 142,707
$ 10,414



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⁾
April 1, 2018 to May 5, 2018:
Open market and privately negotiated purchases ⁽¹⁾⁽²⁾	67,707	$	170.46	67,707

May 6, 2018 to June 2, 2018:
Open market and privately negotiated purchases ⁽¹⁾	22,026	$	187.56	22,026

June 3, 2018 to June 30, 2018:
Open market and privately negotiated purchases ⁽¹⁾	23,045	$	187.78	23,045
Total	112,778				$	90,417

(1)

~~As of~~ ~~March 31, 2018, the Company had an authorized share repurchase program of up to~~ ~~$210 billion~~ ~~of the Company’s common stock, of which~~ ~~$199.6 billion~~ ~~had been utilized. The remaining~~ ~~$10.4 billion~~ ~~in the table represents the amount available to repurchase shares under the authorized repurchase program as of~~ ~~March 31, 2018~~. On May 1, 2018, the Company announced that the Board of Directors had authorized a new program to repurchase up to $100 billion of the Company’s common ~~stock.~~stock, of which $9.6 billion had been utilized as of June 30, 2018. The remaining $90.4 billion in the table represents the amount available to repurchase shares under the new authorized repurchase program as of June 30, 2018. The Company’s new share repurchase program does not obligate it to acquire any specific number of shares. Under ~~the~~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.

(2)

~~In November 2017,~~During the third quarter of 2018, the Company ~~entered into an accelerated share repurchase arrangement (“ASR”) to purchase up to~~repurchased $~~5.0~~10.4 billion of ~~the Company’s~~its common ~~stock. In February 2018, the purchase period for this ASR ended and an additional~~ ~~5.7 million~~ ~~shares were delivered and retired. In total,~~ ~~29.3 million~~ ~~shares were delivered~~stock under ~~this ASR at an average~~its previous share repurchase ~~price~~program of ~~$170.84~~.up to $210 billion, thereby completing that program.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.


Item 6.	Exhibits



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Exhibit	Filing Date/ Period End Date
10.1*	~~Non-Employee Director Stock Plan, as amended and restated as of February 13, 2018.~~	~~8-K~~	~~10.1~~	~~2/14/18~~
10.2, *	~~Form of Restricted Stock Unit Award Agreement under Non-Employee Director Stock Plan effective as of February 13, 2018.~~
31.1**	Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
31.2**	Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
32.1***	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	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.


*	~~Indicates management contract or compensatory plan or arrangement.~~


**	Filed herewith.


***	Furnished herewith.

SIGNATURE

Pursuant to the requirements 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.



~~May 2,~~August 1, 2018	Apple Inc.

	By:	/s/ Luca Maestri
		Luca Maestri
		Senior Vice President, Chief Financial Officer

Apple Inc. | Q2Q3 2018 Form 10-Q | 4748



California		94-2404110
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Apple Park Way Cupertino, California		95014
(Address of principal executive offices)		(Zip Code)


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	March 31, 2018		April 1, 2017		March 31, 2018		April 1, 2017		June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Net sales	$	61,137	$	52,896	$	149,430	$	131,247	$	53,265	$	45,408	$	202,695	$	176,655
Cost of sales	37,715		32,305		92,096		80,480		32,844		27,920		124,940		108,400
Gross margin	23,422		20,591		57,334		50,767		20,421		17,488		77,755		68,255

Operating expenses:
Research and development	3,378		2,776		6,785		5,647		3,701		2,937		10,486		8,584
Selling, general and administrative	4,150		3,718		8,381		7,664		4,108		3,783		12,489		11,447
Total operating expenses	7,528		6,494		15,166		13,311		7,809		6,720		22,975		20,031

Operating income	15,894		14,097		42,168		37,456		12,612		10,768		54,780		48,224
Other income/(expense), net	274		587		1,030		1,408		672		540		1,702		1,948
Income before provision for income taxes	16,168		14,684		43,198		38,864		13,284		11,308		56,482		50,172
Provision for income taxes	2,346		3,655		9,311		9,944		1,765		2,591		11,076		12,535
Net income	$	13,822	$	11,029	$	33,887	$	28,920	$	11,519	$	8,717	$	45,406	$	37,637

Earnings per share:
Basic	$	2.75	$	2.11	$	6.69	$	5.50	$	2.36	$	1.68	$	9.07	$	7.18
Diluted	$	2.73	$	2.10	$	6.63	$	5.46	$	2.34	$	1.67	$	8.99	$	7.14

Shares used in computing earnings per share:
Basic	5,024,877		5,225,791		5,068,877		5,262,226		4,882,167		5,195,088		5,006,640		5,239,847
Diluted	5,068,493		5,261,688		5,113,140		5,294,841		4,926,609		5,233,499		5,050,963		5,274,394

Cash dividends declared per share	$	0.63	$	0.57	$	1.26	$	1.14	$	0.73	$	0.63	$	1.99	$	1.77


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net income	$	13,822		$	11,029		$	33,887		$	28,920		$	11,519		$	8,717		$	45,406		$	37,637
Other comprehensive income/(loss):
Change in foreign currency translation, net of tax effects of $8, $(44), $7 and $32, respectively	263			214			303			(161		)
Change in foreign currency translation, net of tax effects of $(3), $(35), $4 and $(3), respectively													(590		)	120			(287		)	(41		)

Change in unrealized gains/losses on derivative instruments:
Change in fair value of derivatives, net of tax benefit/(expense) of $(64), $(25), $(130) and $(253), respectively	(27		)	(300		)	61			1,168
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $77, $311, $56 and $100, respectively	(207		)	(1,032		)	(105		)	(726		)
Change in fair value of derivatives, net of tax benefit/(expense) of $70, $(16), $(60) and $(269), respectively													109			(166		)	170			1,002
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(254), $176, $(198) and $276, respectively													978			(409		)	873			(1,135		)
Total change in unrealized gains/losses on derivative instruments, net of tax	(234		)	(1,332		)	(44		)	442			1,087			(575		)	1,043			(133		)

Change in unrealized gains/losses on marketable securities:
Change in fair value of marketable securities, net of tax benefit/(expense) of $541, $(256), $1,005 and $733, respectively	(2,003		)	464			(2,849		)	(1,344		)
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(7), $7, $34 and $(4), respectively	29			(13		)	(46		)	7
Change in fair value of marketable securities, net of tax benefit/(expense) of $154, $(197), $1,159 and $536, respectively													(568		)	364			(3,417		)	(980		)
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(7), $16, $27 and $12, respectively													24			(32		)	(22		)	(25		)
Total change in unrealized gains/losses on marketable securities, net of tax	(1,974		)	451			(2,895		)	(1,337		)	(544		)	332			(3,439		)	(1,005		)

Total other comprehensive income/(loss)	(1,945		)	(667		)	(2,636		)	(1,056		)	(47		)	(123		)	(2,683		)	(1,179		)
Total comprehensive income	$	11,877		$	10,362		$	31,251		$	27,864		$	11,472		$	8,594		$	42,723		$	36,458


	March 31, 2018			September 30, 2017			June 30, 2018			September 30, 2017
ASSETS:
Current assets:
Cash and cash equivalents	$	45,059		$	20,289		$	31,971		$	20,289
Short-term marketable securities	42,881			53,892			38,999			53,892
Accounts receivable, less allowances of $60 and $58, respectively	14,324			17,874
Accounts receivable, net							14,104			17,874
Inventories	7,662			4,855			5,936			4,855
Vendor non-trade receivables	8,084			17,799			12,263			17,799
Other current assets	12,043			13,936			12,488			13,936
Total current assets	130,053			128,645			115,761			128,645

Long-term marketable securities	179,286			194,714			172,773			194,714
Property, plant and equipment, net	35,077			33,783			38,117			33,783
Other non-current assets	23,086			18,177			22,546			18,177
Total assets	$	367,502		$	375,319		$	349,197		$	375,319

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	34,311		$	49,049		$	38,489		$	49,049
Accrued expenses	26,756			25,744			25,184			25,744
Deferred revenue	7,775			7,548			7,403			7,548
Commercial paper	11,980			11,977			11,974			11,977
Current portion of long-term debt	8,498			6,496			5,498			6,496
Total current liabilities	89,320			100,814			88,548			100,814

Deferred revenue, non-current	3,087			2,836			2,878			2,836
Long-term debt	101,362			97,207			97,128			97,207
Other non-current liabilities	46,855			40,415			45,694			40,415
Total liabilities	240,624			241,272			234,248			241,272

Commitments and contingencies

Shareholders’ equity:
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,943,282 and 5,126,201 shares issued and outstanding, respectively	38,044			35,867
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,842,917 and 5,126,201 shares issued and outstanding, respectively							38,624			35,867
Retained earnings	91,898			98,330			79,436			98,330
Accumulated other comprehensive income/(loss)	(3,064		)	(150		)	(3,111		)	(150		)
Total shareholders’ equity	126,878			134,047			114,949			134,047
Total liabilities and shareholders’ equity	$	367,502		$	375,319		$	349,197		$	375,319



		Page
Part I
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2122
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3335
Item 4.	Controls and Procedures	3435
Part II
Item 1.	Legal Proceedings	3536
Item 1A.	Risk Factors	3536
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4546
Item 3.	Defaults Upon Senior Securities	4546
Item 4.	Mine Safety Disclosures	4546
Item 5.	Other Information	4546
Item 6.	Exhibits	4647


	March 31, 2018															June 30, 2018
	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	$	9,934	$	—	$	—		$	9,934	$	9,934	$	—	$	—	$	9,973	$	—	$	—		$	9,973	$	9,973	$	—	$	—

Level 1 ⁽¹⁾:
Money market funds	5,742		—		—			5,742		5,742		—		—		7,722		—		—			7,722		7,722		—		—
Mutual funds	800		—		(105		)	695		—		695		—		799		—		(112		)	687		—		687		—
Subtotal	6,542		—		(105		)	6,437		5,742		695		—		8,521		—		(112		)	8,409		7,722		687		—

Level 2 ⁽²⁾:
U.S. Treasury securities	56,737		1		(932		)	55,806		6,379		9,106		40,321		47,056		1		(1,055		)	46,002		350		7,262		38,390
U.S. agency securities	5,539		—		(39		)	5,500		2,837		588		2,075		6,994		—		(44		)	6,950		4,477		483		1,990
Non-U.S. government securities	8,247		88		(137		)	8,198		—		477		7,721		11,774		40		(282		)	11,532		—		1,124		10,408
Certificates of deposit and time deposits	7,266		—		—			7,266		4,611		2,021		634		5,662		—		—			5,662		3,649		1,412		601
Commercial paper	17,417		—		—			17,417		15,455		1,962		—		7,064		—		—			7,064		5,653		1,411		—
Corporate securities	138,036		176		(1,975		)	136,237		101		27,431		108,705		130,945		129		(2,246		)	128,828		147		25,874		102,807
Municipal securities	973		—		(11		)	962		—		166		796		956		—		(8		)	948		—		172		776
Mortgage- and asset-backed securities	19,966		9		(506		)	19,469		—		435		19,034		18,919		9		(553		)	18,375		—		574		17,801
Subtotal	254,181		274		(3,600		)	250,855		29,383		42,186		179,286		229,370		179		(4,188		)	225,361		14,276		38,312		172,773

Total(3)	$	270,657	$	274	$	(3,705	)	$	267,226	$	45,059	$	42,881	$	179,286	$	247,864	$	179	$	(4,300	)	$	243,743	$	31,971	$	38,999	$	172,773


(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 June 30, 2018, total cash, cash equivalents and marketable securities included $8.8 billion, related to the State Aid Decision (see Note 4, “Income Taxes”) and other agreements, which was restricted from general use.


	March 31, 2018									June 30, 2018
	Continuous Unrealized Losses									Continuous Unrealized Losses
	Less than 12 Months			12 Months or Greater			Total			Less than 12 Months			12 Months or Greater			Total
Fair value of marketable securities	$	159,198		$	37,266		$	196,464		$	150,468		$	36,960		$	187,428
Unrealized losses	$	(2,633	)	$	(1,072	)	$	(3,705	)	$	(3,134	)	$	(1,166	)	$	(4,300	)


	March 31, 2018						June 30, 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	$	1,361	$	290	$	1,651	$	850	$	385	$	1,235
Interest rate contracts	$	12	$	—	$	12	$	—	$	—	$	—

Derivative liabilities ⁽²⁾:
Foreign exchange contracts	$	651	$	514	$	1,165	$	357	$	221	$	578
Interest rate contracts	$	1,052	$	—	$	1,052	$	1,271	$	—	$	1,271


(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 Condensed Consolidated Balance Sheets.


(2)	The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses and other non-current liabilities in the Condensed Consolidated Balance Sheets.



	Purchase Period End Date	Number of Shares (in thousands)		Average Repurchase Price Per Share		ASR Amount (in millions)
November 2017 ASR	February 2018	29,269	⁽¹⁾	$	170.84	$	5,000
August 2017 ASR	November 2017	18,887		$	158.84	$	3,000
May 2017 ASR	August 2017	20,108		$	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


~~(1)~~	~~Includes~~ ~~23.6 million~~ ~~shares delivered and retired at the beginning of the purchase period, which began in the first quarter of 2018, and~~ ~~5.7 million~~ ~~shares delivered and retired at the end of the purchase period, which concluded in the second quarter of 2018.~~


	Cumulative Foreign Currency Translation			Unrealized Gains/Losses on Derivative Instruments			Unrealized Gains/Losses on Marketable Securities			Total			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	)	$	(354	)	$	(124	)	$	328		$	(150	)
Other comprehensive income/(loss) before reclassifications	296			191			(3,854		)	(3,367		)	(291		)	230			(4,576		)	(4,637		)
Amounts reclassified from AOCI	—			(161		)	(80		)	(241		)	—			1,071			(49		)	1,022
Tax effect	7			(74		)	1,039			972			4			(258		)	1,186			932
Other comprehensive income/(loss)	303			(44		)	(2,895		)	(2,636		)	(287		)	1,043			(3,439		)	(2,683		)
Cumulative effect of change in accounting principle ⁽¹⁾	(176		)	29			(131		)	(278		)	(176		)	29			(131		)	(278		)
Balances as of March 31, 2018	$	(227	)	$	(139	)	$	(2,698	)	$	(3,064	)
Balances as of June 30, 2018													$	(817	)	$	948		$	(3,242	)	$	(3,111	)


(1)	Refer to Note 4, “Income Taxes” for more information on the Company’s adoption of ASU 2018-02 at the beginning of the second quarter of 2018.


	Number of RSUs (in thousands)		Weighted-Average Grant Date Fair Value Per RSU		Aggregate Fair Value (in millions)		Number of RSUs (in thousands)		Weighted-Average Grant Date Fair Value Per RSU		Aggregate Fair Value (in millions)
Balance as of September 30, 2017	97,571		$	110.33			97,571		$	110.33
RSUs granted	40,184		$	159.25			43,340		$	160.79
RSUs vested	(22,348	)	$	103.66			(41,292	)	$	111.62
RSUs canceled	(3,023	)	$	123.28			(4,884	)	$	126.32
Balance as of March 31, 2018	112,384		$	128.80	$	18,856
Balance as of June 30, 2018							94,735		$	132.03	$	17,536


(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 third quarter of 2018 included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits.


(3)	Includes sales of AirPods, Apple TV, Apple Watch, Beats® products, HomePod, iPod touch and other Apple-branded and third-party accessories.


(2)	Refer to Note 1, “Summary of Significant Accounting Polices” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for more information on the prior period reclassification related to the Company’s adoption of ASU 2016-09.



	Dividends and Dividend Equivalents Paid		Accelerated Share Repurchases		Open Market Share Repurchases		Taxes Related to Settlement of Equity Awards		Total
Q2 2018	$	3,190	$	—	$	23,500	$	152	$	26,842
Q1 2018	3,339		5,000		5,109		1,038		14,486
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	$	67,187	$	72,950	$	126,636	$	8,429	$	275,202

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