UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
January 28, 2015
Date of Report (Date of earliest event reported)
Apple Inc.
(Exact name of registrant as specified in its charter)
|
|
|
|
|
| California |
|
001-36743 |
|
94-2404110 |
| (State or other jurisdiction
of incorporation) |
|
(Commission
File Number) |
|
(IRS. Employer
Identification No.) |
1 Infinite Loop
Cupertino, California 95014
(Address of principal
executive offices) (Zip Code)
(408) 996-1010
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address,
if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12) |
| ¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b)) |
| ¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c)) |
Apple Inc. (the “Company”) is furnishing herewith updated financial
statements and other affected financial information for the periods included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014 (the “Form 10-K”). These financial statements and other
affected financial information have been updated to reflect changes made in fiscal year 2015 to the Company’s reportable operating segment data and categorization of product-level net sales reporting.
In fiscal year 2015, management began reporting business performance and making decisions primarily on a geographic basis, including the results of its
retail stores in each respective geographic segment. Accordingly, to align with the way the business is currently managed, the Company’s reportable operating segments now consist of the Americas, Europe, Greater China, Japan and Rest of Asia
Pacific. Retail is no longer reported as a separate reportable operating segment. Additionally, the Company began allocating certain costs to its operating segments that were previously included in other corporate expenses, including certain
share-based compensation costs. The Company also changed its categorization of product-level net sales reporting to reflect its evolving products and services.
Pursuant to guidance prepared by the staff of the Securities and Exchange Commission, the Company has updated the applicable items that were contained in
the Form 10-K reflecting the above mentioned changes in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” in
Exhibits 99.1 and 99.2 filed in this Current Report on Form 8-K (the “Form 8-K”), respectively. The information included in this Form 8-K is presented for information purposes only in connection with the changes in the Company’s
reportable operating segment data and categorization of product-level net sales reporting. There is no change to the Company’s previously reported Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income,
Consolidated Balance Sheets, Consolidated Statements of Shareholders’ Equity and Consolidated Statements of Cash Flows included in the Form 10-K. This Form 8-K does not reflect events occurring after the Company filed the Form 10-K and does not
modify or update the disclosures therein in any way, other than as noted above. The Company began to report comparative results reflective of the above mentioned changes with the filing of the Company’s Quarterly Report on Form 10-Q for the
quarter ended December 27, 2014.
2
Item 9.01 Financial Statements and Exhibits.
The following exhibits are
furnished herewith:
|
|
|
| Exhibit
Number |
|
Exhibit Description |
|
|
| 23.1 |
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
|
|
| 99.1 |
|
Updated Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, from the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014, as filed with
the Securities and Exchange Commission on October 27, 2014. |
|
|
| 99.2 |
|
Updated Part II, Item 8. Financial Statements and Supplementary Data, from the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014, as filed with the
Securities and Exchange Commission on October 27, 2014. |
|
|
| 101.INS |
|
XBRL Instance Document. |
|
|
| 101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
|
|
| 101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
| 101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
| 101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
| 101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
Apple Inc. |
|
|
|
|
| Date: January 28, 2015 |
|
|
|
By: |
|
/s/ Luca Maestri |
|
|
|
|
|
|
Luca Maestri Senior Vice President,
Chief Financial Officer |
4
EXHIBIT INDEX
|
|
|
| Exhibit
Number |
|
Exhibit Description |
|
|
| 23.1 |
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
|
|
| 99.1 |
|
Updated Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, from the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014, as filed with
the Securities and Exchange Commission on October 27, 2014. |
|
|
| 99.2 |
|
Updated Part II, Item 8. Financial Statements and Supplementary Data, from the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014, as filed with the
Securities and Exchange Commission on October 27, 2014. |
|
|
| 101.INS |
|
XBRL Instance Document. |
|
|
| 101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
|
|
| 101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
| 101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
| 101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
| 101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
5
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
| (1) |
Registration Statement (Form S-8 No. 333-195509) pertaining to Apple Inc. 2014 Employee Stock Plan, |
| (2) |
Registration Statement (Form S-8 No. 333-193709) pertaining to Topsy Labs, Inc. 2007 Stock Plan, |
| (3) |
Registration Statement (Form S-3 ASR No. 333-188191) of Apple Inc., |
| (4) |
Registration Statement (Form S-8 No. 333-184706) pertaining to AuthenTec, Inc. 2007 Stock Incentive Plan and AuthenTec, Inc. 2010 Incentive Plan, as
amended, |
| (5) |
Registration Statement (Form S-8 No. 333-180981) pertaining to Chomp Inc. 2009 Equity Incentive Plan, |
| (6) |
Registration Statement (Form S-8 No. 333-179189) pertaining to Anobit Technologies Ltd. Global Share Incentive Plan (2006), |
| (7) |
Registration Statement (Form S-8 No. 333-168279) pertaining to Siri, Inc. 2008 Stock Option/Stock Issuance Plan, |
| (8) |
Registration Statement (Form S-8 No. 333-165214) pertaining to Apple Inc. 2003 Employee Stock Plan, la la media, inc. 2005 Stock Plan and Quattro
Wireless, Inc. 2006 Stock Option and Grant Plan, |
| (9) |
Registration Statement (Form S-8 No. 333-146026) pertaining to Apple Inc. 2003 Employee Stock Plan and Apple Inc. Amended Employee Stock Purchase Plan,
|
| (10) |
Registration Statement (Form S-8 No. 333-125148) pertaining to Employee Stock Purchase Plan and 2003 Employee Stock Plan, and |
| (11) |
Registration Statement (Form S-8 No. 333-75930) pertaining to 1997 Employee Stock Option Plan; |
of our report dated October 27, 2014, except for Note 11 – Segment Information and Geographic Data, as to which the date is January 28,
2015, with respect to the consolidated financial statements of Apple Inc., included in this Current Report on Form 8-K.
/s/ Ernst & Young
LLP
San Jose, California
January 28, 2015
Exhibit 99.1
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This
section and other parts of this Current Report on Form 8-K (“Form 8-K”) contain forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not
directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,”
“plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual
results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A
of the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014 (“Form 10-K”) under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be
read in conjunction with the consolidated financial statements and notes thereto included in Exhibit 99.2 in this Form 8-K. All information presented herein is based on the Company’s fiscal calendar.
Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the
“Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any
reason, except as required by law.
Overview and Highlights
The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a
variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through
third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories
through its online and retail stores. The Company sells to consumers; small and mid-sized businesses; and education, enterprise and government customers.
Fiscal
2014 Highlights
Net sales rose 7% or $11.9 billion during 2014 compared to 2013. This was driven by increases in net sales of iPhone, Mac and
Services. Net sales and unit sales increased for iPhone primarily due to the successful introduction of iPhone 5s and 5c in the latter half of calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in the fourth quarter of 2014,
and expanded distribution. Mac net sales and unit sales increased primarily due to strong demand for MacBook Air and MacBook Pro which were updated in 2014 with faster processors and offered at lower prices. Net sales of Services grew primarily due
to increased revenue from sales through the App Store, AppleCare and licensing. Growth in these areas was partially offset by the year-over-year decline in net sales for iPad due to lower unit sales in many markets, and a decline in net sales of
Other Products. All of the Company’s operating segments other than the Rest of Asia Pacific segment experienced increased net sales in 2014, with growth being strongest in the Greater China and Japan operating segments.
During the first quarter of 2014, the Company introduced iPad Air, its fifth generation iPad and iPad mini with Retina display. At its Worldwide
Developer Conference in June 2014, the Company announced iOS 8 and OS X Yosemite. In September 2014, the Company introduced iPhone 6 and 6 Plus, released iOS 8, announced Apple Pay, which became available in the U.S. in October 2014, and previewed
Apple Watch, which is expected to be available in early calendar 2015. In October 2014, the Company introduced iPad Air 2, iPad mini 3, iMac with Retina 5K Display and an updated Mac mini; and released OS X Yosemite.
During 2014, the Company completed various business acquisitions, including the acquisitions of Beats Music, LLC, which offers a subscription streaming
music service, and Beats Electronics, LLC, which makes Beats headphones, speakers and audio software.
1
In April 2014, the Company increased its share repurchase authorization to $90 billion and the quarterly
dividend was raised to $0.47 per common share, resulting in an overall increase in its capital return program from $100 billion to over $130 billion. During 2014, the Company utilized $45 billion to repurchase its common stock and paid dividends and
dividend equivalents of $11.1 billion. The current share repurchase program is expected to be completed by the end of December 2015. The Company also issued $12.0 billion of long-term debt during 2014 with varying maturities through 2044 and
launched a commercial paper program, with $6.3 billion outstanding as of September 27, 2014.
Fiscal 2013 Highlights
Net sales rose 9% or $14.4 billion during 2013 compared to 2012. This resulted from growth in net sales of iPhone; Services; and iPad. Growth in 2013
reflected strong sales of iPhone 5, strong continuing sales of iPhone 4 and 4s, the introduction of iPhone 5c and 5s, strong performance of the iPad mini and fourth generation iPad, and continued growth in the Company’s online sales of apps,
digital content and services. Growth in these areas was partially offset by declines in net sales of Mac and Other Products. All of the Company’s operating segments experienced increased net sales in 2013, with net sales growth being
particularly strong in the Americas, Greater China and Japan operating segments. Growth in total net sales was higher during the first half of 2013, rising $12.6 billion or 14.7% over the same period in 2012. First half growth in 2013 was driven by
iPhone and iPad introductions at or near the beginning of 2013.
During the first quarter of 2013, the Company introduced the fourth generation iPad
and iPad mini, a new MacBook Pro with Retina display, a new iPod touch, a new iMac, and expanded the rollout of iPhone 5 which began in September 2012. In June 2013 at its Worldwide Developer Conference, the Company announced iOS 7 and OS X
Mavericks, announced iTunes Radio, introduced a significant upgrade to MacBook Air, and provided a preview of all new Mac Pro desktops that were introduced during 2014. In September 2013, the Company introduced iPhone 5s and 5c, released iOS 7,
launched iTunes Radio, and announced that beginning in September 2013 iPhoto, iMovie and iWork Apps for iOS would be available as free downloads with all new iPhone, iPad and iPod touch devices (“iOS devices”).
In April 2013, the Company announced a significant increase to its program to return capital to shareholders by raising the total amount it expected to
utilize for the program through December 2015 to $100 billion. This included increasing its share repurchase authorization to $60 billion and raising its quarterly dividend to $0.44 per common share beginning in May 2013. During 2013, the Company
utilized $23.0 billion to repurchase common shares and paid dividends of $10.5 billion or $1.64 per common share. In conjunction with its capital return program, in May 2013 the Company issued $17.0 billion of long-term debt with varying maturities
through 2043.
2
Sales Data
In
2015, the Company changed its reportable operating segments and categorization of product-level net sales reporting to align with the way the business is currently managed and to better reflect its evolving products and services. The 2014, 2013 and
2012 presentation of this data has been reclassified to conform to the 2015 presentation.
The following table shows net sales by operating segment
and net sales and unit sales by product during 2014, 2013 and 2012 (dollars in millions and units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net Sales by Operating Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
| Americas |
|
$ |
80,095 |
|
|
|
4% |
|
|
$ |
77,093 |
|
|
|
8% |
|
|
$ |
71,060 |
|
| Europe |
|
|
44,285 |
|
|
|
8% |
|
|
|
40,980 |
|
|
|
4% |
|
|
|
39,326 |
|
| Greater China |
|
|
31,853 |
|
|
|
18% |
|
|
|
27,016 |
|
|
|
14% |
|
|
|
23,756 |
|
| Japan |
|
|
15,314 |
|
|
|
11% |
|
|
|
13,782 |
|
|
|
26% |
|
|
|
10,913 |
|
| Rest of Asia Pacific |
|
|
11,248 |
|
|
|
(7)% |
|
|
|
12,039 |
|
|
|
5% |
|
|
|
11,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net sales |
|
$ |
182,795 |
|
|
|
7% |
|
|
$ |
170,910 |
|
|
|
9% |
|
|
$ |
156,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales by Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| iPhone (1) |
|
$ |
101,991 |
|
|
|
12% |
|
|
$ |
91,279 |
|
|
|
16% |
|
|
$ |
78,692 |
|
| iPad (1) |
|
|
30,283 |
|
|
|
(5)% |
|
|
|
31,980 |
|
|
|
3% |
|
|
|
30,945 |
|
| Mac (1) |
|
|
24,079 |
|
|
|
12% |
|
|
|
21,483 |
|
|
|
(7)% |
|
|
|
23,221 |
|
| Services (2) |
|
|
18,063 |
|
|
|
13% |
|
|
|
16,051 |
|
|
|
25% |
|
|
|
12,890 |
|
| Other Products (1)(3) |
|
|
8,379 |
|
|
|
(17)% |
|
|
|
10,117 |
|
|
|
(6)% |
|
|
|
10,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net sales |
|
$ |
182,795 |
|
|
|
7% |
|
|
$ |
170,910 |
|
|
|
9% |
|
|
$ |
156,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unit Sales by Product: |
|
|
|
|
|
|
|
|
|
|
|
|
| iPhone |
|
|
169,219 |
|
|
|
13% |
|
|
|
150,257 |
|
|
|
20% |
|
|
|
125,046 |
|
| iPad |
|
|
67,977 |
|
|
|
(4)% |
|
|
|
71,033 |
|
|
|
22% |
|
|
|
58,310 |
|
| Mac |
|
|
18,906 |
|
|
|
16% |
|
|
|
16,341 |
|
|
|
(10)% |
|
|
|
18,158 |
|
| |
(1) |
Includes deferrals and amortization of related non-software services and software upgrade rights. |
|
| |
(2) |
Includes revenue from the iTunes Store, App Store, Mac App Store and iBooks Store (collectively “iTunes”), AppleCare, licensing and other services.
|
|
| |
(3) |
Includes sales of iPod, Apple TV, Beats Electronics and Apple-branded and third-party accessories. |
|
The Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of
September. The Company’s fiscal years 2014, 2013 and 2012 ended on September 27, 2014, September 28, 2013 and September 29, 2012, respectively. Both fiscal years 2014 and 2013 spanned 52 weeks. Fiscal year
2012 spanned 53 weeks, with a 14th week included in the first quarter of 2012, as is done approximately every six years to realign the Company’s fiscal quarters more closely to calendar
quarters. Inclusion of the additional week in 2012 increased the Company’s overall net sales and operating expenses for the year.
3
Product Performance
iPhone
The following table presents iPhone net sales and unit sales information for 2014, 2013 and 2012 (dollars in millions and units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
101,991 |
|
|
|
12% |
|
|
$ |
91,279 |
|
|
|
16% |
|
|
$ |
78,692 |
|
| Percentage of total net sales |
|
|
56% |
|
|
|
|
|
|
|
53% |
|
|
|
|
|
|
|
50% |
|
| Unit sales |
|
|
169,219 |
|
|
|
13% |
|
|
|
150,257 |
|
|
|
20% |
|
|
|
125,046 |
|
The year-over-year growth in iPhone net sales and unit sales in 2014 resulted primarily from the successful introduction
of new iPhones in the latter half of calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in September 2014, and expanded distribution. iPhone unit sales grew in all of the Company’s operating segments, while iPhone net
sales grew in all segments except Rest of Asia Pacific. Overall average selling prices (“ASPs”) for iPhone were relatively flat in 2014 compared to 2013, with growth in ASPs in the Americas segment being offset by a decline in ASPs in the
Greater China, Japan and Rest of Asia Pacific segments.
The growth in iPhone net sales and unit sales during 2013 resulted from increased demand for
iPhone in all of the Company’s operating segments primarily due to the launch of iPhone 5 beginning in September 2012 and strong ongoing demand for iPhone 4 and 4s. All of the Company’s operating segments experienced increases in net sales
and unit sales of iPhone during 2013 compared to 2012. The year-over-year impact of higher iPhone unit sales in 2013 was partially offset by a 3% decline in iPhone ASPs primarily as a result of a shift in product mix towards lower-priced iPhone
models, particularly iPhone 4. All of the Company’s operating segments experienced a decline in iPhone ASPs during 2013.
iPad
The following table presents iPad net sales and unit sales information for 2014, 2013 and 2012 (dollars in millions and units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
30,283 |
|
|
|
(5)% |
|
|
$ |
31,980 |
|
|
|
3% |
|
|
$ |
30,945 |
|
| Percentage of total net sales |
|
|
17% |
|
|
|
|
|
|
|
19% |
|
|
|
|
|
|
|
20% |
|
| Unit sales |
|
|
67,977 |
|
|
|
(4)% |
|
|
|
71,033 |
|
|
|
22% |
|
|
|
58,310 |
|
Net sales and unit sales for iPad declined in 2014 compared to 2013. iPad net sales and unit sales grew in the Greater
China and Japan segments but this growth was more than offset by a decline in all other segments. Overall iPad ASPs were relatively flat in 2014 compared to 2013 with a shift in mix to higher-priced iPads being offset by the October 2013 price
reduction of iPad mini. ASPs increased in the Japan and Rest of Asia Pacific segments but were slightly down in other segments.
The growth in net
sales and unit sales of iPad during 2013 resulted from growth in iPad unit sales in all of the Company’s operating segments. This growth was driven by the launch of iPad mini and the fourth generation iPad beginning in the first quarter of
2013. The year-over-year growth rate of total iPad unit sales was significantly higher than the growth rate of total iPad net sales for 2013 due to a reduction in iPad ASPs of 15% in 2013 compared to 2012. This decline resulted primarily from
introduction of the lower priced iPad mini and the full year impact of the price reduction on iPad 2 made in 2012. The decline in iPad ASPs was experienced to various degrees by all of the Company’s operating segments.
4
Mac
The following
table presents Mac net sales and unit sales information for 2014, 2013 and 2012 (dollars in millions and units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
24,079 |
|
|
|
12% |
|
|
$ |
21,483 |
|
|
|
(7)% |
|
|
$ |
23,221 |
|
| Percentage of total net sales |
|
|
13% |
|
|
|
|
|
|
|
13% |
|
|
|
|
|
|
|
15% |
|
| Unit sales |
|
|
18,906 |
|
|
|
16% |
|
|
|
16,341 |
|
|
|
(10)% |
|
|
|
18,158 |
|
The year-over-year growth in Mac net sales and unit sales for 2014 was primarily driven by increased sales of MacBook
Air, MacBook Pro and Mac Pro. Mac net sales and unit sales increased in all of the Company’s operating segments. Mac ASPs decreased during 2014 compared to 2013 primarily due to price reductions on certain Mac models and a shift in mix towards
Mac portable systems.
Mac net sales and unit sales for 2013 were down or relatively flat in all of the Company’s operating segments. Mac ASPs
increased slightly partially offsetting the impact of lower unit sales on net sales. The decline in Mac unit sales and net sales reflected the overall weakness in the market for personal computers.
Services
The following table presents net sales information of Services for
2014, 2013 and 2012 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
18,063 |
|
|
|
13% |
|
|
$ |
16,051 |
|
|
|
25% |
|
|
$ |
12,890 |
|
| Percentage of total net sales |
|
|
10% |
|
|
|
|
|
|
|
9% |
|
|
|
|
|
|
|
8% |
|
The increase in net sales of Services in 2014 compared to 2013 was primarily due to growth in net sales from iTunes,
AppleCare and licensing. iTunes generated a total of $10.2 billion in net sales during 2014 compared to $9.3 billion during 2013. Growth in net sales from iTunes was driven by increases in revenue from app sales reflecting continued growth in the
installed base of iOS devices and the expanded offerings of iOS apps and related in-app purchases. This was partially offset by a decline in sales of digital music.
The increase in net sales of Services in 2013 compared to 2012 was primarily due to growth in net sales from iTunes, AppleCare and licensing. iTunes
generated a total of $9.3 billion in net sales during 2013, a 24% increase from 2012. Growth from iTunes reflected continued growth in the installed base of iOS devices, expanded offerings of iOS apps and related in-app purchases, and expanded
offerings of iTunes digital content.
Segment Operating Performance
The Company manages its business primarily on a geographic basis. As the Company continues to expand its business, management believes collaboration
across its online, retail and indirect channels is integral to better serving its customers and optimizing its financial results. In 2015, the Company’s management began reporting business performance and making decisions primarily on a
geographic basis, including the results of its retail stores in each respective geographic segment. Accordingly, to align with the way the business is currently managed, the Company’s reportable operating segments now consist of the Americas,
Europe, Greater China, Japan and Rest of Asia Pacific. Retail is no longer reported as a separate reportable operating segment. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as
India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the Company’s other operating
segments. Each operating segment provides similar hardware and software products and similar services. Further information regarding the Company’s operating segments may be found in Exhibit 99.2 of this Form 8-K in the Notes to
Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.”
5
Americas
The following table
presents Americas net sales information for 2014, 2013 and 2012 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
80,095 |
|
|
|
4% |
|
|
$ |
77,093 |
|
|
|
8% |
|
|
$ |
71,060 |
|
| Percentage of total net sales |
|
|
44% |
|
|
|
|
|
|
|
45% |
|
|
|
|
|
|
|
45% |
|
The growth in the Americas segment in 2014 was due to increased net sales of iPhone, Mac and Services that were partially
offset by a decline in net sales of iPad and Other Products and weakness in foreign currencies relative to the U.S. dollar compared to 2013. iPhone growth resulted primarily from the successful introduction of iPhone 5s and 5c in September 2013 and
the successful launch of iPhone 6 and 6 Plus in September 2014. Mac growth was driven primarily by increased net sales and unit sales of MacBook Air and Mac Pro.
The growth in the Americas segment net sales during 2013 was driven by increased sales of iPhone following the introduction of iPhone 5 in September 2012
and iPhone 5s and 5c in September 2013, increased sales from iTunes, and increased sales of iPad, particularly iPad mini. These increases were partially offset by a decrease in net sales of Mac and Other Products and a decline in iPad ASPs.
Europe
The following table presents Europe net sales information for 2014,
2013 and 2012 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
44,285 |
|
|
|
8% |
|
|
$ |
40,980 |
|
|
|
4% |
|
|
$ |
39,326 |
|
| Percentage of total net sales |
|
|
24% |
|
|
|
|
|
|
|
24% |
|
|
|
|
|
|
|
25% |
|
The growth in the Europe segment in 2014 was due to increased net sales of iPhone, Mac and Services, as well as strength
in European currencies relative to the U.S. dollar, partially offset by a decline in net sales of iPad. iPhone growth resulted primarily from the successful introduction of iPhone 5s and 5c in the second half of calendar 2013 and the successful
launch of iPhone 6 and 6 Plus in over 20 countries in Europe in September 2014. Mac growth was driven primarily by increased net sales and unit sales of MacBook Air, MacBook Pro and Mac Pro.
The growth in net sales in the Europe segment during 2013 was primarily driven by increased sales of iPhone, iPad and higher net sales from iTunes. These
increases were partially offset by decreases in net sales of Mac and Other Products and a decline in iPad ASPs. Net sales in the Europe segment continued to be negatively impacted by unfavorable economic conditions in parts of the region reflected
by second half 2013 net sales falling 4% compared to the second half of 2012, which followed an 11% increase in net sales during the first half of 2013.
Greater
China
The following table presents Greater China net sales information for 2014, 2013 and 2012 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
31,853 |
|
|
|
18% |
|
|
$ |
27,016 |
|
|
|
14% |
|
|
$ |
23,756 |
|
| Percentage of total net sales |
|
|
17% |
|
|
|
|
|
|
|
16% |
|
|
|
|
|
|
|
15% |
|
The Greater China segment experienced year-over-year growth in net sales in 2014 that was significantly higher than the
growth rate for the Company overall. Greater China growth was driven by higher unit sales and net sales of all major product categories, in addition to higher net sales of Services. Growth in net sales and unit sales of iPhone was especially strong,
driven by the successful launch of iPhone 5s and 5c in Mainland China and Hong Kong in September 2013, the successful launch of iPhone 6 and 6 Plus in Hong Kong in September 2014, increased demand for the Company’s entry-priced iPhones and the
addition of a significant new carrier in the second quarter of 2014.
6
The growth in net sales in the Greater China segment during 2013 resulted from two major iPhone
introductions during the year, iPhone 5 in December 2012 and iPhone 5c and 5s in September 2013. Further contributing to the growth in 2013 was the introduction of the fourth generation iPad and iPad mini during the second quarter of 2013 and an
increase in iPhone channel inventory as of the end of 2013 compared to the end of 2012. While net sales in the Greater China segment were up 14% for all of 2013, net sales for the second half of 2013 declined 3% compared to the second half of 2012.
Japan
The following table presents Japan net sales
information for 2014, 2013 and 2012 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
15,314 |
|
|
|
11% |
|
|
$ |
13,782 |
|
|
|
26% |
|
|
$ |
10,913 |
|
| Percentage of total net sales |
|
|
8% |
|
|
|
|
|
|
|
8% |
|
|
|
|
|
|
|
7% |
|
In 2014 the Japan segment generated year-over-year increases in net sales and unit sales of every major product category
and experienced growth in net sales of Services. The year-over-year growth in iPhone was driven by the successful launch of iPhone 5s and 5c in September 2013, the successful launch of iPhone 6 and 6 Plus in September 2014, increased demand for the
Company’s entry-priced iPhones and the addition of a significant new carrier in the fourth quarter of 2013. These positive factors were partially offset by weakness in the Japanese Yen relative to the U.S. dollar.
The increase in net sales in the Japan segment during 2013 reflected significant increases in unit volumes of iPhone and iPad, strong growth from iTunes
net sales and an increase in iPhone channel inventory as of the end of 2013 compared to the end of 2012. These positive factors were partially offset by declines in ASPs for iPhone and iPad and by weakness in the Japanese Yen relative to the U.S.
dollar.
Rest of Asia Pacific
The following table presents
Rest of Asia Pacific net sales information for 2014, 2013 and 2012 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Net sales |
|
$ |
11,248 |
|
|
|
(7)% |
|
|
$ |
12,039 |
|
|
|
5% |
|
|
$ |
11,453 |
|
| Percentage of total net sales |
|
|
6% |
|
|
|
|
|
|
|
7% |
|
|
|
|
|
|
|
7% |
|
Net sales in the Rest of Asia Pacific segment declined in 2014 compared to 2013 due to year-over-year reductions in net
sales in all major product categories except Mac and reductions in unit sales of iPad. Net sales in 2014 were also negatively affected by the weakness in several foreign currencies relative to the U.S. dollar, including the Australian dollar.
The year-over-year growth in Rest of Asia Pacific segment net sales during 2013 was primarily driven by the launch of iPhone 5 and higher sales from
iTunes, partially offset by a decrease in net sales of iPad and Mac.
Gross Margin
Gross margin for 2014, 2013 and 2012 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Net sales |
|
$ |
182,795 |
|
|
$ |
170,910 |
|
|
$ |
156,508 |
|
| Cost of sales |
|
|
112,258 |
|
|
|
106,606 |
|
|
|
87,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin |
|
$ |
70,537 |
|
|
$ |
64,304 |
|
|
$ |
68,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin percentage |
|
|
38.6% |
|
|
|
37.6% |
|
|
|
43.9% |
|
The year-over-year increase in the gross margin percentage in 2014 was driven by multiple factors including lower
commodity costs, a favorable shift in mix to products with higher margins and improved leverage on fixed costs from higher net sales, which was partially offset by the weakness in several foreign currencies relative to the U.S. dollar, price
reductions on select products and higher cost structures on certain new products.
7
The year-over-year decrease in gross margin in 2013 compared to 2012 was driven by multiple factors
including introduction of new versions of existing products with higher cost structures and flat or reduced pricing; a shift in sales mix to products with lower margins; introduction of iPad mini with gross margin significantly below the
Company’s average product margins; higher expenses associated with changes to certain of the Company’s service policies and other warranty costs; price reductions on certain products, including iPad 2 and iPhone 4; and unfavorable
impact from foreign exchange fluctuations.
The Company anticipates gross margin during the first quarter of 2015 to be between 37.5% and 38.5%. The
foregoing statement regarding the Company’s expected gross margin percentage in the first quarter of 2015 is forward-looking and could differ from actual results. The Company’s future gross margins can be impacted by multiple factors
including, but not limited to those set forth in Part I, Item 1A of the Form 10-K under the heading “Risk Factors” 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, potential increases in the cost of components and potential
strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response to competitive pressures,
the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to
stimulate demand for certain of its products. Due to the Company’s significant international operations, financial results can be significantly affected by fluctuations in exchange rates.
Operating Expenses
Operating expenses for 2014, 2013 and 2012
are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Research and development |
|
$ |
6,041 |
|
|
|
35% |
|
|
$ |
4,475 |
|
|
|
32% |
|
|
$ |
3,381 |
|
| Percentage of total net sales |
|
|
3% |
|
|
|
|
|
|
|
3% |
|
|
|
|
|
|
|
2% |
|
|
|
|
|
|
|
| Selling, general and administrative |
|
$ |
11,993 |
|
|
|
11% |
|
|
$ |
10,830 |
|
|
|
8% |
|
|
$ |
10,040 |
|
| Percentage of total net sales |
|
|
7% |
|
|
|
|
|
|
|
6% |
|
|
|
|
|
|
|
6% |
|
|
|
|
|
|
|
| Total operating expenses |
|
$ |
18,034 |
|
|
|
18% |
|
|
$ |
15,305 |
|
|
|
14% |
|
|
$ |
13,421 |
|
| Percentage of total net sales |
|
|
10% |
|
|
|
|
|
|
|
9% |
|
|
|
|
|
|
|
9% |
|
Research and Development (“R&D”) Expense
The year-over-year growth in 2014 and 2013 R&D expense was driven primarily by an increase in headcount and related expenses, including share-based
compensation costs and machinery and equipment to support expanded R&D activities. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are
directly related to timely development of new and enhanced products that are central to the Company’s core business strategy. As such, the Company expects to make further investments in R&D to remain competitive.
Selling, General and Administrative (“SG&A”) Expense
The growth in SG&A expense during 2014 compared to 2013 was primarily due to increased headcount and related expenses, including share-based
compensation costs; higher spending on marketing, advertising and professional services; and the Company’s continued expansion of its retail stores. The growth in SG&A during 2013 compared to 2012 was primarily due to the Company’s
continued expansion of its retail stores and increased headcount and related expenses, partially offset by decreased spending on professional services.
8
Other Income and Expense
Other income and expense for 2014, 2013 and 2012 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
Change |
|
|
2013 |
|
|
Change |
|
|
2012 |
|
| Interest and dividend income |
|
$ |
1,795 |
|
|
|
|
|
|
$ |
1,616 |
|
|
|
|
|
|
$ |
1,088 |
|
| Interest expense |
|
|
(384 |
) |
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
0 |
|
| Other expense, net |
|
|
(431 |
) |
|
|
|
|
|
|
(324 |
) |
|
|
|
|
|
|
(566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other income/(expense), net |
|
$ |
980 |
|
|
|
(15)% |
|
|
$ |
1,156 |
|
|
|
121% |
|
|
$ |
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in other income and expense during 2014 compared to 2013 was due primarily to higher interest expense on
debt and higher expenses associated with foreign exchange rate movements, partially offset by lower premium expenses on foreign exchange contracts and higher interest income. The year-over-year increase in other income and expense during 2013 was
due primarily to higher interest and dividend income resulting from the Company’s higher cash, cash equivalents and marketable securities balances and lower premium expenses on foreign exchange contracts, partially offset by interest expense on
debt issued in the third quarter of 2013 and higher expenses associated with foreign exchange rate movements. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.11%, 1.03% and 1.03%
during 2014, 2013 and 2012, respectively. The Company had no debt outstanding during 2012 and accordingly did not incur any related interest expense.
Provision
for Income Taxes
Provision for income taxes and effective tax rates for 2014, 2013 and 2012 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Provision for income taxes |
|
$ |
13,973 |
|
|
$ |
13,118 |
|
|
$ |
14,030 |
|
| Effective tax rate |
|
|
26.1% |
|
|
|
26.2% |
|
|
|
25.2% |
|
The Company’s effective tax rates for all years differ from the statutory federal income tax rate of 35% due
primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the
U.S.
As of September 27, 2014, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of
$5.1 billion and deferred tax liabilities of $20.3 billion. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals
of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation
allowance.
During the fiscal year ended September 27, 2014, the U.S. Internal Revenue Service (“IRS”) concluded its review of the
years 2004 through 2009. The IRS is currently examining the years 2010 through 2012. In addition, the Company is subject to audits by state, local and foreign tax authorities. Management believes that adequate provisions have been made for any
adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s
expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
9
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are
transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2018. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or
retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.
Liquidity and Capital Resources
The following table presents
selected financial information and statistics as of and for the years ended September 27, 2014, September 28, 2013 and September 29, 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Cash, cash equivalents and marketable securities |
|
$ |
155,239 |
|
|
$ |
146,761 |
|
|
$ |
121,251 |
|
| Property, plant and equipment, net |
|
$ |
20,624 |
|
|
$ |
16,597 |
|
|
$ |
15,452 |
|
| Long-term debt |
|
$ |
28,987 |
|
|
$ |
16,960 |
|
|
$ |
0 |
|
| Working capital |
|
$ |
5,083 |
|
|
$ |
29,628 |
|
|
$ |
19,111 |
|
|
|
|
|
| Cash generated by operating activities |
|
$ |
59,713 |
|
|
$ |
53,666 |
|
|
$ |
50,856 |
|
| Cash used in investing activities |
|
$ |
(22,579 |
) |
|
$ |
(33,774 |
) |
|
$ |
(48,227 |
) |
| Cash used in financing activities |
|
$ |
(37,549 |
) |
|
$ |
(16,379 |
) |
|
$ |
(1,698 |
) |
The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to
satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. To provide additional flexibility in managing liquidity, the
Company began accessing the commercial paper markets in the third quarter of 2014. The Company currently anticipates the cash used for future dividends and the share repurchase program will come from its current domestic cash, cash generated from
on-going U.S. operating activities and from borrowings.
As of September 27, 2014 and September 28, 2013, $137.1 billion and $111.3
billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by
foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. The Company’s marketable securities investment portfolio is invested primarily in highly-rated securities and its investment policy generally limits
the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss.
During 2014, cash generated from operating activities of $59.7 billion was a result of $39.5 billion of net income, non-cash adjustments to net income of
$13.2 billion and an increase in net change in operating assets and liabilities of $7.0 billion. Cash used in investing activities of $22.6 billion during 2014 consisted primarily of cash used for purchases of marketable securities, net of sales and
maturities, of $9.0 billion; cash used to acquire property, plant and equipment of $9.6 billion; and cash paid for business acquisitions, net of cash acquired, of $3.8 billion. Cash used in financing activities of $37.5 billion during 2014 consisted
primarily of cash used to repurchase common stock of $45.0 billion and cash used to pay dividends and dividend equivalents of $11.1 billion, partially offset by net proceeds from the issuance of long-term debt and commercial paper of $12.0 billion
and $6.3 billion, respectively.
During 2013, cash generated from operating activities of $53.7 billion was a result of $37.0 billion of net income,
non-cash adjustments to net income of $10.2 billion and an increase in net change in operating assets and liabilities of $6.5 billion. Cash used in investing activities of $33.8 billion during 2013 consisted primarily of cash used for purchases of
marketable securities, net of sales and maturities, of $24.0 billion and cash used to acquire property, plant and equipment of $8.2 billion. Cash used in financing activities of $16.4 billion during 2013 consisted primarily of cash used to
repurchase common stock of $22.9 billion and cash used to pay dividends and dividend equivalents of $10.6 billion, partially offset by net proceeds from the issuance of long-term debt of $16.9 billion.
10
Capital Assets
The Company’s capital expenditures were $11.0 billion during 2014. The Company anticipates utilizing approximately $13.0 billion for capital
expenditures during 2015, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
Debt
In April 2014, the Board of Directors authorized the
Company to issue unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company intends to use the net proceeds from the commercial paper program for general corporate purposes, including
dividends and share repurchases. As of September 27, 2014, the Company had $6.3 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.12% and maturities generally less than nine months.
In the third quarter of 2014 and 2013, the Company issued $12.0 billion and $17.0 billion of long-term debt, respectively. The debt issuances included
floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $29.0 billion (collectively the “Notes”). The Company has entered, and may enter in the future, into interest rate swaps to manage interest rate
risk on the Notes. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. In the third quarter of 2014, the Company entered into interest rate
swaps with an aggregate notional amount of $9.0 billion, which effectively converted most of the fixed-rate notes into floating-rate notes, and in the third quarter of 2013, the Company entered into interest rate swaps with an aggregate notional
amount of $3.0 billion, which effectively converted the floating-rate notes into fixed-rate notes.
Capital Return Program
In April 2014, the Company’s Board of Directors increased the share repurchase program authorization from $60 billion to $90 billion of the
Company’s common stock, of which $67.9 billion had been utilized as of September 27, 2014. The share repurchase program is expected to be completed by the end of December 2015. The Company’s share repurchase program does not obligate
it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
The increase to the Company’s share repurchase program authorization resulted in a total capital return program of over $130 billion. The Company
expects to complete the capital return program by the end of December 2015 by paying dividends and dividend equivalents, repurchasing shares and remitting withheld taxes related to net share settlement of restricted stock units. To assist in funding
its capital return program, the Company expects to access the debt markets, both domestically and internationally.
The following table presents the
Company’s dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital return program in August 2012 through September 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dividends and
Dividend
Equivalents Paid |
|
|
Accelerated
Share
Repurchases
|
|
|
Open
Market
Share
Repurchases |
|
|
Taxes Related
to Settlement of
Equity Awards |
|
|
Total |
|
| 2014 |
|
$ |
11,126 |
|
|
$ |
21,000 |
|
|
$ |
24,000 |
|
|
$ |
1,158 |
|
|
$ |
57,284 |
|
| 2013 |
|
|
10,564 |
|
|
|
13,950 |
|
|
|
9,000 |
|
|
|
1,082 |
|
|
|
34,596 |
|
| 2012 |
|
|
2,488 |
|
|
|
0 |
|
|
|
0 |
|
|
|
56 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
24,178 |
|
|
$ |
34,950 |
|
|
$ |
33,000 |
|
|
$ |
2,296 |
|
|
$ |
94,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained
interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or R&D services with the Company.
The following
table presents certain payments due by the Company under contractual obligations with minimum firm commitments as of September 27, 2014, and excludes amounts already recorded on the Consolidated Balance Sheet, except for long-term debt (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due in
Less Than 1 Year |
|
|
Payments Due in
1-3 Years |
|
|
Payments Due in
4-5 Years |
|
|
Payments Due in
More Than 5 Years |
|
|
Total |
|
| Long-term debt |
|
$ |
0 |
|
|
$ |
5,000 |
|
|
$ |
9,000 |
|
|
$ |
15,000 |
|
|
$ |
29,000 |
|
| Operating leases |
|
|
662 |
|
|
|
1,321 |
|
|
|
1,127 |
|
|
|
1,877 |
|
|
|
4,987 |
|
| Purchase commitments |
|
|
24,529 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
24,529 |
|
| Other obligations |
|
|
2,056 |
|
|
|
1,276 |
|
|
|
19 |
|
|
|
0 |
|
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
27,247 |
|
|
$ |
7,597 |
|
|
$ |
10,146 |
|
|
$ |
16,877 |
|
|
$ |
61,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
The
Company’s major facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and
often contain multi-year renewal options. As of September 27, 2014, the Company’s total future minimum lease payments under noncancelable operating leases were $5.0 billion, of which $3.6 billion related to leases for retail space.
Purchase Commitments
The Company utilizes several outsourcing
partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the
Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a
combination of purchase orders, supplier contracts and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with
the respective supplier.
Other Obligations
The
Company’s other obligations were comprised mainly of commitments to acquire capital assets, including product tooling and manufacturing process equipment and commitments related to advertising, R&D, Internet and telecommunications services
and other obligations.
The Company’s other non-current liabilities in the Consolidated Balance Sheets consist primarily of deferred tax
liabilities, gross unrecognized tax benefits and the related gross interest and penalties. As of September 27, 2014, the Company had non-current deferred tax liabilities of $20.3 billion. Additionally, as of September 27, 2014, the Company
had gross unrecognized tax benefits of $4.0 billion and an additional $630 million for gross interest and penalties classified as non-current liabilities. At this time, the Company is unable to make a reasonably reliable estimate of the timing of
payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
12
Indemnification
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes
third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the
Company or an indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against it or an indemnified third-party. In the opinion of management, there was
not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for infringement of third-party intellectual property rights. The
Company did not record a liability for infringement costs related to indemnification as of September 27, 2014 or September 28, 2013.
The
Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by
reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required
to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its
exposure to such obligations and payments made under these agreements historically have not been material.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and
the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements
and accompanying notes. Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Exhibit 99.2 in this Form 8-K describes the significant accounting policies and methods used in the
preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, valuation and impairment of
marketable securities, inventory valuation and valuation of manufacturing-related assets and estimated purchase commitment cancellation fees, warranty costs, income taxes and legal and other contingencies. Management considers these policies
critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s senior
management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors.
Revenue Recognition
Net sales consist primarily of revenue
from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed
or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria
are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company
retains a portion of the risk of loss on these sales during transit. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital
content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
13
For multi-element arrangements that include hardware products containing software essential to the hardware
product’s functionality, undelivered software elements that relate to the hardware product’s essential software and/or undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling
prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party
evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that
deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
For sales of qualifying versions of iOS devices, Mac and Apple TV, the Company has indicated it may from time to time provide future unspecified software
upgrades and features free of charge to customers. The Company also provides various non-software services to owners of qualifying versions of iOS devices and Mac. Because the Company has neither VSOE nor TPE for the unspecified software upgrade
rights or the non-software services, revenue is allocated to these rights and services based on the Company’s ESPs. Revenue allocated to the unspecified software upgrade rights and non-software services based on the Company’s ESPs is
deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided for each of these devices, which ranges from two to four years.
The Company’s process for determining ESPs involves management’s judgment and considers multiple factors that may vary over time depending upon
the unique facts and circumstances related to each deliverable. Should future facts and circumstances change, the Company’s ESPs and the future rate of related amortization for software upgrades and non-software services related to future sales
of these devices could change. Factors subject to change include the unspecified software upgrade rights offered, the estimated value of unspecified software upgrade rights, the estimated or actual costs incurred to provide non-software services and
the estimated period software upgrades and non-software services are expected to be provided.
The Company records reductions to revenue for
estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be
reasonably and reliably estimated and the other conditions for revenue recognition have been met. The Company’s policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the
price protection lapses. For the Company’s other customer incentive programs, the estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also
records reductions to revenue for expected future product returns based on the Company’s historical experience. Future market conditions and product transitions may require the Company to increase customer incentive programs that could result
in reductions to future revenue. Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management’s estimates are based on historical experience and the
specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeems such incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact
on the Company’s results of operations.
Valuation and Impairment of Marketable Securities
The Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair
value of securities are recognized in accumulated other comprehensive income, net of tax, in the Company’s Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities impact the Company’s net income only when
such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. The Company regularly reviews its
investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among
other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be
required to sell, the security before recovery of its amortized cost basis. The Company’s assessment on whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related
to any particular security.
14
Inventory Valuation and Valuation of Manufacturing-Related Assets and Estimated Purchase Commitment Cancellation Fees
The Company must order components for its products and build inventory in advance of product shipments and has invested in manufacturing process
equipment, including capital assets held at its suppliers’ facilities. In addition, the Company has made prepayments to certain of its suppliers associated with long-term supply agreements to secure supply of inventory components. The Company
records a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review of
inventory that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component cost trends. The Company also reviews its manufacturing-related capital assets and
inventory prepayments for impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss equal to the amount
by which the carrying value of such an asset exceeds its fair value.
The industries in which the Company competes are subject to a rapid and
unpredictable pace of product and component obsolescence and demand changes. In certain circumstances the Company may be required to record additional write-downs of inventory, inventory prepayments and/or manufacturing-related capital assets. These
circumstances include future demand or market conditions for the Company’s products being less favorable than forecasted, unforeseen technological changes or changes to the Company’s product development plans that negatively impact the
utility of any of these assets, or significant deterioration in the financial condition of one or more of the Company’s suppliers that hold any of the Company’s manufacturing process equipment or to whom the Company has made an inventory
prepayment. Such write-downs would adversely affect the Company’s results of operations in the period when the write-downs were recorded.
The
Company records accruals for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires components through a combination of purchase
orders, supplier contracts and open orders in each case based on projected demand. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier.
Purchase commitments typically cover the Company’s forecasted component and manufacturing requirements for periods up to 150 days. If there is an abrupt and substantial decline in demand for one or more of the Company’s products, if the
Company’s product development plans change, or if there is an unanticipated change in technological requirements for any of the Company’s products, then the Company may be required to record additional accruals for cancellation fees that
would adversely affect its results of operations in the period when the cancellation fees are identified and recorded.
Warranty Costs
The Company provides for the estimated cost of warranties at the time the related revenue is recognized based on historical and projected warranty claim
rates, historical and projected cost-per-claim and knowledge of specific product failures that are outside of the Company’s typical experience. Each quarter, the Company re-evaluates these estimates to assess the adequacy of its recorded
warranty liabilities considering the size of the installed base of products subject to warranty protection and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated
warranty liabilities would be required and could materially affect the Company’s results of operations.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed
using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for
operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or
settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement.
15
Management believes it is more likely than not that forecasted income, including income that may be
generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all or part of
the net deferred tax assets are not realizable in the future, the Company will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities
involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on
the Company’s financial condition and operating results.
Legal and Other Contingencies
As discussed in Part I, Item 3 of the Form 10-K under the heading “Legal Proceedings” and in Exhibit 99.2 of this Form 8-K in the Notes to
Consolidated Financial Statements in Note 10, “Commitments and Contingencies,” the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is
probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management,
there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for legal and other contingencies. However, the outcome of legal
proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the
Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
16
Exhibit 99.2
| Item 8. |
Financial Statements and Supplementary Data |
|
|
|
|
|
| Index to Consolidated Financial Statements |
|
Page |
|
|
|
| Consolidated Statements of Operations for the years ended September 27, 2014, September
28, 2013 and September 29, 2012 |
|
|
2 |
|
| Consolidated Statements of Comprehensive Income for the years ended September 27, 2014, September
28, 2013 and September 29, 2012 |
|
|
3 |
|
| Consolidated Balance Sheets as of September 27, 2014 and September 28, 2013 |
|
|
4 |
|
| Consolidated Statements of Shareholders’ Equity for the years ended September 27, 2014, September
28, 2013 and September 29, 2012 |
|
|
5 |
|
| Consolidated Statements of Cash Flows for the years ended September 27, 2014, September
28, 2013 and September 29, 2012 |
|
|
6 |
|
| Notes to Consolidated Financial Statements |
|
|
7 |
|
| Selected Quarterly Financial Information (Unaudited) |
|
|
33 |
|
| Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm |
|
|
34 |
|
All financial statement schedules have been omitted, since the required information is not applicable or is not present
in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended |
|
| |
|
September 27,
2014 |
|
|
September 28,
2013 |
|
|
September 29,
2012 |
|
| Net sales |
|
$ |
182,795 |
|
|
$ |
170,910 |
|
|
$ |
156,508 |
|
| Cost of sales |
|
|
112,258 |
|
|
|
106,606 |
|
|
|
87,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin |
|
|
70,537 |
|
|
|
64,304 |
|
|
|
68,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| Research and development |
|
|
6,041 |
|
|
|
4,475 |
|
|
|
3,381 |
|
| Selling, general and administrative |
|
|
11,993 |
|
|
|
10,830 |
|
|
|
10,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
18,034 |
|
|
|
15,305 |
|
|
|
13,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
52,503 |
|
|
|
48,999 |
|
|
|
55,241 |
|
| Other income/(expense), net |
|
|
980 |
|
|
|
1,156 |
|
|
|
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before provision for income taxes |
|
|
53,483 |
|
|
|
50,155 |
|
|
|
55,763 |
|
|
|
|
|
| Provision for income taxes |
|
|
13,973 |
|
|
|
13,118 |
|
|
|
14,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
39,510 |
|
|
$ |
37,037 |
|
|
$ |
41,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
6.49 |
|
|
$ |
5.72 |
|
|
$ |
6.38 |
|
| Diluted |
|
$ |
6.45 |
|
|
$ |
5.68 |
|
|
$ |
6.31 |
|
|
|
|
|
| Shares used in computing earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
6,085,572 |
|
|
|
6,477,320 |
|
|
|
6,543,726 |
|
| Diluted |
|
|
6,122,663 |
|
|
|
6,521,634 |
|
|
|
6,617,483 |
|
|
|
|
|
| Cash dividends declared per common share |
|
$ |
1.82 |
|
|
$ |
1.64 |
|
|
$ |
0.38 |
|
See accompanying Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended |
|
| |
|
September 27,
2014 |
|
|
September 28,
2013 |
|
|
September 29,
2012 |
|
| Net income |
|
$ |
39,510 |
|
|
$ |
37,037 |
|
|
$ |
41,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| Change in foreign currency translation, net of tax effects of $50, $35 and $13, respectively |
|
|
(137 |
) |
|
|
(112 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in unrecognized gains/losses on derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| Change in fair value of derivatives, net of tax benefit/(expense) of $(297), $(351) and $73, respectively |
|
|
1,390 |
|
|
|
522 |
|
|
|
(131 |
) |
| Adjustment for net losses/(gains) realized and included in net income, net of tax expense/(benefit) of $(36), $255 and $220, respectively |
|
|
149 |
|
|
|
(458 |
) |
|
|
(399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total change in unrecognized gains/losses on derivative instruments, net of tax |
|
|
1,539 |
|
|
|
64 |
|
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in unrealized gains/losses on marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Change in fair value of marketable securities, net of tax benefit/(expense) of $(153), $458 and $(421), respectively |
|
|
285 |
|
|
|
(791 |
) |
|
|
715 |
|
| Adjustment for net losses/(gains) realized and included in net income, net of tax expense/(benefit) of $71, $82 and $68, respectively |
|
|
(134 |
) |
|
|
(131 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total change in unrealized gains/losses on marketable securities, net of tax |
|
|
151 |
|
|
|
(922 |
) |
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other comprehensive income/(loss) |
|
|
1,553 |
|
|
|
(970 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income |
|
$ |
41,063 |
|
|
$ |
36,067 |
|
|
$ |
41,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
|
|
|
|
|
|
|
|
|
| |
|
September 27,
2014 |
|
|
September 28,
2013 |
|
| ASSETS: |
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
13,844 |
|
|
$ |
14,259 |
|
| Short-term marketable securities |
|
|
11,233 |
|
|
|
26,287 |
|
| Accounts receivable, less allowances of $86 and $99, respectively |
|
|
17,460 |
|
|
|
13,102 |
|
| Inventories |
|
|
2,111 |
|
|
|
1,764 |
|
| Deferred tax assets |
|
|
4,318 |
|
|
|
3,453 |
|
| Vendor non-trade receivables |
|
|
9,759 |
|
|
|
7,539 |
|
| Other current assets |
|
|
9,806 |
|
|
|
6,882 |
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
68,531 |
|
|
|
73,286 |
|
|
|
|
| Long-term marketable securities |
|
|
130,162 |
|
|
|
106,215 |
|
| Property, plant and equipment, net |
|
|
20,624 |
|
|
|
16,597 |
|
| Goodwill |
|
|
4,616 |
|
|
|
1,577 |
|
| Acquired intangible assets, net |
|
|
4,142 |
|
|
|
4,179 |
|
| Other assets |
|
|
3,764 |
|
|
|
5,146 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
231,839 |
|
|
$ |
207,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY: |
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
30,196 |
|
|
$ |
22,367 |
|
| Accrued expenses |
|
|
18,453 |
|
|
|
13,856 |
|
| Deferred revenue |
|
|
8,491 |
|
|
|
7,435 |
|
| Commercial paper |
|
|
6,308 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
63,448 |
|
|
|
43,658 |
|
|
|
|
| Deferred revenue – non-current |
|
|
3,031 |
|
|
|
2,625 |
|
| Long-term debt |
|
|
28,987 |
|
|
|
16,960 |
|
| Other non-current liabilities |
|
|
24,826 |
|
|
|
20,208 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
120,292 |
|
|
|
83,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
| Shareholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock and additional paid-in capital, $0.00001 par value; 12,600,000 shares authorized; 5,866,161 and 6,294,494 shares issued and
outstanding, respectively |
|
|
23,313 |
|
|
|
19,764 |
|
| Retained earnings |
|
|
87,152 |
|
|
|
104,256 |
|
| Accumulated other comprehensive income/(loss) |
|
|
1,082 |
|
|
|
(471 |
) |
|
|
|
|
|
|
|
|
|
| Total shareholders’ equity |
|
|
111,547 |
|
|
|
123,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$ |
231,839 |
|
|
$ |
207,000 |
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except number of shares which are reflected in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock
and
Additional Paid-In Capital |
|
|
Retained |
|
|
Accumulated
Other
Comprehensive |
|
|
Total
Shareholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Income/(Loss) |
|
|
Equity |
|
| Balances as of September 24, 2011 |
|
|
6,504,937 |
|
|
$ |
13,331 |
|
|
$ |
62,841 |
|
|
$ |
443 |
|
|
$ |
76,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
0 |
|
|
|
0 |
|
|
|
41,733 |
|
|
|
0 |
|
|
|
41,733 |
|
| Other comprehensive income/(loss) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
56 |
|
|
|
56 |
|
| Dividends and dividend equivalents declared |
|
|
0 |
|
|
|
0 |
|
|
|
(2,523 |
) |
|
|
0 |
|
|
|
(2,523 |
) |
| Share-based compensation |
|
|
0 |
|
|
|
1,740 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,740 |
|
| Common stock issued, net of shares withheld for employee taxes |
|
|
69,521 |
|
|
|
200 |
|
|
|
(762 |
) |
|
|
0 |
|
|
|
(562 |
) |
| Tax benefit from equity awards, including transfer pricing adjustments |
|
|
0 |
|
|
|
1,151 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances as of September 29, 2012 |
|
|
6,574,458 |
|
|
|
16,422 |
|
|
|
101,289 |
|
|
|
499 |
|
|
|
118,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
0 |
|
|
|
0 |
|
|
|
37,037 |
|
|
|
0 |
|
|
|
37,037 |
|
| Other comprehensive income/(loss) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(970 |
) |
|
|
(970 |
) |
| Dividends and dividend equivalents declared |
|
|
0 |
|
|
|
0 |
|
|
|
(10,676 |
) |
|
|
0 |
|
|
|
(10,676 |
) |
| Repurchase of common stock |
|
|
(328,837 |
) |
|
|
0 |
|
|
|
(22,950 |
) |
|
|
0 |
|
|
|
(22,950 |
) |
| Share-based compensation |
|
|
0 |
|
|
|
2,253 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,253 |
|
| Common stock issued, net of shares withheld for employee taxes |
|
|
48,873 |
|
|
|
(143 |
) |
|
|
(444 |
) |
|
|
0 |
|
|
|
(587 |
) |
| Tax benefit from equity awards, including transfer pricing adjustments |
|
|
0 |
|
|
|
1,232 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances as of September 28, 2013 |
|
|
6,294,494 |
|
|
|
19,764 |
|
|
|
104,256 |
|
|
|
(471 |
) |
|
|
123,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
0 |
|
|
|
0 |
|
|
|
39,510 |
|
|
|
0 |
|
|
|
39,510 |
|
| Other comprehensive income/(loss) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,553 |
|
|
|
1,553 |
|
| Dividends and dividend equivalents declared |
|
|
0 |
|
|
|
0 |
|
|
|
(11,215 |
) |
|
|
0 |
|
|
|
(11,215 |
) |
| Repurchase of common stock |
|
|
(488,677 |
) |
|
|
0 |
|
|
|
(45,000 |
) |
|
|
0 |
|
|
|
(45,000 |
) |
| Share-based compensation |
|
|
0 |
|
|
|
2,863 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,863 |
|
| Common stock issued, net of shares withheld for employee taxes |
|
|
60,344 |
|
|
|
(49 |
) |
|
|
(399 |
) |
|
|
0 |
|
|
|
(448 |
) |
| Tax benefit from equity awards, including transfer pricing adjustments |
|
|
0 |
|
|
|
735 |
|
|
|
0 |
|
|
|
0 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances as of September 27, 2014 |
|
|
5,866,161 |
|
|
$ |
23,313 |
|
|
$ |
87,152 |
|
|
$ |
1,082 |
|
|
$ |
111,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended |
|
| |
|
September 27,
2014 |
|
|
September 28,
2013 |
|
|
September 29,
2012 |
|
| Cash and cash equivalents, beginning of the year |
|
$ |
14,259 |
|
|
$ |
10,746 |
|
|
$ |
9,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
39,510 |
|
|
|
37,037 |
|
|
|
41,733 |
|
| Adjustments to reconcile net income to cash generated by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
7,946 |
|
|
|
6,757 |
|
|
|
3,277 |
|
| Share-based compensation expense |
|
|
2,863 |
|
|
|
2,253 |
|
|
|
1,740 |
|
| Deferred income tax expense |
|
|
2,347 |
|
|
|
1,141 |
|
|
|
4,405 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable, net |
|
|
(4,232 |
) |
|
|
(2,172 |
) |
|
|
(5,551 |
) |
| Inventories |
|
|
(76 |
) |
|
|
(973 |
) |
|
|
(15 |
) |
| Vendor non-trade receivables |
|
|
(2,220 |
) |
|
|
223 |
|
|
|
(1,414 |
) |
| Other current and non-current assets |
|
|
167 |
|
|
|
1,080 |
|
|
|
(3,162 |
) |
| Accounts payable |
|
|
5,938 |
|
|
|
2,340 |
|
|
|
4,467 |
|
| Deferred revenue |
|
|
1,460 |
|
|
|
1,459 |
|
|
|
2,824 |
|
| Other current and non-current liabilities |
|
|
6,010 |
|
|
|
4,521 |
|
|
|
2,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash generated by operating activities |
|
|
59,713 |
|
|
|
53,666 |
|
|
|
50,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Purchases of marketable securities |
|
|
(217,128 |
) |
|
|
(148,489 |
) |
|
|
(151,232 |
) |
| Proceeds from maturities of marketable securities |
|
|
18,810 |
|
|
|
20,317 |
|
|
|
13,035 |
|
| Proceeds from sales of marketable securities |
|
|
189,301 |
|
|
|
104,130 |
|
|
|
99,770 |
|
| Payments made in connection with business acquisitions, net |
|
|
(3,765 |
) |
|
|
(496 |
) |
|
|
(350 |
) |
| Payments for acquisition of property, plant and equipment |
|
|
(9,571 |
) |
|
|
(8,165 |
) |
|
|
(8,295 |
) |
| Payments for acquisition of intangible assets |
|
|
(242 |
) |
|
|
(911 |
) |
|
|
(1,107 |
) |
| Other |
|
|
16 |
|
|
|
(160 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash used in investing activities |
|
|
(22,579 |
) |
|
|
(33,774 |
) |
|
|
(48,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from issuance of common stock |
|
|
730 |
|
|
|
530 |
|
|
|
665 |
|
| Excess tax benefits from equity awards |
|
|
739 |
|
|
|
701 |
|
|
|
1,351 |
|
| Taxes paid related to net share settlement of equity awards |
|
|
(1,158 |
) |
|
|
(1,082 |
) |
|
|
(1,226 |
) |
| Dividends and dividend equivalents paid |
|
|
(11,126 |
) |
|
|
(10,564 |
) |
|
|
(2,488 |
) |
| Repurchase of common stock |
|
|
(45,000 |
) |
|
|
(22,860 |
) |
|
|
0 |
|
| Proceeds from issuance of long-term debt, net |
|
|
11,960 |
|
|
|
16,896 |
|
|
|
0 |
|
| Proceeds from issuance of commercial paper, net |
|
|
6,306 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash used in financing activities |
|
|
(37,549 |
) |
|
|
(16,379 |
) |
|
|
(1,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Increase/(decrease) in cash and cash equivalents |
|
|
(415 |
) |
|
|
3,513 |
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of the year |
|
$ |
13,844 |
|
|
$ |
14,259 |
|
|
$ |
10,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental cash flow disclosure: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for income taxes, net |
|
$ |
10,026 |
|
|
$ |
9,128 |
|
|
$ |
7,682 |
|
| Cash paid for interest |
|
$ |
339 |
|
|
$ |
0 |
|
|
$ |
0 |
|
See accompanying Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Apple
Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety
of related software, services, accessories, networking solutions and third-party digital content and applications. The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through
third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories
through its online and retail stores. The Company sells to consumers, small and mid-sized businesses, and education, enterprise and government customers.
Basis
of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and
transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the
amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
The
Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2014, 2013 and 2012 ended on September 27, 2014, September 28, 2013 and September 29, 2012,
respectively. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal quarters with calendar quarters. Fiscal years 2014 and 2013 spanned 52 weeks each. Fiscal year 2012 spanned 53 weeks, with a
14th week included in the first quarter of 2012. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of
those fiscal years.
During the first quarter of 2014, the Company adopted updated accounting standards that (i) required disclosure of
additional information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component and (ii) required gross and net disclosures about offsetting assets and liabilities. The adoption of these
updated standards only impacted the disclosures in the Notes to Consolidated Financial Statements; accordingly, the adoption had no impact on the Company’s financial position or results of operations. The Company has provided these additional
disclosures in Note 8, “Comprehensive Income” and Note 2, “Financial Instruments,” respectively.
In 2015, the Company
changed its reportable operating segments, began allocating certain costs to its operating segments that were previously included in other corporate expenses and changed its categorization of product-level net sales reporting. The Company has
reclassified the 2014, 2013 and 2012 amounts to conform to the 2015 presentation as further described in Note 11, “Segment Information and Geographic Data.”
Common Stock Split
On June 6, 2014, the Company effected
a seven-for-one stock split to shareholders of record as of June 2, 2014. All share and per share information has been retroactively adjusted to reflect the stock split.
Revenue Recognition
Net sales consist primarily of revenue
from the sale of hardware, software, digital content and applications, accessories and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed
or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria
are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company
retains a portion of the risk of loss on these sales during transit. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware, and third-party digital
content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
7
For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed
to customers because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For
third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does not determine the selling price of the products and is not the primary obligor to the customer.
Therefore, the Company accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by the Company to third-party app
developers and certain digital content owners is not reflected in the Company’s Consolidated Statements of Operations.
The Company records
deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are
attached to hardware and software products. The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on the iTunes Store for the purchase of digital content and software. The Company records
deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and
support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered under the Company’s standard limited warranty.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions
involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company’s other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the
Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. Revenue is recorded net of taxes
collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered
software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses
a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and
(iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best
estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry specific software accounting guidance, the Company allocates
revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of qualifying versions of iPhone, iPad and iPod touch (“iOS devices”), Mac and Apple TV, the Company has indicated it may from time
to time provide future unspecified software upgrades and features to the essential software bundled with each of these hardware products free of charge to customers. Essential software for iOS devices includes iOS and related applications and for
Mac includes OS X and related applications. The Company also provides various non-software services to owners of qualifying versions of iOS devices and Mac. The Company has identified up to three deliverables regularly included in arrangements
involving the sale of these devices. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with the purchase of
iOS devices, Mac and Apple TV to receive on a when-and-if-available basis, future unspecified software upgrades and features relating to the product’s essential software. The third deliverable is the non-software services to be provided to
qualifying versions of iOS devices and Mac. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on
the Company’s ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded
unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided for each of these devices,
which ranges from two to four years. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized
as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.
8
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple
factors that may vary depending upon the unique facts and circumstances related to each deliverable. The Company believes its customers would be reluctant to buy unspecified software upgrade rights for the essential software included with its
qualifying hardware products. This view is primarily based on the fact that unspecified software upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specify to customers which upgrades or
features will be delivered. The Company also believes its customers would be unwilling to pay a significant amount for access to the non-software services because other companies offer similar services at little or no cost to users. Therefore, the
Company has concluded that if it were to sell upgrade rights or access to the non-software services on a standalone basis, including those rights and services attached to iOS devices, Mac and Apple TV, the selling prices would be relatively low. Key
factors considered by the Company in developing the ESPs for software upgrade rights include prices charged by the Company for similar offerings, market trends in the pricing of Apple-branded and third-party Mac and iOS compatible software, the
nature of the upgrade rights (e.g., unspecified versus specified) and the relative ESP of the upgrade rights as compared to the total selling price of the product. The Company may also consider additional factors as appropriate, including the impact
of other products and services provided to customers, the pricing of competitive alternatives if they exist, product-specific business objectives and the length of time a particular version of a device has been available. When relevant, the same
factors are considered by the Company in developing ESPs for offerings such as the non-software services with additional consideration given to the estimated cost to provide such services.
In 2014, 2013 and 2012, the Company’s combined ESPs for the unspecified software upgrade rights and the rights to receive the non-software services
included with its qualifying hardware devices have ranged from $5 to $40. As of September 27, 2014, the combined ESPs for Mac was $40 and for iPhone and iPad ranged from $15 to $25. Revenue allocated to such rights is deferred and recognized on
a straight-line basis over the estimated period the rights are expected to be provided for each device, which ranges from two to four years.
Shipping Costs
For all periods presented, amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s
shipping and handling costs are included in cost of sales.
Warranty Costs
The Company generally provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized. The Company
assesses the adequacy of its pre-existing warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
Software Development Costs
Research and development
(“R&D”) costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and
ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Costs incurred subsequent to achievement of technological
feasibility were not significant, and software development costs were expensed as incurred during 2014, 2013 and 2012.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expense was $1.2 billion, $1.1
billion and $1.0 billion for 2014, 2013 and 2012, respectively.
Share-based Compensation
The Company recognizes expense related to share-based payment transactions in which it receives employee services in exchange for (a) equity
instruments of the Company or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Share-based compensation cost for restricted stock and
restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. The Company recognizes share-based compensation cost over the award’s requisite service period
on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance metrics. The Company recognizes a benefit from share-based compensation in the Consolidated Statements of
Shareholders’ Equity if an incremental tax benefit is realized. In addition, the Company recognizes the indirect effects of share-based compensation on R&D tax credits, foreign tax credits and domestic manufacturing deductions in the
Consolidated Statements of Operations. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”
9
Income Taxes
The
provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax
assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon settlement. See Note 5, “Income Taxes” for additional information.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of
additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee
stock purchase plan, unvested restricted stock and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an
increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
The following table shows the computation of basic and diluted earnings per share for 2014, 2013 and 2012 (net income in millions and shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
39,510 |
|
|
$ |
37,037 |
|
|
$ |
41,733 |
|
|
|
|
|
| Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average shares outstanding |
|
|
6,085,572 |
|
|
|
6,477,320 |
|
|
|
6,543,726 |
|
| Effect of dilutive securities |
|
|
37,091 |
|
|
|
44,314 |
|
|
|
73,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average diluted shares |
|
|
6,122,663 |
|
|
|
6,521,634 |
|
|
|
6,617,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic earnings per share |
|
$ |
6.49 |
|
|
$ |
5.72 |
|
|
$ |
6.38 |
|
| Diluted earnings per share |
|
$ |
6.45 |
|
|
$ |
5.68 |
|
|
$ |
6.31 |
|
Potentially dilutive securities, the effect of which would have been antidilutive, were not significant for 2014, 2013
and 2012. The Company excluded these securities from the computation of diluted earnings per share.
Financial Instruments
Cash Equivalents and Marketable Securities
All highly liquid
investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable debt and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company classifies its
marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt
securities with maturities greater than 12 months are classified as long-term. The Company classifies its marketable equity securities, including mutual funds, as either short-term or long-term based on the nature of each security and its
availability for use in current operations. The Company’s marketable debt and equity securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’ equity. The cost of
securities sold is based upon the specific identification method.
10
Derivative Financial Instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective
portion of the gain or loss on the derivative instrument is reported as a component of AOCI in shareholders’ equity and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The ineffective
portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged
transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in income. For derivative instruments that hedge the exposure to changes in the fair value
of an asset or a liability and that are designated as fair value hedges, both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in
the current period. For derivative instruments designated as a hedge of the foreign currency translation exposure of the net investment in a foreign operation, the net gain or loss on the effective portion of the derivative instrument is reported in
the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of
effectiveness. Accordingly, any gains or losses related to this component are recognized in current income. Derivatives that do not qualify as hedges are adjusted to fair value through current income.
Allowance for Doubtful Accounts
The Company records its
allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and
other factors that may affect customers’ ability to pay.
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of the inventories exceeds their market
value, provisions are made currently for the difference between the cost and the market value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over
the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between two to five years for machinery and equipment, including product tooling and manufacturing process
equipment; and the shorter of lease terms or ten years for leasehold improvements. The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs
related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $6.9 billion, $5.8
billion and $2.6 billion during 2014, 2013 and 2012, respectively.
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
The Company reviews property, plant and equipment, inventory component prepayments and certain identifiable intangibles, excluding goodwill, for
impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts
to future undiscounted cash flows the assets are expected to generate. If property, plant and equipment, inventory component prepayments and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the
amount by which the carrying value of the assets exceeds its fair value. The Company did not record any significant impairments during 2014, 2013 and 2012.
The Company does not amortize goodwill and intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at
least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible asset impairment tests in the fourth quarter of each year. The Company did not recognize
any impairment charges related to goodwill or indefinite lived intangible assets during 2014, 2013 and 2012. The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill
has been allocated to these reporting units to the extent it relates to each reporting unit. In 2014 and 2013, the Company’s goodwill was allocated to the Americas and Europe reportable operating segments.
The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The
Company typically amortizes its acquired intangible assets with definite useful lives over periods from three to seven years.
11
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact
and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying
the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or
similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants
would use in pricing the asset or liability.
The Company’s valuation techniques used to measure the fair value of money market funds and
certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial
instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair
value. The Company has not elected the fair value option for any eligible financial instruments.
Foreign Currency Translation and Remeasurement
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect
at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in
AOCI in shareholders’ equity. The Company’s subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and
nonmonetary assets and liabilities at historical rates. Gains and losses from these remeasurements were not significant during 2014, 2013 and 2012 and have been included in the Company’s results of operations.
12
Note 2 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following
tables show the Company’s cash and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant
investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of September 27, 2014 and September 28, 2013 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| |
|
Adjusted
Cost |
|
|
Unrealized
Gains |
|
|
Unrealized
Losses |
|
|
Fair Value |
|
|
Cash and
Cash
Equivalents |
|
|
Short-Term
Marketable
Securities |
|
|
Long-Term
Marketable
Securities |
|
| Cash |
|
$ |
10,232 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
10,232 |
|
|
$ |
10,232 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
| Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market funds |
|
|
1,546 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,546 |
|
|
|
1,546 |
|
|
|
0 |
|
|
|
0 |
|
| Mutual funds |
|
|
2,531 |
|
|
|
1 |
|
|
|
(132 |
) |
|
|
2,400 |
|
|
|
0 |
|
|
|
2,400 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
|
|
4,077 |
|
|
|
1 |
|
|
|
(132 |
) |
|
|
3,946 |
|
|
|
1,546 |
|
|
|
2,400 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Treasury securities |
|
|
23,140 |
|
|
|
15 |
|
|
|
(9 |
) |
|
|
23,146 |
|
|
|
12 |
|
|
|
607 |
|
|
|
22,527 |
|
| U.S. agency securities |
|
|
7,373 |
|
|
|
3 |
|
|
|
(11 |
) |
|
|
7,365 |
|
|
|
652 |
|
|
|
157 |
|
|
|
6,556 |
|
| Non-U.S. government securities |
|
|
6,925 |
|
|
|
69 |
|
|
|
(69 |
) |
|
|
6,925 |
|
|
|
0 |
|
|
|
204 |
|
|
|
6,721 |
|
| Certificates of deposit and time deposits |
|
|
3,832 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,832 |
|
|
|
1,230 |
|
|
|
1,233 |
|
|
|
1,369 |
|
| Commercial paper |
|
|
475 |
|
|
|
0 |
|
|
|
0 |
|
|
|
475 |
|
|
|
166 |
|
|
|
309 |
|
|
|
0 |
|
| Corporate securities |
|
|
85,431 |
|
|
|
296 |
|
|
|
(241 |
) |
|
|
85,486 |
|
|
|
6 |
|
|
|
6,298 |
|
|
|
79,182 |
|
| Municipal securities |
|
|
940 |
|
|
|
8 |
|
|
|
0 |
|
|
|
948 |
|
|
|
0 |
|
|
|
0 |
|
|
|
948 |
|
| Mortgage- and asset-backed securities |
|
|
12,907 |
|
|
|
26 |
|
|
|
(49 |
) |
|
|
12,884 |
|
|
|
0 |
|
|
|
25 |
|
|
|
12,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
|
|
141,023 |
|
|
|
417 |
|
|
|
(379 |
) |
|
|
141,061 |
|
|
|
2,066 |
|
|
|
8,833 |
|
|
|
130,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
155,332 |
|
|
$ |
418 |
|
|
$ |
(511 |
) |
|
$ |
155,239 |
|
|
$ |
13,844 |
|
|
$ |
11,233 |
|
|
$ |
130,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| |
|
Adjusted
Cost |
|
|
Unrealized
Gains |
|
|
Unrealized
Losses |
|
|
Fair Value |
|
|
Cash and
Cash
Equivalents |
|
|
Short-Term
Marketable
Securities |
|
|
Long-Term
Marketable
Securities |
|
| Cash |
|
$ |
8,705 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,705 |
|
|
$ |
8,705 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
| Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market funds |
|
|
1,793 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,793 |
|
|
|
1,793 |
|
|
|
0 |
|
|
|
0 |
|
| Mutual funds |
|
|
3,999 |
|
|
|
0 |
|
|
|
(197 |
) |
|
|
3,802 |
|
|
|
0 |
|
|
|
3,802 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
|
|
5,792 |
|
|
|
0 |
|
|
|
(197 |
) |
|
|
5,595 |
|
|
|
1,793 |
|
|
|
3,802 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Treasury securities |
|
|
27,642 |
|
|
|
24 |
|
|
|
(47 |
) |
|
|
27,619 |
|
|
|
431 |
|
|
|
7,554 |
|
|
|
19,634 |
|
| U.S. agency securities |
|
|
16,878 |
|
|
|
12 |
|
|
|
(52 |
) |
|
|
16,838 |
|
|
|
177 |
|
|
|
3,412 |
|
|
|
13,249 |
|
| Non-U.S. government securities |
|
|
5,545 |
|
|
|
35 |
|
|
|
(137 |
) |
|
|
5,443 |
|
|
|
50 |
|
|
|
313 |
|
|
|
5,080 |
|
| Certificates of deposit and time deposits |
|
|
2,344 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,344 |
|
|
|
1,264 |
|
|
|
844 |
|
|
|
236 |
|
| Commercial paper |
|
|
2,998 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,998 |
|
|
|
1,835 |
|
|
|
1,163 |
|
|
|
0 |
|
| Corporate securities |
|
|
54,586 |
|
|
|
275 |
|
|
|
(252 |
) |
|
|
54,609 |
|
|
|
0 |
|
|
|
8,077 |
|
|
|
46,532 |
|
| Municipal securities |
|
|
6,257 |
|
|
|
45 |
|
|
|
(22 |
) |
|
|
6,280 |
|
|
|
4 |
|
|
|
1,114 |
|
|
|
5,162 |
|
| Mortgage- and asset-backed securities |
|
|
16,396 |
|
|
|
23 |
|
|
|
(89 |
) |
|
|
16,330 |
|
|
|
0 |
|
|
|
8 |
|
|
|
16,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
|
|
132,646 |
|
|
|
414 |
|
|
|
(599 |
) |
|
|
132,461 |
|
|
|
3,761 |
|
|
|
22,485 |
|
|
|
106,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
147,143 |
|
|
$ |
414 |
|
|
$ |
(796 |
) |
|
$ |
146,761 |
|
|
$ |
14,259 |
|
|
$ |
26,287 |
|
|
$ |
106,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons
including, but not limited to, anticipation of credit deterioration and duration management. The net realized gains or losses recognized by the Company, related to such sales, were not significant during 2014, 2013 and 2012. The maturities of the
Company’s long-term marketable securities generally range from one to five years.
13
As of September 27, 2014 and September 28, 2013, gross unrealized losses related to individual
securities that had been in a continuous loss position for 12 months or longer were not significant.
As of September 27, 2014, the Company
considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated
securities, and its investment policy limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair
values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below
its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery
of the investment’s cost basis. During 2014, 2013 and 2012 the Company did not recognize any significant impairment charges.
Derivative Financial
Instruments
The Company uses derivatives to partially offset its business exposure to foreign currency and interest rate risk. The Company may
enter into forward contracts, option contracts, swaps, or other derivative instruments to offset some of the risk on expected future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities.
However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges
will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To help protect
gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar hedge a portion of forecasted foreign currency revenue. The Company’s subsidiaries whose
functional currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company typically hedges portions of its
forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To help protect the net
investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to
fluctuations in foreign currency exchange rates.
The Company may also enter into foreign currency forward contracts and option contracts to
partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies.
The Company may enter into interest rate swaps, options, or other instruments to manage interest rate risk. These instruments may offset a portion of
changes in income or expense, or changes in fair value of the Company’s long-term debt or investments.
The Company records all derivatives in
the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these instruments is based on the hedge designation. The effective portions of cash flow hedges are recorded in AOCI until the hedged item is recognized in
earnings. Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item. The effective portions of net investment hedges are
recorded in other comprehensive income (“OCI”) as a part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and net investment hedges are recorded in other income and expense. Derivatives that are not
designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as
the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses
associated with cash flow hedges of interest income or expense are recognized as a component of other income/(expense), net in the same period as the related income or expense is recognized. The Company’s foreign currency and interest rate
transactions hedged with cash flow hedges as of September 27, 2014 are expected to occur within 12 months and four years, respectively.
14
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable
the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified immediately into
other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any significant net
gains or losses related to the loss of hedge designation on discontinued cash flow hedges during 2014, 2013 and 2012.
The gain/loss recognized in
other income and expense for foreign currency forward and option contracts not designated as hedging instruments was not significant during 2014, 2013 and 2012. These amounts represent the net gain or loss on the derivative contracts and do not
include changes in the related exposures, which generally offset a portion of the gain or loss on the derivative contracts.
The following table
shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 27, 2014 and September 28, 2013 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| |
|
Notional
Amount |
|
|
Credit Risk
Amounts |
|
|
Notional
Amount |
|
|
Credit Risk
Amounts |
|
| Instruments designated as accounting hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
42,945 |
|
|
$ |
1,333 |
|
|
$ |
35,013 |
|
|
$ |
159 |
|
| Interest rate contracts |
|
$ |
12,000 |
|
|
$ |
89 |
|
|
$ |
3,000 |
|
|
$ |
44 |
|
|
|
|
|
|
| Instruments not designated as accounting hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
38,510 |
|
|
$ |
222 |
|
|
$ |
16,131 |
|
|
$ |
25 |
|
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and
do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all
counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s gross exposure on these transactions may be
further mitigated by collateral received from certain counterparties. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit
risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with
the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from
contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. As of September 27, 2014, the Company received $2.1 billion of cash
collateral related to the derivative instruments under its collateral security arrangements, which were recorded as accrued expenses in the Consolidated Balance Sheet. As of September 28, 2013, the Company posted cash collateral related to
the derivative instruments under its collateral security arrangements of $164 million, which were recorded as other current assets in the Consolidated Balance Sheet. The Company did not have any derivative instruments with credit-risk related
contingent features that would require it to post additional collateral as of September 27, 2014 or September 28, 2013.
Under master
netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 27, 2014 and
September 28, 2013, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities
of $1.6 billion and $333 million, respectively, resulting in net derivative liabilities of $549 million and $57 million, respectively.
15
The following tables show the Company’s derivative instruments at gross fair value as reflected in the
Consolidated Balance Sheets as of September 27, 2014 and September 28, 2013 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| |
|
Fair Value of Derivatives
Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not
Designated as Hedge Instruments |
|
|
Total
Fair Value |
|
| Derivative assets (1): |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
1,332 |
|
|
$ |
222 |
|
|
$ |
1,554 |
|
| Interest rate contracts |
|
$ |
81 |
|
|
$ |
0 |
|
|
$ |
81 |
|
|
|
|
|
| Derivative liabilities (2): |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
41 |
|
|
$ |
40 |
|
|
$ |
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| |
|
Fair Value of Derivatives
Designated as Hedge Instruments |
|
|
Fair Value of Derivatives Not
Designated as Hedge Instruments |
|
|
Total
Fair Value |
|
| Derivative assets (1): |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
145 |
|
|
$ |
25 |
|
|
$ |
170 |
|
| Interest rate contracts |
|
$ |
44 |
|
|
$ |
0 |
|
|
$ |
44 |
|
|
|
|
|
| Derivative liabilities (2): |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
389 |
|
|
$ |
46 |
|
|
$ |
435 |
|
| |
(1) |
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other
current assets in the Consolidated Balance Sheets. |
|
| |
(2) |
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as
accrued expenses in the Consolidated Balance Sheets. |
|
The following tables show the pre-tax effect of the Company’s derivative instruments designated as cash
flow, net investment and fair value hedges on OCI and the Consolidated Statements of Operations for 2014, 2013 and 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gains/(Losses) Recognized in
OCI - Effective
Portion |
|
|
Gains/(Losses) Reclassified from AOCI
into
Net Income - Effective Portion |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
1,750 |
|
|
$ |
891 |
|
|
$ |
(175 |
) |
|
$ |
(154 |
) |
|
$ |
676 |
|
|
$ |
607 |
|
| Interest rate contracts |
|
|
(15 |
) |
|
|
12 |
|
|
|
0 |
|
|
|
(16 |
) |
|
|
(6 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
1,735 |
|
|
$ |
903 |
|
|
$ |
(175 |
) |
|
$ |
(170 |
) |
|
$ |
670 |
|
|
$ |
607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net investment hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
$ |
53 |
|
|
$ |
143 |
|
|
$ |
(5 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gains/(Losses) On Derivative Instruments |
|
|
Gains/(Losses) Related to Hedged Items |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Fair value hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate contracts |
|
$ |
39 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
(39 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized a charge of $120 million, $301 million and $658 million in other income and expense during 2014,
2013 and 2012, respectively, for the ineffective portions of and amounts excluded from the effectiveness testing of cash flow hedges. The ineffective portions of and amounts excluded from the effectiveness testing of net investment and fair value
hedges recognized in other income and expense were not significant during 2014, 2013 and 2012.
16
Accounts Receivable
Trade
Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers,
value-added resellers, small and mid-sized businesses, and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to
limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These
credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 27, 2014, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 16% and
the other 13%. As of September 28, 2013, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 13% and the other 10%. The Company’s cellular network carriers accounted for 72% and
68% of trade receivables as of September 27, 2014 and September 28, 2013, respectively. The additions and write-offs to the Company’s allowance for doubtful accounts during 2014, 2013 and 2012 were not significant.
Vendor Non-Trade Receivables
The Company has non-trade
receivables from certain of its manufacturing vendors resulting from the sale of components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly
from suppliers. Three of the Company’s vendors accounted for 51%, 16% and 14% of total vendor non-trade receivables as of September 27, 2014 and three of the Company’s vendors accounted for 47%, 21% and 15% of total vendor non-trade
receivables as of September 28, 2013. The Company does not reflect the sale of these components in net sales and does not recognize any profits on these sales until the related products are sold by the Company, at which time any profit is
recognized as a reduction of cost of sales.
Note 3 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated balance sheet details as of September 27, 2014 and September 28, 2013 (in millions):
Inventories
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Components |
|
$ |
471 |
|
|
$ |
683 |
|
| Finished goods |
|
|
1,640 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
| Total inventories |
|
$ |
2,111 |
|
|
$ |
1,764 |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Land and buildings |
|
$ |
4,863 |
|
|
$ |
3,309 |
|
| Machinery, equipment and internal-use software |
|
|
29,639 |
|
|
|
21,242 |
|
| Leasehold improvements |
|
|
4,513 |
|
|
|
3,968 |
|
|
|
|
|
|
|
|
|
|
| Gross property, plant and equipment |
|
|
39,015 |
|
|
|
28,519 |
|
| Accumulated depreciation and amortization |
|
|
(18,391 |
) |
|
|
(11,922 |
) |
|
|
|
|
|
|
|
|
|
| Net property, plant and equipment |
|
$ |
20,624 |
|
|
$ |
16,597 |
|
|
|
|
|
|
|
|
|
|
17
Accrued Expenses
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Accrued warranty and related costs |
|
$ |
4,159 |
|
|
$ |
2,967 |
|
| Accrued marketing and selling expenses |
|
|
2,321 |
|
|
|
1,291 |
|
| Accrued taxes |
|
|
1,209 |
|
|
|
1,200 |
|
| Accrued compensation and employee benefits |
|
|
1,209 |
|
|
|
959 |
|
| Deferred margin on component sales |
|
|
1,057 |
|
|
|
1,262 |
|
| Other current liabilities |
|
|
8,498 |
|
|
|
6,177 |
|
|
|
|
|
|
|
|
|
|
| Total accrued expenses |
|
$ |
18,453 |
|
|
$ |
13,856 |
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Deferred tax liabilities |
|
$ |
20,259 |
|
|
$ |
16,489 |
|
| Other non-current liabilities |
|
|
4,567 |
|
|
|
3,719 |
|
|
|
|
|
|
|
|
|
|
| Total other non-current liabilities |
|
$ |
24,826 |
|
|
$ |
20,208 |
|
|
|
|
|
|
|
|
|
|
Other Income and Expense
The
following table shows the detail of other income and expense for 2014, 2013 and 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Interest and dividend income |
|
$ |
1,795 |
|
|
$ |
1,616 |
|
|
$ |
1,088 |
|
| Interest expense |
|
|
(384 |
) |
|
|
(136 |
) |
|
|
0 |
|
| Other expense, net |
|
|
(431 |
) |
|
|
(324 |
) |
|
|
(566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other income/(expense), net |
|
$ |
980 |
|
|
$ |
1,156 |
|
|
$ |
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 – Goodwill and Other Intangible Assets
On July 31, 2014, the Company completed the acquisitions of Beats Music, LLC, which offers a subscription streaming music service, and Beats
Electronics, LLC, which makes Beats® headphones, speakers and audio software (collectively, “Beats”). The total purchase price consideration for these acquisitions was $2.6 billion,
which consisted primarily of cash, of which $2.2 billion was allocated to goodwill, $636 million to acquired intangible assets and $258 million to net liabilities assumed. Concurrent with the close of the acquisition, the Company repaid $295 million
of existing Beats outstanding debt to third-party creditors. In conjunction with the Beats acquisitions, the Company issued approximately 5.1 million shares of its common stock to certain former equity holders of Beats. The restricted stock was
valued at approximately $485 million based on the Company’s common stock on the acquisition date. The majority of these shares, valued at approximately $417 million, will vest over time based on continued employment with Apple.
The Company also completed various other business acquisitions during 2014 for an aggregate cash consideration, net of cash acquired, of $957 million, of
which $828 million was allocated to goodwill, $257 million to acquired intangible assets and $128 million to net liabilities assumed.
The Company
completed various business acquisitions during 2013 for an aggregate cash consideration, net of cash acquired, of $496 million, of which $419 million was allocated to goodwill, $179 million to acquired intangible assets and $102 million to net
liabilities assumed.
The Company’s gross carrying amount of goodwill was $4.6 billion and $1.6 billion as of September 27, 2014 and
September 28, 2013, respectively. The Company did not have any goodwill impairments during 2014, 2013 or 2012.
18
The following table summarizes the components of gross and net intangible asset balances as of
September 27, 2014 and September 28, 2013 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| |
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
| Definite-lived and amortizable acquired intangible assets |
|
$ |
7,127 |
|
|
$ |
(3,085 |
) |
|
$ |
4,042 |
|
|
$ |
6,081 |
|
|
$ |
(2,002 |
) |
|
$ |
4,079 |
|
| Indefinite-lived and non-amortizable acquired intangible assets |
|
|
100 |
|
|
|
0 |
|
|
|
100 |
|
|
|
100 |
|
|
|
0 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total acquired intangible assets |
|
$ |
7,227 |
|
|
$ |
(3,085 |
) |
|
$ |
4,142 |
|
|
$ |
6,181 |
|
|
$ |
(2,002 |
) |
|
$ |
4,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to acquired intangible assets was $1.1 billion, $960 million and $605 million in 2014, 2013
and 2012, respectively. As of September 27, 2014, the remaining weighted-average amortization period for acquired intangible assets is 3.8 years. The expected annual amortization expense related to acquired intangible assets as of
September 27, 2014, is as follows (in millions):
|
|
|
|
|
| 2015 |
|
$ |
1,204 |
|
| 2016 |
|
|
1,083 |
|
| 2017 |
|
|
825 |
|
| 2018 |
|
|
592 |
|
| 2019 |
|
|
175 |
|
| Thereafter |
|
|
163 |
|
|
|
|
|
|
| Total |
|
$ |
4,042 |
|
|
|
|
|
|
Note 5 – Income Taxes
The
provision for income taxes for 2014, 2013 and 2012, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
$ |
8,624 |
|
|
$ |
9,334 |
|
|
$ |
7,240 |
|
| Deferred |
|
|
3,183 |
|
|
|
1,878 |
|
|
|
5,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,807 |
|
|
|
11,212 |
|
|
|
12,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| State: |
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
|
855 |
|
|
|
1,084 |
|
|
|
1,182 |
|
| Deferred |
|
|
(178 |
) |
|
|
(311 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677 |
|
|
|
773 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
|
2,147 |
|
|
|
1,559 |
|
|
|
1,203 |
|
| Deferred |
|
|
(658 |
) |
|
|
(426 |
) |
|
|
(490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,489 |
|
|
|
1,133 |
|
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
$ |
13,973 |
|
|
$ |
13,118 |
|
|
$ |
14,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign provision for income taxes is based on foreign pre-tax earnings of $33.6 billion, $30.5 billion and $36.8
billion in 2014, 2013 and 2012, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S.
Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of
September 27, 2014, U.S. income taxes have not been provided on a cumulative total of $69.7 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately
$23.3 billion.
19
As of September 27, 2014 and September 28, 2013, $137.1 billion and $111.3 billion, respectively,
of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are
generally subject to U.S. income taxation on repatriation to the U.S.
A reconciliation of the provision for income taxes, with the amount computed
by applying the statutory federal income tax rate (35% in 2014, 2013 and 2012) to income before provision for income taxes for 2014, 2013 and 2012, is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Computed expected tax |
|
$ |
18,719 |
|
|
$ |
17,554 |
|
|
$ |
19,517 |
|
| State taxes, net of federal effect |
|
|
469 |
|
|
|
508 |
|
|
|
677 |
|
| Indefinitely invested earnings of foreign subsidiaries |
|
|
(4,744 |
) |
|
|
(4,614 |
) |
|
|
(5,895 |
) |
| Research and development credit, net |
|
|
(88 |
) |
|
|
(287 |
) |
|
|
(103 |
) |
| Domestic production activities deduction |
|
|
(495 |
) |
|
|
(308 |
) |
|
|
(328 |
) |
| Other |
|
|
112 |
|
|
|
265 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
$ |
13,973 |
|
|
$ |
13,118 |
|
|
$ |
14,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effective tax rate |
|
|
26.1% |
|
|
|
26.2% |
|
|
|
25.2% |
|
The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For stock
options, the Company receives an income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of the exercise and the exercise price. For RSUs, the Company receives an income
tax benefit upon the award’s vesting equal to the tax effect of the underlying stock’s fair market value. The Company had net excess tax benefits from equity awards of $706 million, $643 million and $1.4 billion in 2014, 2013 and 2012,
respectively, which were reflected as increases to common stock.
As of September 27, 2014 and September 28, 2013, the significant
components of the Company’s deferred tax assets and liabilities were (in millions):
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Deferred tax assets: |
|
|
|
|
| Accrued liabilities and other reserves |
|
$ |
2,761 |
|
|
$ |
1,892 |
|
| Deferred revenue |
|
|
1,787 |
|
|
|
1,475 |
|
| Basis of capital assets and investments |
|
|
898 |
|
|
|
1,020 |
|
| Share-based compensation |
|
|
454 |
|
|
|
458 |
|
| Other |
|
|
644 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
| Total deferred tax assets |
|
|
6,544 |
|
|
|
5,874 |
|
| Less valuation allowance |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
| Deferred tax assets, net of valuation allowance |
|
|
6,544 |
|
|
|
5,874 |
|
|
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| Unremitted earnings of foreign subsidiaries |
|
|
21,544 |
|
|
|
18,044 |
|
| Other |
|
|
120 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
| Total deferred tax liabilities |
|
|
21,664 |
|
|
|
18,156 |
|
|
|
|
|
|
|
|
|
|
| Net deferred tax liabilities |
|
$ |
(15,120 |
) |
|
$ |
(12,282 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of
temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
20
Uncertain Tax Positions
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained
upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit
that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as
non-current liabilities in the Consolidated Balance Sheets.
As of September 27, 2014, the total amount of gross unrecognized tax benefits was
$4.0 billion, of which $1.4 billion, if recognized, would affect the Company’s effective tax rate. As of September 28, 2013, the total amount of gross unrecognized tax benefits was $2.7 billion, of which $1.4 billion, if recognized, would
affect the Company’s effective tax rate.
The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and
penalties, for 2014, 2013 and 2012, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Beginning Balance |
|
$ |
2,714 |
|
|
$ |
2,062 |
|
|
$ |
1,375 |
|
| Increases related to tax positions taken during a prior year |
|
|
1,295 |
|
|
|
745 |
|
|
|
340 |
|
| Decreases related to tax positions taken during a prior year |
|
|
(280 |
) |
|
|
(118 |
) |
|
|
(107 |
) |
| Increases related to tax positions taken during the current year |
|
|
882 |
|
|
|
626 |
|
|
|
467 |
|
| Decreases related to settlements with taxing authorities |
|
|
(574 |
) |
|
|
(592 |
) |
|
|
(3 |
) |
| Decreases related to expiration of statute of limitations |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending Balance |
|
$ |
4,033 |
|
|
$ |
2,714 |
|
|
$ |
2,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes.
As of September 27, 2014 and September 28, 2013, the total amount of gross interest and penalties accrued was $630 million and $590 million, respectively, which is classified as non-current liabilities in the Consolidated Balance Sheets.
In connection with tax matters, the Company recognized interest and penalty expense in 2014, 2013 and 2012 of $40 million, $189 million and $140 million, respectively.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. During the
fiscal year ended September 27, 2014, the U.S. Internal Revenue Service (“IRS”) concluded its review of the years 2004 through 2009, which resulted in the Company reducing its gross unrecognized tax benefits by $570 million and
recognizing a tax benefit of $166 million. The IRS is currently examining the years 2010 through 2012. In addition, the Company is also subject to audits by state, local and foreign tax authorities. In major states and major foreign
jurisdictions, the years subsequent to 1996 and 2002, respectively, generally remain open and could be subject to examination by the taxing authorities.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax
audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes
in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.
Note 6 – Debt
Commercial Paper
In April 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes (“Commercial Paper”) pursuant to a
commercial paper program. The Company intends to use net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 27, 2014, the Company had $6.3 billion of Commercial
Paper outstanding, with a weighted-average interest rate of 0.12% and maturities generally less than nine months.
21
The following table provides a summary of cash flows associated with the issuance and maturities of
Commercial Paper for 2014 (in millions):
|
|
|
|
|
| Maturities less than 90 days: |
|
|
|
|
| Proceeds from (repayments of) commercial paper, net |
|
$ |
1,865 |
|
|
|
| Maturities greater than 90 days: |
|
|
|
|
| Proceeds from commercial paper |
|
|
4,771 |
|
| Repayments of commercial paper |
|
|
(330 |
) |
|
|
|
|
|
| Maturities greater than 90 days, net |
|
|
4,441 |
|
|
|
|
|
|
| Total proceeds from issuance of commercial paper, net |
|
$ |
6,306 |
|
|
|
|
|
|
Long-Term Debt
In the third
quarter of 2014 and 2013, the Company issued $12.0 billion and $17.0 billion of long-term debt, respectively. The debt issuances included floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $29.0 billion
(collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the floating-rate notes and semi-annually for the fixed-rate notes.
The following table provides a summary of the Company’s long-term debt as of September 27, 2014 and September 28, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| |
|
Amount
(in millions) |
|
|
Effective
Interest Rate |
|
|
Amount
(in millions) |
|
|
Effective
Interest Rate |
|
| Floating-rate notes due 2016 |
|
$ |
1,000 |
|
|
|
0.51% |
|
|
$ |
1,000 |
|
|
|
0.51% |
|
| Floating-rate notes due 2017 |
|
|
1,000 |
|
|
|
0.31% |
|
|
|
0 |
|
|
|
0 |
|
| Floating-rate notes due 2018 |
|
|
2,000 |
|
|
|
1.10% |
|
|
|
2,000 |
|
|
|
1.10% |
|
| Floating-rate notes due 2019 |
|
|
1,000 |
|
|
|
0.54% |
|
|
|
0 |
|
|
|
0 |
|
| Fixed-rate 0.45% notes due 2016 |
|
|
1,500 |
|
|
|
0.51% |
|
|
|
1,500 |
|
|
|
0.51% |
|
| Fixed-rate 1.05% notes due 2017 |
|
|
1,500 |
|
|
|
0.30% |
|
|
|
0 |
|
|
|
0 |
|
| Fixed-rate 1.00% notes due 2018 |
|
|
4,000 |
|
|
|
1.08% |
|
|
|
4,000 |
|
|
|
1.08% |
|
| Fixed-rate 2.10% notes due 2019 |
|
|
2,000 |
|
|
|
0.53% |
|
|
|
0 |
|
|
|
0 |
|
| Fixed-rate 2.85% notes due 2021 |
|
|
3,000 |
|
|
|
0.79% |
|
|
|
0 |
|
|
|
0 |
|
| Fixed-rate 2.40% notes due 2023 |
|
|
5,500 |
|
|
|
2.44% |
|
|
|
5,500 |
|
|
|
2.44% |
|
| Fixed-rate 3.45% notes due 2024 |
|
|
2,500 |
|
|
|
0.90% |
|
|
|
0 |
|
|
|
0 |
|
| Fixed-rate 3.85% notes due 2043 |
|
|
3,000 |
|
|
|
3.91% |
|
|
|
3,000 |
|
|
|
3.91% |
|
| Fixed-rate 4.45% notes due 2044 |
|
|
1,000 |
|
|
|
4.48% |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total borrowings |
|
|
29,000 |
|
|
|
|
|
|
|
17,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unamortized discount |
|
|
(52 |
) |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
| Hedge accounting fair value adjustments |
|
|
39 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total long-term debt |
|
$ |
28,987 |
|
|
|
|
|
|
$ |
16,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has entered, and may enter in the future, into interest rate swaps to manage interest rate risk on the Notes.
Such swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. In the third quarter of 2014, the Company entered into interest rate swaps with an aggregate
notional amount of $9.0 billion, which effectively converted the fixed-rate notes due 2017, 2019, 2021 and 2024 into floating-rate notes. In the third quarter of 2013, the Company entered into interest rate swaps with an aggregate notional
amount of $3.0 billion, which effectively converted the floating-rate notes due 2016 and 2018 into fixed-rate notes.
The effective rates for the
Notes include the interest on the Notes, amortization of the discount and, if applicable, adjustments related to hedging. The Company recognized $381 million and $136 million of interest expense on its long-term debt for the years ended
September 27, 2014 and September 28, 2013, respectively. The Company did not have any long-term debt in 2012.
22
Future principal payments for the Company’s Notes as of September 27, 2014, are as follows (in
millions):
|
|
|
|
|
| 2015 |
|
$ |
0 |
|
| 2016 |
|
|
2,500 |
|
| 2017 |
|
|
2,500 |
|
| 2018 |
|
|
6,000 |
|
| 2019 |
|
|
3,000 |
|
| Thereafter |
|
|
15,000 |
|
|
|
|
|
|
| Total |
|
$ |
29,000 |
|
|
|
|
|
|
As of September 27, 2014 and September 28, 2013, the fair value of the Company’s Notes, based on Level 2
inputs, was $28.5 billion and $15.9 billion, respectively.
Note 7 – Shareholders’ Equity
Preferred and Common Stock
During the second quarter of 2014,
the Company’s shareholders approved amendments (the “Amendments”) to the Company’s Restated Articles of Incorporation. The Amendments included the elimination of the Board of Directors’ authority to issue preferred stock and
established a par value for the Company’s common stock of $0.00001 per share.
Dividends
The Company declared and paid cash dividends per common share during the periods presented as follows:
|
|
|
|
|
|
|
|
|
| |
|
Dividends
Per Share |
|
|
Amount
(in millions) |
|
| 2014: |
|
|
|
|
|
|
|
|
| Fourth quarter |
|
$ |
0.47 |
|
|
$ |
2,807 |
|
| Third quarter |
|
|
0.47 |
|
|
|
2,830 |
|
| Second quarter |
|
|
0.44 |
|
|
|
2,655 |
|
| First quarter |
|
|
0.44 |
|
|
|
2,739 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
1.82 |
|
|
$ |
11,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013: |
|
|
|
|
|
|
|
|
| Fourth quarter |
|
$ |
0.44 |
|
|
$ |
2,763 |
|
| Third quarter |
|
|
0.44 |
|
|
|
2,789 |
|
| Second quarter |
|
|
0.38 |
|
|
|
2,490 |
|
| First quarter |
|
|
0.38 |
|
|
|
2,486 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
1.64 |
|
|
$ |
10,528 |
|
|
|
|
|
|
|
|
|
|
The Company paid cash dividends of $0.38 per share, totaling $2.5 billion, during the fourth quarter of 2012. Future
dividends are subject to declaration by the Board of Directors.
Share Repurchase Program
In 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in 2013.
The Company’s Board of Directors increased the share repurchase authorization to $60 billion in April 2013 and to $90 billion in April 2014. As of September 27, 2014, $67.9 billion of the $90 billion had been utilized. The Company’s
share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
23
The Company has entered into four accelerated share repurchase arrangements (“ASRs”) with
financial institutions beginning in August 2012. In exchange for up-front payments, the financial institutions deliver shares of the Company’s common stock during the purchase periods of each ASR. The total number of shares ultimately
delivered, and therefore the average repurchase price paid per share, will be determined at the end of the applicable purchase period of each ASR based on the volume weighted-average price of the Company’s common stock during that period. The
shares received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction to shareholders’ equity in the Company’s Consolidated Balance Sheet in the periods the payments are made. The Company
reflects the ASRs as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the applicable criteria for equity classification,
and therefore, were not accounted for as derivative instruments.
The following table presents the Company’s ASRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Purchase
Period End
Date |
|
|
Number of
Shares
(in thousands) |
|
|
Average
Repurchase
Price Per
Share |
|
|
ASR
Amount
(in millions) |
|
| August 2014 ASR |
|
|
(1) |
|
|
|
59,924 (1) |
|
|
|
(1) |
|
|
$ |
9,000 |
|
| January 2014 ASR |
|
|
(1) |
|
|
|
134,247 (1) |
|
|
|
(1) |
|
|
$ |
12,000 |
|
| April 2013 ASR |
|
|
March 2014 |
|
|
|
172,548 (2) |
|
|
$ |
69.55 |
|
|
$ |
12,000 |
|
| August 2012 ASR |
|
|
April 2013 |
|
|
|
28,544 |
|
|
$ |
68.31 |
|
|
$ |
1,950 |
|
| |
(1) |
“Number of Shares” represents those shares delivered in advance of settlement and does not
represent the final number of shares to be delivered under the ASRs. The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, will be determined at the end of the applicable purchase period based on
the volume weighted-average price of the Company’s common stock during that period. The August 2014 ASR and January 2014 ASR purchase periods will end in or before February 2015 and December 2014, respectively. |
|
| |
(2) |
Includes 8.0 million shares that were delivered and retired at the end of the purchase period, which concluded in the second quarter of 2014. |
|
Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon
repurchase, during the periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Shares
(in thousands) |
|
|
Average Repurchase
Price Per Share |
|
|
Amount
(in millions) |
|
|
|
|
|
| 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
| Fourth quarter |
|
|
81,255 |
|
|
$ |
98.46 |
|
|
$ |
8,000 |
|
| Third quarter |
|
|
58,661 |
|
|
$ |
85.23 |
|
|
|
5,000 |
|
| Second quarter |
|
|
79,749 |
|
|
$ |
75.24 |
|
|
|
6,000 |
|
| First quarter |
|
|
66,847 |
|
|
$ |
74.79 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
286,512 |
|
|
|
|
|
|
$ |
24,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
| Fourth quarter |
|
|
73,064 |
|
|
$ |
68.43 |
|
|
$ |
5,000 |
|
| Third quarter |
|
|
62,676 |
|
|
$ |
63.82 |
|
|
|
4,000 |
|
| Second quarter |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
| First quarter |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
135,740 |
|
|
|
|
|
|
$ |
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Note 8 – Comprehensive Income
Comprehensive income consists of two components, net income and OCI. OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as
an element of shareholders’ equity but are excluded from net income. The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains
and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable securities classified as available-for-sale.
The following table shows the gross amounts reclassified from AOCI into the Consolidated Statements of Operations and the associated financial statement
line item for 2014 (in millions):
|
|
|
|
|
|
|
| Comprehensive Income Components |
|
Financial Statement Line Item |
|
2014 |
|
| Unrecognized gains/losses on derivative instruments: |
|
|
|
|
|
|
| Foreign exchange contracts |
|
Revenue |
|
$ |
449 |
|
|
|
Cost of sales |
|
|
(295 |
) |
|
|
Other income/expense, net |
|
|
15 |
|
| Interest rate contracts |
|
Other income/expense, net |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
185 |
|
| Unrealized gains/losses on marketable securities |
|
Other income/expense, net |
|
|
(205 |
) |
|
|
|
|
|
|
|
| Total amounts reclassified from AOCI |
|
$ |
(20 |
) |
|
|
|
|
|
|
|
The following table shows the changes in AOCI by component for 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cumulative
Foreign
Currency
Translation |
|
|
Unrecognized
Gains/Losses
on Derivative
Instruments |
|
|
Unrealized
Gains
/Losses on
Marketable
Securities |
|
|
Total |
|
| Balance at September 28, 2013 |
|
$ |
(105 |
) |
|
$ |
(175 |
) |
|
$ |
(191 |
) |
|
$ |
(471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income/(loss) before reclassifications |
|
|
(187 |
) |
|
|
1,687 |
|
|
|
438 |
|
|
|
1,938 |
|
| Amounts reclassified from AOCI |
|
|
0 |
|
|
|
185 |
|
|
|
(205 |
) |
|
|
(20 |
) |
| Tax effect |
|
|
50 |
|
|
|
(333 |
) |
|
|
(82 |
) |
|
|
(365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income/(loss) |
|
|
(137 |
) |
|
|
1,539 |
|
|
|
151 |
|
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 27, 2014 |
|
$ |
(242 |
) |
|
$ |
1,364 |
|
|
$ |
(40 |
) |
|
$ |
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Note 9 – Benefit Plans
Stock Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority
to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based
awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common
stock on a one-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reduces the number of shares available for grant under the plan by two shares. RSUs cancelled and shares withheld to satisfy tax withholding obligations
increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs cancelled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights
(“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid
when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the
2003 Plan that expire, are cancelled or otherwise terminate, or are withheld to satisfy tax withholding obligations with respect to RSUs, will also be available for awards under the 2014 Plan. As of September 27, 2014, approximately
492.6 million shares were reserved for future issuance under the 2014 Plan.
2003 Employee Stock Plan
The 2003 Plan is a shareholder approved plan that provided for broad-based equity grants to employees, including executive officers. The 2003 Plan
permitted the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights and performance-based awards. Options granted under the 2003 Plan generally expire seven to ten years after the
grant date and generally become exercisable over a period of four years, based on continued employment, with either annual, semi-annual or quarterly vesting. RSUs granted under the 2003 Plan generally vest over two to four years, based on continued
employment and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. All RSUs, other than RSUs held by the Chief Executive Officer, granted under the 2003 Plan have DERs. DERs are subject to the same vesting
and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. In the second quarter of 2014, the Company terminated the authority to grant new awards under the 2003 Plan.
1997 Director Stock Plan
The 1997 Director Stock Plan (the
“Director Plan”) is a shareholder approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a
non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the relative mixture of stock options and RSUs for
the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants without shareholder approval. Each share issued with respect to RSUs granted under the Director
Plan reduces the number of shares available for grant under the plan by two shares. The Director Plan expires November 9, 2019. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms
and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 27, 2014, approximately 1.2 million shares were reserved for future issuance under the Director Plan.
Rule 10b5-1 Trading Plans
During the fourth quarter of 2014,
Section 16 officers Timothy D. Cook, Luca Maestri, Daniel Riccio, Philip W. Schiller, D. Bruce Sewell and Jeffrey E. Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan
is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s
employee and director equity plans.
26
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder approved plan under which substantially all employees may purchase the
Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase
Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 27, 2014, approximately 7.6 million shares were reserved for future issuance
under the Purchase Plan.
401(k) Plan
The Company’s
401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($17,500
for calendar year 2014). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum 6% of the employee’s eligible earnings. The Company’s matching contributions to the 401(k) Plan
were $163 million, $135 million and $114 million in 2014, 2013 and 2012, respectively.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2014, 2013 and 2012, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of RSUs
(in thousands) |
|
|
Weighted-Average
Grant
Date Fair Value
Per Share |
|
|
Aggregate
Intrinsic Value
(in millions) |
|
| Balance at September 24, 2011 |
|
|
101,122 |
|
|
$ |
33.07 |
|
|
|
|
|
| RSUs granted |
|
|
54,597 |
|
|
$ |
61.62 |
|
|
|
|
|
| RSUs vested |
|
|
(44,137 |
) |
|
$ |
29.32 |
|
|
|
|
|
| RSUs cancelled |
|
|
(6,545 |
) |
|
$ |
36.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 29, 2012 |
|
|
105,037 |
|
|
$ |
49.27 |
|
|
|
|
|
| RSUs granted |
|
|
39,415 |
|
|
$ |
78.23 |
|
|
|
|
|
| RSUs vested |
|
|
(42,291 |
) |
|
$ |
45.96 |
|
|
|
|
|
| RSUs cancelled |
|
|
(8,877 |
) |
|
$ |
57.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 28, 2013 |
|
|
93,284 |
|
|
$ |
62.24 |
|
|
|
|
|
| RSUs granted |
|
|
59,269 |
|
|
$ |
74.54 |
|
|
|
|
|
| RSUs vested |
|
|
(43,111 |
) |
|
$ |
57.29 |
|
|
|
|
|
| RSUs cancelled |
|
|
(5,620 |
) |
|
$ |
68.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 27, 2014 |
|
|
103,822 |
|
|
$ |
70.98 |
|
|
$ |
10,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value as of the respective vesting dates of RSUs was $3.4 billion, $3.1 billion and $3.3 billion for 2014, 2013
and 2012, respectively. The majority of RSUs that vested in 2014, 2013 and 2012 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and
other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 15.6 million, 15.5 million and 16.1 million for 2014, 2013 and 2012, respectively, and were based on the
value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $1.2 billion, $1.1 billion and $1.2 billion in 2014, 2013
and 2012, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares
that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.
Stock Options
The Company had 6.6 million stock options outstanding as of September 27, 2014, with a weighted-average exercise price per share of $21.99 and
weighted-average remaining contractual term of 1.4 years, substantially all of which are exercisable. The aggregate intrinsic value of the stock options outstanding as of September 27, 2014 was $520 million, which represents the value of the
Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding. Total intrinsic value of options at time of exercise was $1.5 billion, $1.0
billion and $2.3 billion for 2014, 2013 and 2012, respectively.
27
Share-based Compensation
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2014, 2013 and 2012
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Cost of sales |
|
$ |
450 |
|
|
$ |
350 |
|
|
$ |
265 |
|
| Research and development |
|
|
1,216 |
|
|
|
917 |
|
|
|
668 |
|
| Selling, general and administrative |
|
|
1,197 |
|
|
|
986 |
|
|
|
807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total share-based compensation expense |
|
$ |
2,863 |
|
|
$ |
2,253 |
|
|
$ |
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit related to share-based compensation expense was $1.0 billion, $816 million and $567 million for
2014, 2013 and 2012, respectively. As of September 27, 2014, the total unrecognized compensation cost related to outstanding stock options, RSUs and restricted stock was $6.3 billion, which the Company expects to recognize over a
weighted-average period of 2.9 years.
Note 10 – Commitments and Contingencies
Accrued Warranty and Indemnification
The Company offers a basic
limited parts and labor warranty on its hardware products. The basic warranty period for hardware products is typically one year from the date of purchase by the end-user. The Company also offers a 90-day
basic warranty for its service parts used to repair the Company’s hardware products. The Company provides currently for the estimated cost that may be incurred under its basic limited product warranties at the time related revenue is
recognized. Factors considered in determining appropriate accruals for product warranty obligations include the size of the installed base of products subject to warranty protection, historical and projected warranty claim rates, historical and
projected cost-per-claim and knowledge of specific product failures that are outside of the Company’s typical experience. The Company assesses the adequacy of its pre-existing warranty liabilities and adjusts the amounts as necessary based on
actual experience and changes in future estimates.
The following table shows changes in the Company’s accrued warranties and related costs for
2014, 2013 and 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Beginning accrued warranty and related costs |
|
$ |
2,967 |
|
|
$ |
1,638 |
|
|
$ |
1,240 |
|
| Cost of warranty claims |
|
|
(3,760 |
) |
|
|
(3,703 |
) |
|
|
(1,786 |
) |
| Accruals for product warranty |
|
|
4,952 |
|
|
|
5,032 |
|
|
|
2,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending accrued warranty and related costs |
|
$ |
4,159 |
|
|
$ |
2,967 |
|
|
$ |
1,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company generally does not indemnify end-users of its operating system and application software against legal claims
that the software infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an
infringement claim against the Company or an indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against it or an indemnified third-party. In the
opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for infringement of third-party
intellectual property rights. The Company did not record a liability for infringement costs related to indemnification as of September 27, 2014 or September 28, 2013.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to
indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It
is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each
claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.
28
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, a number of components are currently
obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the
Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Company’s financial condition and operating
results.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often
utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. If the
Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be
materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain
sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrated on the production of common components instead of components customized to
meet the Company’s requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee
that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial
condition and operating results.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located
primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and
manufacturers for many of the Company’s products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were
unable to meet their production commitments. The Company’s purchase commitments typically cover its requirements for periods up to 150 days.
Other
Off-Balance Sheet Commitments
Operating Leases
The
Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off-balance sheet financing arrangements. The major facility leases are
typically for terms not exceeding 10 years and generally contain multi-year renewal options. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options.
As of September 27, 2014, the Company’s total future minimum lease payments under noncancelable operating leases were $5.0 billion, of which $3.6 billion related to leases for retail space.
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $717 million, $645 million and $488 million in 2014,
2013 and 2012, respectively. Future minimum lease payments under noncancelable operating leases having remaining terms in excess of one year as of September 27, 2014, are as follows (in millions):
|
|
|
|
|
| 2015 |
|
$ |
662 |
|
| 2016 |
|
|
676 |
|
| 2017 |
|
|
645 |
|
| 2018 |
|
|
593 |
|
| 2019 |
|
|
534 |
|
| Thereafter |
|
|
1,877 |
|
|
|
|
|
|
| Total |
|
$ |
4,987 |
|
|
|
|
|
|
29
Other Commitments
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing
of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products
from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts and open orders based on projected demand information. Where
appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of September 27, 2014, the Company had outstanding off-balance sheet third-party
manufacturing commitments and component purchase commitments of $24.5 billion.
In addition to the off-balance sheet commitments mentioned above, the
Company had outstanding obligations of $3.4 billion as of September 27, 2014, which consisted mainly of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to
advertising, R&D, Internet and telecommunications services and other obligations.
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully
adjudicated. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies. However, the outcome of
litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of
management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
Apple Inc.
v. Samsung Electronics Co., Ltd, et al.
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit
against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of the Company in the
amount of approximately $930 million. Because the award is now subject to appeal, the Company has not recognized the award in its results of operations.
VirnetX, Inc. v. Apple Inc. et al.
On August 11, 2010,
VirnetX, Inc. filed an action against the Company alleging that certain of its products infringed on four patents relating to network communications technology. On November 6, 2012, a jury returned a verdict against the Company, and awarded
damages of $368 million. On September 16, 2014, the Court of Appeals for the Federal Circuit affirmed the District Court’s decision in part, reversed in part, and vacated the damages award. The case has been remanded for further
proceedings.
30
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by
management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business
primarily on a geographic basis. As the Company continues to expand its business, management believes collaboration across its online, retail and indirect channels is integral to better serving its customers and optimizing its financial results. In
2015, management began reporting business performance and making decisions primarily on a geographic basis, including the results of its retail stores in each respective geographic segment. Accordingly, to align with the way the business is
currently managed, the Company’s reportable operating segments now consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Retail is no longer reported as a separate reportable operating segment. The Americas segment
includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia
and Asian countries, other than those countries included in the Company’s other operating segments. Each operating segment provides similar hardware and software products and similar services. The accounting policies of the various segments are
the same as those described in Note 1, “Summary of Significant Accounting Policies.”
The Company evaluates the performance of its
operating segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income
for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. In 2015, the Company also began allocating certain costs to its operating segments that were previously included
in other corporate expenses, including certain share-based compensation costs. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and
expense and certain expenses managed outside the operating segments. Costs excluded from segment operating income include various corporate expenses such as R&D, corporate marketing expenses, certain share-based compensation expense, income
taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by operating segment for 2014, 2013 and 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Americas: |
|
|
|
|
| Net sales |
|
$ |
80,095 |
|
|
$ |
77,093 |
|
|
$ |
71,060 |
|
| Operating income |
|
$ |
26,158 |
|
|
$ |
24,829 |
|
|
$ |
26,244 |
|
|
|
|
|
| Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
44,285 |
|
|
$ |
40,980 |
|
|
$ |
39,326 |
|
| Operating income |
|
$ |
14,434 |
|
|
$ |
12,767 |
|
|
$ |
15,129 |
|
|
|
|
|
| Greater China: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
31,853 |
|
|
$ |
27,016 |
|
|
$ |
23,756 |
|
| Operating income |
|
$ |
11,039 |
|
|
$ |
8,499 |
|
|
$ |
9,978 |
|
|
|
|
|
| Japan: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
15,314 |
|
|
$ |
13,782 |
|
|
$ |
10,913 |
|
| Operating income |
|
$ |
6,904 |
|
|
$ |
6,668 |
|
|
$ |
5,826 |
|
|
|
|
|
| Rest of Asia Pacific: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
11,248 |
|
|
$ |
12,039 |
|
|
$ |
11,453 |
|
| Operating income |
|
$ |
3,674 |
|
|
$ |
3,762 |
|
|
$ |
4,321 |
|
31
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations
for 2014, 2013 and 2012, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Segment operating income |
|
$ |
62,209 |
|
|
$ |
56,525 |
|
|
$ |
61,498 |
|
| Research and development expense |
|
|
(6,041 |
) |
|
|
(4,475 |
) |
|
|
(3,381 |
) |
| Other corporate expenses, net |
|
|
(3,665 |
) |
|
|
(3,051 |
) |
|
|
(2,876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating income |
|
$ |
52,503 |
|
|
$ |
48,999 |
|
|
$ |
55,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2014, 2013
and 2012. There was no single customer that accounted for more than 10% of net sales in 2014, 2013 or 2012. Net sales for 2014, 2013 and 2012 and long-lived assets as of September 27, 2014 and September 28, 2013 are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. |
|
$ |
68,909 |
|
|
$ |
66,197 |
|
|
$ |
60,949 |
|
| China (1) |
|
|
30,638 |
|
|
|
25,946 |
|
|
|
22,797 |
|
| Other countries |
|
|
83,248 |
|
|
|
78,767 |
|
|
|
72,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net sales |
|
$ |
182,795 |
|
|
$ |
170,910 |
|
|
$ |
156,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. |
|
$ |
9,108 |
|
|
$ |
7,399 |
|
|
|
|
|
| China (1) |
|
|
9,477 |
|
|
|
7,403 |
|
|
|
|
|
| Other countries |
|
|
2,917 |
|
|
|
2,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total long-lived assets |
|
$ |
21,502 |
|
|
$ |
17,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) |
China includes Hong Kong. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to
retail stores and related infrastructure. |
|
In 2015, the Company changed its categorization of product-level net sales reporting to better reflect its
evolving products and services. Net sales by product for 2014, 2013 and 2012 have been reclassified to conform to the Company’s 2015 presentation and are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Net Sales by Product: |
|
|
|
|
|
|
|
|
|
|
|
|
| iPhone (1) |
|
$ |
101,991 |
|
|
$ |
91,279 |
|
|
$ |
78,692 |
|
| iPad (1) |
|
|
30,283 |
|
|
|
31,980 |
|
|
|
30,945 |
|
| Mac (1) |
|
|
24,079 |
|
|
|
21,483 |
|
|
|
23,221 |
|
| Services (2) |
|
|
18,063 |
|
|
|
16,051 |
|
|
|
12,890 |
|
| Other Products (1)(3) |
|
|
8,379 |
|
|
|
10,117 |
|
|
|
10,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net sales |
|
$ |
182,795 |
|
|
$ |
170,910 |
|
|
$ |
156,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) |
Includes deferrals and amortization of related non-software services and software upgrade rights. |
|
| |
(2) |
Includes revenue from the iTunes Store, App Store, Mac App Store and iBooks Store (collectively “iTunes”), AppleCare, licensing and other services.
|
|
| |
(3) |
Includes sales of iPod, Apple TV, Beats Electronics and Apple-branded and third-party accessories. |
|
32
Note 12 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2014 and 2013 (in millions,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fourth Quarter |
|
|
Third Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
| 2014: |
|
|
|
|
| Net sales |
|
$ |
42,123 |
|
|
$ |
37,432 |
|
|
$ |
45,646 |
|
|
$ |
57,594 |
|
| Gross margin |
|
$ |
16,009 |
|
|
$ |
14,735 |
|
|
$ |
17,947 |
|
|
$ |
21,846 |
|
| Net income |
|
$ |
8,467 |
|
|
$ |
7,748 |
|
|
$ |
10,223 |
|
|
$ |
13,072 |
|
|
|
|
|
|
| Earnings per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
1.43 |
|
|
$ |
1.29 |
|
|
$ |
1.67 |
|
|
$ |
2.08 |
|
| Diluted |
|
$ |
1.42 |
|
|
$ |
1.28 |
|
|
$ |
1.66 |
|
|
$ |
2.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fourth Quarter |
|
|
Third Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
| 2013: |
|
|
|
|
| Net sales |
|
$ |
37,472 |
|
|
$ |
35,323 |
|
|
$ |
43,603 |
|
|
$ |
54,512 |
|
| Gross margin |
|
$ |
13,871 |
|
|
$ |
13,024 |
|
|
$ |
16,349 |
|
|
$ |
21,060 |
|
| Net income |
|
$ |
7,512 |
|
|
$ |
6,900 |
|
|
$ |
9,547 |
|
|
$ |
13,078 |
|
|
|
|
|
|
| Earnings per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
1.19 |
|
|
$ |
1.07 |
|
|
$ |
1.45 |
|
|
$ |
1.99 |
|
| Diluted |
|
$ |
1.18 |
|
|
$ |
1.07 |
|
|
$ |
1.44 |
|
|
$ |
1.97 |
|
| |
(1) |
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per
share information may not equal annual basic and diluted earnings per share. |
|
33
Report of Ernst & Young LLP, Independent Registered Public
Accounting Firm
The Board of Directors and Shareholders of Apple Inc.
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 27, 2014 and September 28, 2013, and the related
consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 27, 2014. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple Inc. at September 27, 2014 and September 28, 2013, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended September 27, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple Inc.’s internal
control over financial reporting as of September 27, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and
our report dated October 27, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
October 27, 2014,
except for Note 11 – Segment Information and Geographic Data, as to which the date is January 28, 2015
34
Apple (NASDAQ:AAPL)
Historical Stock Chart
From Mar 2024 to Apr 2024
Apple (NASDAQ:AAPL)
Historical Stock Chart
From Apr 2023 to Apr 2024
