Financial Statement Analysis Grading Guide
ACC/561 Version 6
Learning Team: Financial Statement Analysis
Purpose of Assignment
This assignment will allow students to master basic financial statement analysis by analyzing real-world
financial statements from an actual American corporation. Students will learn to find key data on the four
primary financial statements and to compare this data to measure liquidity, solvency, and profitability.
Resources
Week 1 Individual Assignment
Grading Guide
Met
Content
Partially
Met
Not Met
Each member of the team conducted the
following using the financial statements for
the respective companies:
Perform at least one (1) profitability ratio
to measure the income and operating
success of your selected company.
Perform at least one (1) liquidity ratio to
measure the ability of the company to pay
short-term debt and meet unexpected
needs.
Perform at least one (1) solvency ratio to
measure the ability of the company to
survive in the long-term.
Review all of the calculations of the
different companies as a team. Compare
the profitability, liquidity, and solvency
ratios.
Complete a spreadsheet that presents the
profitability, liquidity, and solvency ratios
comparatively for all of the companies.
Highlight the company that has the best
numbers for each ratio.
The students evaluated the financial
opportunity presented by the companies and
discussed which company the team would
lend money to and why. The team also
defended that decision.
The students evaluated the investment
opportunity presented by the companies and
discussed which team they would choose to
invest $100,000 in and why. The team also
provided a rationale for their decision.
The students evaluated the employment
opportunity presented by the companies The
team also discussed how they would respond
Copyright © 2016 by University of Phoenix. All rights reserved.
Comments:
1
Financial Statement Analysis Grading Guide
ACC/561 Version 6
to an offer of employment from each company
and which they would accept and why.
The assignment is 700 words in length.
Met
Writing Guidelines
Total
Available
Total
Earned
10.5
#/10.5
Partially
Met
Not Met
Total
Available
Total
Earned
4.5
#/4.5
15
#/15
The paper — including tables and graphs,
headings, a title page, and a reference page
— is consistent with APA formatting
guidelines and meets course-level
requirements.
The paper includes properly cited intellectual
property using APA style in-text citations and
a reference page.
The paper includes paragraph and sentence
transitions that are logical and maintain flow
throughout the paper.
The paper includes sentences that are
complete, clear, and concise.
The paper follows proper rules of grammar
and usage including spelling and punctuation.
Assignment Total
#
Additional comments:
Copyright © 2016 by University of Phoenix. All rights reserved.
Comments:
2
Company
Boeing
Well's Fargo
Apple
Domino's Pizza
Profitability Ratio:
Profit Margin Ratio
5.39%
37.61%
18.40%
0.09%
Liquidity Ratio:
Current Ratio
1.36
1.31
1.31
1.26
Solvency Ratio:
Debt to Equity Ratio
1.573
173.940
0.671
-1.340
Profit Margin Ratio = Net Income/Net Sales
* The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a
profitability ratio that measures the amount of net income earned with each dollar of sales
generated by comparing the net income and net sales of a company. In other words, the
profit margin ratio shows what percentage of sales are left over after all expenses are paid
by the business.
EXAMPLE: A 20% profit margin, then, means the company has a net income of $0.20 for
each dollar of total revenue earned.
Current Ratio = Current Assets/Current Liabilities
* The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off
its short-term liabilities with its current assets. The current ratio is an important measure of
liquidity because short-term liabilities are due within the next year.
EXAMPLE: A ratio under 1 indicates that a company’s liabilities are greater than its assets
and suggests that the company in question would be unable to pay off its obligations if
they came due at that point.
Debt to Equity Ratio = Total Debt/Total Shareholders Equity
* The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt
to total equity. The debt to equity ratio shows the percentage of company financing that
comes from creditors and investors. A higher debt to equity ratio indicates that more
creditor financing (bank loans) is used than investor financing (shareholders).
IMPORTANT: Like with most ratios, when using the debt/equity ratio it is very important
to consider the industry in which the company operates. Because different industries rely
on different amounts of capital to operate and use that capital in different ways, a
relatively high D/E ratio may be common in one industry while a relatively low D/E may be
common in another.
* A higher debt-to-equity ratio typically shows that a company has been aggressive in
financing its growth with debt, and there may be a greater potential for financial distress if
earnings do not exceed the cost of borrowed funds.
Total Current Liabilities
Total Current Assests
Total Shareholders Equity
Total Debt
Net Income
Net Sales
$
$
$
$
$
$
* Boeing data is for year ending 2015
Boeing*
50,142,000,000
68,234,000,000
6,335,000,000
9,964,000,000
5,176,000,000
96,114,000,000
Wells Fargo
Apple
Dominoes Pizza
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
!
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 2016
or
" TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission File Number: 001-36743
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
94-2404110
(State or other jurisdiction
of incorporation or organization)
(I.R.S. 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)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes !
No "
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the Registrant was required to submit and post such files).
Yes !
No "
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
#
Accelerated filer
"
Non-accelerated filer
" (Do not check if a smaller reporting company)
Smaller reporting company
"
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes " No !
5,388,443,000 shares of common stock, par value $0.00001 per share, issued and outstanding as of July 15, 2016
Apple Inc.
Form 10-Q
For the Fiscal Quarter Ended June 25, 2016
TABLE OF CONTENTS
Page
Part I
Item 1.
Item 2.
Item 3.
Item 4.
Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
3
23
34
34
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Part II
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Other Information
Exhibits
35
36
46
46
46
46
47
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except number of shares which are reflected in thousands and per share amounts)
Three Months Ended
June 25,
June 27,
2016
2015
Net sales
Cost of sales
$
Nine Months Ended
June 25,
June 27,
2016
2015
42,358 $
26,252
49,605 $
29,924
16,106
19,681
66,450
73,078
2,560
3,441
2,034
3,564
7,475
10,712
5,847
10,624
6,001
5,598
18,187
16,471
Operating income
Other income/(expense), net
10,105
364
14,083
390
48,263
921
56,607
846
Income before provision for income taxes
Provision for income taxes
10,469
2,673
14,473
3,796
49,184
12,511
57,453
15,183
Gross margin
Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses
168,787 $
102,337
182,214
109,136
Net income
$
7,796 $
10,677 $
36,673 $
42,270
Earnings per share:
Basic
Diluted
$
$
1.43 $
1.42 $
1.86 $
1.85 $
6.66 $
6.62 $
7.30
7.25
Shares used in computing earnings per share:
Basic
Diluted
Cash dividends declared per share
5,443,058
5,472,781
$
0.57 $
5,729,886
5,773,099
5,505,456
5,535,931
0.52 $
See accompanying Notes to Condensed Consolidated Financial Statements.
3
1.61 $
5,788,922
5,829,920
1.46
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions)
Three Months Ended
June 25,
2016
Net income
$
Other comprehensive income/(loss):
Change in foreign currency translation, net of tax
Nine Months Ended
June 27,
2015
June 25,
2016
7,796 $
10,677 $
36,673 $
46
67
64
June 27,
2015
42,270
(179)
Change in unrealized gains/losses on derivative
instruments:
Change in fair value of derivatives, net of tax
(175)
(64)
(66)
Adjustment for net (gains)/losses realized and included
in net income, net of tax
2,955
(88)
(1,195)
(1,061)
Total change in unrealized gains/losses on
derivative instruments, net of tax
(263)
(1,259)
(1,127)
456
1,217
(286)
(2,499)
Change in unrealized gains/losses on marketable
securities:
Change in fair value of marketable securities, net of tax
1,170
Adjustment for net (gains)/losses realized and included
in net income, net of tax
(12)
Total change in unrealized gains/losses on
marketable securities, net of tax
Total other comprehensive income/(loss)
Total comprehensive income
$
(423)
3
1,158
(420)
1,301
941
(1,612)
238
8,737 $
9,065 $
See accompanying Notes to Condensed Consolidated Financial Statements.
4
84
36,911 $
25
(261)
16
42,286
Apple Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except number of shares which are reflected in thousands and par value)
June 25,
2016
September 26,
2015
ASSETS:
Current assets:
Cash and cash equivalents
18,237 $
21,120
Short-term marketable securities
$
43,519
20,481
Accounts receivable, less allowances of $55 and $63, respectively
11,714
16,849
1,831
2,349
Inventories
Vendor non-trade receivables
Other current assets
Total current assets
Long-term marketable securities
Property, plant and equipment, net
7,328
13,494
11,132
15,085
93,761
89,378
169,764
164,065
25,448
22,471
Goodwill
5,261
5,116
Acquired intangible assets, net
3,506
3,893
Other non-current assets
7,862
5,556
Total assets
$
305,602 $
290,479
$
26,318 $
35,490
20,820
25,181
Deferred revenue
8,352
8,940
Commercial paper
12,496
8,499
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
3,500
2,500
Total current liabilities
71,486
80,610
Deferred revenue, non-current
3,064
3,624
Long-term debt
68,939
53,463
Other non-current liabilities
35,572
33,427
179,061
171,124
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares
authorized; 5,393,165 and 5,578,753 shares issued and outstanding, respectively
30,106
27,416
Retained earnings
96,542
92,284
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Accumulated other comprehensive income/(loss)
(107)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
126,541
119,355
305,602 $
290,479
See accompanying Notes to Condensed Consolidated Financial Statements.
5
(345)
Apple Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
Nine Months Ended
June 25,
2016
Cash and cash equivalents, beginning of the period
$
June 27,
2015
21,120 $
13,844
36,673
42,270
Depreciation and amortization
7,957
8,138
Share-based compensation expense
3,180
2,671
Deferred income tax expense
5,191
2,820
5,135
7,090
Operating activities:
Net income
Adjustments to reconcile net income to cash generated by operating activities:
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
518
69
Vendor non-trade receivables
6,166
222
Other current and non-current assets
1,143
2,286
Accounts payable
(9,622)
(3,263)
Deferred revenue
(1,148)
1,040
Other current and non-current liabilities
Cash generated by operating activities
(5,495)
4,448
49,698
67,791
(112,068)
(137,524)
Investing activities:
Purchases of marketable securities
Proceeds from maturities of marketable securities
14,915
9,916
Proceeds from sales of marketable securities
69,926
80,635
Payments made in connection with business acquisitions, net
Payments for acquisition of property, plant and equipment
Payments for acquisition of intangible assets
Payments for strategic investments
(146)
(230)
(8,757)
(7,629)
(753)
(201)
(1,376)
Other
(321)
Cash used in investing activities
(38,580)
—
134
(54,899)
Financing activities:
Proceeds from issuance of common stock
247
Excess tax benefits from equity awards
391
324
684
Payments for taxes related to net share settlement of equity awards
(1,361)
(1,332)
Payments for dividends and dividend equivalents
(9,058)
(8,597)
Repurchases of common stock
(23,696)
(22,000)
Proceeds from issuance of term debt, net
17,984
21,312
Repayments of term debt
(2,500)
Change in commercial paper, net
Cash used in financing activities
Increase/(decrease) in cash and cash equivalents
3,992
(1,808)
(14,001)
(11,417)
(2,883)
Cash and cash equivalents, end of the period
—
1,475
$
18,237 $
15,319
Cash paid for income taxes, net
$
8,990 $
10,604
Cash paid for interest
$
892 $
427
Supplemental cash flow disclosure:
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Apple Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile
communication and 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 Apple-compatible products, including
application software and various accessories through its online and retail stores. The Company sells to consumers, small and midsized businesses and education, enterprise and government customers.
Basis of Presentation and Preparation
The accompanying condensed consolidated financial statements include the accounts of the Company. Intercompany accounts and
transactions have been eliminated. In the opinion of the Company’s management, the condensed consolidated financial statements
reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation
of these condensed 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 condensed consolidated
financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior period
amounts in the condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's
annual consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year ended
September 26, 2015 (the “2015 Form 10-K”). The Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of
September. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal quarters with
calendar quarters, which will next occur in the first quarter of fiscal year 2017. The Company’s fiscal years 2016 and 2015 each
include 52 weeks. Unless otherwise stated, references to particular years, quarters or months refer to the Company’s fiscal years
ended in September and the associated quarters or months of those fiscal years.
During the first quarter of 2016, the Company adopted an accounting standard that simplified the presentation of deferred taxes by
requiring deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The Company
has adopted this accounting standard prospectively; accordingly, the prior period amounts in the Company’s Condensed
Consolidated Balance Sheets within this Quarterly Report on Form 10-Q were not adjusted to conform to the new accounting
standard. The adoption of this accounting standard was not material to the Company’s condensed consolidated financial statements.
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 restricted stock units (“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.
7
The following table shows the computation of basic and diluted earnings per share for the three- and nine-month periods ended June
25, 2016 and June 27, 2015 (net income in millions and shares in thousands):
Three Months Ended
June 25,
2016
Numerator:
Net income
$
Nine Months Ended
June 27,
2015
7,796 $
June 25,
2016
10,677 $
June 27,
2015
36,673 $
42,270
Denominator:
Weighted-average shares outstanding
5,443,058
5,729,886
5,505,456
29,723
43,213
30,475
40,998
5,472,781
5,773,099
5,535,931
5,829,920
Effect of dilutive securities
Weighted-average diluted shares
5,788,922
Basic earnings per share
$
1.43 $
1.86 $
6.66 $
7.30
Diluted earnings per share
$
1.42 $
1.85 $
6.62 $
7.25
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per
share.
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 June 25, 2016 and September 26, 2015 (in millions):
June 25, 2016
Adjusted
Cost
Cash
$
Unrealized
Gains
Unrealized
Losses
9,118 $
— $
Money market funds
3,318
—
Mutual funds
1,772
—
(185)
5,090
—
Level 1
(1)
(2)
Cash and
Cash
Equivalents
— $
9,118 $
9,118
—
3,318
1,587
(185)
4,905
Short-Term
Marketable
Securities
$
Long-Term
Marketable
Securities
— $
—
3,318
—
—
—
1,587
—
3,318
1,587
—
:
Subtotal
Level 2
Fair
Value
:
U.S. Treasury securities
45,583
416
(1)
45,998
833
17,209
27,956
U.S. agency securities
7,490
21
—
7,511
1,832
2,539
3,140
Non-U.S. government securities
7,101
139
(63)
7,177
50
685
6,442
Certificates of deposit and time deposits
3,729
—
—
3,729
314
1,493
1,922
Commercial paper
4,708
—
—
4,708
2,772
1,936
—
128,146
1,185
128,898
—
17,883
111,015
Corporate securities
Municipal securities
Mortgage- and asset-backed securities
Subtotal
Total
$
(433)
952
9
961
—
127
834
18,333
207
(25)
—
18,515
—
60
18,455
216,042
1,977
(522)
217,497
5,801
41,932
169,764
230,250 $
1,977 $
(707) $
231,520 $
43,519 $
169,764
8
18,237
$
September 26, 2015
Adjusted
Cost
Cash
$
Level 1
(1)
11,389 $
Unrealized
Gains
Unrealized
Losses
— $
—
Fair
Value
$
11,389 $
Cash and
Cash
Equivalents
Short-Term
Marketable
Securities
11,389
$
Long-Term
Marketable
Securities
— $
—
:
Money market funds
1,798
—
1,798
1,798
—
—
Mutual funds
1,772
—
(144)
1,628
—
1,628
—
3,570
—
(144)
3,426
1,798
1,628
—
Subtotal
Level 2
(2)
—
:
U.S. Treasury securities
34,902
181
(1)
35,082
—
3,498
31,584
U.S. agency securities
5,864
14
—
5,878
841
767
4,270
Non-U.S. government securities
6,356
45
6,234
43
135
6,056
Certificates of deposit and time deposits
4,347
—
—
4,347
2,065
1,405
877
Commercial paper
6,016
—
—
6,016
4,981
1,035
—
116,908
242
116,165
3
11,948
104,214
Corporate securities
Municipal securities
Mortgage- and asset-backed securities
Subtotal
Total
$
(167)
(985)
947
5
—
952
—
48
904
16,121
87
(31)
16,177
—
17
16,160
191,461
574
(1,184)
190,851
7,933
18,853
164,065
206,420 $
574 $
(1,328) $
205,666 $
20,481 $
164,065
21,120
$
(1)
The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or
liabilities.
(2)
The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for
identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
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 maturities of the Company’s long-term marketable
securities generally range from one to five years.
The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. The
Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any
one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential
risk of principal loss. 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. As of June 25, 2016, the Company does not consider any of its investments to be other-than-temporarily
impaired.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected
future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the
Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations
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 may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional
currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not
denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other
instruments to manage this risk and may designate these instruments as cash flow hedges. The Company typically hedges portions
of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
9
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. In addition, the Company may use non-derivative financial instruments, such as its
foreign-currency-denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these cases,
the Company designates these instruments as net investment hedges.
The Company may also enter into non-designated foreign currency 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 term debt or investments. The Company
designates these instruments as either cash flow or fair value hedges. The Company’s hedged interest rate transactions as of
June 25, 2016 are expected to be recognized within ten years.
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in accumulated other comprehensive income (“AOCI”) until the hedged item
is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as
a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow
hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are
recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other
income/(expense), net in the same period as the related income or expense is recognized. The ineffective portions and amounts
excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.
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/(expense), net. Any subsequent
changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as
hedges of other transactions.
Net Investment Hedges
The effective portions of net investment hedges are recorded in other comprehensive income (“OCI”) as a part of the cumulative
translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are
recognized in other income/(expense), net.
Fair Value Hedges
Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related
to the change in value of the underlying hedged item.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line
item to which the derivative relates.
The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting
treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative
instruments at gross fair value as of June 25, 2016 and September 26, 2015 (in millions):
June 25, 2016
Fair Value of
Derivatives Designated
as Hedge Instruments
Fair Value of
Derivatives Not Designated
as Hedge Instruments
Total
Fair Value
(1)
Derivative assets :
Foreign exchange contracts
Interest rate contracts
$
$
391 $
860 $
115 $
— $
506
860
$
$
903 $
4 $
281 $
— $
1,184
4
(2)
Derivative liabilities :
Foreign exchange contracts
Interest rate contracts
10
September 26, 2015
Fair Value of
Derivatives Designated
as Hedge Instruments
Fair Value of
Derivatives Not Designated
as Hedge Instruments
Total
Fair Value
(1)
Derivative assets :
Foreign exchange contracts
Interest rate contracts
$
1,442 $
109 $
1,551
$
394 $
— $
394
$
905 $
94 $
999
$
13 $
— $
13
(2)
Derivative liabilities :
Foreign exchange contracts
Interest rate contracts
(1)
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the
Condensed Consolidated Balance Sheets.
(2)
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the
Condensed Consolidated Balance Sheets.
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as
cash flow, net investment and fair value hedges on OCI and the Condensed Consolidated Statements of Operations for the threeand nine-month periods ended June 25, 2016 and June 27, 2015 (in millions):
Three Months Ended
June 25,
2016
Nine Months Ended
June 27,
2015
June 25,
2016
June 27,
2015
Gains/(Losses) recognized in OCI – effective portion:
Cash flow hedges:
Foreign exchange contracts
$
(170) $
(11)
1
$
(181) $
(33) $
— $
55 $
Interest rate contracts
Total
(34) $
18 $
(53)
3,716
(90)
(35) $
3,626
— $
167
Net investment hedges:
Foreign exchange contracts
$
Foreign currency debt
Total
(128)
(6)
(205)
(6)
$
(128) $
49 $
(205) $
161
$
142 $
1,420 $
1,325 $
2,905
(3)
(4)
(10)
$
139 $
1,416 $
1,315 $
$
345 $
(254) $
484 $
(15)
$
(345) $
254 $
(484) $
15
Gains/(Losses) reclassified from AOCI into net income –
effective portion:
Cash flow hedges:
Foreign exchange contracts
Interest rate contracts
Total
(13)
2,892
Gains/(Losses) on derivative instruments:
Fair value hedges:
Interest rate contracts
Gains/(Losses) related to hedged items:
Fair value hedges:
Interest rate contracts
11
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 June 25, 2016 and September 26, 2015 (in millions):
June 25, 2016
Notional
Amount
September 26, 2015
Credit Risk
Amount
Notional
Amount
Credit Risk
Amount
Instruments designated as accounting hedges:
Foreign exchange contracts
Interest rate contracts
$
$
37,843 $
23,050 $
391 $
860 $
70,054 $
18,750 $
1,385
394
Instruments not designated as accounting hedges:
Foreign exchange contracts
$
38,764 $
115 $
49,190 $
109
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not
represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross
exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform
according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s
exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects
the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with
the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during
the remaining life of the instruments.
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net
settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security
arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates
from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair
values in its Condensed Consolidated Balance Sheets. As of June 25, 2016, the net cash collateral posted by the Company related to
derivative instruments under its collateral security arrangements was $175 million, which was recorded as other current assets in the
Condensed Consolidated Balance Sheet. As of September 26, 2015, the net cash collateral received by the Company related to
derivative instruments under its collateral security arrangements was $1.0 billion, which was recorded as accrued expenses in the
Condensed Consolidated Balance Sheet.
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed
to net settle transactions with a single net amount payable by one party to the other. As of June 25, 2016 and September 26, 2015,
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 $1.3 billion and $2.2 billion, respectively, resulting in a net
derivative asset of $353 million and a net derivative liability of $78 million, respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers,
value-added resellers, small and mid-sized businesses and education, enterprise and government customers that are not covered by
collateral, third-party financing arrangements or credit insurance. As of June 25, 2016 and September 26, 2015, the Company had
one customer that represented 11% and 12%, of total trade receivables, respectively. The Company’s cellular network carriers
accounted for 59% and 71% of trade receivables as of June 25, 2016 and September 26, 2015, respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these
vendors who manufacture sub-assemblies or assemble final products for the Company. Vendor non-trade receivables from three of
the Company’s vendors accounted for 47%, 17% and 16% of total vendor non-trade receivables as of June 25, 2016 and three of the
Company’s vendors accounted for 38%, 18% and 14% of total vendor non-trade receivables as of September 26, 2015.
12
Note 3 – Condensed Consolidated Financial Statement Details
The following tables show the Company’s condensed consolidated financial statement details as of June 25, 2016 and September 26,
2015 (in millions):
Property, Plant and Equipment, Net
June 25,
2016
Land and buildings
Machinery, equipment and internal-use software
Leasehold improvements
$
September 26,
2015
9,108 $
42,550
6,333
Gross property, plant and equipment
Accumulated depreciation and amortization
6,956
37,038
5,263
57,991
(32,543)
Total property, plant and equipment, net
$
49,257
(26,786)
25,448 $
22,471
Other Non-Current Liabilities
June 25,
2016
Deferred tax liabilities
$
September 26,
2015
24,560 $
Other non-current liabilities
24,062
11,012
Total other non-current liabilities
$
9,365
35,572 $
33,427
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for the three- and nine-month periods ended June 25, 2016 and
June 27, 2015 (in millions):
Three Months Ended
June 25,
2016
Interest and dividend income
Interest expense
$
1,036 $
Other expense, net
Total other income/(expense), net
Nine Months Ended
June 27,
2015
$
June 25,
2016
766 $
June 27,
2015
2,963 $
2,095
(409)
(201)
(1,006)
(495)
(263)
(175)
(1,036)
(754)
364 $
390 $
921 $
846
Note 4 – Acquired Intangible Assets
The Company’s acquired intangible assets with definite useful lives primarily consist of patents and licenses and are amortized over
periods typically from three to seven years. The following table summarizes the components of gross and net acquired intangible
asset balances as of June 25, 2016 and September 26, 2015 (in millions):
June 25, 2016
Gross
Carrying
Amount
Definite-lived and amortizable acquired
intangible assets
$
Indefinite-lived and non-amortizable
acquired intangible assets
Total acquired intangible assets
$
Accumulated
Amortization
September 26, 2015
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
8,817 $
(5,411) $
3,406 $
8,125 $
(4,332) $
100
—
100
100
—
8,917 $
(5,411) $
3,506 $
8,225 $
(4,332) $
13
Net
Carrying
Amount
3,793
100
3,893
Note 5 – Income Taxes
As of June 25, 2016, the Company recorded gross unrecognized tax benefits of $7.6 billion, of which $2.8 billion, if recognized, would
affect the Company’s effective tax rate. As of September 26, 2015, the total amount of gross unrecognized tax benefits was $6.9
billion, of which $2.5 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross
unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The
Company had $1.5 billion and $1.3 billion of gross interest and penalties accrued as of June 25, 2016 and September 26, 2015,
respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.
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 believes it is reasonably possible that its gross unrecognized tax benefits could decrease (whether by payment, release or
a combination of both) in the next 12 months by as much as $800 million.
On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged
state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two
subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European
Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past
taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of June 25,
2016 the Company is unable to estimate the impact.
Note 6 – Debt
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The
Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share
repurchases. As of June 25, 2016 and September 26, 2015, the Company had $12.5 billion and $8.5 billion of Commercial Paper
outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s
Commercial Paper was 0.42% as of June 25, 2016 and 0.14% as of September 26, 2015.
The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the nine
months ended June 25, 2016 and June 27, 2015 (in millions):
Nine Months Ended
June 25,
2016
Maturities less than 90 days:
Proceeds from (repayments of) commercial paper, net
$
Maturities greater than 90 days:
Proceeds from commercial paper
Repayments of commercial paper
Proceeds from (repayments of) commercial paper, net
Total change in commercial paper, net
$
14
4,154 $
June 27,
2015
579
1,846
(2,008)
2,601
(4,988)
(162)
(2,387)
3,992 $
(1,808)
Long-Term Debt
As of June 25, 2016, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal
amount of $71.6 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears,
quarterly for the U.S. dollar-denominated and Australian dollar-denominated floating-rate notes, semi-annually for the U.S. dollardenominated, Australian dollar-denominated, British pound-denominated and Japanese yen-denominated fixed-rate notes and
annually for the euro-denominated and Swiss franc-denominated fixed-rate notes. The following table provides a summary of the
Company’s term debt as of June 25, 2016 and September 26, 2015:
June 25, 2016
Amount
(in millions)
Maturities
September 26, 2015
Effective
Interest Rate
Amount
(in millions)
Effective
Interest Rate
2013 debt issuance of $17.0 billion:
Floating-rate notes
Fixed-rate 1.00% - 3.85% notes
2018
$
2018 - 2043
2,000
1.10%
12,500
1.08% - 3.91%
$
3,000
0.51% - 1.10%
14,000
0.51% - 3.91%
2014 debt issuance of $12.0 billion:
Floating-rate notes
2017 - 2019
2,000
0.70% - 0.93%
2,000
0.37% - 0.60%
Fixed-rate 1.05% - 4.45% notes
2017 - 2044
10,000
0.70% - 4.48%
10,000
0.37% - 4.48%
2015 debt issuances of $27.3 billion:
Floating-rate notes
2017 - 2020
1,774
0.68% - 1.87%
1,743
0.36% - 1.87%
Fixed-rate 0.35% - 4.375% notes
2017 - 2045
25,347
0.28% - 4.51%
24,958
0.28% - 4.51%
Floating-rate notes
2019
500
1.47 %
—
—
Floating-rate notes
2021
500
1.78 %
—
—
Fixed-rate 1.30% notes
2018
500
1.32 %
—
—
Fixed-rate 1.70% notes
2019
1,000
1.71 %
—
—
Fixed-rate 2.25% notes
2021
3,000
1.80 %
—
—
Fixed-rate 2.85% notes
2023
1,500
2.50 %
—
—
Fixed-rate 3.25% notes
2026
3,250
2.40 %
—
—
Fixed-rate 4.50% notes
2036
1,250
4.54 %
—
—
Fixed-rate 4.65% notes
2046
4,000
4.58 %
—
—
Fixed-rate 2.65% notes
2020
487
1.92 %
—
—
Fixed-rate 3.35% notes
2024
337
2.61 %
—
—
Fixed-rate 3.60% notes
2026
243
2.84 %
—
—
1,377
4.15 %
—
—
Second quarter 2016 debt issuance of $15.5 billion:
Third quarter 2016 Australian dollar-denominated debt issuance
of A$1.4 billion:
Third quarter 2016 debt issuance of $1.4 billion:
Fixed-rate 4.15% notes
2046
Total term debt
71,565
Unamortized premium/(discount)
55,701
14
Hedge accounting fair value adjustments
(114)
860
Less: Current portion of long-term debt
376
(3,500)
Total long-term debt
$
68,939
(2,500)
$
53,463
During the third quarter of 2016, the Company issued $1.4 billion U.S. dollar-denominated notes in Taiwan and A$1.4 billion
Australian dollar-denominated notes. To manage foreign currency risk associated with the Australian dollar-denominated notes, the
Company entered into currency swaps with an aggregate notional amount of $1.0 billion, which effectively converted these notes to
U.S. dollar-denominated notes.
During the second quarter of 2016, the Company issued $15.5 billion U.S. dollar-denominated notes. To manage interest rate risk on
the fixed-rate notes maturing in 2021, 2023 and 2026, the Company entered into interest rate swaps with an aggregate notional
amount of $5.0 billion, which effectively converted a portion of the fixed interest rates on these notes to a floating interest rate.
15
As of June 25, 2016, ¥191.0 billion of Japanese yen-denominated notes was designated as a hedge of the foreign currency exposure
of its net investment in a foreign operation. The foreign currency transaction gain or loss on the Japanese yen-denominated debt
designated as a hedge is recorded in OCI as a part of the cumulative translation adjustment. As of June 25, 2016 and September 26,
2015, the carrying value of the debt designated as a net investment hedge was $1.8 billion and $2.1 billion, respectively. For further
discussion regarding the Company’s use of derivative instruments see the Derivative Financial Instruments section of Note 2,
“Financial Instruments.”
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount and, if applicable, adjustments
related to hedging. The Company recognized $393 million and $975 million of interest expense on its term debt for the three- and
nine-month periods ended June 25, 2016, respectively. The Company recognized $197 million and $486 million of interest expense
on its term debt for the three- and nine-month periods ended June 27, 2015, respectively.
As of June 25, 2016 and September 26, 2015, the fair value of the Company’s Notes, based on Level 2 inputs, was $74.1 billion and
$54.9 billion, respectively.
Note 7 – Shareholders’ Equity
Dividends
The Company declared and paid cash dividends per share during the periods presented as follows:
Dividends
Per Share
2016:
Third quarter
$
Amount
(in millions)
0.57 $
3,117
Second quarter
0.52
2,879
First quarter
0.52
2,898
$
1.61 $
8,894
$
0.52 $
2,950
Third quarter
0.52
2,997
Second quarter
0.47
2,734
Total cash dividends declared and paid
2015:
Fourth quarter
First quarter
0.47
Total cash dividends declared and paid
$
1.98 $
2,750
11,431
Future dividends are subject to declaration by the Board of Directors.
Share Repurchase Program
In the third quarter of 2016, the Company’s Board of Directors increased the share repurchase authorization to $175 billion of the
Company’s common stock, of which $127 billion had been utilized as of June 25, 2016. 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”).
The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (“ASRs”) with financial
institutions. In exchange for up-front payments, the financial institutions deliver 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, is determined at the end of the applicable purchase period of each ASR based on the volume weighted-average price of the
Company’s common stock during that period. The shares received are retired in the periods they are delivered, and the up-front
payments are accounted for as a reduction to shareholders’ equity in the Company’s Condensed Consolidated Balance Sheets in the
periods the payments are made. The Company reflects the ASRs as a repurchase of common stock in the period delivered for
purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the
applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.
16
The following table shows the Company’s ASR activity and related information during the nine months ended June 25, 2016 and the
year ended September 26, 2015:
Purchase Period
End Date
Average
Repurchase
Price
Per Share
Number of
Shares
(in thousands)
August 2016
48,183
(1)
November 2015 ASR
April 2016
29,122
(2)
May 2015 ASR
July 2015
(1)
$
6,000
$
103.02
$
3,000
48,293
$
124.24
$
6,000
February 2015
81,525
$
110.40
$
9,000
December 2014
134,247
$
89.39
$
12,000
May 2016 ASR
August 2014 ASR
January 2014 ASR
(1)
ASR Amount
(in millions)
“Number of Shares” represents those shares delivered in the beginning of the purchase period and does not represent the
final number of shares to be delivered under the ASR. The total number of shares ultimately delivered, and therefore the
average repurchase price paid per share, will be determined at the end of the applicable purchase period based on the
volume-weighted average price of the Company’s common stock during that period. The May 2016 ASR purchase period
will end in or before August 2016.
(2) Includes 20.4 million shares delivered and retired at the beginning of the purchase period, which began in the first quarter of
2016 and 8.7 million shares delivered and retired at the end of the purchase period, which concluded in the third quarter of
2016.
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)
2016:
Third quarter
Second quarter
First quarter
41,238 $
Total open market common stock repurchases
Average
Repurchase
Price Per Share
Amount
(in millions)
97.00 $
4,000
71,766 $
97.54
7,000
25,984 $
115.45
3,000
138,988
$
14,000
115.15 $
14,026
2015:
Fourth quarter
121,802 $
Third quarter
31,231 $
128.08
4,000
Second quarter
56,400 $
124.11
7,000
45,704 $
109.40
First quarter
Total open market common stock repurchases
255,137
5,000
$
30,026
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.
17
The following table shows the pre-tax amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations,
and the associated financial statement line item, for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (in
millions):
Three Months Ended
Comprehensive Income Components
Financial Statement Line Item
Unrealized (gains)/losses on derivative
instruments:
Foreign exchange contracts
Revenue
June 25,
2016
$
Cost of sales
Other income/(expense), net
Interest rate contracts
Other income/(expense), net
(131) $
(785) $
(1,835)
(529)
(419)
(1,450)
(112)
(116)
(123)
327
10
13
(20)
$
June 27,
2015
(828) $
3
Other income/(expense), net
Total amounts reclassified from AOCI
June 25,
2016
106
(134)
Unrealized (gains)/losses on marketable
securities
Nine Months Ended
June 27,
2015
(154) $
5
(1,468)
(1,317)
3
(2,945)
129
(1,465) $
37
(1,188) $
(2,908)
The following table shows the changes in AOCI by component for the nine months ended June 25, 2016 (in millions):
Cumulative
Foreign
Currency
Translation
Balance at September 26, 2015
$
(653) $
Other comprehensive income/(loss) before
reclassifications
Amounts reclassified from AOCI
Tax effect
(56)
—
(1,317)
64
$
772 $
62
2
Other comprehensive income/(loss)
Balance at June 25, 2016
Unrealized
Gains/Losses
on Derivative
Instruments
(589) $
246
(1,127)
(355) $
Unrealized
Gains/Losses
on Marketable
Securities
(464) $
1,880
129
(708)
1,301
837 $
Total
(345)
1,886
(1,188)
(460)
238
(107)
Note 9 – Benefit Plans
Stock Plans
The Company had 386.3 million shares reserved for future issuance under its stock plans as of June 25, 2016. RSUs granted
generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common
stock on a one-for-one basis. Each share issued with respect to RSUs granted under the Company’s stock plans reduces the number
of shares available for grant under the plan by two shares. RSUs cancelled and shares withheld to satisfy tax withholding obligations
increase the number of shares available for grant under the plans utilizing a factor of two times the number of RSUs cancelled or
shares withheld. Stock options count against the number of shares available for grant on a one-for-one basis.
Rule 10b5-1 Trading Plans
During the three months ended June 25, 2016, Section 16 officers Timothy D. Cook, Angela Ahrendts, Luca Maestri, Daniel Riccio,
Philip Schiller and Jeffrey 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.
18
Restricted Stock Units
A summary of the Company’s RSU activity and related information for the nine months ended June 25, 2016 is as follows:
Weighted-Average
Grant Date
Fair Value Per Share
Number of RSUs
(in thousands)
Balance at September 26, 2015
RSUs granted
RSUs vested
101,467 $
85.77
47,100 $
109.67
(41,326) $
84.86
(4,250) $
95.44
RSUs cancelled
Balance at June 25, 2016
102,991 $
Aggregate
Intrinsic Value
(in millions)
96.57 $
9,619
RSUs that vested during the three- and nine-month periods ended June 25, 2016 had fair values of $2.0 billion and $4.5 billion,
respectively, as of the vesting date. RSUs that vested during the three- and nine-month periods ended June 27, 2015 had fair values
of $2.3 billion and $4.3 billion, respectively, as of the vesting date.
Stock Options
The Company had 1.1 million stock options outstanding as of June 25, 2016, with a weighted-average exercise price per share of
$15.69 and weighted-average remaining contractual term of 3.4 years, substantially all of which are exercisable. The aggregate
intrinsic value of the stock options outstanding as of June 25, 2016 was $84 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.
Share-Based Compensation
The following table shows a summary of the share-based compensation expense included in the Condensed Consolidated
Statements of Operations for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 (in millions):
Three Months Ended
June 25,
2016
Cost of sales
Research and development
$
Selling, general and administrative
Total share-based compensation expense
June 25,
2016
188 $
148 $
388
1,413
320
1,184
1,095
856 $
3,180 $
2,671
1,054 $
583 $
June 27,
2015
479
387
$
Nine Months Ended
June 27,
2015
430
1,146
The income tax benefit related to share-based compensation expense was $321 million and $1.1 billion for the three- and nine-month
periods ended June 25, 2016, respectively, and was $286 million and $948 million for the three- and nine-month periods ended June
27, 2015, respectively. As of June 25, 2016, the total unrecognized compensation cost related to outstanding stock options, RSUs
and restricted stock was $8.3 billion, which the Company expects to recognize over a weighted-average period of 2.7 years.
19
Note 10 – Commitments and Contingencies
Accrued Warranty and Indemnification
The following table shows changes in the Company’s accrued warranties and related costs for the three- and nine-month periods
ended June 25, 2016 and June 27, 2015 (in millions):
Three Months Ended
June 25,
2016
Beginning accrued warranty and related costs
$
Cost of warranty claims
Accruals for product warranty
Ending accrued warranty and related costs
4,985 $
(1,110)
380
$
4,255 $
June 27,
2015
5,143 $
(1,077)
Nine Months Ended
June 25,
2016
4,780 $
(3,507)
June 27,
2015
4,159
(3,151)
1,071
2,982
4,129
5,137 $
4,255 $
5,137
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. 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 offers an iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s and 6s Plus in its U.S.
retail and online stores and activate the purchased iPhone with one of the four U.S. national carriers. The iPhone Upgrade Program
provides customers the right to trade in that iPhone for a new iPhone, provided certain conditions are met. One of the conditions of
this program requires the customer to finance the initial purchase price of the iPhone with a third-party lender. Upon exercise of the
trade-in right and purchase of a new iPhone, the Company satisfies the customer’s outstanding balance due to the third-party lender
on the original device. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net
of the fair value of such right with subsequent changes to the guarantee liability recognized within revenue.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the
Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their
status as directors or officers 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.
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.
20
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. As
of June 25, 2016, the Company’s total future minimum lease payments under noncancelable operating leases were $7.1 billion. The
Company's retail store and other facility leases are typically for terms not exceeding 10 years and generally contain multi-year
renewal options.
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have
not been fully adjudicated, as further discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part
II, Item 1A of this Form 10-Q under the heading “Risk Factors.” In the opinion of management, there was not at least a reasonable
possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss
contingencies for asserted legal and other claims. 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. On May 18, 2015, the U.S.
Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court. As a result, the Court
of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million, with the District Court to
determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part. Samsung paid
$548 million to the Company in December 2015, which was included in net sales in the Condensed Consolidated Statement of
Operations. Because the case remains subject to further proceedings, the Company has not recognized any further amounts in its
results of operations. On March 21, 2016, the United States Supreme Court agreed to hear Samsung’s request for appeal related to
the $548 million in damages.
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
operating segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments consist of the
Americas, Europe, Greater China, Japan and Rest of Asia Pacific. 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 those Asian countries not included in the
Company’s other reportable operating segments. Although the reportable operating segments provide similar hardware and software
products and similar services, each one is managed separately to better align with the location of the Company’s customers and
distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are
the same as those described in Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial
Statements in Part II, Item 8 of the 2015 Form 10-K.
21
The Company evaluates the performance of its reportable 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. Advertising expenses are generally included in the geographic segment in which the
expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed
outside the reportable operating segments. Costs excluded from segment operating income include various corporate expenses such
as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various
nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany
transfers between segments for management reporting purposes.
The following table shows information by reportable operating segment for the three- and nine-month periods ended June 25, 2016
and June 27, 2015 (in millions):
Three Months Ended
June 25,
2016
June 27,
2015
Nine Months Ended
June 25,
2016
June 27,
2015
Americas:
Net sales
Operating income
$
$
17,963 $
5,453 $
20,209 $
6,177 $
66,384 $
21,587 $
72,091
24,064
Europe:
Net sales
Operating income
$
$
9,643 $
2,666 $
10,342 $
3,275 $
39,110 $
12,047 $
39,760
13,269
Greater China:
Net sales
Operating income
$
$
8,848 $
3,415 $
13,230 $
5,147 $
39,707 $
15,809 $
46,197
18,227
Japan:
Net sales
Operating income
$
$
3,529 $
1,435 $
2,872 $
1,447 $
12,604 $
5,605 $
11,777
5,634
Rest of Asia Pacific:
Net sales
Operating income
$
$
2,375 $
753 $
2,952 $
1,154 $
10,982 $
3,880 $
12,389
4,603
A reconciliation of the Company’s segment operating income to the Condensed Consolidated Statements of Operations for the threeand nine-month periods ended June 25, 2016 and June 27, 2015 is as follows (in millions):
Three Months Ended
June 25,
2016
Segment operating income
Research and development expense
Other corporate expenses, net
Total operating income
June 27,
2015
Nine Months Ended
June 25,
2016
June 27,
2015
$
13,722 $
(2,560)
(1,057)
17,200 $
(2,034)
(1,083)
58,928 $
(7,475)
(3,190)
65,797
(5,847)
(3,343)
$
10,105 $
14,083 $
48,263 $
56,607
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Quarterly Report on Form 10-Q 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 II, Item
1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should
be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended September 26, 2015 (the “2015 Form 10K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and
notes thereto included elsewhere in this Form 10-Q. 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.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed
with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy
statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are available
free of charge on the Company’s website at investor.apple.com/sec.cfm when such reports are available on the SEC’s website. The
public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of websites are not
incorporated into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
Overview and Highlights
Company Background
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’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple Watch®, Apple TV®, a
portfolio of consumer and professional software applications, iOS, macOS™, watchOS® and tvOS™ operating systems, iCloud®,
Apple Pay® and a variety of accessory, service and support offerings. The Company sells and delivers digital content and
applications through the iTunes Store®, App Store®, Mac App Store, TV App Store, iBooks Store™ and Apple Music® (collectively
“Internet Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as
through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety
of third-party Apple compatible products, including application software and various accessories through its online and retail stores.
The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Business Strategy
The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and
services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware,
application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and
seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital
content and applications through its Internet Services, which allows customers to discover and download digital content, iOS, Mac,
Apple Watch and Apple TV applications, and books through either a Mac or Windows-based computer or through iPhone, iPad and
iPod touch® devices (“iOS devices”) and Apple Watch. The Company also supports a community for the development of third-party
software and hardware products and digital content that complement the Company’s offerings. The Company believes a high-quality
buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly
enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes building and expanding its own
retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a highquality sales and post-sales support experience. The Company believes ongoing investment in research and development (“R&D”),
marketing and advertising is critical to the development and sale of innovative products and technologies.
23
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part
to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating
expenses. Product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are
filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the
next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product
introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered
reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.
Third Quarter Fiscal 2016 Highlights
Net sales decreased 15% or $7.2 billion during the third quarter of 2016 compared to the same quarter in 2015, primarily driven by
lower unit sales and a reduction in the average selling price ("ASP") for iPhone. The Company had strong year-over-year net sales
growth in Services.
TM
During the third quarter of 2016, the Company began shipping iPhone SE and the 9.7-inch iPad Pro . Additionally, at its Worldwide
Developers Conference in June 2016, the Company announced updates to its operating systems with iOS 10, macOS Sierra,
watchOS 3 and the new tvOS, which are expected to be available in the fall of 2016.
The Company utilized $10.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $3.2
billion during the third quarter of 2016. Additionally, the Company issued $1.4 billion of U.S. dollar-denominated and A$1.4 billion of
Australian dollar-denominated long-term debt.
Sales Data
The following table shows net sales by operating segment and net sales and unit sales by product for the three- and nine-month
periods ended June 25, 2016 and June 27, 2015 (dollars in millions and units in thousands):
Three Months Ended
June 25,
2016
Net Sales by Operating Segment:
Americas
Europe
Greater China
Japan
Rest of Asia Pacific
Total net sales
June 27,
2015
Nine Months Ended
Change
June 25,
2016
June 27,
2015
Change
$
17,963 $
9,643
8,848
3,529
2,375
20,209
10,342
13,230
2,872
2,952
(11 )% $
(7 )%
(33 )%
23 %
(20 )%
66,384 $
39,110
39,707
12,604
10,982
72,091
39,760
46,197
11,777
12,389
(8 )%
(2 )%
(14 )%
7 %
(11 )%
$
42,358 $
49,605
(15 )% $
168,787 $
182,214
(7 )%
$
24,048 $
4,876
5,239
5,976
2,219
31,368
4,538
6,030
5,028
2,641
(23 )% $
7 %
(13 )%
19 %
(16 )%
108,540 $
16,373
17,092
18,023
8,759
122,832
18,951
18,589
14,823
7,019
(12 )%
(14 )%
(8 )%
22 %
25 %
$
42,358 $
49,605
(15 )% $
168,787 $
182,214
(7 )%
40,399
9,950
4,252
47,534
10,931
4,796
(15 )%
(9 )%
(11 )%
166,371
36,323
13,598
183,172
44,973
14,878
(9 )%
(19 )%
(9 )%
Net Sales by Product:
(1)
iPhone
(1)
iPad
(1)
Mac
(2)
Services
(1)(3)
Other Products
Total net sales
Unit Sales by Product:
iPhone
iPad
Mac
(1)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(2)
Includes revenue from Internet Services, AppleCare®, Apple Pay, licensing and other services.
(3)
Includes sales of Apple TV, Apple Watch, Beats® products, iPod and Apple-branded and third-party accessories.
24
Product Performance
iPhone
The following table presents iPhone net sales and unit sales information for the three- and nine-month periods ended June 25, 2016
and June 27, 2015 (dollars in millions and units in thousands):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
Unit sales
$
June 27,
2015
24,048 $
57 %
40,399
31,368
63 %
47,534
Nine Months Ended
Change
June 25,
2016
June 27,
2015
(23 )% $ 108,540 $ 122,832
64 %
67 %
(15 )%
166,371
183,172
Change
(12 )%
(9 )%
iPhone net sales and unit sales decreased during the third quarter and first nine months of 2016 compared to the same periods in
2015. The Company believes the unit sales decline is due primarily to the acceleration of iPhone upgrades in 2015 and challenging
market conditions around the world. ASPs for iPhone were lower year-over-year during the third quarter and first nine months of 2016
due primarily to a shift in the mix of iPhones.
iPad
The following table presents iPad net sales and unit sales information for the three- and nine-month periods ended June 25, 2016 and
June 27, 2015 (dollars in millions and units in thousands):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
Unit sales
$
June 27,
2015
4,876 $
12 %
9,950
4,538
9%
10,931
Nine Months Ended
Change
7 % $
(9 )%
June 25,
2016
16,373 $
10 %
36,323
June 27,
2015
18,951
10 %
44,973
Change
(14 )%
(19 )%
iPad net sales increased in the third quarter of 2016 compared to the same period in 2015 primarily due to higher ASPs for iPad
driven by the launch of the 9.7-inch iPad Pro. iPad net sales decreased during the first nine months of 2016 compared to the same
period in 2015 primarily due to lower unit sales and the effect of weakness in most foreign currencies relative to the U.S. dollar,
partially offset by higher ASPs for iPad. The Company believes the year-over-year decline in unit sales during the third quarter and
first nine months of 2016 is due in part to a longer repurchase cycle for iPads and some level of cannibalization from the Company's
other products.
Mac
The following table presents Mac net sales and unit sales information for the three- and nine-month periods ended June 25, 2016 and
June 27, 2015 (dollars in millions and units in thousands):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
Unit sales
$
June 27,
2015
5,239 $
12 %
4,252
6,030
12 %
4,796
Nine Months Ended
Change
(13 )% $
(11 )%
June 25,
2016
17,092 $
10 %
13,598
June 27,
2015
18,589
10 %
14,878
Change
(8 )%
(9 )%
Mac net sales and unit sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015
similar to the overall market contraction.
25
Services
The following table presents net sales information of Services for the three- and nine-month periods ended June 25, 2016 and
June 27, 2015 (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
$
June 27,
2015
5,976 $
14 %
5,028
10 %
Nine Months Ended
Change
19 % $
June 25,
2016
18,023 $
11 %
June 27,
2015
14,823
8%
Change
22 %
The year-over-year increase in net sales of Services in the third quarter and first nine months of 2016 was due primarily to growth
from App Store, licensing and AppleCare sales. During the first quarter of 2016, the Company received $548 million from Samsung
Electronics Co., Ltd. related to its patent infringement lawsuit, which was recorded as licensing net sales within Services.
Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments consist of the
Americas, Europe, Greater China, Japan and Rest of Asia Pacific. 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 those Asian countries not included in the
Company’s other reportable operating segments. Although the reportable operating segments provide similar hardware and software
products and similar services, each one is managed separately to better align with the location of the Company’s customers and
distribution partners and the unique market dynamics of each geographic region. Further information regarding the Company’s
reportable operating segments can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial
Statements, in Note 11, “Segment Information and Geographic Data.”
Americas
The following table presents Americas net sales information for the three- and nine-month periods ended June 25, 2016 and June 27,
2015 (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
$
June 27,
2015
17,963 $
42 %
20,209
41 %
Nine Months Ended
Change
(11 )% $
June 25,
2016
66,384 $
39 %
June 27,
2015
72,091
40 %
Change
(8 )%
Americas net sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015 due
primarily to lower net sales of iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar.
Europe
The following table presents Europe net sales information for the three- and nine-month periods ended June 25, 2016 and June 27,
2015 (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
$
June 27,
2015
9,643 $
23 %
10,342
21 %
Nine Months Ended
Change
(7 )% $
June 25,
2016
39,110 $
23 %
June 27,
2015
39,760
22 %
Change
(2 )%
Europe net sales decreased during the third quarter of 2016 compared to the same period in 2015 due primarily to lower net sales of
iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar, partially offset by an increase in Services. The
year-over-year decrease in Europe net sales during the first nine months of 2016 was driven primarily by the effect of weakness in
foreign currencies relative to the U.S. dollar, partially offset by an increase in Services.
26
Greater China
The following table presents Greater China net sales information for the three- and nine-month periods ended June 25, 2016 and
June 27, 2015 (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
$
June 27,
2015
8,848 $
21 %
13,230
27 %
Nine Months Ended
Change
(33 )% $
June 25,
2016
39,707 $
24 %
June 27,
2015
46,197
25 %
Change
(14 )%
Greater China net sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015 due
primarily to lower net sales of iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar, partially offset by an
increase in Services.
Japan
The following table presents Japan net sales information for the three- and nine-month periods ended June 25, 2016 and June 27,
2015 (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
$
June 27,
2015
3,529 $
8%
2,872
6%
Nine Months Ended
Change
23 % $
June 25,
2016
12,604 $
7%
June 27,
2015
11,777
6%
Change
7%
The year-over-year increase in Japan net sales during the third quarter of 2016 was due primarily to higher net sales of iPhone and
Services, and the effect of strength in the Japanese yen relative to the U.S. dollar. Japan net sales increased during the first nine
months of 2016 compared to the same period in 2015 due primarily to higher net sales of Services and iPhone, partially offset by the
effect of 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 the three- and nine-month periods ended June 25, 2016
and June 27, 2015 (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Percentage of total net sales
$
June 27,
2015
2,375 $
6%
2,952
6%
Nine Months Ended
Change
(20 )% $
June 25,
2016
10,982 $
7%
June 27,
2015
12,389
7%
Change
(11 )%
Rest of Asia Pacific net sales decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015
due primarily to lower net sales of iPhone and the effect of weakness in foreign currencies relative to the U.S. dollar.
27
Gross Margin
Gross margin for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 was as follows (dollars in millions):
Three Months Ended
June 25,
2016
Net sales
Cost of sales
Gross margin
Nine Months Ended
June 27,
2015
June 25,
2016
June 27,
2015
$
42,358
26,252
$
49,605
29,924
$
168,787
102,337
$
182,214
109,136
$
16,106
$
19,681
$
66,450
$
73,078
Gross margin percentage
38.0 %
39.7 %
39.4 %
40.1 %
Gross margin decreased during the third quarter and first nine months of 2016 compared to the same periods in 2015 due primarily to
the effect of weakness in most foreign currencies relative to the U.S. dollar and unfavorable leverage on fixed costs from lower net
sales, partially offset by a favorable shift in mix to services.
The Company anticipates gross margin during the fourth quarter of 2016 to be between 37.5% and 38.0%. The foregoing statement
regarding the Company’s expected gross margin percentage in the third quarter of 2016 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 II, Item 1A of this Form 10-Q 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, its financial condition and operating
results, including gross margins, could be significantly affected by fluctuations in exchange rates.
Operating Expenses
Operating expenses for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 were as follows (dollars in
millions):
Three Months Ended
June 25,
2016
June 27,
2015
Nine Months Ended
June 25,
2016
June 27,
2015
Research and development
Percentage of total net sales
$
2,560 $
6%
2,034 $
4%
7,475 $
4%
5,847
3%
Selling, general and administrative
Percentage of total net sales
$
3,441 $
8%
3,564 $
7%
10,712 $
6%
10,624
6%
Total operating expenses
Percentage of total net sales
$
6,001 $
14 %
5,598 $
11 %
18,187 $
11 %
16,471
9%
Research and Development
The growth in R&D expense during the third quarter and first nine months of 2016 compared to the same periods in 2015 was driven
primarily by an increase in headcount and related expenses, and material costs 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
the development of new and updated products that are central to the Company’s core business strategy.
Selling, General and Administrative
The decrease in selling, general and administrative expense during the third quarter of 2016 compared to the same period in 2015
was primarily due to lower spending on marketing and advertising. The year-over-year increase in selling, general and administrative
expense during the first nine months of 2016 compared to the same period in 2015 was due primarily to increased headcount and
related expenses, partially offset primarily by a decrease in discretionary expenditures.
28
Other Income/(Expense), Net
Other income/(expense), net for the three- and nine-month periods ended June 25, 2016 and June 27, 2015 was as follows (dollars in
millions):
Three Months Ended
June 25,
2016
Interest and dividend income
Interest expense
Other expense, net
Total other income/(expense), net
June 27,
2015
$
1,036 $
(409)
(263)
$
364 $
Nine Months Ended
June 25,
2016
Change
766
(201)
(175)
390
June 27,
2015
$
2,963 $
(1,006)
(1,036)
(7 )% $
921 $
Change
2,095
(495)
(754)
846
9%
The decrease in other income/(expense), net during the third quarter of 2016 compared to the same period in 2015 was due primarily
to higher interest expense on debt and higher expenses associated with foreign exchange activity, partially offset by higher interest
income. The increase in other income/(expense), net during the first nine months of 2016 compared to the same period in 2015 was
due primarily to higher interest income, partially offset by higher interest expense on debt. The weighted-average interest rate earned
by the Company on its cash, cash equivalents and marketable securities was 1.77% and 1.51% in the third quarters of 2016 and
2015, respectively, and 1.72% and 1.45% in the first nine months of 2016 and 2015, respectively.
Provision for Income Taxes
Provision for income taxes and effective tax rates for the three- and nine-month periods ended June 25, 2016 and June 27, 2015
were as follows (dollars in millions):
Three Months Ended
June 25,
2016
Provision for income taxes
Effective tax rate
$
2,673 $
25.5 %
June 27,
2015
3,796 $
26.2 %
Nine Months Ended
June 25,
2016
12,511 $
25.4 %
June 27,
2015
15,183
26.4 %
The Company’s effective tax rates during the third quarter of 2016 and 2015 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 when such earnings are intended to be indefinitely reinvested outside the U.S. The
lower effective tax rate during the third quarter and first nine months of 2016 compared to the same periods in 2015 was due primarily
to a different geographic mix of earnings.
Subsequent to the end of the third quarter of 2016, the Company reached a partial settlement with the U.S. Internal Revenue Service
on its examination of the years 2010 through 2012. In connection with this settlement, the Company expects to recognize a tax
benefit in the fourth quarter of 2016, which the Company does not believe will be significant to its consolidated financial statements. 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.
On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged
state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two
subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European
Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past
taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of June 25,
2016 the Company is unable to estimate the impact.
29
Recent Accounting Pronouncements
Stock Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”),
which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of
awards and classification in the statement of cash flows. ASU 2016-09 will be effective for the Company beginning in its first quarter
of 2018. The Company is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both
lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those
leases classified as operating leases under previous accounting standards and disclosing key information about leasing
arrangements. ASU 2016-02 will be effective for the Company beginning in its first quarter of 2020 and early adoption is permitted.
The Company is currently evaluating the timing of its adoption and the impact of adopting ASU 2016-02 on its consolidated financial
statements.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition,
measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its
first quarter of 2019. The Company does not believe the adoption of ASU 2016-01 will have a material impact on its consolidated
financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments.
ASU 2016-13 will be effective for the Company beginning in its first quarter of 2021 and early adoption is permitted. The Company
does not believe the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 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 2019 and early adoption is permitted.
Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and L...
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