Apple financial data review, accounting homework help

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Develop a 400-word evaluation of the companies listed on the spreadsheet in which the team does the following:

  • Evaluate the employment opportunity presented by the companies. If the team members could work for any of the companies, which company would the team select? Defend the team's decision.

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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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Explanation & Answer

Apple Inc.

1

Apple Inc.
Name
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Apple Inc.

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Apple Inc.

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products including the I Phone 6 ...


Anonymous
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