I a ¯L k e¶ rk t...iPad ®, Mac ®, Apple Watch ®, Apple TV ®, a portfolio of consumer and...
Transcript of I a ¯L k e¶ rk t...iPad ®, Mac ®, Apple Watch ®, Apple TV ®, a portfolio of consumer and...
UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(MarkOne)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934ForthequarterlyperiodendedJuly1,2017
or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Forthetransitionperiodfromto.CommissionFileNumber:001-36743
Apple Inc.(ExactnameofRegistrantasspecifiedinitscharter)
California 94-2404110
(Stateorotherjurisdictionofincorporationororganization)
(I.R.S.EmployerIdentificationNo.)
1 Infinite LoopCupertino, California 95014
(Addressofprincipalexecutiveoffices) (ZipCode)
(408) 996-1010(Registrant’stelephonenumber,includingareacode)
IndicatebycheckmarkwhethertheRegistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheRegistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.
Yes☒No☐IndicatebycheckmarkwhethertheRegistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheRegistrantwasrequiredtosubmitandpostsuchfiles).
Yes☒No☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growthcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler,”“smallerreportingcompany,”and“emerginggrowthcompany”inRule12b-2oftheExchangeAct.
Largeacceleratedfiler ☒ Acceleratedfiler ☐
Non-acceleratedfiler ☐(Donotcheckifasmallerreportingcompany) Smallerreportingcompany ☐
Emerginggrowthcompany ☐
Ifanemerginggrowthcompany,indicatebycheckmarkiftheRegistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.☐
IndicatebycheckmarkwhethertheRegistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).Yes☐No☒
5,165,228,000sharesofcommonstock,parvalue$0.00001pershare,issuedandoutstandingasofJuly21,2017
Apple Inc.Form 10-Q
For the Fiscal Quarter Ended July 1, 2017
TABLE OF CONTENTS
PagePart I
Item1. FinancialStatements 1Item2. Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations 21Item3. QuantitativeandQualitativeDisclosuresAboutMarketRisk 33Item4. ControlsandProcedures 33
Part IIItem1. LegalProceedings 34Item1A. RiskFactors 34Item2. UnregisteredSalesofEquitySecuritiesandUseofProceeds 44Item3. DefaultsUponSeniorSecurities 44Item4. MineSafetyDisclosures 44Item5. OtherInformation 44Item6. Exhibits 45
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)(Inmillions,exceptnumberofshareswhicharereflectedinthousandsandpershareamounts)
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Netsales $ 45,408 $ 42,358 $ 176,655 $ 168,787Costofsales 27,920 26,252 108,400 102,337
Grossmargin 17,488 16,106 68,255 66,450
Operatingexpenses:
Researchanddevelopment 2,937 2,560 8,584 7,475Selling,generalandadministrative 3,783 3,441 11,447 10,712
Totaloperatingexpenses 6,720 6,001 20,031 18,187
Operatingincome 10,768 10,105 48,224 48,263Otherincome/(expense),net 540 364 1,948 921Incomebeforeprovisionforincometaxes 11,308 10,469 50,172 49,184Provisionforincometaxes 2,591 2,673 12,535 12,511Netincome $ 8,717 $ 7,796 $ 37,637 $ 36,673
Earningspershare:
Basic $ 1.68 $ 1.43 $ 7.18 $ 6.66Diluted $ 1.67 $ 1.42 $ 7.14 $ 6.62
Sharesusedincomputingearningspershare:
Basic 5,195,088 5,443,058 5,239,847 5,505,456Diluted 5,233,499 5,472,781 5,274,394 5,535,931
Cashdividendsdeclaredpershare $ 0.63 $ 0.57 $ 1.77 $ 1.61
SeeaccompanyingNotestoCondensedConsolidatedFinancialStatements.
AppleInc.|Q32017Form10-Q|1
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)(Inmillions)
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Netincome $ 8,717 $ 7,796 $ 37,637 $ 36,673Othercomprehensiveincome/(loss):
Changeinforeigncurrencytranslation,netoftaxeffectsof$(35),$2,$(3)and$2,respectively 120 46 (41) 64
Changeinunrealizedgains/lossesonderivativeinstruments:
Changeinfairvalueofderivatives,netoftaxbenefit/(expense)of$(16),$27,$(269)and$(10),respectively (166) (175) 1,002 (66)
Adjustmentfornet(gains)/lossesrealizedandincludedinnetincome,netoftaxexpense/(benefit)of$176,$46,$276and$256,respectively (409) (88) (1,135) (1,061)
Totalchangeinunrealizedgains/lossesonderivativeinstruments,netoftax (575) (263) (133) (1,127)
Changeinunrealizedgains/lossesonmarketablesecurities:
Changeinfairvalueofmarketablesecurities,netoftaxbenefit/(expense)of$(197),$(641),$536and$(663),respectively 364 1,170 (980) 1,217
Adjustmentfornet(gains)/lossesrealizedandincludedinnetincome,netoftaxexpense/(benefit)of$16,$8,$12and$(45),respectively (32) (12) (25) 84
Totalchangeinunrealizedgains/lossesonmarketablesecurities,netoftax 332 1,158 (1,005) 1,301
Totalothercomprehensiveincome/(loss) (123) 941 (1,179) 238Totalcomprehensiveincome $ 8,594 $ 8,737 $ 36,458 $ 36,911
SeeaccompanyingNotestoCondensedConsolidatedFinancialStatements.
AppleInc.|Q32017Form10-Q|2
Apple Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)(Inmillions,exceptnumberofshareswhicharereflectedinthousandsandparvalue)
July 1,
2017 September 24,
2016ASSETS:
Currentassets: Cashandcashequivalents $ 18,571 $ 20,484Short-termmarketablesecurities 58,188 46,671Accountsreceivable,lessallowancesof$55and$53,respectively 12,399 15,754Inventories 3,146 2,132Vendornon-tradereceivables 10,233 13,545Othercurrentassets 10,338 8,283
Totalcurrentassets 112,875 106,869 Long-termmarketablesecurities 184,757 170,430Property,plantandequipment,net 29,286 27,010Goodwill 5,661 5,414Acquiredintangibleassets,net 2,444 3,206Othernon-currentassets 10,150 8,757
Totalassets $ 345,173 $ 321,686
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Currentliabilities: Accountspayable $ 31,915 $ 37,294Accruedexpenses 23,304 22,027Deferredrevenue 7,608 8,080Commercialpaper 11,980 8,105Currentportionoflong-termdebt 6,495 3,500
Totalcurrentliabilities 81,302 79,006 Deferredrevenue,non-current 2,984 2,930Long-termdebt 89,864 75,427Othernon-currentliabilities 38,598 36,074
Totalliabilities 212,748 193,437
Commitmentsandcontingencies Shareholders’equity:
Commonstockandadditionalpaid-incapital,$0.00001parvalue:12,600,000sharesauthorized;5,169,782and5,336,166sharesissuedandoutstanding,respectively 34,445 31,251
Retainedearnings 98,525 96,364Accumulatedothercomprehensiveincome/(loss) (545) 634
Totalshareholders’equity 132,425 128,249Totalliabilitiesandshareholders’equity $ 345,173 $ 321,686
SeeaccompanyingNotestoCondensedConsolidatedFinancialStatements.
AppleInc.|Q32017Form10-Q|3
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(Inmillions)
Nine Months Ended
July 1,
2017 June 25,
2016Cashandcashequivalents,beginningoftheperiod $ 20,484 $ 21,120
Operatingactivities: Netincome 37,637 36,673Adjustmentstoreconcilenetincometocashgeneratedbyoperatingactivities:
Depreciationandamortization 7,673 7,957Share-basedcompensationexpense 3,666 3,180Deferredincometaxexpense 4,764 5,191Other (142) 419
Changesinoperatingassetsandliabilities: Accountsreceivable,net 3,381 4,623Inventories (1,014) 518Vendornon-tradereceivables 3,312 6,166Othercurrentandnon-currentassets (3,229) 1,049Accountspayable (5,212) (9,567)Deferredrevenue (418) (1,148)Othercurrentandnon-currentliabilities (2,476) (5,363)
Cashgeneratedbyoperatingactivities 47,942 49,698
Investingactivities: Purchasesofmarketablesecurities (123,781) (112,068)Proceedsfrommaturitiesofmarketablesecurities 19,347 14,915Proceedsfromsalesofmarketablesecurities 76,747 69,926Paymentsmadeinconnectionwithbusinessacquisitions,net (248) (146)Paymentsforacquisitionofproperty,plantandequipment (8,586) (8,757)Paymentsforacquisitionofintangibleassets (209) (753)
Paymentsforstrategicinvestments,net (87) (1,376)Other 313 (321)
Cashusedininvestingactivities (36,504) (38,580)
Financingactivities: Proceedsfromissuanceofcommonstock 274 247Excesstaxbenefitsfromequityawards 534 391Paymentsfortaxesrelatedtonetsharesettlementofequityawards (1,646) (1,361)Paymentsfordividendsanddividendequivalents (9,499) (9,058)Repurchasesofcommonstock (25,105) (23,696)Proceedsfromissuanceoftermdebt,net 21,725 17,984Repaymentsoftermdebt (3,500) (2,500)Changeincommercialpaper,net 3,866 3,992
Cashusedinfinancingactivities (13,351) (14,001)Increase/(Decrease)incashandcashequivalents (1,913) (2,883)Cashandcashequivalents,endoftheperiod $ 18,571 $ 18,237
Supplementalcashflowdisclosure: Cashpaidforincometaxes,net $ 9,752 $ 8,990Cashpaidforinterest $ 1,456 $ 892
SeeaccompanyingNotestoCondensedConsolidatedFinancialStatements.
AppleInc.|Q32017Form10-Q|4
Apple Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile communication and mediadevices and personal computers, and sells a variety of related software, services, accessories, networking solutions and third-party digital content andapplications.TheCompany’sproductsandservicesincludeiPhone®,iPad®,Mac®,AppleWatch®,AppleTV®,aportfolioofconsumerandprofessionalsoftware applications, iOS, macOS® , watchOS®andtvOS™operating systems, iCloud® , Apple Pay®anda variety of accessory, service and supportofferings.TheCompanysellsanddeliversdigital contentandapplicationsthroughtheiTunesStore® , AppStore® , MacAppStore,TVAppStore,iBooksStore®andAppleMusic®(collectively“Digital ContentandServices”). TheCompanysellsitsproductsworldwidethroughitsretail stores,onlinestoresanddirect sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells avarietyofthird-partyApple-compatibleproducts,includingapplicationsoftwareandvariousaccessoriesthroughitsretailandonlinestores.TheCompanysellstoconsumers,smallandmid-sizedbusinessesandeducation,enterpriseandgovernmentcustomers.
Basis of Presentation and Preparation
Theaccompanying condensed consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have beeneliminated. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal andrecurringinnature,necessaryforfairfinancialstatementpresentation.ThepreparationofthesecondensedconsolidatedfinancialstatementsinconformitywithU.S.generallyacceptedaccountingprinciples(“GAAP”)requiresmanagementtomakeestimatesandassumptionsthat affect theamountsreportedinthesecondensedconsolidatedfinancialstatementsandaccompanyingnotes.Actualresultscoulddiffermateriallyfromthoseestimates.Certainpriorperiodamountsin the condensed consolidated financial statements have been reclassified to conform to the current period’s presentation. These condensed consolidatedfinancialstatementsandaccompanyingnotesshouldbereadinconjunctionwiththeCompany’sannualconsolidatedfinancialstatementsandthenotestheretoincludedinitsAnnualReportonForm10-KforthefiscalyearendedSeptember24,2016(the“2016Form10-K”).
TheCompany’sfiscalyearisthe52or53-weekperiodthatendsonthelastSaturdayofSeptember.TheCompany’sfiscalyear2017willinclude53weeksandendsonSeptember30,2017anditsfiscalyear2016included52weeksandendedonSeptember24,2016.A14thweekwasincludedinthefirstquarterof2017, as is done every five or six years, to realign fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters,monthsandperiodsrefertotheCompany’sfiscalyearsendedinSeptemberandtheassociatedquarters,monthsandperiodsofthosefiscalyears.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stockoutstandingduringtheperiod.Dilutedearningspershareiscomputedbydividingincomeavailabletocommonshareholdersbytheweighted-averagenumberofsharesofcommonstockoutstandingduringtheperiodincreasedtoincludethenumberofadditionalsharesofcommonstockthatwouldhavebeenoutstandingifthepotentiallydilutivesecuritieshadbeenissued.Potentiallydilutivesecuritiesincludeoutstandingstockoptions,sharestobepurchasedbyemployeesundertheCompany’semployeestockpurchaseplan,unvestedrestrictedstockandunvestedrestrictedstockunits(“RSUs”).Thedilutiveeffectofpotentiallydilutivesecuritiesisreflectedindilutedearningspersharebyapplicationofthetreasurystockmethod.Underthetreasurystockmethod,anincreaseinthefairmarketvalueoftheCompany’scommonstockcanresultinagreaterdilutiveeffectfrompotentiallydilutivesecurities.
AppleInc.|Q32017Form10-Q|5
Thefollowingtableshowsthecomputationofbasicanddilutedearningspershareforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(netincomeinmillionsandsharesinthousands):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Numerator:
Netincome $ 8,717 $ 7,796 $ 37,637 $ 36,673 Denominator:
Weighted-averagesharesoutstanding 5,195,088 5,443,058 5,239,847 5,505,456Effectofdilutivesecurities 38,411 29,723 34,547 30,475Weighted-averagedilutedshares 5,233,499 5,472,781 5,274,394 5,535,931
Basicearningspershare $ 1.68 $ 1.43 $ 7.18 $ 6.66Dilutedearningspershare $ 1.67 $ 1.42 $ 7.14 $ 6.62
Potentiallydilutivesecuritieswhoseeffectwouldhavebeenantidilutiveareexcludedfromthecomputationofdilutedearningspershare.
Note 2 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
ThefollowingtablesshowtheCompany’scashandavailable-for-salesecuritiesbysignificantinvestmentcategoryasofJuly1,2017andSeptember24,2016(inmillions):
July 1, 2017
Adjusted
Cost Unrealized
Gains Unrealized
Losses Fair
Value
Cash andCash
Equivalents
Short-TermMarketableSecurities
Long-TermMarketableSecurities
Cash $ 8,529 $ — $ — $ 8,529 $ 8,529 $ — $ —
Level1(1):
Moneymarketfunds 3,088 — — 3,088 3,088 — —
Mutualfunds 1,004 — (118) 886 — 886 —
Subtotal 4,092 — (118) 3,974 3,088 886 —
Level2(2):
U.S.Treasurysecurities 52,616 77 (230) 52,463 1,013 20,104 31,346
U.S.agencysecurities 5,328 3 (9) 5,322 2,255 1,774 1,293
Non-U.S.governmentsecurities 6,987 156 (50) 7,093 — 64 7,029
Certificatesofdepositandtimedeposits 6,731 — — 6,731 894 5,191 646
Commercialpaper 5,187 — — 5,187 2,683 2,504 —
Corporatesecurities 150,089 882 (312) 150,659 109 27,522 123,028
Municipalsecurities 938 3 (2) 939 — 127 812
Mortgage-andasset-backedsecurities 20,762 34 (177) 20,619 — 16 20,603
Subtotal 248,638 1,155 (780) 249,013 6,954 57,302 184,757
Total $ 261,259 $ 1,155 $ (898) $ 261,516 $ 18,571 $ 58,188 $ 184,757
AppleInc.|Q32017Form10-Q|6
September 24, 2016
Adjusted
Cost Unrealized
Gains Unrealized
Losses Fair
Value
Cash andCash
Equivalents
Short-TermMarketableSecurities
Long-TermMarketableSecurities
Cash $ 8,601 $ — $ — $ 8,601 $ 8,601 $ — $ —
Level1(1):
Moneymarketfunds 3,666 — — 3,666 3,666 — —
Mutualfunds 1,407 — (146) 1,261 — 1,261 —
Subtotal 5,073 — (146) 4,927 3,666 1,261 —
Level2(2):
U.S.Treasurysecurities 41,697 319 (4) 42,012 1,527 13,492 26,993
U.S.agencysecurities 7,543 16 — 7,559 2,762 2,441 2,356
Non-U.S.governmentsecurities 7,609 259 (27) 7,841 110 818 6,913
Certificatesofdepositandtimedeposits 6,598 — — 6,598 1,108 3,897 1,593
Commercialpaper 7,433 — — 7,433 2,468 4,965 —
Corporatesecurities 131,166 1,409 (206) 132,369 242 19,599 112,528
Municipalsecurities 956 5 — 961 — 167 794
Mortgage-andasset-backedsecurities 19,134 178 (28) 19,284 — 31 19,253
Subtotal 222,136 2,186 (265) 224,057 8,217 45,410 170,430
Total $ 235,810 $ 2,186 $ (411) $ 237,585 $ 20,484 $ 46,671 $ 170,430
(1) Level1fairvalueestimatesarebasedonquotedpricesinactivemarketsforidenticalassetsorliabilities.
(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 foridenticalorsimilarassetsorliabilitiesininactivemarkets,orotherinputsthatareobservableorcanbecorroboratedbyobservablemarketdataforsubstantiallythefulltermoftheassetsorliabilities.
TheCompanymaysellcertainofitsmarketablesecuritiespriortotheirstatedmaturitiesforstrategicreasonsincluding,butnotlimitedto,anticipationofcreditdeteriorationanddurationmanagement.ThematuritiesoftheCompany’slong-termmarketablesecuritiesgenerallyrangefromonetofiveyears.
TheCompanyconsidersthedeclinesinmarketvalueofitsmarketablesecuritiesinvestmentportfoliotobetemporaryinnature.TheCompanytypicallyinvestsinhighly-ratedsecurities,anditsinvestmentpolicygenerallylimitstheamountofcreditexposuretoanyoneissuer.Thepolicygenerallyrequiresinvestmentstobeinvestmentgrade,withtheprimaryobjectiveofminimizingthepotentialriskofprincipalloss.Fairvaluesweredeterminedforeachindividualsecurityintheinvestmentportfolio.Whenevaluatinganinvestmentforother-than-temporaryimpairment,theCompanyreviewsfactorssuchasthelengthoftimeandextenttowhich fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and theCompany’sintenttosell,orwhetheritismorelikelythannotitwillberequiredtoselltheinvestmentbeforerecoveryoftheinvestment’scostbasis.AsofJuly1,2017,theCompanydoesnotconsideranyofitsinvestmentstobeother-than-temporarilyimpaired.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on netinvestmentsincertainforeignsubsidiariesandoncertainexistingassetsandliabilities.However,theCompanymaychoosenottohedgecertainexposuresforavarietyofreasonsincluding,butnotlimitedto,accountingconsiderationsandtheprohibitiveeconomiccostofhedgingparticularexposures.Therecanbenoassurancethehedgeswilloffsetmorethanaportionofthefinancialimpactresultingfrommovementsinforeigncurrencyexchangeorinterestrates.
Tohelpprotectgrossmarginsfromfluctuationsinforeigncurrencyexchangerates,certainoftheCompany’ssubsidiarieswhosefunctionalcurrencyistheU.S.dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar and who sell in localcurrencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter intoforwardcontracts,optioncontractsorotherinstrumentstomanagethisriskandmaydesignatetheseinstrumentsascashflowhedges.TheCompanytypicallyhedgesportionsofitsforecastedforeigncurrencyexposureassociatedwithrevenueandinventorypurchases,typicallyforupto12months.
AppleInc.|Q32017Form10-Q|7
To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter into foreigncurrencyforwardandoptioncontractstooffsetthechangesinthecarryingamountsoftheseinvestmentsduetofluctuationsinforeigncurrencyexchangerates.In addition, the Company may use non-derivative financial instruments, such as its foreign currency-denominated debt, as economic hedges of its netinvestmentsincertainforeignsubsidiaries.Inbothofthesecases,theCompanydesignatestheseinstrumentsasnetinvestmenthedges.
TheCompanymayalsoenterintonon-designatedforeigncurrencycontractstopartiallyoffsettheforeigncurrencyexchangegainsandlossesgeneratedbytheremeasurementofcertainassetsandliabilitiesdenominatedinnon-functionalcurrencies.
TheCompanymayenterintointerestrateswaps,options,orotherinstrumentstomanageinterestraterisk.Theseinstrumentsmayoffsetaportionofchangesinincomeorexpense,orchangesinfairvalueoftheCompany’stermdebtorinvestments.TheCompanydesignatestheseinstrumentsaseithercashfloworfairvaluehedges.TheCompany’shedgedinterestratetransactionsasofJuly1,2017areexpectedtoberecognizedwithin10years.
CashFlowHedges
Theeffectiveportionsofcashflowhedgesarerecordedinaccumulatedothercomprehensiveincome(“AOCI”)untilthehedgeditemisrecognizedinearnings.Deferredgainsandlossesassociatedwithcashflowhedgesofforeigncurrencyrevenuearerecognizedasacomponentofnetsalesinthesameperiodastherelatedrevenueisrecognized, anddeferredgainsandlossesrelatedtocashflowhedgesof inventorypurchasesarerecognizedasacomponent of cost ofsalesinthesameperiodastherelatedcostsarerecognized.Deferredgainsandlossesassociatedwithcashflowhedgesofinterestincomeorexpensearerecognizedinotherincome/(expense),netinthesameperiodastherelatedincomeorexpenseisrecognized.Theineffectiveportionsandamountsexcludedfromtheeffectivenesstestingofcashflowhedgesarerecognizedinotherincome/(expense),net.
Derivativeinstrumentsdesignatedascashflowhedgesmustbede-designatedashedgeswhenitisprobabletheforecastedhedgedtransactionwillnotoccurintheinitiallyidentifiedtimeperiodorwithinasubsequenttwo-monthtimeperiod.DeferredgainsandlossesinAOCIassociatedwithsuchderivativeinstrumentsare reclassified immediately into other income/(expense), net. Any subsequent changes in fair value of such derivative instruments are reflected in otherincome/(expense),netunlesstheyarere-designatedashedgesofothertransactions.
NetInvestmentHedges
Theeffectiveportionsofnet investmenthedgesarerecordedinothercomprehensiveincome(“OCI”)asapart of thecumulativetranslationadjustment. Theineffectiveportionsandamountsexcludedfromtheeffectivenesstestingofnetinvestmenthedgesarerecognizedinotherincome/(expense),net.
FairValueHedges
Gainsandlossesrelatedtochangesinfairvaluehedgesarerecognizedinearningsalongwithacorrespondinglossorgainrelatedtothechangeinvalueoftheunderlyinghedgeditem.
Non-DesignatedDerivatives
Derivativesthatarenotdesignatedashedginginstrumentsareadjustedtofairvaluethroughearningsinthefinancialstatementlineitemtowhichthederivativerelates.Asaresult,duringthethree-andnine-monthperiodsendedJuly1,2017,respectively,theCompanyrecognizedalossof$77millionandagainof$129millioninnetsales,gainsof$12millionand$91millionincostofsalesandgainsof$49millionand$481millioninotherincome/(expense),net.
TheCompanyrecordsall derivativesintheCondensedConsolidatedBalanceSheetsatfair value.TheCompany’saccountingtreatmentforthesederivativeinstruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of July 1, 2017 andSeptember24,2016(inmillions):
July 1, 2017
Fair Value ofDerivatives Designatedas Hedge Instruments
Fair Value ofDerivatives Not Designated
as Hedge Instruments Total
Fair Value
Derivativeassets(1): Foreignexchangecontracts $ 485 $ 242 $ 727Interestratecontracts $ 253 $ — $ 253
Derivativeliabilities(2): Foreignexchangecontracts $ 842 $ 362 $ 1,204Interestratecontracts $ 264 $ — $ 264
AppleInc.|Q32017Form10-Q|8
September 24, 2016
Fair Value ofDerivatives Designatedas Hedge Instruments
Fair Value ofDerivatives Not Designated
as Hedge Instruments Total
Fair Value
Derivativeassets(1): Foreignexchangecontracts $ 518 $ 153 $ 671Interestratecontracts $ 728 $ — $ 728
Derivativeliabilities(2): Foreignexchangecontracts $ 935 $ 134 $ 1,069Interestratecontracts $ 7 $ — $ 7
(1) ThefairvalueofderivativeassetsismeasuredusingLevel2fairvalueinputsandisrecordedasothercurrentassetsintheCondensedConsolidatedBalanceSheets.
(2) ThefairvalueofderivativeliabilitiesismeasuredusingLevel2fairvalueinputsandisrecordedasaccruedexpensesintheCondensedConsolidatedBalanceSheets.
Thefollowingtableshowsthepre-taxgainsandlossesoftheCompany’sderivativeandnon-derivativeinstrumentsdesignatedascashflow,netinvestmentandfairvaluehedgesinOCIandtheCondensedConsolidatedStatementsofOperationsforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Gains/(Losses)recognizedinOCI–effectiveportion:
Cashflowhedges: Foreignexchangecontracts $ (143) $ (170) $ 1,267 $ 18Interestratecontracts (2) (11) 7 (53)
Total $ (145) $ (181) $ 1,274 $ (35)
Netinvestmenthedges:
Foreigncurrencydebt $ 16 $ (128) $ 53 $ (205)
Gains/(Losses)reclassifiedfromAOCIintonetincome–effectiveportion:
Cashflowhedges: Foreignexchangecontracts $ 585 $ 142 $ 1,418 $ 1,325Interestratecontracts — (3) (3) (10)
Total $ 585 $ 139 $ 1,415 $ 1,315
Gains/(Losses)onderivativeinstruments:
Fairvaluehedges: Interestratecontracts $ 185 $ 345 $ (737) $ 484
Gains/(Losses)relatedtohedgeditems:
Fairvaluehedges: Fixed-ratedebt $ (185) $ (345) $ 737 $ (484)
AppleInc.|Q32017Form10-Q|9
Thefollowingtableshowsthenotional amountsof theCompany’soutstandingderivativeinstrumentsandcredit riskamountsassociatedwithoutstandingorunsettledderivativeinstrumentsasofJuly1,2017andSeptember24,2016(inmillions):
July 1, 2017 September 24, 2016
NotionalAmount
Credit RiskAmount
NotionalAmount
Credit RiskAmount
Instrumentsdesignatedasaccountinghedges: Foreignexchangecontracts $ 43,700 $ 485 $ 44,678 $ 518Interestratecontracts $ 31,500 $ 253 $ 24,500 $ 728
Instrumentsnotdesignatedasaccountinghedges:
Foreignexchangecontracts $ 48,774 $ 242 $ 54,305 $ 153
ThenotionalamountsforoutstandingderivativeinstrumentsprovideonemeasureofthetransactionvolumeoutstandinganddonotrepresenttheamountoftheCompany’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivativeinstruments that are outstanding or unsettled if all counterparties failed to performaccordingto thetermsof the contract, basedonthen-current currencyorinterest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change.AlthoughthetableabovereflectsthenotionalandcreditriskamountsoftheCompany’sderivativeinstruments,itdoesnotreflectthegainsorlossesassociatedwiththeexposuresandtransactionsthattheinstrumentsareintendedtohedge.Theamountsultimatelyrealizeduponsettlementofthesefinancialinstruments,togetherwiththegainsandlossesontheunderlyingexposures,willdependonactualmarketconditionsduringtheremaininglifeoftheinstruments.
TheCompanygenerallyentersintomasternettingarrangements,whicharedesignedtoreducecreditriskbypermittingnetsettlementoftransactionswiththesamecounterparty. Tofurtherlimitcredit risk,theCompanygenerallyentersintocollateral securityarrangementsthatprovideforcollateral tobereceivedorpostedwhenthenetfairvalueofcertainfinancialinstrumentsfluctuatesfromcontractuallyestablishedthresholds.TheCompanypresentsitsderivativeassetsand derivative liabilities at their gross fair values in its Condensed Consolidated Balance Sheets. As of July 1, 2017 , the net cash collateral posted by theCompany related to derivative instruments under its collateral security arrangements was $162 million , which was recorded as other current assets in theCondensedConsolidatedBalanceSheet.AsofSeptember24,2016,thenetcashcollateralreceivedbytheCompanyrelatedtoderivativeinstrumentsunderitscollateralsecurityarrangementswas$163million,whichwasrecordedasaccruedexpensesintheCondensedConsolidatedBalanceSheet.
UndermasternettingarrangementswiththerespectivecounterpartiestotheCompany’sderivativecontracts,theCompanyisallowedtonetsettletransactionswithasinglenetamountpayablebyonepartytotheother.AsofJuly1,2017andSeptember24,2016,thepotentialeffectsoftheserightsofset-offassociatedwiththeCompany’sderivativecontracts,includingtheeffectsofcollateral,wouldbeareductiontobothderivativeassetsandderivativeliabilitiesof$1.3billionand$1.5billion,respectively,resultinginanetderivativeliabilityof$326millionandanetderivativeassetof$160million,respectively.
Accounts Receivable
TradeReceivables
TheCompanyhasconsiderabletradereceivablesoutstandingwithitsthird-partycellularnetworkcarriers, wholesalers, retailers,value-addedresellers, smalland mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers;however,theCompanywillrequirecollateralincertaininstancestolimitcreditrisk.Inaddition,whenpossible,theCompanyattemptstolimitcreditriskontradereceivableswithcreditinsuranceforcertaincustomersorbyrequiringthird-partyfinancing,loansorleasestosupportcreditexposure.Thesecredit-financingarrangementsaredirectlybetweenthethird-partyfinancingcompanyandtheendcustomer.Assuch,theCompanygenerallydoesnotassumeanyrecourseorcreditrisksharingrelatedtoanyofthesearrangements.
The Company had nocustomers that individually represented 10%or more of total trade receivables as of July 1, 2017 . As ofSeptember 24, 2016 ,theCompany hadonecustomer that represented 10% or more of total trade receivables, which accounted for 10%. The Company’s cellular network carriersaccountedfor46%and63%oftotaltradereceivablesasofJuly1,2017andSeptember24,2016,respectively.
VendorNon-TradeReceivables
TheCompanyhasnon-tradereceivablesfromcertainofitsmanufacturingvendorsresultingfromthesaleofcomponentstothesevendorswhomanufacturesub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of July 1, 2017 ,theCompanyhadthreevendorsthatindividuallyrepresented10%ormoreoftotalvendornon-tradereceivables,whichaccountedfor39%,19%and16%.AsofSeptember24,2016,theCompanyhadtwovendorsthatindividuallyrepresented10%ormoreoftotalvendornon-tradereceivables,whichaccountedfor47%and21%.
AppleInc.|Q32017Form10-Q|10
Note 3 – Condensed Consolidated Financial Statement Details
ThefollowingtablesshowtheCompany’scondensedconsolidatedfinancialstatementdetailsasofJuly1,2017andSeptember24,2016(inmillions):
Property, Plant and Equipment, Net
July 1,
2017 September 24,
2016Landandbuildings $ 12,529 $ 10,185Machinery,equipmentandinternal-usesoftware 49,491 44,543Leaseholdimprovements 6,961 6,517
Grossproperty,plantandequipment 68,981 61,245Accumulateddepreciationandamortization (39,695) (34,235)
Totalproperty,plantandequipment,net $ 29,286 $ 27,010
Other Non-Current Liabilities
July 1,
2017 September 24,
2016Deferredtaxliabilities $ 30,191 $ 26,019Othernon-currentliabilities 8,407 10,055
Totalothernon-currentliabilities $ 38,598 $ 36,074
Other Income/(Expense), Net
Thefollowingtableshowsthedetailofotherincome/(expense),netforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Interestanddividendincome $ 1,327 $ 1,036 $ 3,833 $ 2,963Interestexpense (602) (409) (1,657) (1,006)Otherexpense,net (185) (263) (228) (1,036)
Totalotherincome/(expense),net $ 540 $ 364 $ 1,948 $ 921
Note 4 – Acquired Intangible Assets
TheCompany’sacquiredintangibleassetswithdefiniteusefullivesprimarilyconsistofpatentsandlicenses.ThefollowingtablesummarizesthecomponentsofacquiredintangibleassetbalancesasofJuly1,2017andSeptember24,2016(inmillions):
July 1, 2017 September 24, 2016
GrossCarryingAmount
AccumulatedAmortization
Net CarryingAmount
GrossCarryingAmount
AccumulatedAmortization
Net CarryingAmount
Definite-livedandamortizableacquiredintangibleassets $ 7,358 $ (5,014) $ 2,344 $ 8,912 $ (5,806) $ 3,106
Indefinite-livedandnon-amortizableacquiredintangibleassets 100 — 100 100 — 100Totalacquiredintangibleassets $ 7,458 $ (5,014) $ 2,444 $ 9,012 $ (5,806) $ 3,206
AppleInc.|Q32017Form10-Q|11
Note 5 – Income Taxes
AsofJuly1,2017, theCompanyrecordedgrossunrecognizedtaxbenefitsof$8.6billion,ofwhich$2.6billion,if recognized,wouldaffecttheCompany’seffectivetaxrate.AsofSeptember24,2016,thetotalamountofgrossunrecognizedtaxbenefitswas$7.7billion,ofwhich$2.8billion,ifrecognized,wouldhave affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in theCondensed Consolidated Balance Sheets. The Company had $1.3 billion and $1.0 billion of gross interest and penalties accrued as of July 1, 2017 andSeptember24,2016,respectively,whichareclassifiedasothernon-currentliabilitiesintheCondensedConsolidatedBalanceSheets.
TheCompanybelievesthat anadequateprovisionhasbeenmadeforanyadjustmentsthat mayresult fromtaxexaminations. However, theoutcomeof taxauditscannotbepredictedwithcertainty.IfanyissuesaddressedintheCompany’staxauditsareresolvedinamannernotconsistentwithitsexpectations,theCompanycould be required to adjust its provision for incometaxes in the period suchresolution occurs. Althoughtiming of the resolution and/or closure ofauditsisnotcertain,theCompanybelievesitisreasonablypossiblethatitsgrossunrecognizedtaxbenefitscoulddecrease(whetherbypayment,releaseoracombinationofboth)inthenext12monthsbyasmuchas$700million.
OnAugust30,2016,theEuropeanCommissionannounceditsdecisionthatIrelandgrantedstateaidtotheCompanybyprovidingtaxopinionsin1991and2007concerningthetaxallocationofprofitsoftheIrishbranchesoftwosubsidiariesoftheCompany(the“StateAidDecision”).TheStateAidDecisionordersIrelandtocalculateandrecoveradditionaltaxesfromtheCompanyfortheperiodJune2003throughDecember2014.Irishlegislativechanges,effectiveasofJanuary 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit andappealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. While the EuropeanCommissionannouncedarecoveryamountofupto€13billion,plusinterest,theactualamountofadditionaltaxessubjecttorecoveryistobecalculatedbyIreland in accordance with the European Commission’s guidance. Once the recovery amount is computed by Ireland, the Company anticipates funding it,including interest, out of foreign cash into escrow, where it will remain pending conclusion of all appeals. The Company believes that any incremental IrishcorporateincometaxespotentiallyduerelatedtotheStateAidDecisionwouldbecreditableagainstU.S.taxes.
Note 6 – Debt
Commercial Paper
TheCompanyissuesunsecuredshort-termpromissorynotes(“CommercialPaper”)pursuanttoacommercialpaperprogram.TheCompanyusesnetproceedsfromthecommercialpaperprogramforgeneralcorporatepurposes,includingdividendsandsharerepurchases.AsofJuly1,2017andSeptember24,2016,theCompanyhad$12.0billionand$8.1billionofCommercialPaperoutstanding,respectively,withmaturitiesgenerallylessthanninemonths.Theweighted-averageinterestrateoftheCompany’sCommercialPaperwas1.01%asofJuly1,2017and0.45%asofSeptember24,2016.
ThefollowingtableprovidesasummaryofcashflowsassociatedwiththeissuanceandmaturitiesofCommercialPaperfortheninemonthsendedJuly1,2017andJune25,2016(inmillions):
Nine Months Ended
July 1,
2017 June 25,
2016Maturitieslessthan90days:
Proceedsfrom/(Repaymentsof)commercialpaper,net $ (143) $ 4,154
Maturitiesgreaterthan90days: Proceedsfromcommercialpaper 12,633 1,846Repaymentsofcommercialpaper (8,624) (2,008)Proceedsfrom/(Repaymentsof)commercialpaper,net 4,009 (162)
Totalchangeincommercialpaper,net $ 3,866 $ 3,992
AppleInc.|Q32017Form10-Q|12
Term Debt
Asof July 1, 2017 , the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $96.6billion(collectivelythe“Notes”).TheNotesareseniorunsecuredobligations,andinterestispayableinarrears,quarterlyfortheU.S.dollar-denominatedandAustraliandollar-denominatedfloating-ratenotes,semi-annuallyfortheU.S.dollar-denominated,Australiandollar-denominated,Britishpound-denominatedandJapaneseyen-denominated fixed-rate notes and annually for the euro-denominated and Swiss franc-denominated fixed-rate notes. The following table provides asummaryoftheCompany’stermdebtasofJuly1,2017andSeptember24,2016:
Maturities
July 1, 2017 September 24, 2016
Amount
(inmillions) EffectiveInterest Rate Amount
(inmillions) EffectiveInterest Rate
2013debtissuanceof$17.0billion:
Floating-ratenotes 2018 2018 $ 2,000 1.10% 1.10% $ 2,000 1.10% 1.10%
Fixed-rate1.000%–3.850%notes 2018 – 2043 12,500 1.08% – 3.91% 12,500 1.08% – 3.91%
2014debtissuanceof$12.0billion:
Floating-ratenotes 2019 – 2019 1,000 1.48% 1.48% 2,000 0.86% – 1.09%
Fixed-rate2.100%–4.450%notes 2019 – 2044 8,500 1.48% – 4.48% 10,000 0.85% – 4.48%
2015debtissuancesof$27.3billion:
Floating-ratenotes 2019 – 2020 1,532 1.43% – 1.87% 1,781 0.87% – 1.87%
Fixed-rate0.350%–4.375%notes 2019 – 2045 24,259 0.28% – 4.51% 25,144 0.28% – 4.51%
2016debtissuancesof$24.9billion:
Floating-ratenotes 2019 – 2021 1,350 1.31% – 2.32% 1,350 0.91% – 1.95%
Fixed-rate1.100%–4.650%notes 2018 – 2046 23,610 1.13% – 4.78% 23,609 1.13% – 4.58%
Secondquarter2017debtissuanceof$10.0billion:
Floating-ratenotes 2019 500 1.26% — —%
Floating-ratenotes 2020 500 1.38% — —%
Floating-ratenotes 2022 1,000 1.68% — —%
Fixed-rate1.550%notes 2019 500 1.59% — —%
Fixed-rate1.900%notes 2020 1,000 1.38% — —%
Fixed-rate2.500%notes 2022 1,500 1.67% — —%
Fixed-rate3.000%notes 2024 1,750 1.98% — —%
Fixed-rate3.350%notes 2027 2,250 2.12% — —%
Fixed-rate4.250%notes 2047 1,000 4.26% — —%
Secondquarter2017debtissuanceof$1.0billion:
Fixed-rate4.300%notes 2047 1,000 4.30% — —%
Thirdquarter2017debtissuanceof$7.0billion:
Floating-ratenotes 2020 500 1.25% — —%
Floating-ratenotes 2022 750 1.53% — —%
Fixed-rate1.800%notes 2020 1,000 1.84% — —%
Fixed-rate2.300%notes 2022 1,000 2.34% — —%
Fixed-rate2.850%notes 2024 1,750 2.16% — —%
Fixed-rate3.200%notes 2027 2,000 2.34% — —%
Thirdquarter2017euro-denominateddebtissuanceof€2.5billion:
Fixed-rate0.875%notes 2025 1,419 3.03% — —%
Fixed-rate1.375%notes 2029 1,419 3.37% — —%
Thirdquarter2017debtissuanceof$1.0billion:
Fixed-rate3.000%notes 2027 1,000 3.03% — —%
Totaltermdebt 96,589 78,384
Unamortizedpremium/(discount)andissuancecosts,net (210) (174)
Hedgeaccountingfairvalueadjustments (20) 717
Less:Currentportionoflong-termdebt (6,495) (3,500)
Totallong-termdebt $ 89,864 $ 75,427
AppleInc.|Q32017Form10-Q|13
Tomanageinterestrateriskoncertainofitsfixed-ratenotesissuedduringthethirdquarterof2017andmaturingin2024and2027,theCompanyenteredintointerestrateswapswithanaggregatenotionalamountof$2.75billion,whicheffectivelyconvertedthefixedinterestratesonaportionofthesenotestofloatinginterestrates.TheCompanyalsohedgeditsentirethirdquarter2017issuanceof€2.5billionofeuro-denominatednotesbyenteringintoforeigncurrencyswapstoeffectivelyconvertthesenotestoU.S.dollar-denominatednotes.
To manage interest rate risk on certain of its fixed-rate notes issued during the second quarter of 2017 and maturing in 2020, 2022, 2024 and 2027, theCompanyenteredintointerestrateswapswithanaggregatenotionalamountof$6.5billion,whicheffectivelyconvertedthefixedinterestratesonthesenotestofloatinginterestrates.
AportionoftheCompany’sJapaneseyen-denominatednotesisdesignatedasahedgeoftheforeigncurrencyexposureoftheCompany’snetinvestmentinaforeignoperation.TheforeigncurrencytransactiongainorlossontheJapaneseyen-denominateddebtdesignatedasahedgeisrecordedinOCIasapartofthecumulativetranslationadjustment.AsofJuly1,2017andSeptember24,2016,thecarryingvalueofthedebtdesignatedasanetinvestmenthedgewas$1.5billionand$1.9billion,respectively.ForfurtherdiscussionregardingtheCompany’suseofderivativeinstrumentsseetheDerivativeFinancialInstrumentssectionofNote2,“FinancialInstruments.”
TheeffectiveinterestratesfortheNotesincludetheinterestontheNotes,amortizationofthediscountorpremiumand,if applicable, adjustmentsrelatedtohedging.TheCompanyrecognized$574millionand$1.6billionofinterestexpenseonitstermdebtforthethree-andnine-monthperiodsendedJuly1,2017,respectively.TheCompanyrecognized$393millionand$975millionofinterestexpenseonitstermdebtforthethree-andnine-monthperiodsendedJune25,2016,respectively.
AsofJuly1,2017andSeptember24,2016,thefairvalueoftheCompany’sNotes,basedonLevel2inputs,was$98.3billionand$81.7billion,respectively.
Note 7 – Shareholders’ Equity
Dividends
TheCompanydeclaredandpaidcashdividendspershareduringtheperiodspresentedasfollows:
DividendsPer Share
Amount(inmillions)
2017: Thirdquarter $ 0.63 $ 3,281Secondquarter 0.57 2,988Firstquarter 0.57 3,042
Totalcashdividendsdeclaredandpaid $ 1.77 $ 9,311
2016:
Fourthquarter $ 0.57 $ 3,071Thirdquarter 0.57 3,117Secondquarter 0.52 2,879Firstquarter 0.52 2,898
Totalcashdividendsdeclaredandpaid $ 2.18 $ 11,965
FuturedividendsaresubjecttodeclarationbytheBoardofDirectors.
Share Repurchase Program
InMay2017,theCompany’sBoardofDirectorsincreasedthesharerepurchaseauthorizationfrom$175billionto$210billionoftheCompany’scommonstock,ofwhich$158billionhadbeenutilizedasofJuly1,2017.TheCompany’ssharerepurchaseprogramdoesnotobligateit toacquireanyspecificnumberofshares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying withRule10b5-1undertheSecuritiesExchangeActof1934,asamended(the“ExchangeAct”).
AppleInc.|Q32017Form10-Q|14
TheCompanyhasentered,andinthefuturemayenter,intoacceleratedsharerepurchasearrangements(“ASRs”)withfinancialinstitutions.Inexchangeforup-frontpayments,thefinancialinstitutionsdeliversharesoftheCompany’scommonstockduringthepurchaseperiodsofeachASR.Thetotalnumberofsharesultimatelydelivered,andthereforetheaveragerepurchasepricepaidpershare,isdeterminedattheendoftheapplicablepurchaseperiodofeachASRbasedonthevolume-weightedaveragepriceoftheCompany’scommonstockduringthatperiod.Thesharesreceivedareretiredintheperiodstheyaredelivered,andtheup-frontpaymentsareaccountedforasareductiontoshareholders’equityintheCompany’sCondensedConsolidatedBalanceSheetsintheperiodsthepaymentsaremade. TheCompanyreflectstheASRsasarepurchaseof commonstockintheperioddeliveredfor purposesof calculatingearningspershareandasforwardcontractsindexedtoitsowncommonstock.TheASRsmetalloftheapplicablecriteriaforequityclassification,andthereforewerenotaccountedforasderivativeinstruments.
ThefollowingtableshowstheCompany’sASRactivityandrelatedinformationduringtheninemonthsendedJuly1,2017andtheyearendedSeptember24,2016:
Purchase Period
End Date Number of Shares(inthousands)
AverageRepurchase
Price Per Share ASR Amount(inmillions)
May2017ASR August2017 15,598 (1) (1) $ 3,000February2017ASR May2017 20,949 (2) $ 143.20 $ 3,000November2016ASR February2017 51,157 $ 117.29 $ 6,000August2016ASR November2016 26,850 $ 111.73 $ 3,000May2016ASR August2016 60,452 $ 99.25 $ 6,000November2015ASR April2016 29,122 $ 103.02 $ 3,000
(1) “Number of Shares” represents those shares delivered at the beginning of the purchase period and does not represent the final number of shares to bedeliveredundertheASR.Thetotalnumberofsharesultimatelydelivered,andthereforetheaveragerepurchasepricepaidpershare,willbedeterminedattheendof thepurchaseperiodbasedonthevolume-weightedaveragepriceof theCompany’scommonstockduringthat period. TheMay2017ASRpurchaseperiodwillendinAugust2017.
(2) Includes17.5millionsharesdeliveredandretiredatthebeginningofthepurchaseperiod,whichbeganinthesecondquarterof2017and3.4millionsharesdeliveredandretiredattheendofthepurchaseperiod,whichconcludedinthethirdquarterof2017.
Additionally,theCompanyrepurchasedsharesofitscommonstockintheopenmarket,whichwereretireduponrepurchase,duringtheperiodspresentedasfollows:
Number of Shares(inthousands)
Average RepurchasePrice Per Share
Amount(inmillions)
2017: Thirdquarter 30,356 $ 148.24 $ 4,500Secondquarter 31,070 $ 128.74 4,001Firstquarter 44,333 $ 112.78 5,000
Totalopenmarketcommonstockrepurchases 105,759 $ 13,501
2016:
Fourthquarter 28,579 $ 104.97 $ 3,000Thirdquarter 41,238 $ 97.00 4,000Secondquarter 71,766 $ 97.54 7,000Firstquarter 25,984 $ 115.45 3,000
Totalopenmarketcommonstockrepurchases 167,567 $ 17,000
Note 8 – Comprehensive Income
Comprehensive income consists of two components, net income and OCI. OCI refers to revenue, expenses, and gains and losses that under GAAP arerecordedasanelementofshareholders’equitybutareexcludedfromnetincome.TheCompany’sOCIconsistsofforeigncurrencytranslationadjustmentsfromthosesubsidiariesnotusingtheU.S.dollarastheirfunctionalcurrency,netdeferredgainsandlossesoncertainderivativeinstrumentsaccountedforascashflowhedgesandunrealizedgainsandlossesonmarketablesecuritiesclassifiedasavailable-for-sale.
AppleInc.|Q32017Form10-Q|15
Thefollowingtableshowsthepre-taxamountsreclassifiedfromAOCIintotheCondensedConsolidatedStatementsofOperations,andtheassociatedfinancialstatementlineitem,forthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(inmillions):
Three Months Ended Nine Months Ended
Comprehensive Income Components Financial Statement Line Item July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Unrealized(gains)/lossesonderivativeinstruments: Foreignexchangecontracts Revenue $ (148) $ (131) $ (657) $ (785)
Costofsales (73) 106 (630) (419) Otherincome/(expense),net (364) (112) (127) (123)
Interestratecontracts Otherincome/(expense),net — 3 3 10 (585) (134) (1,411) (1,317)Unrealized(gains)/lossesonmarketablesecurities Otherincome/(expense),net (48) (20) (37) 129
TotalamountsreclassifiedfromAOCI $ (633) $ (154) $ (1,448) $ (1,188)
ThefollowingtableshowsthechangesinAOCIbycomponentfortheninemonthsendedJuly1,2017(inmillions):
Cumulative ForeignCurrency
Translation
UnrealizedGains/Losseson DerivativeInstruments
UnrealizedGains/Losseson Marketable
Securities TotalBalanceatSeptember24,2016 $ (578) $ 38 $ 1,174 $ 634
Othercomprehensiveincome/(loss)beforereclassifications (38) 1,271 (1,516) (283)AmountsreclassifiedfromAOCI — (1,411) (37) (1,448)Taxeffect (3) 7 548 552
Othercomprehensiveincome/(loss) (41) (133) (1,005) (1,179)BalanceatJuly1,2017 $ (619) $ (95) $ 169 $ (545)
Note 9 – Benefit Plans
Stock Plans
TheCompanyhad328.1millionsharesreservedforfutureissuanceunderitsstockplansasofJuly1,2017.RSUsgrantedgenerallyvestover fouryears,basedon continuedemployment, andare settled uponvesting in shares of the Company’s commonstock on aone-for-one basis. Each share issued withrespecttoRSUsgrantedundertheCompany’sstockplansreducesthenumberofsharesavailableforgrantundertheplanbytwoshares.RSUscanceledandshareswithheldtosatisfytaxwithholdingobligationsincreasethenumberofsharesavailableforgrantundertheplansutilizingafactoroftwotimesthenumberofRSUscanceledorshareswithheld.
Rule10b5-1TradingPlans
DuringthethreemonthsendedJuly 1, 2017 ,Section16officersAngelaAhrendts,TimothyD.Cook,LucaMaestri,DanielRiccioandPhilipSchillerhadequitytrading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes theamounts, pricesanddates(orformulafordeterminingtheamounts, pricesanddates)offuturepurchasesorsalesoftheCompany’sstock,includingsharesacquiredpursuanttotheCompany’semployeeanddirectorequityplans.
AppleInc.|Q32017Form10-Q|16
Restricted Stock Units
AsummaryoftheCompany’sRSUactivityandrelatedinformationfortheninemonthsendedJuly1,2017isasfollows:
Number ofRSUs
(inthousands)
Weighted-AverageGrant Date FairValue Per Share
Aggregate Fair Value(inmillions)
BalanceatSeptember24,2016 99,089 $ 97.54 RSUsgranted 48,000 $ 120.09 RSUsvested (41,712) $ 95.78 RSUscanceled (4,779) $ 106.75
BalanceatJuly1,2017 100,598 $ 108.59 $ 14,488
RSUsthatvestedduringthethree-andnine-monthperiodsendedJuly1,2017hadfairvaluesof$2.8billionand$5.4billion,respectively,asofthevestingdate.RSUsthatvestedduringthethree-andnine-monthperiodsendedJune25,2016hadfairvaluesof$2.0billionand$4.5billion,respectively,asofthevestingdate.
Share-Based Compensation
Thefollowingtableshowsasummaryof theshare-basedcompensationexpenseincludedintheCondensedConsolidatedStatements of Operationsfor thethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Costofsales $ 216 $ 188 $ 662 $ 583Researchanddevelopment 566 479 1,730 1,413Selling,generalandadministrative 411 387 1,274 1,184
Totalshare-basedcompensationexpense $ 1,193 $ 1,054 $ 3,666 $ 3,180
Theincometaxbenefit relatedtoshare-basedcompensationexpensewas$380millionand$1.3billionforthethree-andnine-monthperiodsendedJuly1,2017,respectively,andwas$321millionand$1.1billionforthethree-andnine-monthperiodsendedJune25,2016,respectively.AsofJuly1,2017,thetotalunrecognizedcompensationcostrelatedtooutstandingRSUs,restrictedstockandstockoptionswas$9.0billion, whichtheCompanyexpects torecognizeoveraweighted-averageperiodof2.6years.
Note 10 – Commitments and Contingencies
Accrued Warranty and Indemnification
ThefollowingtableshowschangesintheCompany’saccruedwarrantiesandrelatedcostsforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Beginningaccruedwarrantyandrelatedcosts $ 4,735 $ 4,985 $ 3,702 $ 4,780
Costofwarrantyclaims (932) (1,110) (3,300) (3,507)Accrualsforproductwarranty 496 380 3,897 2,982
Endingaccruedwarrantyandrelatedcosts $ 4,299 $ 4,255 $ 4,299 $ 4,255
AgreementsenteredintobytheCompanysometimesincludeindemnificationprovisionswhichmaysubjecttheCompanytocostsanddamagesintheeventofaclaim against an indemnified third party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred amaterialloss,oramateriallossinexcessofarecordedaccrual,withrespecttoindemnificationofthirdparties.
TheCompanyoffersaniPhoneUpgradeProgram,whichisavailabletocustomerswhopurchaseaqualifyingiPhoneintheU.S.,theU.K.andmainlandChina.The iPhoneUpgrade Programprovides customers the right to trade in that iPhonefor a specified amount whenpurchasing a newiPhone, provided certainconditionsaremet.TheCompanyaccountsforthetrade-inrightasaguaranteeliabilityandrecognizesarrangementrevenuenetofthefairvalueofsuchrightwithsubsequentchangestotheguaranteeliabilityrecognizedwithinrevenue.
AppleInc.|Q32017Form10-Q|17
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed toindemnifysuchindividualstothefullestextentpermittedbylawagainstliabilitiesthatarisebyreasonoftheirstatusasdirectorsorofficersoftheCompanyandtoadvanceexpensesincurredbysuchindividualsinconnectionwithrelatedlegalproceedings.ItisnotpossibletodeterminethemaximumpotentialamountofpaymentstheCompanycouldberequiredtomakeundertheseagreementsduetothelimitedhistoryofpriorindemnificationclaimsandtheuniquefactsandcircumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may beinsufficienttocoveralllossesoralltypesofclaimsthatmayarise.
Concentrations in the Available Sources of Supply of Materials and Product
AlthoughmostcomponentsessentialtotheCompany’sbusinessaregenerallyavailablefrommultiplesources,anumberofcomponentsarecurrentlyobtainedfromsingleorlimitedsources.Inaddition,theCompanycompetesforvariouscomponentswithotherparticipantsinthemarketsformobilecommunicationandmediadevicesandpersonalcomputers. Therefore, manycomponentsusedbytheCompany,includingthosethatareavailablefrommultiplesources,areattimessubjecttoindustry-wideshortageandsignificantpricingfluctuationsthatcouldmateriallyadverselyaffecttheCompany’sfinancialconditionandoperatingresults.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilizecustom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until thesuppliers’yieldshavematuredormanufacturingcapacityhasincreased.IftheCompany’ssupplyofcomponentsforaneworexistingproductweredelayedorconstrained, or if anoutsourcingpartner delayedshipmentsof completedproducts totheCompany, theCompany’sfinancial conditionandoperatingresultscouldbemateriallyadverselyaffected.TheCompany’sbusinessandfinancialperformancecouldalsobemateriallyadverselyaffecteddependingonthetimerequiredtoobtainsufficientquantitiesfromtheoriginalsource,ortoidentifyandobtainsufficientquantitiesfromanalternativesource.Continuedavailabilityofthesecomponentsatacceptableprices,oratall,maybeaffectedifthosesuppliersdecidetoconcentrateontheproductionofcommoncomponentsinsteadofcomponentscustomizedtomeettheCompany’srequirements.
TheCompanyhasenteredintoagreementsforthesupplyofmanycomponents;however,therecanbenoguaranteethattheCompanywillbeabletoextendorrenewtheseagreementsonsimilarterms,oratall. Therefore, theCompanyremainssubjecttosignificantrisksofsupplyshortagesandpriceincreasesthatcouldmateriallyadverselyaffectitsfinancialconditionandoperatingresults.
SubstantiallyalloftheCompany’shardwareproductsaremanufacturedbyoutsourcingpartnersthatarelocatedprimarilyinAsia.Asignificantconcentrationofthismanufacturingiscurrentlyperformedbyasmallnumberofoutsourcingpartners,ofteninsinglelocations.Certainoftheseoutsourcingpartnersarethesole-sourcedsuppliersofcomponentsandmanufacturersformanyoftheCompany’sproducts.AlthoughtheCompanyworkscloselywithitsoutsourcingpartnersonmanufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were unable to meet their productioncommitments.TheCompany’smanufacturingpurchaseobligationstypicallycoveritsrequirementsforperiodsupto150days.
Other Off-Balance Sheet Commitments
OperatingLeases
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does notcurrently utilize any other off-balance sheet financing arrangements. As of July 1, 2017 , the Company’s total future minimum lease payments undernoncancelable operating leases were $8.5 billion . The Company’s retail store and other facility leases are typically for terms not exceeding 10 yearsandgenerallycontainmulti-yearrenewaloptions.
Contingencies
TheCompanyissubjecttovariouslegalproceedingsandclaimsthathavearisenintheordinarycourseofbusinessandthathavenotbeenfullyadjudicated,asfurtherdiscussedinPartII,Item1ofthisForm10-Qundertheheading“LegalProceedings”andinPartII,Item1AofthisForm10-Qundertheheading“RiskFactors.”Intheopinionofmanagement,therewasnotatleastareasonablepossibilitytheCompanymayhaveincurredamaterialloss,oramateriallossinexcessofarecordedaccrual,withrespecttolosscontingenciesforassertedlegalandotherclaims.However,theoutcomeoflitigationisinherentlyuncertain.Therefore, althoughmanagementconsidersthelikelihoodofsuchanoutcometoberemote, if oneormoreoftheselegalmatterswereresolvedagainst theCompanyinareportingperiodforamountsinexcessofmanagement’sexpectations,theCompany’sconsolidatedfinancialstatementsforthatreportingperiodcouldbemateriallyadverselyaffected.
AppleInc.|Q32017Form10-Q|18
AppleInc.v.SamsungElectronicsCo.,Ltd.,etal.
OnAugust24,2012,ajuryreturnedaverdictawardingtheCompany$1.05billioninitslawsuitagainstSamsungElectronicsCo.,Ltd.andaffiliatedpartiesintheUnited States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of theCompanyintheamountofapproximately$930million.OnMay18,2015,theU.S.CourtofAppealsfortheFederalCircuitaffirmedinpart,andreversedinpart,thedecisionoftheDistrictCourt.Asaresult,theCourtofAppealsorderedentryoffinaljudgmentondamagesintheamountofapproximately$548million,withtheDistrictCourttodeterminesupplementaldamagesandinterest,aswellasdamagesowedforproductssubjecttothereversalinpart.Samsungpaid$548milliontotheCompanyinDecember2015,whichwasincludedinnetsalesintheCondensedConsolidatedStatementofOperations.OnDecember6,2016,theU.S.SupremeCourtremandedthecasetotheU.S.CourtofAppealsfortheFederalCircuitforfurtherproceedingsrelatedtothe$548millionindamages.OnFebruary7,2017,theU.S.CourtofAppealsfortheFederalCircuitremandedthecasetotheDistrictCourttodeterminewhatadditionalproceedings,ifany,areneeded.Becausethecaseremainssubjecttofurtherproceedings,theCompanyhasnotrecognizedanyfurtheramountsinitsresultsofoperations.
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used bymanagementformakingdecisionsandassessingperformanceasthesourceoftheCompany’sreportableoperatingsegments.
TheCompanymanagesitsbusinessprimarilyonageographicbasis.TheCompany’sreportableoperatingsegmentsconsistoftheAmericas,Europe,GreaterChina,JapanandRestofAsiaPacific.TheAmericassegmentincludesbothNorthandSouthAmerica.TheEuropesegmentincludesEuropeancountries,aswell as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includesAustraliaandthoseAsiancountriesnotincludedintheCompany’sotherreportableoperatingsegments.Althoughthereportableoperatingsegmentsprovidesimilarhardwareandsoftwareproductsandsimilarservices,eachoneismanagedseparatelytobetteralignwiththelocationoftheCompany’scustomersanddistribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as thosedescribedinNote1,“SummaryofSignificantAccountingPolicies”oftheNotestoConsolidatedFinancialStatementsinPartII,Item8ofthe2016Form10-K.
TheCompanyevaluatestheperformanceofitsreportableoperatingsegmentsbasedonnetsalesandoperatingincome.NetsalesforgeographicsegmentsaregenerallybasedonthelocationofcustomersandsalesthroughtheCompany’sretailstoreslocatedinthosegeographiclocations.Operatingincomeforeachsegmentincludesnetsalestothirdparties,relatedcostofsalesandoperatingexpensesdirectlyattributabletothesegment.Advertisingexpensesaregenerallyincludedinthegeographicsegmentinwhichtheexpendituresareincurred.Operatingincomeforeachsegmentexcludesotherincomeandexpenseandcertainexpensesmanagedoutsidethereportableoperatingsegments. Costsexcludedfromsegmentoperatingincomeincludevariouscorporateexpensessuchasresearchanddevelopment,corporatemarketingexpenses,certainshare-basedcompensationexpenses,incometaxes,variousnonrecurringchargesandotherseparately managedgeneral andadministrative costs. TheCompanydoesnot includeintercompany transfers betweensegments for management reportingpurposes.
AppleInc.|Q32017Form10-Q|19
The following table shows information by reportable operating segment for the three- and nine-month periods ended July 1, 2017 and June 25, 2016 (inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Americas:
Netsales $ 20,376 $ 17,963 $ 73,501 $ 66,384Operatingincome $ 6,420 $ 5,453 $ 23,582 $ 21,587
Europe:
Netsales $ 10,675 $ 9,643 $ 41,929 $ 39,110Operatingincome $ 2,984 $ 2,666 $ 12,571 $ 12,047
GreaterChina:
Netsales $ 8,004 $ 8,848 $ 34,963 $ 39,707Operatingincome $ 3,002 $ 3,415 $ 13,402 $ 15,809
Japan:
Netsales $ 3,624 $ 3,529 $ 13,875 $ 12,604Operatingincome $ 1,624 $ 1,435 $ 6,334 $ 5,605
RestofAsiaPacific:
Netsales $ 2,729 $ 2,375 $ 12,387 $ 10,982Operatingincome $ 892 $ 753 $ 4,430 $ 3,880
AreconciliationoftheCompany’ssegmentoperatingincometotheCondensedConsolidatedStatementsofOperationsforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016isasfollows(inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Segmentoperatingincome $ 14,922 $ 13,722 $ 60,319 $ 58,928Researchanddevelopmentexpense (2,937) (2,560) (8,584) (7,475)Othercorporateexpenses,net (1,217) (1,057) (3,511) (3,190)
Totaloperatingincome $ 10,768 $ 10,105 $ 48,224 $ 48,263
AppleInc.|Q32017Form10-Q|20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ThissectionandotherpartsofthisQuarterlyReportonForm10‑Qcontainforward-lookingstatements,withinthemeaningofthePrivateSecuritiesLitigationReformActof1995,thatinvolverisksanduncertainties.Forward-lookingstatementsprovidecurrentexpectationsoffutureeventsbasedoncertainassumptionsandincludeanystatement that does not directly relate to any historical or current fact. Forward-looking statements canalso beidentified by words suchas“future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-lookingstatementsarenotguaranteesoffutureperformanceandtheCompany’sactualresultsmaydiffersignificantlyfromtheresultsdiscussedintheforward-lookingstatements.Factorsthatmightcausesuchdifferencesinclude,butarenotlimitedto,thosediscussedinPartII,Item1AofthisForm10-Qundertheheading“RiskFactors,”whichareincorporatedhereinbyreference.ThefollowingdiscussionshouldbereadinconjunctionwiththeCompany’sAnnualReportonForm10-KfortheyearendedSeptember24,2016(the“2016Form10-K”)filedwiththeU.S.SecuritiesandExchangeCommission(the“SEC”)andthecondensedconsolidatedfinancialstatementsandnotestheretoincludedelsewhereinthisForm10-Q.AllinformationpresentedhereinisbasedontheCompany’sfiscalcalendar.Unlessotherwisestated,referencestoparticularyears,quarters,monthsorperiodsrefertotheCompany’sfiscalyearsendedinSeptemberandtheassociatedquarters,monthsandperiodsofthosefiscalyears.Eachofthetermsthe“Company”and“Apple”asusedhereinreferscollectivelytoAppleInc.anditswholly-ownedsubsidiaries,unlessotherwisestated.TheCompanyassumesnoobligationtoreviseorupdateanyforward-lookingstatementsforanyreason,exceptasrequiredbylaw.
Available Information
TheCompany’sAnnual Report onForm10-K,Quarterly ReportsonForm10-Q,CurrentReportsonForm8-K,andamendmentstoreportsfiledpursuant toSections13(a) and15(d) of theSecuritiesExchangeAct of 1934, asamended(the“ExchangeAct”), arefiledwiththeSEC.TheCompanyissubject totheinformationalrequirementsoftheExchangeActandfilesorfurnishesreports, proxystatements, andotherinformationwiththeSEC.SuchreportsandotherinformationfiledbytheCompanywiththeSECareavailablefreeof chargeontheCompany’swebsiteat investor.apple.com/sec.cfmwhensuchreportsareavailableontheSEC’swebsite.ThepublicmayreadandcopyanymaterialsfiledbytheCompanywiththeSECattheSEC’sPublicReferenceRoomat100FStreet,NE,Room1580,Washington,DC20549.ThepublicmayobtaininformationontheoperationofthePublicReferenceRoombycallingtheSECat1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that fileelectronicallywiththeSECatwww.sec.gov.Thecontentsofwebsitesarenotincorporatedintothisfiling.Further,theCompany’sreferencestowebsiteURLsareintendedtobeinactivetextualreferencesonly.
Overview and Highlights
TheCompanydesigns,manufacturesandmarketsmobilecommunicationandmediadevicesandpersonalcomputers,andsellsavarietyofrelatedsoftware,services,accessories,networkingsolutionsandthird-partydigitalcontentandapplications.TheCompany’sproductsandservicesincludeiPhone®,iPad®,Mac® , Apple Watch® , Apple TV® , a portfolio of consumer and professional software applications, iOS, macOS® , watchOS®and tvOS™operatingsystems,iCloud® , ApplePay®andavariety of accessory, serviceandsupport offerings. TheCompanysells anddelivers digital content andapplicationsthroughtheiTunesStore®,AppStore®,MacAppStore,TVAppStore,iBooksStore®andAppleMusic®(collectively“DigitalContentandServices”).TheCompany sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers,wholesalers,retailersandvalue-addedresellers.Inaddition,theCompanysellsavarietyofthird-partyApple-compatibleproducts,includingapplicationsoftwareandvariousaccessoriesthroughitsretailandonlinestores.TheCompanysellstoconsumers,smallandmid-sizedbusinessesandeducation,enterpriseandgovernmentcustomers.
BusinessStrategy
The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company’sbusiness strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide itscustomers products and solutions with innovative design, superior ease-of-use and seamless integration. As part of its strategy, the Company continues toexpanditsplatformforthediscoveryanddeliveryofdigitalcontentandapplicationsthroughitsDigitalContentandServices,whichallowscustomerstodiscoveranddownloaddigitalcontent, iOS,Mac,AppleWatchandAppleTVapplications,andbooksthrougheitheraMacorWindowspersonalcomputerorthroughiPhone,iPadandiPodtouch®devices(“iOSdevices”),AppleTVandAppleWatch.TheCompanyalsosupportsacommunityforthedevelopmentofthird-partysoftwareandhardwareproducts anddigital content that complement theCompany’s offerings. TheCompanybelievesahigh-quality buyingexperiencewithknowledgeablesalespersonswhocanconveythevalueof theCompany’sproducts andservicesgreatly enhancesits ability toattract andretaincustomers.Therefore, the Company’s strategy also includes building and expanding its ownretail and online stores andits third-party distribution network to effectivelyreachmorecustomersandprovidethemwithahigh-qualitysalesandpost-salessupportexperience.TheCompanybelievesongoinginvestmentinresearchanddevelopment(“R&D”),marketingandadvertisingiscriticaltothedevelopmentandsaleofinnovativeproducts,servicesandtechnologies.
AppleInc.|Q32017Form10-Q|21
BusinessSeasonalityandProductIntroductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holidaydemand.Additionally,newproductintroductionscansignificantlyimpactnetsales,productcostsandoperatingexpenses.ProductintroductionscanalsoimpacttheCompany’snetsalestoitsindirectdistributionchannelsasthesechannelsarefilledwithnewproductinventoryfollowingaproductintroduction,andoften,channelinventoryofaparticularproductdeclinesasthenextrelatedmajorproductlaunchapproaches.Netsalescanalsobeaffectedwhenconsumersanddistributorsanticipateaproductintroduction.However,neitherhistoricalseasonalpatternsnorhistoricalpatternsofproductintroductionsshouldbeconsideredreliableindicatorsoftheCompany’sfuturepatternofproductintroductions,futurenetsalesorfinancialperformance.
FiscalPeriod
TheCompany’sfiscalyearisthe52or53-weekperiodthatendsonthelastSaturdayofSeptember.TheCompany’sfiscalyear2017willinclude53weeksandwill endonSeptember 30, 2017 . A 14th week was included in the first quarter of 2017, as is done every five or six years, to realign the Company’s fiscalquarterswithcalendarquarters.
ThirdQuarterFiscal2017Highlights
Netsalesincreased7%or$3.1billionduringthethirdquarterof2017comparedtothesamequarterin2016,primarilydrivenbygrowthinServices,iPhoneandOtherProducts.Theyear-over-yearincreaseinnetsalesreflectedgrowthineachofthegeographicoperatingsegments,withtheexceptionofGreaterChina.TheweaknessinforeigncurrenciesrelativetotheU.S.dollarhadanunfavorableimpactonnetsalesduringthethirdquarterof2017comparedtothesamequarterin2016.
Duringthethirdquarterof2017,theCompanybeganshippinganew10.5-inchiPadPro®andanupdated12.9-inchiPadPro,aswellasupdatedversionsofiMac®,MacBook®,MacBookAir®andMacBook®Procomputers.TheCompanyalsoprevieweditsnewiMacPro™andHomePod™wirelessspeaker,bothofwhichareexpectedtobeavailableinDecember2017.Additionally,theCompanyannouncedupdatestoitsoperatingsystemsiOS11,macOSHighSierraandwatchOS4,allofwhichareexpectedtobeavailableinthefallof2017.
TheCompanyutilized$7.5billiontorepurchasesharesofitscommonstockandpaiddividendsanddividendequivalentsof$3.4billionduringthethirdquarterof2017.Additionally,theCompanyissued$8.0billionofU.S.dollar-denominatedand€2.5billionofeuro-denominatedlong-termdebt.
AppleInc.|Q32017Form10-Q|22
SalesData
Thefollowingtableshowsnetsalesbyoperatingsegmentandnetsalesandunitsalesbyproductforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillionsandunitsinthousands):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetSalesbyOperatingSegment:
Americas $ 20,376 $ 17,963 13% $ 73,501 $ 66,384 11%
Europe 10,675 9,643 11% 41,929 39,110 7%
GreaterChina 8,004 8,848 (10)% 34,963 39,707 (12)%
Japan 3,624 3,529 3% 13,875 12,604 10%
RestofAsiaPacific 2,729 2,375 15% 12,387 10,982 13%
Totalnetsales $ 45,408 $ 42,358 7% $ 176,655 $ 168,787 5%
NetSalesbyProduct:
iPhone(1) $ 24,846 $ 24,048 3% $ 112,473 $ 108,540 4%
iPad(1) 4,969 4,876 2% 14,391 16,373 (12)%
Mac(1) 5,592 5,239 7% 18,680 17,092 9%
Services(2) 7,266 5,976 22% 21,479 18,023 19%
OtherProducts(1)(3) 2,735 2,219 23% 9,632 8,759 10%
Totalnetsales $ 45,408 $ 42,358 7% $ 176,655 $ 168,787 5%
UnitSalesbyProduct:
iPhone 41,026 40,399 2% 170,079 166,371 2%
iPad 11,424 9,950 15% 33,427 36,323 (8)%
Mac 4,292 4,252 1% 13,865 13,598 2%
(1) Includesdeferralsandamortizationofrelatedsoftwareupgraderightsandnon-softwareservices.
(2) IncludesrevenuefromDigitalContentandServices,AppleCare®,ApplePay,licensingandotherservices.
(3) IncludessalesofAppleTV,AppleWatch,Beats®products,iPodandApple-brandedandthird-partyaccessories.
AppleInc.|Q32017Form10-Q|23
Product Performance
iPhone
ThefollowingtablepresentsiPhonenetsalesandunitsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillionsandunitsinthousands):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetsales $ 24,846 $ 24,048 3% $ 112,473 $ 108,540 4%
Percentageoftotalnetsales 55% 57% 64% 64% Unitsales 41,026 40,399 2% 170,079 166,371 2%
iPhonenetsalesincreasedduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016duetohigheriPhoneunitsalesandadifferentmixofiPhoneswithhigheraveragesellingprices.TheweaknessinforeigncurrenciesrelativetotheU.S.dollarhadanunfavorableimpactoniPhonenetsalesduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016.
iPad
ThefollowingtablepresentsiPadnetsalesandunitsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillionsandunitsinthousands):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetsales $ 4,969 $ 4,876 2% $ 14,391 $ 16,373 (12)%
Percentageoftotalnetsales 11% 12% 8% 10% Unitsales 11,424 9,950 15% 33,427 36,323 (8)%
iPadnetsalesincreasedduringthethirdquarterof2017comparedtothesameperiodin2016dueprimarilytohigheriPadunitsales,partiallyoffsetbyloweriPadaveragesellingprices.Theyear-over-yeardecreaseiniPadnetsalesduringthefirstninemonthsof2017wasdueprimarilytoloweriPadunitsalesandadifferentmixofiPadswithloweraveragesellingprices.TheweaknessinforeigncurrenciesrelativetotheU.S.dollarhadanunfavorableimpactoniPadnetsalesduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016.
Mac
ThefollowingtablepresentsMacnetsalesandunitsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillionsandunitsinthousands):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetsales $ 5,592 $ 5,239 7% $ 18,680 $ 17,092 9%
Percentageoftotalnetsales 12% 12% 11% 10% Unitsales 4,292 4,252 1% 13,865 13,598 2%
Macnetsalesincreasedduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016dueprimarilytoadifferentmixofMacswith higher averagesellingprices, includingthenewMacBookProintroducedin thefirst quarter of 2017, andto a lesser extent higher Macunit sales. TheweaknessinforeigncurrenciesrelativetotheU.S.dollar hadanunfavorableimpactonMacnetsalesduringthethirdquarter andfirst ninemonthsof 2017comparedtothesameperiodsin2016.
AppleInc.|Q32017Form10-Q|24
Services
ThefollowingtablepresentsServicesnetsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetsales $ 7,266 $ 5,976 22% $ 21,479 $ 18,023 19%
Percentageoftotalnetsales 16% 14% 12% 11%
TheincreaseinServicesnetsalesinthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016wasdueprimarilytogrowthfromtheAppStoreandlicensingsales.
Segment Operating Performance
TheCompanymanagesitsbusinessprimarilyonageographicbasis.TheCompany’sreportableoperatingsegmentsconsistoftheAmericas,Europe,GreaterChina,JapanandRestofAsiaPacific.TheAmericassegmentincludesbothNorthandSouthAmerica.TheEuropesegmentincludesEuropeancountries,aswell as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includesAustraliaandthoseAsiancountriesnotincludedintheCompany’sotherreportableoperatingsegments.Althoughthereportableoperatingsegmentsprovidesimilarhardwareandsoftwareproductsandsimilarservices,eachoneismanagedseparatelytobetteralignwiththelocationoftheCompany’scustomersanddistributionpartnersandtheuniquemarketdynamicsofeachgeographicregion.FurtherinformationregardingtheCompany’sreportableoperatingsegmentscan be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 11, “Segment Information andGeographicData.”
Americas
ThefollowingtablepresentsAmericasnetsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetsales $ 20,376 $ 17,963 13% $ 73,501 $ 66,384 11%
Percentageoftotalnetsales 45% 42% 42% 39%
Americasnetsalesincreasedduringthethirdquarterof2017comparedtothesameperiodin2016dueprimarilytohighernetsalesofiPhone,ServicesandOtherProducts. Theyear-over-yearincreaseinAmericasnetsalesduringthefirst ninemonthsof 2017wasdueprimarilytohighernet salesof iPhoneandServices.
Europe
ThefollowingtablepresentsEuropenetsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeNetsales $ 10,675 $ 9,643 11% $ 41,929 $ 39,110 7%
Percentageoftotalnetsales 24% 23% 24% 23%
Europenetsalesincreasedduringthethirdquarterandfirst ninemonthsof2017comparedtothesameperiodsin2016dueprimarilytohighernetsalesofiPhoneandServices.TheweaknessinforeigncurrenciesrelativetotheU.S.dollarhadanunfavorableimpactonEuropenetsalesduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016.
AppleInc.|Q32017Form10-Q|25
GreaterChina
The following table presents Greater China net sales information for the three- and nine-month periods ended July 1, 2017 andJune 25, 2016 (dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 Change Netsales $ 8,004 $ 8,848 (10)% $ 34,963 $ 39,707 (12)%
Percentageoftotalnetsales 18% 21% 20% 24%
GreaterChinanetsalesdecreasedduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016dueprimarilytolowernetsalesofiPhone,partiallyoffsetbygrowthinnetsalesofServices.TheweaknessinforeigncurrenciesrelativetotheU.S.dollarhadanunfavorableimpactonGreaterChinanetsalesduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016.
Japan
ThefollowingtablepresentsJapannetsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 Change Netsales $ 3,624 $ 3,529 3% $ 13,875 $ 12,604 10%
Percentageoftotalnetsales 8% 8% 8% 7%
Japannetsalesincreasedduringthethirdquarterof2017comparedtothesameperiodin2016dueprimarilytohighernetsalesofServicesandiPad,partiallyoffsetbylowernetsalesofiPhone.Theyear-over-yearincreaseinJapannetsalesduringthefirstninemonthsof2017wasdueprimarilytothegrowthinnetsalesofServicesandiPhone.ThestrengthintheJapaneseyenrelativetotheU.S.dollarhadafavorableimpactonJapannetsalesduringthefirstninemonthsof2017comparedtothesameperiodin2016.
RestofAsiaPacific
ThefollowingtablepresentsRestofAsiaPacificnetsalesinformationforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 Change Netsales $ 2,729 $ 2,375 15% $ 12,387 $ 10,982 13%
Percentageoftotalnetsales 6% 6% 7% 7%
RestofAsiaPacificnetsalesincreasedduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016dueprimarilytohighernetsalesofiPhoneandServices.ThestrengthinforeigncurrenciesrelativetotheU.S.dollarhadafavorableimpactonRestofAsiaPacificnetsalesduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016.
AppleInc.|Q32017Form10-Q|26
Gross Margin
Grossmarginforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016wasasfollows(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Netsales $ 45,408 $ 42,358 $ 176,655 $ 168,787Costofsales 27,920 26,252 108,400 102,337
Grossmargin $ 17,488 $ 16,106 $ 68,255 $ 66,450Grossmarginpercentage 38.5% 38.0% 38.6% 39.4%
Gross margin percentage increased during the third quarter of 2017 compared to the same quarter of 2016 driven primarily by a favorable shift in mix toServices,partiallyoffsetbyhigherproductcoststructures.Theyear-over-yeardecreaseingrossmarginpercentageduringthefirstninemonthsof2017wasdueprimarilytohigherproductcoststructures,partiallyoffsetbyafavorablemixofproductsandservices.TheweaknessinforeigncurrenciesrelativetotheU.S.dollarhadanunfavorableimpactongrossmarginpercentageduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016.
TheCompanyanticipatesgrossmarginpercentageduringthefourthquarterof2017tobebetween37.5%and38.0%.TheforegoingstatementregardingtheCompany’sexpectedgrossmarginpercentageinthefourthquarterof2017isforward-lookingandcoulddifferfromactualresults.TheCompany’sfuturegrossmarginscanbeimpactedbymultiplefactorsincluding,butnotlimitedto,thosesetforthinPartII,Item1AofthisForm10-Qundertheheading“RiskFactors”and those described in this paragraph. In general, the Company believes gross margins will remain under downward pressure due to a variety of factors,including continued industry-wide global product pricing pressures, increased competition, compressed product life cycles, product transitions, potentialincreasesinthecostofcomponents,andpotentialstrengtheningoftheU.S.dollar,aswellaspotentialincreasesinthecostsofoutsidemanufacturingservicesandapotentialshiftintheCompany’ssalesmixtowardsproductswithlowergrossmargins.Inresponsetocompetitivepressures,theCompanyexpectsitwillcontinuetotakeproductpricingactions,whichwouldadverselyaffectgrossmargins.GrossmarginscouldalsobeaffectedbytheCompany’sabilitytomanageproductqualityandwarrantycostseffectivelyandtostimulatedemandforcertainofitsproducts.DuetotheCompany’ssignificantinternationaloperations,itsfinancialconditionandoperatingresults,includinggrossmargins,couldbesignificantlyaffectedbyfluctuationsinexchangerates.
Operating Expenses
Operatingexpensesforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016wereasfollows(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Researchanddevelopment $ 2,937 $ 2,560 $ 8,584 $ 7,475
Percentageoftotalnetsales 6% 6% 5% 4%Selling,generalandadministrative $ 3,783 $ 3,441 $ 11,447 $ 10,712
Percentageoftotalnetsales 8% 8% 6% 6%Totaloperatingexpenses $ 6,720 $ 6,001 $ 20,031 $ 18,187
Percentageoftotalnetsales 15% 14% 11% 11%
ResearchandDevelopment
ThegrowthinR&Dexpenseduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016wasdrivenprimarilybyanincreaseinheadcount-relatedexpensestosupportexpandedR&Dactivities.TheCompanycontinuestobelievethatfocusedinvestmentsinR&Darecriticaltoitsfuturegrowthandcompetitivepositioninthemarketplace,andtothedevelopmentofnewandupdatedproductsandservicesthatarecentraltotheCompany’scorebusinessstrategy.
Selling,GeneralandAdministrative
Thegrowthinselling, general andadministrativeexpenseduringthethirdquarter andfirst ninemonthsof 2017comparedtothesameperiodsin2016wasdrivenprimarilybyanincreaseinheadcount-relatedexpensesandhighervariablesellingexpenses.
AppleInc.|Q32017Form10-Q|27
Other Income/(Expense), Net
Otherincome/(expense),netforthethree-andnine-monthperiodsendedJuly1,2017andJune25,2016wasasfollows(dollarsinmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 Change July 1,
2017 June 25,
2016 ChangeInterestanddividendincome $ 1,327 $ 1,036 $ 3,833 $ 2,963 Interestexpense (602) (409) (1,657) (1,006) Otherexpense,net (185) (263) (228) (1,036)
Totalotherincome/(expense),net $ 540 $ 364 48% $ 1,948 $ 921 112%
Theincreaseinotherincome/(expense),netduringthethirdquarterandfirstninemonthsof2017comparedtothesameperiodsin2016wasdueprimarilytohigherinterest incomeandthefavorableimpactof foreignexchange-relateditems,partiallyoffset byhigherinterest expenseondebt. Theweighted-averageinterest rate earned by the Company on its cash, cash equivalents and marketable securities was 2.03%and 1.77%in the third quarter of 2017 and 2016,respectively,and1.96%and1.72%inthefirstninemonthsof2017and2016,respectively.
Provision for Income Taxes
Provision for incometaxes and effective tax rates for the three- and nine-month periods ended July 1, 2017andJune25, 2016were as follows (dollars inmillions):
Three Months Ended Nine Months Ended
July 1,
2017 June 25,
2016 July 1,
2017 June 25,
2016Provisionforincometaxes $ 2,591 $ 2,673 $ 12,535 $ 12,511
Effectivetaxrate 22.9% 25.5% 25.0% 25.4%
TheCompany’seffectivetaxratesduringthethirdquarterandfirstninemonthsof2017and2016differfromthestatutoryfederalincometaxrateof35%dueprimarilytocertainundistributedforeignearnings,asubstantialportionofwhichwasgeneratedbysubsidiariesorganizedinIreland,forwhichnoU.S.taxesareprovided when such earnings are intended to be indefinitely reinvested outside the U.S.The lower effective tax rates during the third quarter and first ninemonthsof2017comparedtothesameperiodsin2016wereduetohigherU.S.R&Dcredits,inpartasaresultoftheresolutionoftheU.S.InternalRevenueService(“IRS”)auditofyears2010through2012.
The IRS concluded its review of the years 2010 through 2012 during the third quarter of 2017. All years prior to 2013 are closed, and the IRS is currentlyexamining the years 2013 through 2015. The Company is subject to audits by federal, state, local and foreign tax authorities. Management believes thatadequateprovisionshavebeenmadeforanyadjustmentsthatmayresultfromtaxexaminations.However,theoutcomeoftaxauditscannotbepredictedwithcertainty.IfanyissuesaddressedintheCompany’staxauditsareresolvedinamannernotconsistentwithmanagement’sexpectations,theCompanycouldberequiredtoadjustitsprovisionforincometaxesintheperiodsuchresolutionoccurs.
OnAugust30,2016,theEuropeanCommissionannounceditsdecisionthatIrelandgrantedstateaidtotheCompanybyprovidingtaxopinionsin1991and2007concerningthetaxallocationofprofitsoftheIrishbranchesoftwosubsidiariesoftheCompany(the“StateAidDecision”).TheStateAidDecisionordersIrelandtocalculateandrecoveradditionaltaxesfromtheCompanyfortheperiodJune2003throughDecember2014.Irishlegislativechanges,effectiveasofJanuary 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit andappealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. While the EuropeanCommissionannouncedarecoveryamountofupto€13billion,plusinterest,theactualamountofadditionaltaxessubjecttorecoveryistobecalculatedbyIreland in accordance with the European Commission’s guidance. Once the recovery amount is computed by Ireland, the Company anticipates funding it,including interest, out of foreign cash into escrow, where it will remain pending conclusion of all appeals. The Company believes that any incremental IrishcorporateincometaxespotentiallyduerelatedtotheStateAidDecisionwouldbecreditableagainstU.S.taxes.
AppleInc.|Q32017Form10-Q|28
Recent Accounting Pronouncements
RestrictedCash
InNovember2016,theFinancialAccountingStandardsBoard(“FASB”)issuedAccountingStandardsUpdate(“ASU”)No.2016-18,StatementofCashFlows(Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in thestatementofcashflows.TheCompanywilladoptASU2016-18initsfirstquarterof2019utilizingtheretrospectiveadoptionmethod.Currently,theCompany’srestrictedcashbalanceisnotsignificant.
IncomeTaxes
InOctober2016,theFASBissuedASUNo.2016-16,IncomeTaxes(Topic740):Intra-EntityTransfersofAssetsOtherThanInventory(“ASU2016-16”),whichrequirestherecognitionoftheincometaxconsequencesofanintra-entitytransferofanasset,otherthaninventory,whenthetransferoccurs.TheCompanywilladoptASU2016-16initsfirstquarterof2019utilizingthemodifiedretrospectiveadoptionmethod.Currently,theCompanyanticipatesrecordingupto$9billionofnetdeferredtaxassetsonitsConsolidatedBalanceSheets.However,theultimateimpactofadoptingASU2016-16willdependonthebalanceofintellectualpropertytransferredbetweenitssubsidiariesasoftheadoptiondate.TheCompanywillrecognizeincrementaldeferredincometaxexpensethereafterasthesedeferredtaxassetsareutilized.
StockCompensation
In March 2016, the FASB issued ASUNo. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting(“ASU2016-09”),whichmodifiescertainaspectsoftheaccountingforshare-basedpaymenttransactions,includingincometaxes,classificationofawards, andclassificationinthestatementof cashflows.TheCompanywill adopt ASU2016-09initsfirst quarter of 2018. Currently, excesstaxbenefits ordeficienciesfromtheCompany’sequityawardsarerecordedasadditionalpaid-incapitalinitsConsolidatedBalanceSheets.Uponadoption,theCompanywillrecord any excess tax benefits or deficiencies fromits equity awards in its Consolidated Statements of Operations in the reporting periods in which vestingoccurs.Asaresult,subsequenttoadoptiontheCompany’sincometaxexpenseandassociatedeffectivetaxratewillbeimpactedbyfluctuationsinstockpricebetweenthegrantdatesandvestingdatesofequityawards.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increasetransparencyandcomparabilitybyrecordingleaseassetsandliabilitiesforoperatingleasesanddisclosingkeyinformationaboutleasingarrangements.ASU2016-02willbeeffectivefortheCompanybeginninginitsfirstquarterof2020,andearlyadoptionispermitted.TheCompanywilluseamodifiedretrospectiveadoptionapproach. WhiletheCompanyiscurrently evaluatingthetimingandimpact of adoptingASU2016-02, currently theCompanyanticipatesrecordingleaseassetsandliabilitiesinexcessof$8.5billiononitsConsolidatedBalanceSheets,withnomaterialimpacttoitsConsolidatedStatementsofOperations.However,theultimateimpactofadoptingASU2016-02willdependontheCompany’sleaseportfolioasoftheadoptiondate.
FinancialInstruments
InJanuary2016,theFASBissuedASUNo.2016-01,FinancialInstruments–Overall(Subtopic825-10):RecognitionandMeasurementofFinancialAssetsandFinancial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. TheCompanywilladoptASU2016-01initsfirstquarterof2019utilizingthemodifiedretrospectiveadoptionmethod.BasedonthecompositionoftheCompany’sinvestmentportfolio,theadoptionofASU2016-01isnotexpectedtohaveamaterialimpactonitsconsolidatedfinancialstatements.
InJune2016,theFASBissuedASUNo.2016-13,FinancialInstruments–CreditLosses(Topic326):MeasurementofCreditLossesonFinancialInstruments(“ASU2016-13”),whichmodifiesthemeasurementofexpectedcreditlossesofcertainfinancialinstruments.TheCompanywilladoptASU2016-13initsfirstquarter of 2021 utilizing the modified retrospective adoption method. Based on the composition of the Company’s investment portfolio, current marketconditions,andhistoricalcreditlossactivity,theadoptionofASU2016-13isnotexpectedtohaveamaterialimpactonitsconsolidatedfinancialstatements.
RevenueRecognition
InMay2014,theFASBissuedASUNo.2014-09,RevenuefromContractswithCustomers(Topic606)(“ASU2014-09”),whichamendstheexistingaccountingstandardsfor revenuerecognition. ASU2014-09is basedonprinciplesthat governtherecognition of revenueat anamount anentity expects to beentitledwhenproductsaretransferredtocustomers.
AppleInc.|Q32017Form10-Q|29
Subsequently,theFASBhasissuedthefollowingstandardsrelatedtoASU2014-09:ASUNo.2016-08,RevenuefromContractswithCustomers(Topic606):Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying PerformanceObligationsandLicensing(“ASU2016-10”);ASUNo.2016-12,RevenuefromContractswithCustomers(Topic606):Narrow-ScopeImprovementsandPracticalExpedients(“ASU2016-12”); andASUNo.2016-20, Technical CorrectionsandImprovementstoTopic606, RevenuefromContractswithCustomers(“ASU2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenuestandards”).
Thenewrevenuestandardsmaybeappliedretrospectivelytoeachpriorperiodpresentedorretrospectivelywiththecumulativeeffectrecognizedasofthedateofadoption.TheCompanyplanstoadoptthenewrevenuestandardsinitsfirstquarterof2019utilizingthefullretrospectiveadoptionmethod.ThenewrevenuestandardsarenotexpectedtohaveamaterialimpactontheamountandtimingofrevenuerecognizedintheCompany’sconsolidatedfinancialstatements.
Liquidity and Capital Resources
ThefollowingtablespresentselectedfinancialinformationandstatisticsasofJuly1,2017andSeptember24,2016andforthefirstninemonthsof2017and2016(inmillions):
July 1,
2017 September 24,
2016Cash,cashequivalentsandmarketablesecurities $ 261,516 $ 237,585Property,plantandequipment,net $ 29,286 $ 27,010Commercialpaper $ 11,980 $ 8,105Totaltermdebt $ 96,359 $ 78,927Workingcapital $ 31,573 $ 27,863
Nine Months Ended
July 1,
2017 June 25,
2016Cashgeneratedbyoperatingactivities $ 47,942 $ 49,698Cashusedininvestingactivities $ (36,504) $ (38,580)Cashusedinfinancingactivities $ (13,351) $ (14,001)
TheCompanybelievesitsexistingbalancesof cash, cashequivalentsandmarketablesecuritieswill besufficient tosatisfyitsworkingcapital needs, capitalasset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. The Companycurrently anticipates thecashusedfor future dividends, the sharerepurchaseprogramanddebt repayments will comefromits current domestic cash, cashgeneratedfromongoingU.S.operatingactivitiesandfromborrowings.
AsofJuly1,2017andSeptember24,2016,theCompany’scash,cashequivalentsandmarketablesecuritiesheldbyforeignsubsidiarieswere$246.0billionand$216.0billion,respectively,andaregenerallybasedinU.S.dollar-denominatedholdings.AmountsheldbyforeignsubsidiariesaregenerallysubjecttoU.S.incometaxationonrepatriationtotheU.S.InconnectionwiththeStateAidDecision,theEuropeanCommissionannouncedarecoveryamountofupto€13billion,plusinterest.TheactualamountofadditionaltaxessubjecttorecoveryistobecalculatedbyIrelandinaccordancewiththeEuropeanCommission’sguidance.OncetherecoveryamountiscomputedbyIreland,theCompanyanticipatesfundingit,includinginterest,outofforeigncashintoescrow,whereitwillremainpendingconclusionofallappeals.
TheCompany’smarketablesecuritiesinvestmentportfolioisprimarilyinvestedinhighly-ratedsecurities,anditsinvestmentpolicygenerallylimitstheamountofcreditexposuretoanyoneissuer.Thepolicygenerallyrequiresinvestmentstobeinvestmentgrade,withtheprimaryobjectiveofminimizingthepotentialriskofprincipalloss.
During theninemonths endedJuly 1, 2017 , cash generated by operating activities of $47.9 billionwas a result of $37.6 billionof net income, non-cashadjustmentstonetincomeof$16.0billionandadecreaseinthenetchangeinoperatingassetsandliabilitiesof$5.7billion,whichincludedaone-timepaymentof$1.9billionrelatedtoamulti-yearlicenseagreement.Cashusedininvestingactivitiesof$36.5billionduringtheninemonthsendedJuly1,2017consistedprimarily of cash used for purchases of marketable securities, net of sales and maturities, of $27.7 billion and cash used to acquire property, plant andequipment of$8.6 billion . Cash used in financing activities of $13.4 billionduring theninemonths endedJuly 1, 2017consisted primarily of cash used torepurchasecommonstockof$25.1billion,cashusedtopaydividendsanddividendequivalentsof$9.5billionandcashusedtorepaytermdebtof$3.5billion,partiallyoffsetbyproceedsfromtheissuanceoftermdebt,netof$21.7billionandproceedsfromcommercialpaper,netof$3.9billion.
AppleInc.|Q32017Form10-Q|30
During theninemonths endedJune25, 2016 , cashgenerated by operating activities of$49.7 billionwas a result of$36.7 billionof net income, non-cashadjustmentstonetincomeof$16.7billionandadecreaseinthenetchangeinoperatingassetsandliabilitiesof$3.7billion.Cashusedininvestingactivitiesof$38.6billionduringtheninemonthsendedJune25,2016consistedprimarilyofcashusedforpurchasesofmarketablesecurities,netofsalesandmaturities,of$27.2billionandcashusedtoacquireproperty,plantandequipmentof$8.8billion.Cashusedinfinancingactivitiesof$14.0billionduringtheninemonthsendedJune25,2016consistedprimarilyofcashusedtorepurchasecommonstockof$23.7billion,cashusedtopaydividendsanddividendequivalentsof$9.1billionandcashusedtorepaytermdebtof$2.5billion,partiallyoffsetbyproceedsfromtheissuanceoftermdebt,netof$18.0billionandproceedsfromcommercialpaper,netof$4.0billion.
CapitalAssets
TheCompany’scapitalexpenditureswere$8.5billionduringthefirstninemonthsof2017.TheCompanyanticipatesutilizingapproximately$15.0billionforcapital expenditures during2017, whichincludesproduct tooling andmanufacturing processequipment; data centers; corporate facilities andinfrastructure,includinginformationsystemshardware,softwareandenhancements;andretailstorefacilities.
Debt
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses the netproceedsfromthecommercialpaperprogramforgeneralcorporatepurposes,includingdividendsandsharerepurchases.AsofJuly1,2017,theCompanyhad$12.0billionofCommercialPaperoutstanding,withaweighted-averageinterestrateof1.01%andmaturitiesgenerallylessthanninemonths.
As of July 1, 2017 , the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $96.6billion(collectivelythe“Notes”).Duringthethirdquarterof2017,theCompanyrepaid$3.5billionofitsNotes.TheCompanyhasentered,andinthefuturemayenter,into interest rate swapsto manageinterest rate risk ontheNotes. In addition, the Companyhasentered, andin thefuture mayenter, into foreigncurrencyswapstomanageforeigncurrencyriskontheNotes.
Further information regarding the Company’s debt issuances and related hedging activity can be found in Part I, Item 1 of this Form 10-Q in the Notes toCondensedConsolidatedFinancialStatementsinNote2,“FinancialInstruments”andNote6,“Debt.”
CapitalReturnProgram
InMay2017,theCompany’sBoardofDirectorsincreasedthetotalcapitalreturnprogramfrom$250billionto$300billion,whichincludedanincreaseintheshare repurchase authorization from $175 billion to $210 billionof the Company’s common stock. Additionally, the Company announced that the Board ofDirectorsraisedtheCompany’squarterlycashdividendfrom$0.57to$0.63pershare,beginningwiththedividendpaidduringthethirdquarterof2017.TheCompanyintendstoincreaseitsdividendonanannualbasissubjecttodeclarationbytheBoardofDirectors.
AsofJuly1,2017,$158billionofthesharerepurchaseprogramhadbeenutilized.TheCompany’ssharerepurchaseprogramdoesnotobligateittoacquireany specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under planscomplyingwithRule10b5-1undertheExchangeAct.
ThefollowingtablepresentstheCompany’sdividends,dividendequivalents,sharerepurchasesandnetsharesettlementactivityfromthestart ofthecapitalreturnprograminAugust2012throughJuly1,2017(inmillions):
Dividends andDividend
Equivalents Paid Accelerated Share
Repurchases Open Market
Share Repurchases
Taxes Relatedto Settlement
of Equity Awards TotalQ32017 $ 3,365 $ 3,000 $ 4,500 $ 858 $ 11,723Q22017 3,004 3,000 4,001 159 10,164Q12017 3,130 6,000 5,000 629 14,7592016 12,150 12,000 17,000 1,570 42,7202015 11,561 6,000 30,026 1,499 49,0862014 11,126 21,000 24,000 1,158 57,2842013 10,564 13,950 9,000 1,082 34,5962012 2,488 — — 56 2,544
Total $ 57,388 $ 64,950 $ 93,527 $ 7,011 $ 222,876
AppleInc.|Q32017Form10-Q|31
TheCompanyexpectstoexecuteitscapitalreturnprogrambytheendofMarch2019bypayingdividendsanddividendequivalents,repurchasingsharesandremittingwithheldtaxesrelatedtonetsharesettlementofrestrictedstockunits.TheCompanyplanstocontinuetoaccessthedomesticandinternationaldebtmarketstoassistinfundingitscapitalreturnprogram.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retainedinterests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any otherobligationunderavariableinterestinanunconsolidatedentitythatprovidesfinancing,liquidity,marketrisk,orcreditrisksupporttotheCompany,orengagesinleasing,hedging,orR&DserviceswiththeCompany.
OperatingLeases
AsofJuly1,2017,theCompany’stotalfutureminimumleasepaymentsundernoncancelableoperatingleaseswere$8.5billion.TheCompany’sretailstoreandotherfacilityleasesaretypicallyfortermsnotexceeding10yearsandgenerallycontainmulti-yearrenewaloptions.
ManufacturingPurchaseObligations
TheCompanyutilizesseveral outsourcingpartnerstomanufacturesub-assembliesfor theCompany’sproducts andtoperformfinal assemblyandtestingoffinishedproducts.TheseoutsourcingpartnersacquirecomponentsandbuildproductbasedondemandinformationsuppliedbytheCompany,whichtypicallycoversperiodsupto150days.TheCompanyalsoobtainsindividualcomponentsforitsproductsfromawidevarietyofindividualsuppliers.AsofJuly1,2017,theCompanyexpectstopay$23.4billionundermanufacturing-relatedsupplierarrangements,substantiallyallofwhichisnoncancelable.
OtherPurchaseObligations
The Company’s other purchase obligations consisted of noncancelable obligations to acquire capital assets, including product tooling and manufacturingprocessequipment,andnoncancelableobligationsrelatedtoadvertising,licensing,R&D,internetandtelecommunicationsservicesandotherobligations.AsofJuly1,2017,theCompanyhadotherpurchaseobligationsof$9.0billion.
TheCompany’sothernon-currentliabilitiesintheCondensedConsolidatedBalanceSheetsconsistprimarilyofdeferredtaxliabilities,grossunrecognizedtaxbenefits and the related gross interest and penalties. As of July 1, 2017 , the Company had non-current deferred tax liabilities of $30.2 billion , grossunrecognizedtaxbenefitsof$8.6billionandanadditional$1.3billionforgrossinterestandpenalties.
Indemnification
AgreementsenteredintobytheCompanysometimesincludeindemnificationprovisionswhichmaysubjecttheCompanytocostsanddamagesintheeventofaclaim against an indemnified third party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred amaterialloss,oramateriallossinexcessofarecordedaccrual,withrespecttoindemnificationofthirdparties.
TheCompanyoffersaniPhoneUpgradeProgram,whichisavailabletocustomerswhopurchaseaqualifyingiPhoneintheU.S.,theU.K.andmainlandChina.The iPhoneUpgrade Programprovides customers the right to trade in that iPhonefor a specified amount whenpurchasing a newiPhone, provided certainconditionsaremet.TheCompanyaccountsforthetrade-inrightasaguaranteeliabilityandrecognizesarrangementrevenuenetofthefairvalueofsuchrightwithsubsequentchangestotheguaranteeliabilityrecognizedwithinrevenue.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed toindemnifysuchindividualstothefullestextentpermittedbylawagainstliabilitiesthatarisebyreasonoftheirstatusasdirectorsorofficersoftheCompanyandtoadvanceexpensesincurredbysuchindividualsinconnectionwithrelatedlegalproceedings.ItisnotpossibletodeterminethemaximumpotentialamountofpaymentstheCompanycouldberequiredtomakeundertheseagreementsduetothelimitedhistoryofpriorindemnificationclaimsandtheuniquefactsandcircumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may beinsufficienttocoveralllossesoralltypesofclaimsthatmayarise.
AppleInc.|Q32017Form10-Q|32
Critical Accounting Policies and Estimates
ThepreparationoffinancialstatementsandrelateddisclosuresinconformitywithU.S.generallyacceptedaccountingprinciplesandtheCompany’sdiscussionandanalysisofitsfinancialconditionandoperatingresultsrequiretheCompany’smanagementtomakejudgments,assumptionsandestimatesthataffecttheamountsreportedinitscondensedconsolidatedfinancialstatementsandaccompanyingnotes.Managementbasesitsestimatesonhistoricalexperienceandonvariousotherassumptionsitbelievestobereasonableunderthecircumstances,theresultsofwhichformthebasisformakingjudgmentsaboutthecarryingvaluesofassetsandliabilities.Actualresultsmaydifferfromtheseestimates,andsuchdifferencesmaybematerial.
Note1,“SummaryofSignificantAccountingPolicies”inPartI,Item1ofthisForm10-QandintheNotestoConsolidatedFinancialStatementsinPartII,Item8ofthe2016Form10-K,and“CriticalAccountingPoliciesandEstimates”inPartII,Item7ofthe2016Form10-Kdescribethesignificantaccountingpoliciesandmethods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’scriticalaccountingpoliciesandestimatessincethe2016Form10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk during the first ninemonths of2017. For a discussion of the Company’s exposure tomarketrisk,refertotheCompany’smarketriskdisclosuressetforthinPartII,Item7A,“QuantitativeandQualitativeDisclosuresAboutMarketRisk”ofthe2016Form10-K.
Item 4. Controls and Procedures
EvaluationofDisclosureControlsandProcedures
BasedonanevaluationunderthesupervisionandwiththeparticipationoftheCompany’smanagement,theCompany’sprincipalexecutiveofficerandprincipalfinancialofficerhaveconcludedthattheCompany’sdisclosurecontrolsandproceduresasdefinedinRules13a-15(e)and15d-15(e)undertheExchangeActwereeffectiveasofJuly1,2017toensurethatinformationrequiredtobedisclosedbytheCompanyinreportsthatitfilesorsubmitsundertheExchangeActis(i)recorded,processed,summarizedandreportedwithinthetimeperiodsspecifiedintheSECrulesandformsand(ii)accumulatedandcommunicatedtotheCompany’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding requireddisclosure.
ChangesinInternalControlOverFinancialReporting
There were no changes in the Company’s internal control over financial reporting during the thirdquarterof2017, whichwereidentified in connection withmanagement’sevaluationrequiredbyparagraph(d)ofRules13a-15and15d-15undertheExchangeAct,thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,theCompany’sinternalcontroloverfinancialreporting.
AppleInc.|Q32017Form10-Q|33
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
TheCompanyissubjecttolegalproceedingsandclaimsthathavenotbeenfullyresolvedandthathavearisenintheordinarycourseofbusiness.Intheopinionof management, there wasnot at least a reasonable possibility the Companymayhaveincurred a material loss, or a material loss in excess of a recordedaccrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against theCompanyis subject to significant uncertainty. Therefore, althoughmanagement considersthelikelihoodof suchanoutcometoberemote, if oneor moreoftheselegalmatterswereresolvedagainsttheCompanyinareportingperiodforamountsinexcessofmanagement’sexpectations,theCompany’sconsolidatedfinancialstatementsforthatreportingperiodcouldbemateriallyadverselyaffected.Seetheriskfactor“TheCompanycouldbeimpactedbyunfavorableresultsof 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 “RiskFactors.” The Company settled certain matters during the thirdquarter of2017that did not individually or in the aggregate have a material impact on theCompany’sfinancialconditionoroperatingresults.
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’sbusinesspreviouslydisclosedinPartI,Item1Aofthe2016Form10-KandinPartII,Item1AoftheForms10-QforthequartersendedDecember31,2016andApril 1, 2017, in each case under the heading “Risk Factors.” The business, financial condition and operating results of the Company can be affected by anumberoffactors,whethercurrentlyknownorunknown,includingbutnotlimitedtothosedescribedbelow,anyoneormoreofwhichcould,directlyorindirectly,causetheCompany’sactualfinancialconditionandoperatingresultstovarymateriallyfrompast,orfromanticipatedfuture,financialconditionandoperatingresults.Anyofthesefactors,inwholeorinpart,couldmateriallyandadverselyaffecttheCompany’sbusiness,financialcondition,operatingresultsandstockprice.
Thefollowingdiscussionofriskfactorscontainsforward-lookingstatements.TheseriskfactorsmaybeimportanttounderstandingotherstatementsinthisForm10-Q. The following information should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1,“FinancialStatements”andPartI,Item2,“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”ofthisForm10-Q.
Becauseofthefollowingfactors,aswellasotherfactorsaffectingtheCompany’sfinancialconditionandoperatingresults,pastfinancialperformanceshouldnotbeconsideredtobeareliableindicatoroffutureperformance,andinvestorsshouldnotusehistoricaltrendstoanticipateresultsortrendsinfutureperiods.
Global and regional economic conditions could materially adversely affect the Company.
TheCompany’soperationsandperformancedependsignificantlyonglobalandregionaleconomicconditions.Uncertaintyaboutglobalandregionaleconomicconditionsposesariskasconsumersandbusinessesmaypostponespendinginresponsetotighter credit, higherunemployment, financial market volatility,government austerity programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economicconditionscouldhaveamaterialadverseeffectondemandfortheCompany’sproductsandservices.DemandalsocoulddiffermateriallyfromtheCompany’sexpectationsasaresultofcurrencyfluctuationsbecausetheCompanygenerallyraisespricesongoodsandservicessoldoutsidetheU.S.tocorrespondwiththeeffectofastrengtheningoftheU.S.dollar.Otherfactorsthatcouldinfluenceworldwideorregionaldemandincludechangesinfuelandotherenergycosts,conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence and othermacroeconomicfactorsaffectingconsumerspendingbehavior.TheseandothereconomicfactorscouldmateriallyadverselyaffectdemandfortheCompany’sproductsandservices.
In the event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significantfinancialserviceinstitutionfailures,therecouldbetighteninginthecreditmarkets,lowliquidityandextremevolatilityinfixedincome,credit,currencyandequitymarkets.ThiscouldhaveanumberofeffectsontheCompany’sbusiness,includingtheinsolvencyorfinancialinstabilityofoutsourcingpartnersorsuppliersortheirinabilitytoobtaincredittofinancedevelopmentand/ormanufactureproducts,resultinginproductdelays;inabilityofcustomers,includingchannelpartners,to obtain credit to finance purchases of the Company’s products; failure of derivative counterparties and other financial institutions; and restrictions on theCompany’sabilitytoissuenewdebt.Otherincomeandexpensealsocouldvarymateriallyfromexpectationsdependingongainsorlossesrealizedonthesaleorexchangeoffinancial instruments; impairmentchargesresultingfromrevaluationsofdebtandequitysecuritiesandotherinvestments; changesininterestrates;increasesordecreasesincashbalances;volatilityinforeignexchangerates;andchangesinfairvalueofderivativeinstruments.IncreasedvolatilityinthefinancialmarketsandoveralleconomicuncertaintywouldincreasetheriskoftheactualamountsrealizedinthefutureontheCompany’sfinancialinstrumentsdifferingsignificantlyfromthefairvaluescurrentlyassignedtothem.
AppleInc.|Q32017Form10-Q|34
Global markets for the Company’s products and services are highly competitive and subject to rapid technological change, and the Company may beunable to compete effectively in these markets.
TheCompany’sproductsandservicescompeteinhighlycompetitiveglobalmarketscharacterizedbyaggressivepricecuttingandresultingdownwardpressureon gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in productprice/performancecharacteristics,rapidadoptionoftechnologicalandproductadvancementsbycompetitorsandpricesensitivityonthepartofconsumers.
TheCompany’sabilitytocompetesuccessfullydependsheavilyonitsabilitytoensureacontinuingandtimelyintroductionofinnovativenewproducts,servicesandtechnologiestothemarketplace.TheCompanybelievesitisuniqueinthatitdesignsanddevelopsnearlytheentiresolutionforitsproducts,includingthehardware,operatingsystem,numeroussoftwareapplicationsandrelatedservices.Asaresult, theCompanymustmakesignificantinvestmentsinR&D.TheCompanycurrentlyholdsasignificantnumberofpatentsandcopyrightsandhasregisteredand/orhasappliedtoregisternumerouspatents,trademarksandservice marks. In contrast, many of the Company’s competitors seek to compete primarily through aggressive pricing and very low cost structures, andemulatingtheCompany’sproductsandinfringingonitsintellectualproperty.IftheCompanyisunabletocontinuetodevelopandsellinnovativenewproductswith attractive margins or if competitors infringeontheCompany’s intellectual property, the Company’s ability to maintain a competitive advantagecould beadverselyaffected.
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 significanttechnical,marketing,distributionandotherresources,aswellasestablishedhardware,softwareanddigitalcontentsupplierrelationships;andtheCompanyhasaminoritymarketshareintheglobalsmartphonemarket.Additionally,theCompanyfacessignificantpricecompetitionascompetitorsreducetheirsellingpricesandattempttoimitatetheCompany’sproductfeaturesandapplicationswithintheirownproductsor,alternatively,collaboratewitheachothertooffersolutionsthataremorecompetitivethanthosetheycurrentlyoffer.TheCompanycompeteswithbusinessmodelsthatprovidecontenttousersforfree.TheCompanyalso competes with illegitimate means to obtain third-party digital content and applications. Some of the Company’s competitors have greater experience,productbreadthanddistributionchannelsthantheCompany.Becausesomecurrentandpotential competitorshavesubstantial resourcesand/orexperienceandalowercoststructure,theymaybeabletoprovideproductsandservicesatlittleornoprofitorevenataloss.TheCompanyalsoexpectscompetitiontointensifyascompetitorsattempttoimitatetheCompany’sapproachtoprovidingcomponentsseamlesslywithintheirindividualofferingsorworkcollaborativelytoofferintegratedsolutions.TheCompany’sfinancialconditionandoperatingresultsdependsubstantiallyontheCompany’sabilitytocontinuallyimproveiOSandiOSdevicesinordertomaintaintheirfunctionalanddesignadvantages.
TheCompanyistheonlyauthorizedmakerofhardwareusingmacOS,whichhasaminoritymarketshareinthepersonalcomputermarket.Thismarkethasbeencontractingandisdominatedbycomputermakersusingcompetingoperatingsystems,mostnotablyWindows.Inthemarketforpersonalcomputersandaccessories, theCompanyfacesasignificantnumberof competitors, manyofwhichhavebroaderproduct lines,lower-pricedproductsandalargerinstalledcustomerbase.Historically,consolidationinthismarkethasresultedinlargercompetitors.Pricecompetitionhasbeenparticularlyintenseascompetitorshaveaggressivelycutpricesandloweredproductmargins.Anincreasingnumberofinternet-enableddevicesthatincludesoftwareapplicationsandaresmallerandsimplerthantraditionalpersonalcomputerscompeteformarketsharewiththeCompany’sexistingproducts.TheCompany’sfinancialconditionandoperatingresultsalsodependonitsabilitytocontinuallyimprovetheMacplatformtomaintainitsfunctionalanddesignadvantages.
TherecanbenoassurancetheCompanywillbeabletocontinuetoprovideproductsandservicesthatcompeteeffectively.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Dueto the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce newproducts,services andtechnologies, enhance existing products andservices, effectively stimulate customer demandfor newandupgradedproducts andsuccessfullymanagethetransitiontothesenewandupgradedproducts.Thesuccessofnewproductintroductionsdependsonanumberoffactorsincluding,butnotlimitedto,timelyandsuccessfulproductdevelopment,marketacceptance,theCompany’sabilitytomanagetherisksassociatedwithnewproductproductionramp-upissues,theavailabilityofapplicationsoftwarefornewproducts,theeffectivemanagementofpurchasecommitmentsandinventorylevelsinlinewithanticipatedproduct demand,theavailabilityof productsinappropriatequantitiesandat expectedcoststomeetanticipateddemandandtheriskthat newproductsmayhavequalityorotherdefectsordeficienciesintheearlystagesofintroduction.Accordingly,theCompanycannotdetermineinadvancetheultimateeffectofnewproductintroductionsandtransitions.
AppleInc.|Q32017Form10-Q|35
The Company depends on the performance of distributors, carriers and other resellers.
TheCompanydistributesitsproductsthroughcellularnetworkcarriers,wholesalers,nationalandregionalretailersandvalue-addedresellers,manyofwhomdistribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly toeducation,enterpriseandgovernmentcustomersandconsumersandsmallandmid-sizedbusinessesthroughitsretailandonlinestores.
Some carriers providing cellular network service for iPhone subsidize users’ purchases of the device. There is no assurance that such subsidies will becontinuedatallorinthesameamountsuponrenewaloftheCompany’sagreementswiththesecarriersorinagreementstheCompanyentersintowithnewcarriers.
The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers’ stores with Companyemployeesandcontractors,andimprovingproductplacementdisplays.Theseprogramscouldrequireasubstantialinvestmentwhileprovidingnoassuranceofreturn or incremental revenue. The financial condition of these resellers could weaken, these resellers could stop distributing the Company’s products, oruncertainty regarding demand for some or all of the Company’s products could cause resellers to reduce their ordering and marketing of the Company’sproducts.
The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
TheCompanyrecordsawrite-downforproductandcomponentinventoriesthathavebecomeobsoleteorexceedanticipateddemandornetrealizablevalueandaccrues necessary cancellation fee reserves for orders of excess products andcomponents. TheCompanyalso reviewsits long-lived assets, includingcapitalassetsheldatitssuppliers’facilitiesandinventoryprepayments,forimpairmentwhenevereventsorcircumstancesindicatethecarryingamountofanassetmaynotberecoverable.IftheCompanydeterminesthatimpairmenthasoccurred,itrecordsawrite-downequaltotheamountbywhichthecarryingvalueoftheassetexceedsitsfairvalue.AlthoughtheCompanybelievesitsprovisionsrelatedtoinventory,capitalassets,inventoryprepaymentsandotherassetsandpurchasecommitmentsarecurrentlyadequate,noassurancecanbegiventhattheCompanywillnotincuradditionalrelatedchargesgiventherapidandunpredictablepaceofproductobsolescenceintheindustriesinwhichtheCompanycompetes.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Manufacturing purchaseobligationstypicallycoverforecastedcomponent andmanufacturingrequirementsfor periodsupto150days. BecausetheCompany’s markets arevolatile,competitiveandsubjecttorapidtechnologyandpricechanges,thereisarisktheCompanywillforecastincorrectlyandorderorproduceexcessorinsufficientamountsofcomponentsorproducts,ornotfullyutilizefirmpurchasecommitments.
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. Manycomponents, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricingfluctuations.WhiletheCompanyhasenteredintoagreementsforthesupplyofmanycomponents,therecanbenoassurancethattheCompanywillbeabletoextendorrenewtheseagreementsonsimilarterms,oratall.Anumberofsuppliersofcomponentsmaysufferfrompoorfinancialconditions,whichcanleadtobusinessfailureforthesupplierorconsolidationwithinaparticularindustry,furtherlimitingtheCompany’sabilitytoobtainsufficientquantitiesofcomponentsoncommerciallyreasonableterms.TheeffectsofglobalorregionaleconomicconditionsontheCompany’ssuppliers,describedin“Globalandregionaleconomicconditions could materially adversely affect the Company” above, also could affect the Company’s ability to obtain components .Therefore, the Companyremainssubjecttosignificantrisksofsupplyshortagesandpriceincreases.
TheCompany’snewproductsoftenutilizecustomcomponentsavailablefromonlyonesource. Whenacomponent or product usesnewtechnologies, initialcapacityconstraintsmayexistuntilthesuppliers’yieldshavematuredormanufacturingcapacityhasincreased.Continuedavailabilityofthesecomponentsatacceptable prices, or at all, may be affected for any number of reasons, including if those suppliers decide to concentrate on the production of commoncomponentsinsteadofcomponentscustomizedtomeettheCompany’srequirements.Thesupplyofcomponentsforaneworexistingproductcouldbedelayedorconstrained,orakeymanufacturingvendorcoulddelayshipmentsofcompletedproductstotheCompany.
AppleInc.|Q32017Form10-Q|36
The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which arelocated outside of the U.S.
SubstantiallyalloftheCompany’smanufacturingisperformedinwholeorinpartbyafewoutsourcingpartnerslocatedprimarilyinAsia.TheCompanyhasalsooutsourcedmuchofitstransportationandlogisticsmanagement.Whilethesearrangementsmayloweroperatingcosts,theyalsoreducetheCompany’sdirectcontrol over productionanddistribution. It is uncertain what effect suchdiminishedcontrol will haveonthequality or quantity of products or services, or theCompany’s flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for warranty expensereimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience anunanticipatedproductdefectorwarrantyliability.WhiletheCompanyreliesonitspartnerstoadheretoitssuppliercodeofconduct,materialviolationsofthesuppliercodeofconductcouldoccur.
The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components, and onoutsourcingpartnersprimarilylocatedinAsia,forfinalassemblyofsubstantiallyalloftheCompany’shardwareproducts.Anyfailureofthesepartnerstoperformmayhavea negative impact on the Company’s cost or supply of components or finishedgoods. In addition, manufacturing or logistics in theselocations ortransit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technologysystemfailures,commercialdisputes,militaryactionsoreconomic,business,labor,environmental,publichealth,orpoliticalissues.
TheCompanyhasinvestedinmanufacturingprocessequipment,muchofwhichisheldatcertainofitsoutsourcingpartners,andhasmadeprepaymentstocertainofitssuppliersassociatedwithlong-termsupplyagreements. Whilethesearrangementshelpensurethesupplyofcomponentsandfinishedgoods,iftheseoutsourcingpartnersorsuppliersexperienceseverefinancialproblemsorotherdisruptionsintheirbusiness,suchcontinuedsupplycouldbereducedorterminatedandthenetrealizablevalueoftheseassetscouldbenegativelyimpacted.
The Company’s products and services may experience quality problems from time to time that can result in decreased sales and operating marginand harm to the Company’s reputation.
TheCompanysellscomplexhardwareandsoftwareproductsandservicesthatcancontaindesignandmanufacturingdefects.Sophisticatedoperatingsystemsoftwareandapplications,suchasthosesoldbytheCompany,oftencontain“bugs”thatcanunexpectedlyinterferewiththesoftware’sintendedoperation.TheCompany’sonlineservicesmayfromtimetotimeexperienceoutages,serviceslowdownsorerrors.DefectsmayalsooccurincomponentsandproductstheCompanypurchasesfromthirdparties.TherecanbenoassurancetheCompanywillbeabletodetectandfixalldefectsinthehardware,softwareandservicesitsells.Failuretodosocouldresultinlostrevenue,significantwarrantyandotherexpensesandharmtotheCompany’sreputation.
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.
TheCompanycontractswithnumerousthirdpartiestooffertheirdigitalcontenttocustomers.Thisincludestherighttosellcurrentlyavailablemusic,movies,TVshowsandbooks.Thelicensingorotherdistributionarrangementswiththesethirdpartiesareforrelativelyshorttermsanddonotguaranteethecontinuationorrenewalofthesearrangementsonreasonableterms,ifatall.Somethird-partycontentprovidersanddistributorscurrentlyorinthefuturemayoffercompetingproductsandservices,andcouldtakeactiontomakeitmoredifficultorimpossiblefortheCompanytolicenseorotherwisedistributetheircontentinthefuture.Othercontentowners,providersordistributorsmayseektolimittheCompany’saccessto,orincreasethecostof,suchcontent.TheCompanymaybeunabletocontinuetoofferawidevarietyofcontentatreasonablepriceswithacceptableusagerules,orcontinuetoexpanditsgeographicreach.Failuretoobtaintherighttomakethird-partydigitalcontentavailable,ortomakesuchcontentavailableoncommerciallyreasonableterms,couldhaveamaterialadverseimpactontheCompany’sfinancialconditionandoperatingresults.
Somethird-partydigitalcontentprovidersrequiretheCompanytoprovidedigitalrightsmanagementandothersecuritysolutions.Ifrequirementschange,theCompanymayhavetodeveloporlicensenewtechnologytoprovidethesesolutions.ThereisnoassurancetheCompanywillbeabletodeveloporlicensesuchsolutionsat areasonablecost andinatimelymanner. Inaddition, certaincountrieshavepassedor mayproposeandadopt legislationthat wouldforcetheCompany to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affectarrangementswiththeCompany’scontentproviders.
AppleInc.|Q32017Form10-Q|37
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 andservices.Thereisnoassurancethatthird-partydeveloperswillcontinuetodevelopandmaintainsoftwareapplicationsandservicesfortheCompany’sproducts.If third-party software applications and services cease to be developed and maintained for the Company’s products, customers may choose not to buy theCompany’sproducts.
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 andanalysis of the relative benefits of developing, maintaining andupgrading suchsoftware for the Company’s products compared to Windows-basedproducts. This analysis maybe basedonfactors suchas the market position of the Companyandits products, the anticipated revenuethat maybegenerated, expected future growth of Mac sales and the costs of developing such applications and services. If the Company’s minority share of the globalpersonal computer market causes developers to question the Mac’s prospects, developers could be less inclined to develop or upgrade software for theCompany’sMacproductsandmoreinclinedtodevotetheirresourcestodevelopingandupgradingsoftwareforthelargerWindowsmarket.
Withrespect toiOSdevices, theCompanyreliesonthecontinuedavailability anddevelopment of compellingandinnovativesoftwareapplications, includingapplicationsdistributedthroughtheAppStore.iOSdevicesaresubjecttorapidtechnologicalchange,and,ifthird-partydevelopersareunabletoorchoosenottokeepupwiththispaceofchange,third-partyapplicationsmightnotsuccessfullyoperateandmayresultindissatisfiedcustomers.AswithapplicationsfortheCompany’sMacproducts,theavailabilityanddevelopmentoftheseapplicationsalsodependondevelopers’perceptionsandanalysisoftherelativebenefitsofdeveloping,maintainingorupgradingsoftwarefortheCompany’siOSdevicesratherthanitscompetitors’platforms,suchasAndroid.Ifdevelopersfocustheireffortsonthesecompetingplatforms,theavailabilityandqualityofapplicationsfortheCompany’siOSdevicesmaysuffer.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms orat all.
Many of the Company’s products include third-party intellectual property, which requires licenses from those third parties. Based on past experience andindustry practice, the Companybelievessuchlicensesgenerally canbeobtainedonreasonable terms. There is, however, noassurancethat the necessarylicensescanbeobtainedonacceptabletermsoratall.Failuretoobtaintherighttousethird-partyintellectualproperty,ortousesuchintellectualpropertyoncommercially reasonable terms, could preclude the Company from selling certain products or otherwise have a material adverse impact on the Company’sfinancialconditionandoperatingresults.
The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights.
TheCompanyissubjecttovariouslegalproceedingsandclaimsthathavearisenintheordinarycourseofbusinessandhavenotyetbeenfullyresolved,andnewclaimsmayariseinthefuture.Inaddition,agreementsenteredintobytheCompanysometimesincludeindemnificationprovisionswhichmaysubjecttheCompanytocostsanddamagesintheeventofaclaimagainstanindemnifiedthirdparty.
ClaimsagainsttheCompanybasedonallegationsofpatentinfringementorotherviolationsofintellectualpropertyrightshavegenerallyincreasedovertimeandmaycontinuetoincrease.Inparticular,theCompanyhashistoricallyfacedasignificantnumberofpatentclaimsrelatingtoitscellular-enabledproducts,andnewclaimsmayariseinthefuture.Forexample,technologyandotherpatent-holdingcompaniesfrequentlyasserttheirpatentsandseekroyaltiesandoftenenter into litigation based on allegations of patent infringement or other violations of intellectual property rights. The Company is vigorously defendinginfringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in variouscountries.Theplaintiffsintheseactionsfrequentlyseekinjunctionsandsubstantialdamages.
Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to the Company’s operations and distracting tomanagement. Inrecognitionoftheseconsiderations,theCompanymayenterintolicensingagreementsorotherarrangementstosettlelitigationandresolvesuchdisputes.Noassurancecanbegiventhatsuchagreementscanbeobtainedonacceptabletermsorthatlitigationwillnotoccur.TheseagreementsmayalsosignificantlyincreasetheCompany’soperatingexpenses.
In management’s opinion, there is not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of arecordedaccrual,withrespecttolosscontingencies,includingmattersrelatedtoinfringementofintellectualpropertyrights.However,theoutcomeoflitigationisinherentlyuncertain.
AppleInc.|Q32017Form10-Q|38
Although management considers the likelihood of such an outcome to be remote, if one or more legal matters were resolved against the Company or anindemnified third party in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for thatreporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetarydamages, disgorgement of revenueorprofits, remedial corporatemeasuresorinjunctiverelief against theCompanythat couldmaterially adverselyaffect itsfinancialconditionandoperatingresults.
WhiletheCompanymaintainsinsurancecoverageforcertaintypesof claims,suchinsurancecoveragemaybeinsufficient tocoverall lossesorall typesofclaimsthatmayarise.
The Company is subject to laws and regulations worldwide, changes to which could increase the Company’s costs and individually or in theaggregate 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 andregulationsaffecttheCompany’sactivitiesincluding,butnotlimitedto,inareasoflabor,advertising,digitalcontent,consumerprotection,realestate,billing,e-commerce,promotions,qualityofservices,telecommunications,mobilecommunicationsandmedia,television,intellectualpropertyownershipandinfringement,tax, import andexport requirements, anti-corruption, foreignexchangecontrolsandcashrepatriationrestrictions,dataprivacyrequirements, anti-competition,environmental,healthandsafety.
Bywayof example,lawsandregulationsrelatedtomobilecommunicationsandmediadevicesinthemanyjurisdictionsinwhichtheCompanyoperatesareextensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices,lockingdevicestoacarrier’snetwork,ormandatingtheuseofdevicesonmorethanonecarrier’snetwork.Thesedevicesarealsosubjecttocertificationandregulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes areextensiveandtimeconsuming,andcouldresultinadditionaltestingrequirements,productmodifications,ordelaysinproductshipmentdates,orcouldprecludetheCompanyfromsellingcertainproducts.
Compliancewiththeselaws,regulationsandsimilarrequirementsmaybeonerousandexpensive,andtheymaybeinconsistentfromjurisdictiontojurisdiction,furtherincreasingthecostofcomplianceanddoingbusiness.Anysuchcosts,whichmayriseinthefutureasaresultofchangesintheselawsandregulationsorintheirinterpretation,couldindividuallyorintheaggregatemaketheCompany’sproductsandserviceslessattractivetotheCompany’scustomers,delaytheintroductionofnewproductsinoneormoreregions,orcausetheCompanytochangeorlimititsbusinesspractices.TheCompanyhasimplementedpoliciesand procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees,contractors,oragentswillnotviolatesuchlawsandregulationsortheCompany’spoliciesandprocedures.
The Company’s business is subject to the risks of international operations.
TheCompanyderivesasignificantportionofitsrevenueandearningsfromitsinternationaloperations.CompliancewithapplicableU.S.andforeignlawsandregulations, suchasimport andexport requirements, anti-corruptionlaws,taxlaws,foreignexchangecontrolsandcashrepatriationrestrictions, dataprivacyrequirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although theCompanyhasimplementedpoliciesandprocedurestocomplywiththeselawsandregulations,aviolationbytheCompany’semployees,contractorsoragentscouldneverthelessoccur.Insomecases,compliancewiththelawsandregulationsofonecountrycouldviolatethelawsandregulationsofanothercountry.ViolationsoftheselawsandregulationscouldmateriallyadverselyaffecttheCompany’sbrand,internationalgrowtheffortsandbusiness.
The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and laborconditions, increasedduties, taxesandothercostsandpolitical instability. Marginsonsalesof theCompany’sproductsinforeigncountries, andonsalesofproducts that include components obtained fromforeign suppliers, could be materially adversely affected by international trade regulations, including duties,tariffsandantidumpingpenalties.TheCompanyisalsoexposedtocreditandcollectabilityriskonitstradereceivableswithcustomersincertaininternationalmarkets.TherecanbenoassurancetheCompanycaneffectivelylimititscreditriskandavoidlosses.
AppleInc.|Q32017Form10-Q|39
The Company’s retail stores have required and will continue to require a substantial investment and commitment of resources and are subject tonumerous risks and uncertainties.
TheCompany’s retail stores haverequired substantial investment in equipment andleasehold improvements, information systems, inventory andpersonnel.TheCompanyalsohasenteredintosubstantial operatingleasecommitmentsforretail space.Certainstoreshavebeendesignedandbuilt toserveashigh-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements,locationsandsize,thesestoresrequiresubstantiallymoreinvestmentthantheCompany’smoretypicalretailstores.DuetothehighcoststructureassociatedwiththeCompany’sretailstores,adeclineinsalesortheclosureorpoorperformanceofindividualormultiplestorescouldresultinsignificantleaseterminationcosts,write-offsofequipmentandleaseholdimprovementsandseverancecosts.
Manyfactorsuniquetoretailoperations,someofwhicharebeyondtheCompany’scontrol,poserisksanduncertainties.Theserisksanduncertaintiesinclude,butarenotlimitedto,macro-economicfactorsthatcouldhaveanadverseeffectongeneralretailactivity,aswellastheCompany’sinabilitytomanagecostsassociatedwithstoreconstructionandoperation,theCompany’sfailuretomanagerelationshipswithitsexistingretailpartners,morechallengingenvironmentsinmanagingretail operationsoutsidetheU.S., costsassociatedwithunanticipatedfluctuationsinthevalueofretail inventory, andtheCompany’sinabilitytoobtainandrenewleasesinqualityretaillocationsatareasonablecost.
Investment in new business strategies and acquisitions could disrupt the Company’s ongoing business and present risks not originallycontemplated.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks anduncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital andunidentifiedissuesnotdiscoveredintheCompany’sduediligence.Thesenewventuresareinherentlyriskyandmaynotbesuccessful.
The Company’s business and reputation may be impacted by information technology system failures or network disruptions.
TheCompanymaybesubjecttoinformationtechnologysystemfailuresandnetworkdisruptions.Thesemaybecausedbynaturaldisasters,accidents,powerdisruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. Systemredundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient for all eventualities. Such failures ordisruptionscould,amongotherthings,preventaccesstotheCompany’sonlinestoresandservices,precluderetailstoretransactions,compromiseCompanyorcustomerdata,andresultindelayedorcanceledorders.Systemfailuresanddisruptionscouldalsoimpedethemanufacturingandshippingofproducts,deliveryofonlineservices,transactionsprocessingandfinancialreporting.
There may be breaches of the Company’s information technology systems that materially damage business partner and customer relationships,curtail or otherwise adversely impact access to online stores and services, or subject the Company to significant reputational, financial, legal andoperational consequences.
TheCompany’s business requires it to use and store customer, employee and business partner personally identifiable information (“PII”). This mayinclude,among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and payment accountinformation. Althoughmaliciousattacksto gainaccessto PII affect manycompaniesacrossvariousindustries, theCompanyis at arelatively greater riskofbeingtargetedbecauseofitshighprofileandtheamountofPIIitmanages.
The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption andauthenticationtechnologiesdesignedtosecurethetransmissionandstorageofdataandpreventaccesstoCompanydataoraccounts.Aswithallcompanies,these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities. Forexample,thirdpartiesmayattempttofraudulentlyinduceemployeesorcustomersintodisclosingusernames,passwordsorothersensitiveinformation,whichmayinturnbeusedtoaccesstheCompany’sinformationtechnologysystems.TohelpprotectcustomersandtheCompany,theCompanymonitorsaccountsandsystemsforunusualactivityandmayfreezeaccountsundersuspiciouscircumstances,whichmayresultinthedelayorlossofcustomerorders.
AppleInc.|Q32017Form10-Q|40
TheCompanydevotessignificantresourcestonetworksecurity,dataencryptionandothersecuritymeasurestoprotectitssystemsanddata,butthesesecuritymeasurescannotprovideabsolutesecurity. TotheextenttheCompanywastoexperienceabreachofitssystemsandwasunabletoprotectsensitivedata,such a breach could materially damage business partner and customer relationships, and curtail or otherwise adversely impact access to online stores andservices.Moreover,ifacomputersecuritybreachaffectstheCompany’ssystemsorresultsintheunauthorizedreleaseofPII,theCompany’sreputationandbrand could be materially damaged, use of the Company’s products and services could decrease, and the Company could be exposed to a risk of loss orlitigationandpossibleliability.WhiletheCompanymaintainsinsurancecoveragethat, subjecttopolicytermsandconditionsandsubjecttoasignificantself-insuredretention,isdesignedtoaddresscertainaspectsofcyberrisks,suchinsurancecoveragemaybeinsufficienttocoveralllossesoralltypesofclaimsthatmayariseinthecontinuallyevolvingareaofcyberrisk.
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these rules andobligations, if information is compromised, the Company could be liable to payment card issuers for associated expenses and penalties. In addition, if theCompanyfailstofollowpaymentcardindustrysecuritystandards,evenifnocustomerinformationiscompromised,theCompanycouldincursignificantfinesorexperienceasignificantincreaseinpaymentcardtransactioncosts.
The Company’s business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
TheCompanyissubjecttofederal,stateandinternationallawsrelatingtothecollection,use,retention,securityandtransferofPII.Inmanycases,theselawsapplynotonlytothird-partytransactions,butalsomayrestricttransfersofPIIamongtheCompanyanditsinternationalsubsidiaries.Severaljurisdictionshavepassedlawsinthisarea,andotherjurisdictionsareconsideringimposingadditionalrestrictions.Theselawscontinuetodevelopandmaybeinconsistentfromjurisdictiontojurisdiction.ComplyingwithemergingandchanginginternationalrequirementsmaycausetheCompanytoincursubstantialcostsorrequiretheCompanytochangeitsbusinesspractices.Noncompliancecouldresultinsignificantpenaltiesorlegalliability.
TheCompanymakesstatementsaboutitsuseanddisclosureofPIIthroughitsprivacypolicy,informationprovidedonitswebsiteandpressstatements.AnyfailurebytheCompanytocomplywiththesepublicstatementsorwithotherfederal,stateorinternationalprivacy-relatedordataprotectionlawsandregulationscouldresultinproceedingsagainsttheCompanybygovernmentalentitiesorothers.Inadditiontoreputationalimpacts,penaltiescouldincludeongoingauditrequirementsandsignificantlegalliability.
The Company’s success depends largely on the continued service and availability of key personnel.
MuchoftheCompany’sfuturesuccessdependsonthecontinuedavailabilityandserviceofkeypersonnel,includingitsChiefExecutiveOfficer,executiveteamandotherhighlyskilledemployees.Experiencedpersonnelinthetechnologyindustryareinhighdemandandcompetitionfortheirtalentsisintense,especiallyinSiliconValley,wheremostoftheCompany’skeypersonnelarelocated.
The Company’s business may be impacted by political events, war, terrorism, public health issues, natural disasters and other businessinterruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused and could cause damage or disruption tointernationalcommerceandtheglobaleconomy,andthuscouldhaveamaterialadverseeffectontheCompany,itssuppliers,logisticsproviders,manufacturingvendorsandcustomers,includingchannelpartners.TheCompany’sbusinessoperationsaresubjecttointerruptionby,amongothers,naturaldisasters,whetherasaresultofclimatechangeorotherwise,fire,powershortages,nuclearpowerplantaccidentsandotherindustrialaccidents,terroristattacksandotherhostileacts,labordisputes,publichealthissuesandothereventsbeyonditscontrol.SucheventscoulddecreasedemandfortheCompany’sproducts,makeitdifficultor impossible for the Company to make and deliver products to its customers, including channel partners, or to receive components fromits suppliers, andcreate delays and inefficiencies in the Company’s supply chain. While the Company’s suppliers are required to maintain safe working environments andoperations,anindustrialaccidentcouldoccurandcouldresultindisruptiontotheCompany’sbusinessandharmtotheCompany’sreputation.Shouldmajorpublichealthissues,includingpandemics,arise,theCompanycouldbeadverselyaffectedbymorestringentemployeetravelrestrictions,additionallimitationsinfreightservices,governmentalactionslimitingthemovementofproductsbetweenregions,delaysinproductionrampsofnewproductsanddisruptionsintheoperations of the Company’s manufacturing vendors and component suppliers. The majority of the Company’s R&D activities, its corporate headquarters,informationtechnologysystemsandothercriticalbusinessoperations,includingcertaincomponentsuppliersandmanufacturingvendors,areinlocationsthatcould be affected by natural disasters. In the event of a natural disaster, the Company could incur significant losses, require substantial recovery time andexperiencesignificantexpendituresinordertoresumeoperations.
AppleInc.|Q32017Form10-Q|41
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 contractsgenerallyhavehighergrossmarginsthancertainoftheCompany’sotherproducts.GrossmarginsontheCompany’shardwareproductsvaryacrossproductlinesandcanchangeovertimeasaresultofproducttransitions,pricingandconfigurationchanges,andcomponent,warranty,andothercostfluctuations.TheCompany’sdirectsalesgenerallyhavehigherassociatedgrossmarginsthanitsindirectsalesthroughitschannelpartners.Inaddition,theCompany’sgrossmarginandoperatingmarginpercentages,aswellasoverallprofitability,maybemateriallyadverselyimpactedasaresultofashiftinproduct,geographicorchannelmix,componentcostincreases,thestrengtheningU.S.dollar,pricecompetition,ortheintroductionofnewproducts,includingthosethathavehighercoststructureswithflatorreducedpricing.
TheCompanyhastypicallyexperiencedhighernetsalesinitsfirstquartercomparedtootherquartersdueinparttoseasonalholidaydemand.Additionally,newproductintroductionscansignificantlyimpactnetsales,productcostsandoperatingexpenses.Further,theCompanygeneratesamajorityofitsnetsalesfromasingle product and a decline in demandfor that product could significantly impact quarterly net sales. The Company could also be subject to unexpecteddevelopmentslateinaquarter,suchaslower-than-anticipateddemandfortheCompany’sproducts,issueswithnewproductintroductions,aninternalsystemsfailure,orfailureofoneoftheCompany’slogistics,componentssupply,ormanufacturingpartners.
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, thetechnologyindustryandthestockmarketasawholehaveexperiencedextremestockpriceandvolumefluctuationsthathaveaffectedstockpricesinwaysthatmayhavebeenunrelatedtothesecompanies’operatingperformance.PricevolatilityoveragivenperiodmaycausetheaveragepriceatwhichtheCompanyrepurchasesitsownstocktoexceedthestock’spriceatagivenpointintime.TheCompanybelievesitsstockpriceshouldreflectexpectationsoffuturegrowthandprofitability.TheCompanyalsobelievesitsstockpriceshouldreflectexpectationsthatitscashdividendwillcontinueatcurrentlevelsorgrowandthatitscurrent share repurchase program will be fully consummated. Future dividends are subject to declaration by the Company’s Board of Directors, and theCompany’ssharerepurchaseprogramdoesnotobligateittoacquireanyspecificnumberofshares.IftheCompanyfailstomeetexpectationsrelatedtofuturegrowth,profitability,dividends,sharerepurchasesorothermarketexpectations,itsstockpricemaydeclinesignificantly,whichcouldhaveamaterialadverseimpactoninvestorconfidenceandemployeeretention.
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 expensesworldwide.WeakeningofforeigncurrenciesrelativetotheU.S.dollaradverselyaffectstheU.S.dollarvalueoftheCompany’sforeigncurrency-denominatedsalesandearnings,andgenerallyleadstheCompanytoraiseinternationalpricing,potentiallyreducingdemandfortheCompany’sproducts.MarginsonsalesoftheCompany’sproductsinforeigncountriesandonsalesofproductsthatincludecomponentsobtainedfromforeignsuppliers,couldbemateriallyadverselyaffectedbyforeigncurrencyexchangeratefluctuations.Insomecircumstances,forcompetitiveorotherreasons,theCompanymaydecidenottoraiselocalpricestofullyoffsetthedollar’sstrengthening,oratall,whichwouldadverselyaffecttheU.S.dollarvalueoftheCompany’sforeigncurrency-denominatedsalesand 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 also increase the Company’s cost of product components denominated inthosecurrencies,thusadverselyaffectinggrossmargins.
TheCompanyusesderivativeinstruments,suchasforeigncurrencyforwardandoptioncontracts,tohedgecertainexposurestofluctuationsinforeigncurrencyexchangerates. Theuseof suchhedgingactivitiesmaynotoffset any, or morethanaportion, of theadversefinancial effectsof unfavorablemovementsinforeignexchangeratesoverthelimitedtimethehedgesareinplace.
The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Giventheglobalnatureofitsbusiness,theCompanyhasbothdomesticandinternationalinvestments.CreditratingsandpricingoftheCompany’sinvestmentscanbenegativelyaffectedbyliquidity,creditdeterioration,financialresults,economicrisk,politicalrisk,sovereignriskorotherfactors.Asaresult,thevalueandliquidityoftheCompany’scash,cashequivalentsandmarketablesecuritiesmayfluctuatesubstantially.Therefore,althoughtheCompanyhasnotrealizedanysignificantlossesonitscash,cashequivalentsandmarketablesecurities,futurefluctuationsintheirvaluecouldresultinsignificantrealizedlosses.
AppleInc.|Q32017Form10-Q|42
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supplyagreements, and this risk is heightened during periods when economic conditions worsen.
TheCompanydistributesitsproductsthroughthird-partycellularnetworkcarriers,wholesalers,retailersandvalue-addedresellers.TheCompanyalsosellsitsproductsdirectlytosmallandmid-sizedbusinessesandeducation,enterpriseandgovernmentcustomers.AsubstantialmajorityoftheCompany’soutstandingtradereceivablesarenotcoveredbycollateral,third-partyfinancingarrangementsorcreditinsurance.TheCompany’sexposuretocreditandcollectabilityriskonitstradereceivablesishigherincertaininternationalmarketsanditsabilitytomitigatesuchrisksmaybelimited.TheCompanyalsohasunsecuredvendornon-tradereceivablesresultingfrompurchasesofcomponentsbyoutsourcingpartnersandothervendorsthatmanufacturesub-assembliesorassemblefinalproducts for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventorycomponents.AsofJuly1,2017,asignificantportionoftheCompany’stradereceivableswasconcentratedwithincellularnetworkcarriers,anditsvendornon-tradereceivablesandprepaymentsrelatedtolong-termsupplyagreementswereconcentratedamongafewindividualvendorslocatedprimarilyinAsia.WhiletheCompanyhasprocedurestomonitorandlimitexposuretocreditriskonitstradeandvendornon-tradereceivables,aswellaslong-termprepayments,therecanbenoassurancesuchprocedureswilleffectivelylimititscreditriskandavoidlosses.
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 taxliabilities.
TheCompanyissubjecttotaxesintheU.S.andnumerousforeignjurisdictions,includingIreland,whereanumberoftheCompany’ssubsidiariesareorganized.Dueto economic andpolitical conditions, tax rates in variousjurisdictionsmaybesubject to significant change. TheCompany’s effective tax ratescould beaffected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, orchangesintaxlawsortheirinterpretation,includingintheU.S.andIreland.
TheCompanyis alsosubject to theexaminationof its taxreturnsandother taxmatters bytheIRSandother taxauthorities andgovernmental bodies. TheCompanyregularlyassessesthelikelihoodofanadverseoutcomeresultingfromtheseexaminationstodeterminetheadequacyofitsprovisionfortaxes.Therecanbenoassuranceastotheoutcomeoftheseexaminations.IftheCompany’seffectivetaxratesweretoincrease,particularlyintheU.S.orIreland,oriftheultimatedeterminationoftheCompany’staxesowedisforanamountinexcessofamountspreviouslyaccrued,theCompany’sfinancialcondition,operatingresultsandcashflowscouldbeadverselyaffected.
AppleInc.|Q32017Form10-Q|43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
SharerepurchaseactivityduringthethreemonthsendedJuly1,2017wasasfollows(inmillions,exceptnumberofshares,whicharereflectedinthousands,andpershareamounts):
Periods
Total Numberof Shares
Purchased
AveragePrice
Paid PerShare
Total Number ofShares
Purchased as Partof Publicly
Announced Plansor Programs
ApproximateDollar Value of
Shares That May Yet BePurchased
Under the Plans orPrograms (1)
April2,2017toMay6,2017: Openmarketandprivatelynegotiatedpurchases 6,968 $ 143.52 6,968
May7,2017toJune3,2017:
February2017ASR 3,422 (2) 3,422 May2017ASR 15,598 (3) (3) 15,598 (3) Openmarketandprivatelynegotiatedpurchases 10,650 $ 153.65 10,650
June4,2017toJuly1,2017:
Openmarketandprivatelynegotiatedpurchases 12,738 $ 146.31 12,738 Total 49,376 $ 51,523
(1) InMay2017,theCompany’sBoardofDirectorsincreasedthesharerepurchaseauthorizationfrom$175billionto$210billionoftheCompany’scommonstock,ofwhich$158billionhadbeenutilizedasofJuly1,2017.Theremaining$52billioninthetablerepresentstheamountavailabletorepurchasesharesundertheauthorizedrepurchaseprogramasofJuly1,2017.TheCompany’ssharerepurchaseprogramdoesnotobligateittoacquireanyspecificnumberofshares.Under the program, sharesmaybe repurchasedin privately negotiated and/or openmarket transactions, includingunder planscomplyingwith Rule 10b5-1undertheExchangeAct.
(2) InFebruary2017,theCompanyenteredintoanacceleratedsharerepurchasearrangement(“ASR”)topurchaseupto$3.0billionoftheCompany’scommonstock.InMay2017,thepurchaseperiodforthisASRendedandanadditional3.4millionsharesweredeliveredandretired.Intotal,20.9millionsharesweredeliveredunderthisASRatanaveragerepurchasepriceof$143.20.
(3) InMay2017,theCompanyenteredintoanewASRtopurchaseupto$3.0billionoftheCompany’scommonstock.Inexchangeforanup-frontpaymentof$3.0billion,thefinancialinstitutionpartytothearrangementcommittedtodeliversharestotheCompanyduringtheASR’spurchaseperiod,whichwillendinAugust2017.Thetotalnumberofsharesultimatelydelivered,andthereforetheaveragepricepaidpershare,willbedeterminedattheendoftheapplicablepurchaseperiodbasedonthevolume-weightedaveragepriceoftheCompany’scommonstockduringthatperiod.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Notapplicable.
Item 5. Other Information
None.
AppleInc.|Q32017Form10-Q|44
Item 6. Exhibits
Exhibit Index
Incorporated by Reference
ExhibitNumber
Exhibit Description Form Exhibit
Filing Date/Period EndDate
4.1
Officer’s Certificate of the Registrant, dated as of May 11, 2017, including forms of global notesrepresenting the Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.800% Notes due2020,2.300%Notesdue2022,2.850%Notesdue2024and3.200%Notesdue2027.
8-K
4.1
5/11/17
4.2 Officer’s Certificate of the Registrant, dated as of May 24, 2017, including forms of global notesrepresentingthe0.875%Notesdue2025and1.375%Notesdue2029.
8-K 4.1
5/24/17
4.3 Officer’s Certificate of the Registrant, dated as of June 20, 2017, including form of global noterepresentingthe3.000%Notesdue2027.
8-K 4.1
6/20/17
31.1* Rule13a-14(a)/15d-14(a)CertificationofChiefExecutiveOfficer. 31.2* Rule13a-14(a)/15d-14(a)CertificationofChiefFinancialOfficer. 32.1** Section1350CertificationsofChiefExecutiveOfficerandChiefFinancialOfficer. 101.INS* XBRLInstanceDocument. 101.SCH* XBRLTaxonomyExtensionSchemaDocument. 101.CAL* XBRLTaxonomyExtensionCalculationLinkbaseDocument. 101.DEF* XBRLTaxonomyExtensionDefinitionLinkbaseDocument. 101.LAB* XBRLTaxonomyExtensionLabelLinkbaseDocument. 101.PRE* XBRLTaxonomyExtensionPresentationLinkbaseDocument.
* Filedherewith.
** Furnishedherewith.
AppleInc.|Q32017Form10-Q|45
SIGNATURE
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,theRegistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersignedthereuntodulyauthorized.
August2,2017 AppleInc.
By: /s/LucaMaestri
LucaMaestri SeniorVicePresident, ChiefFinancialOfficer
AppleInc.|Q32017Form10-Q|46
Exhibit 31.1
CERTIFICATION
I, Timothy D. Cook, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Apple Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internalcontrol over financial reporting.
Date: August 2, 2017
By: /s/ Timothy D. Cook
Timothy D. Cook Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Luca Maestri, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Apple Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internalcontrol over financial reporting.
Date: August 2, 2017
By: /s/ Luca Maestri
Luca Maestri Senior Vice President, Chief Financial Officer
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO
18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy D. Cook, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that the Quarterly Report of Apple Inc. on Form 10-Q for the period ended July 1, 2017 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results ofoperations of Apple Inc. at the dates and for the periods indicated.
Date: August 2, 2017
By: /s/ Timothy D. Cook
Timothy D. Cook Chief Executive Officer
I, Luca Maestri, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, thatthe Quarterly Report of Apple Inc. on Form 10-Q for the period ended July 1, 2017 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results ofoperations of Apple Inc. at the dates and for the periods indicated.
Date: August 2, 2017
By: /s/ Luca Maestri
Luca Maestri Senior Vice President, Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Apple Inc. and will be retained by Apple Inc. and furnished to theSecurities and Exchange Commission or its staff upon request.